Roblox: Revenue guidance lowered out of caution, growth has resumed in early April (1Q24 earnings call minutes)

The following is the summary of the 1Q24 performance conference call for $ Roblox(RBLX.US) , for financial report analysis, please refer to Roblox: Key Metrics Slipping, Growth Doubts Arise .

I. Financial Metrics Review

II. Executive Report

1) Financial Data:

In 1Q24, DAU reached 77 million, a 17% year-on-year growth;

DAU over 13 years old performed well, with a 22% year-on-year growth; globally, there was growth in all regions, with Japan being a key gaming market, growing by 50% year-on-year;

India is also a huge market, growing by 58% year-on-year. Engagement hours reached 167 billion, a 15% year-on-year growth, with growth in over 13 years old and globally, including Japan and India. Revenue was $801 million, a 22% year-on-year growth, exceeding our guidance range of $755 million to $780 million. Bookings were $923.8 million, in the middle of the guidance range of $910 million to $940 million, with a 19.4% year-on-year growth.

a) CS: Net cash flow from operating activities in Q1 was $238 million, a 37% year-on-year growth. Free cash flow increased by 133% to $191 million, 50% more than the free cash flow generated for the full year 2023.

b) IS: According to GAAP accounting, the net loss was $272 million, flat compared to the same period last year, lower than guidance (guidance was a net loss of $347 million to $342 million). On the expenditure side, efficiency was improved by using artificial intelligence, internal efficiency, and optimizing infrastructure to reduce costs. In terms of workforce, the number of employees remained relatively stable, focusing on developing economic advertising, AI security, and on-site event operations team. Q1 bookings reached 19.4%, infrastructure costs decreased by 4% year-on-year, and labor costs increased by 20%.

2) DAU Analysis: The growth rate of bookings in Q1 exceeded the growth rate of DAU, the overall user base of the platform is good, but the growth is lower than expected, due to two reasons:

On one hand, the effects of new technologies introduced (dynamic avatars, layered clothing, anti-cheating, expanded voice) were slow to respond, and on the other hand, the release speed of new content on the platform slowed down since mid-4QHowever, with the effects of new technologies beginning to show, in the second half of April and the first half of May, the booking volume, DAU, and engagement hours in the United States and Canada have returned to growth of over 20%.

3) Advertising: This year will not be a substantial increase. We announced a partnership with PUBMATIC in April. On April 29th, the first real-world shopping test was conducted at Walmart, and more tests like this will be launched.

On May 1st, it was announced that video ads will be provided to all advertisers through self-service on the ad manager, with great potential for video ads. A brand reduction solution was launched in cooperation with KANTAR, and the direct sales team has been participating in various activities. By the end of this quarter, more than 370 brands have been activated.

To attract talent to join the advertising team, David Westby from Google has been welcomed, who has built many engineering advertising technologies on YouTube.

4) Creation: Utilizing proprietary data to build their own artificial intelligence platform. Continuing to build generative AI assistant tools, the Texture Generator was launched early this year, and the Avatar Auto Setup tool was launched in the first quarter. Code assistance tools are also gradually being optimized.

5) Continued Progress: Curating features on the homepage; adjusting core ML algorithms; on-site operational activities (similar to Easter's The Hunt); dynamic price floor (proposed in February); the creator store provides 100% net revenue for all creators of tools, plugins, messages, images, fonts to encourage creation; opening up the UGC market to more creators, transforming the Avatar platform into a fully UGC platform; improving performance on low-end Android devices (increasing frame rates, enhancing stability).

2. Q&A Analyst Q&A

Q: I have two questions. First, we understand your comments on search and discovery, but have you seen any changes in the speed or quality of content on the platform? Secondly, Dave, you mentioned the next event is coming, how many events will be held this year, how meaningful are they to the platform, and perhaps any good ideas to bring additional revenue to the Hunt?

A: Yes. What I want to say is, first, the overall content in the first quarter is more widely distributed than in the fourth quarter, indicating that new content has gained more market share. I believe that compared to the fourth quarter, the speed of new experiences entering the top 20 in the first quarter has also increased.

Regarding events, we must carefully announce a complete schedule, but what I want to say is, every 1 to 2 months, we hope to do one. The next event, you can -- if you delve into Twitter, you can figure out what it will be, and it will be great. Therefore, we do believe that these are ways to highlight the key advantages of our platform, which is a widely distributed content platform, with many contents having daily activity exceeding 1 millionSo, I think this is like bringing more good things from our activities.

Q: You mentioned performance - the recent performance of some key KPIs has seen a year-on-year growth of around 20%. However, at least for the first quarter, this is the second consecutive quarter where Bookings' year-on-year growth has exceeded the year-on-year change of other KPIs such as DAUs and engagement time. Do you know what caused this? Do you expect this trend to continue?

Finally, you previously guided for a 20% CAGR in Bookings growth from 2025 to 2027. I know it's just one quarter, but after adjusting for 2024, is 20% still an appropriate long-term target?

A: Yes, the first thing I want to comment on is that I emphasize that we hope all these numbers can progress equally at 20% in terms of DAUs, engagement time, and bookings. One sign in the first quarter indicates that things did not meet our expectations, which is the deviation between bookings, engagement, and time. We also see this in the numbers - just internal numbers, which we usually refer to as the comparison between regular users on the platform and DAUs and time.

So, in the past 3 weeks, we have seen all these numbers in what can be said as the most mature markets (namely the United States and Canada), all these 3 numbers are above 20%. We hope that the DAU numbers are also above 20%, but this is not our guiding target.

In the past few quarters, the time spent by each DAU and individual payer has increased, which is good. This has driven the growth of Bookings to be higher than the total time growth. Overall, this is a fairly healthy trend, with not very significant changes, just a few percentage points in the last quarter, 3%.

With the seasonal changes of payers, they tend to spend more on the platform. Therefore, there is always a balance between how many new payers or how many new payers enter the platform, and how many payers become long-term payers after spending on the platform. But the year-on-year numbers are relatively close.

Therefore, in Dave's view, generally speaking, we believe that these numbers will remain consistent. But in a certain quarter, the growth rate of time spent may be faster than bookings, or the growth rate of bookings may be faster than time spent. But our goal is to keep them basically consistent.

If you take a long-term view of Roblox, you will find that in the United States, as we introduce advertising and other forms of monetization, you can imagine that our hourly bookings in the United States and Canada will increase, as we have not fully entered the advertising market yet. In addition, DAUs in some countries (such as India) will also see significant growth, but the level of monetization may be lower. Therefore, we have some forces driving hourly bookings and other forces driving our DAU numbers, and they will complement each otherQ: I think the previous analysts have asked whether you need to adjust the 20% outlook for 25 to 27 years mentioned at the Investor Day. Have you answered this question in your response? If I didn't hear it, please forgive me.

A: No, we didn't - we forgot to answer. Yes, we still believe that the business undoubtedly has this growth potential. Just like what we have seen in the early second quarter now, it is encouraging, and we absolutely still believe that the business has this growth potential.

Q: Okay, so should we consider the plan for the 24th year, the lower guidance is one-off, due to factors you just mentioned, such as PlayStation and Easter. Can you provide more information about the 25th fiscal year, such as how much growth is being driven by core business and advertising business? I think you have mentioned in the past that it is above 20%, is it still the case now?

A: Yes.

Q: In the past few years, have your views on advertising and core advertising changed?

A: I don't think there has been a change in our view on advertising and core business this year. We will provide it early next year when we give guidance for 25 years, we will provide advertising guidance for the first time. We believe that we have enough foundation and momentum to provide this number for next year.

What we have really done in the second half of this year is that we have taken the growth rate implied by the first half guidance and applied it to the second half, based only on a slight decline in the fourth quarter of last year, which was clearly our fastest-growing quarter, and things like PlayStation, which we will research and optimize this year.

Therefore, ultimately, the growth rate in the second half of this year will be about 100 to 150 basis points lower than the initial guidance. On the other hand, looking ahead, based on what we see today, we believe we can continue to grow the core business at the pace we talked about in November last year.

So, we think that advertising in 25 years is a good growth for the business, but it will not substantially drive the overall growth rate of the company. It will ultimately contribute to the overall growth rate, but more so in 26, 27 years.

Q: I have one more question. If I quickly calculate the 24 top line guide, it seems to have decreased by less than $200 million, but the EBITDA profit margin seems unchanged, and you don't seem to have lost the cost leverage effect. Has your investment plan changed? Or have you withdrawn fixed investment plans, is this the reason for the unchanged EBITDA profit margin you mentioned before?

A: Yes, the top line guidance has decreased by about 4%. You are right, profitability, EBITDA, and cash flow figures remain unchanged. This is simply because we have operational leverage in the business, and we have had it for some time. Looking back over the past four quarters, we have been gaining leverage in fixed costs (i.e., infrastructure, trust and safety, and headcount). We hope to continue to see this situation by acting very cautiously, but we have predicted that we will have operational leverageIn terms of free cash flow, this is because capital expenditures are decreasing, as we discussed last November, and we will definitely see this trend this year. Therefore, as we have mentioned before, the company has high unit economic efficiency and cash flow generation capabilities, and our situation is good because we have enough cushion in operating expenses and capital expenditures to provide the same amount of cash flow under current forecasts or guidance, which is about 4% lower now.

Q: I hope you can further explain what you think is driving user engagement in the first quarter. I know you mentioned the slow development of low-end Android systems, but is there anything else to point out? Also, you mentioned that the booking rate in the United States and Canada reached 20% at the beginning of this quarter. I believe the guidance for the second quarter implies a 13% growth in bookings. Can you clarify this for us?

A: Yes, let me first talk about the first quarter. What we need to point out is that we believe it is a combination of several factors that were below benchmarks in the fourth quarter and began to show in the first quarter. One of the biggest drivers on our platform, or you could say one of the biggest growth drivers, is original performance.

Joining and experiencing time, experiencing frame rates, the ability to play continuously for a long time on our platform, and the speed of finding friends. These are huge growth drivers. We launched a lot of things in the second half of last year or the second half of the fourth quarter.

We also started to roll out a lot of things. We reintroduced dynamic avatars with trackable cameras, more and more users are starting to use decorations with complex multi-layered clothing, and more and more users are using voice on the platform. In addition, we acquired Hyperion in the fourth quarter and second half of last year, and we can say we have fine-tuned one of the best anti-cheat systems in the industry. Many of our users use high-end devices, but there are also many users using low-end mobile devices. The performance of all these devices is crucial.

Therefore, we have put a lot of effort into every aspect of the technology stack, focusing on improvements. Our creator tools team, user client team, and core engine simulation team have been working hard to measure finer groups, measure more specific users, and we believe this has contributed to the recovery we saw in the first quarter, at least I think in the past three weeks, the recovery in the United States and Canada has exceeded 20%.

The results of the activities we have seen in the past three weeks are clearly encouraging, as is the case in the second half of April and so far in May. Our guidance for this quarter reflects several things. First, you have to consider the situation in the first half of April.

Improvements did start from April 15th, which is very significant in our data. Therefore, combining the data from the first and second halves of the year, we have the data for April. In the following three weeks, as we incorporate the data from these three weeks into the forecasts for May and June, we must be cautious and consider what this means for this quarterTherefore, in the context of providing guidance for this quarter, the second quarter, and the growth rate, we believe that lowering the growth rate and leaving some buffer space for ourselves is a more prudent approach. The same applies to the second half of this year. While we are pleased with the performance of the past three weeks, it is not reasonable or cautious to extrapolate it entirely to the third and fourth quarters. Therefore, we strive to think carefully, approach rationally, and ultimately have an overall impact on the full-year guidance of about 4%.

Q: I have two questions. I want to go back to the issue of new content. In terms of platform users, we have a lot of very good reputation in terms of active paying users, but slightly lagging behind in terms of developers. In terms of new content, have both user and developer engagement faced challenges? I just want to know, if there are some limitations on the developer side, would you consider addressing them in a way different from users?

A: Yes, this is really exciting. We are holding developer day events with some of the top creators on the platform. Our foundation is not just 5, 10, or 20, but hundreds of the most creative people creating studios on our platform, who can be said to be the CEOs of the future interactive entertainment environment.

This content already exists. In our TOP 300 list, there are many amazing works. What we increasingly want to do is to ensure that these amazing creators see the growth they need to continue building their businesses, optimizing the long-term health of our platform. If our content distribution is too concentrated, some (not necessarily long-tail) creators, such as some of the top 300 creators, cannot see enough action to boost their business.

We saw changes in the content curve in the first quarter, and what we did was not only our curated content, the ability to buy sponsored placements, algorithm adjustments, but I think we also focused on long-term platform assistance. We see the curve becoming flatter and the distribution more even.

Another thing is our live events. For example, the Hunt has 100 creators, some of whom are the most amazing creators, and there is a content discovery event behind the scenes. As part of the Hunt, users on our platform experienced all 100 projects. So, I think -- there are already amazing creations on the platform. There are many creators, their teams already have 5 to 20 people, are building businesses, can be said to be up-and-coming, with great new content, we see, I can say, more new creators entering our top 20 last quarter than in the fourth quarter.

Q: Understood. Perhaps we are considering predicting the situation in the second half of this year in a more cautious manner. I wonder if some of the product release plans you mentioned in the last quarter have also slowed down accordingly? Have these plans been reduced in the third or fourth quarter?I would like to make a comment on this. In terms of advertising and economics, we have a lot of work in progress, and we will continue to drive this work. As I emphasized, we have launched dynamic pricing floors. We are introducing more integrations -- sponsor ads on the homepage, and we will also introduce other content related to search ads on the platform. We have just launched in-game videos and non-experience videos. So, you will continue to see the pace of development in this area.

In other areas of the company, you will see that the pursuit of quality and performance in the original performance of our simulator is still ongoing. Therefore, I think this is selective. I also emphasized that in the field of artificial intelligence, we have a lot of work to do, and there will be a lot of things to bring to the market. We will focus on artificial intelligence security, while continuing to improve efficiency and quality in other areas of the company, we are also focusing on economic added value.

Q: Actually, there are two questions. First, in the past 12 to 18 months, you have seen a lot of influx of brand experiences. I am curious, how does the engagement and monetization of these brand experiences compare to traditional non-branded content on the platform?

A: I'll just say some anecdotes, no metrics. Then, Mike, I don't know if you have. There are some games on Roblox, in the top 20, top 100, top 200 games, where some players play many times a day, week, or month, sometimes even for several years. These are long-term engaging games, which may not necessarily be what we expect from brand experiences. Although over time, more and more brand experiences will have longer game time and stay time.

Our research shows that an interactive movie trailer on our platform has higher user engagement compared to a regular video movie trailer. We expect that the engagement of brand experiences will ultimately be very different from that of images, prints, or videos. In these experiences, friends can shop together, try on clothes, and interact with the brand. Similarly, whether it's Lamborghini, Adidas, or Gucci, they can resonate with it. Therefore, the engagement is much higher than with videos.

We don't have exact numbers yet. I think this is an early experience, everyone has their own experience. They are learning how to build content on the platform. So, some of them have done very well, creating very attractive experiences, while others are still learning what our platform is, they are still trying, and have not paid attention to these metrics. So, I think it's still too early to draw conclusions.

Q: Yes, although it's still early to realize this, in the few days you have been working with Walmart, they have only 3 products to sell in the real world. How is the progress? Your digital advertising test period is 6 months. How long do you think it will take before it goes live on a larger scale?

A: We hope that this year we will focus on ads such as images, portals, and videos. We are excited about physical shopping in the real world, partly because this is a way for our partners to measure the success of ads and to be able to purchase goods. Therefore, virtual world shopping is still in a very early stage, and in any of our models, this part of revenue is not considered until 2024 or 2025However, it does point to the future, just like playing games, hide and seek, socializing, or other activities with friends on Roblox. Over time, we believe more people will shop together, which is an exciting new way. As time goes on, we do see the future, but without any predictions or expected dates, we will shop with friends in 3D, try on items, and then purchase physical goods, which will become part of people's perception of Roblox.

I would like to add that we are really excited that the first partner is a company like Walmart. Walmart's quality, scale, and brand in the retail industry make it the perfect partner to launch such a project. Therefore, we are very pleased to collaborate with a company like Walmart to obtain the earliest commercial signs and signals on the Roblox platform.

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