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$Roblox(RBLX.US) released its second-quarter results for the 2024 fiscal year before the U.S. stock market opened on August 1. The operating performance in the second quarter has significantly improved compared to the first quarter, with key indicators such as Bookings and loss situation exceeding the original guidance. In addition, the management has also raised the full-year guidance for 2024.

In theory, it is a performance report that is not explosive and tends to be positive. However, the market reaction from the release of the financial report to the start of the earnings call was quite chaotic: the stock price rose before the market opened, then fell, and plummeted more than 6 points after the official opening. So, what considerations are behind the change in market sentiment? Dolphin Jun will analyze the reasons based on the content of the earnings call.

Let's first look at the core performance indicators in the financial report:

1. Increase in User Activity Against the Trend: Due to the consecutive special events, "The Hunt" and "The Classic," user activity in the second quarter, which originally belonged to the off-season, increased against the trend. This is reflected in a net increase of 1.8 million DAU (mainly users aged 13 and above), a new high in total playtime with accelerated year-on-year growth, and an increase in average revenue per user (Bookings revenue per DAU) compared to the peak season in Q1.

Starting from August 1, Roblox will launch "The Games," an Olympic-themed event, which is expected to further fuel the high user activity in the peak season.

2. Rebound in Bookings: Booking revenue in the second quarter increased by 22.4% year-on-year, showing a significant rebound compared to 19.4% in the first quarter. In fact, when the first-quarter report was disclosed in May, the management had already hinted at the improvement in user activity through special events, so the rebound in Bookings could have been anticipated.

However, because the management still lowered the second-quarter and full-year Bookings guidance in Q1, the market did not boldly anticipate a rebound in Bookings, leading to a sell-off after the Q1 financial report was released.

Nevertheless, with the strong user data performance in May and June disclosed by third-party platforms, the market revised its expectations for Bookings and pushed it higher. Bloomberg's consensus expectations are relatively lagging and cannot truly reflect the sentiment of funds, especially the more optimistic expectations of buyers. Therefore, the seemingly better-than-expected performance of Bookings in the second quarter is actually at an inline or slightly beat level.

As for the more crucial guidance data, due to the situation in Q2, the management raised the full-year guidance by nearly 150 million compared to Q1, with the new guidance range being 41.8 to 42.3 billion. However, because the buyers' expectations have already been raised, it cannot be considered particularly bullish

On the contrary, during the conference call, analysts repeatedly inquired about the implied slowdown in Bookings growth in the third and fourth quarters under the new guidance. The company explained that due to the launch of the PlayStation version in the second half of last year, considering the high base, cautious guidance was given.

3. Continuing cost control, accelerating loss reduction: The operating loss in the second quarter was 238 million, with a loss rate of 27%, showing significant improvements both quarter-on-quarter and year-on-year, and the adjusted EBITDA directly turned losses into profits, reaching 67 million. According to the original EBITDA indicator, which includes deferred revenue and costs to reflect profitability under Bookings, the Covenant adj. EBITDA was 150 million, with a 7% improvement in profit margin quarter-on-quarter, returning to 16%.

Similar to Bottomline and Bookings, the performance in Q2 and the upward revision of the full-year guidance seem to greatly exceed expectations, but in reality, they are in line with or slightly above expectations. The recovery of Bookings directly drove the reduction in losses, and there was also a noticeable slowdown in research and development and sales expenses. The company stated that it will continue to strictly control expenses, maintaining the previously set medium to long-term goal of increasing profit margin by 1% to 3% annually.

Dolphin Research Point of View

The operating performance in the second quarter was actually quite good, not only reversing the lackluster performance in the first quarter but also setting new highs in multiple operating indicators. However, expectations were leading, as third-party platforms had already raised buyer expectations with high-frequency data disclosures, and the continuously rising stock price trend since June also reflects this change in expectations.

The problem is, when the first-quarter results were disclosed, it was already early May, during The Hunt event, and whether it was the rebound in user activity in April mentioned in third-party platform data or the explicit statements by management in the financial report, why did the market ignore the leading indicator of user data and still sell off by 20 points to vent dissatisfaction with the financial report?

Dolphin believes that the main reason lies in the management's "deliberately conservative guidance" not matching the valuation at the time. And even with the upward revision of the full-year guidance in Q2, there was still selling pressure, indicating market concerns about the cautious guidance from management and the sustainability of high growth.

1) Why was the initial Q1 guidance downgrade considered deliberately conservative?: Despite clearly seeing a turnaround in user data, the downward adjustment of Booking guidance in Q1 was explained by management as a cautious move due to poor Q1 data at the time.

2) Why is it said that the Q2 guidance revision is also conservative?: Although the guidance was raised in the second quarter, the increase was almost equivalent to the actual outperformance in the second quarter. This implies that the company may not be confident in whether the success of the second-quarter activities can bring sustained high growth.**

This is also the analysts' confusion during the conference call regarding the implied slowdown in growth in the second half of the year under the new guidance, based on what considerations? It suggests an apparent upward revision, but in reality, it does not exceed the latest expectations derived linearly from the market. The management's explanation for this issue is still based on cautious considerations under a high base, wanting to leave some room for themselves.

Dolphin believes that this kind of short-term performance expectation gap will indeed bring significant price fluctuations to growth stocks. However, for To C-end platform companies, the platform's user activity, short-term fluctuations can be caused by various factors, such as price changes, operational activities, sudden crashes, and so on. In order to reduce too much deviation in guidance, Roblox's management simply chose a relatively conservative guidance approach.

Overall, the cautious guidance of non-linear deduction, as well as the CFO planning to leave, have collectively brought about short-term negative sentiment in the market. For companies like this, in addition to having the energy and conditions to track high-frequency paid data to find performance gaps, we also recommend smoothing the impact of growth stock fluctuations on holding experience from a medium to long-term perspective (market space, competitive landscape) and the absolute safety and relatively high valuation range.

For example, after a 20% drop in the first quarter report, Dolphin hinted that we are approaching our conservative valuation, and during the oscillating pullback, attention can be paid to opportunities for bottom fishing. Although this time also dropped by more than 6 points, the valuation is still in the neutral range. Since short-term advertising cannot provide strong support yet (video ad performance is good, but monetization is still relatively early), the current position (implied 7x EV/Sales) is not absolutely safe.

However, at the same time, because Dolphin believes that the management's expectations are conservative and the second-quarter performance is still good, we expect this round of adjustment to be limited. If the new user data for the third quarter continues to be strong, it is also expected to drive the stock price, but this also means that there is a high requirement for investors to track short-term platform user data.

Financial Indicators Overview

Financial report detailed interpretation

I. Rapid Rebound in Bookings

For excellent business models like Roblox, which have a subscription revenue front-loading and a relatively large share (25%) of developer revenue sharing in operating expenses, under normal operating cycles, as long as you focus on Bookings, at most, look at deferred revenue to see short-term trends in the future.

In the second quarter, with the support of two major events (The Hunt, The Classic), despite being the off-season, user activity increased against the trend, driving Bookings to grow by 22.4% year-on-year, accelerating from the first quarter on a quarter-on-quarter basis.

From the perspective of deferred revenue, the net incremental value in the second quarter has decreased to a certain extent compared to the previous quarter, which also indicates that user activity during the event period was high, and the willingness to purchase after recharging was strong, with more added payments being recognized as current income.

Guidance wasn't bad, but not surprising either. The company's Q3 Bookings guidance (10-10.25 billion) is higher than consensus expectations (9.4 billion), but similar to the latest buyer expectations. However, what slightly disappoints the market is that although the second quarter performed well, the company only raised the full-year guidance in line with the excess from the second quarter, from the original 40-41 billion to 41.8-42.3 billion.

Implying a slowdown in growth in the second half of the year, and the strong performance in the second quarter may not bring more sustainability. Looking at the full-year Bookings growth guidance of 19%-20%, it is still slightly lower than the target set during the investor day.

For revenue indicators that the market is currently not paying much attention to, the second quarter continued to be adjusted upwards, implying some positive expectations for video advertising.

II. Boosted by activities, user activity remains strong in the off-season

With the support of two events, Roblox's user ecosystem expanded against the trend in the off-season. The overall net increase in users in the second quarter was 1.8 million, mainly from the group of users aged 13 and above, which increased by 1.5 million. The overall number of users on the platform reached 79.5 million, with 46.4 million being non-child users. Considering that video ads are only shown to users aged 13 and above, the expansion trend of this group of users is still quite important and needs to be closely monitored.

In terms of regions, user growth in the second quarter mainly came from the Asia-Pacific region, with Japan, India, and other regions with gaming genes or large populations being the main drivers.

In terms of user stickiness, there was also a counter-trend increase in the second quarter, with average daily time per user increasing by 2.5% year-on-year. With total user time expanding simultaneously with user scale and individual user time, the total user time in the second quarter increased by 24.4% year-on-year, showing a significant acceleration compared to the relatively poor performance in Q1

In addition, the growth of Bookings is mainly driven by user expansion, with a small portion coming from the stable growth of single-user payments.

II. Adjusted EBITDA finally turned losses into profits

In the second quarter, Roblox's operating losses under GAAP continued to shrink on a quarter-on-quarter basis, mainly due to the continuous reduction of Capex over the past year, reducing infrastructure costs. In addition, operating expenses were strictly controlled, with research and development expenses and sales expenses decreasing year-on-year.

However, a significant portion of expenses are still highly correlated with revenue. Dolphin mentioned in "Roblox: Can't Swallow the 'Big Cake' of the Metaverse" that Roblox's way of recognizing revenue and cost expenses, so looking at the changes in the "expenses/Bookings" ratio is more in line with the actual operating situation.

By comparing operating profit to Bookings revenue, there have been slight optimizations in various ratios on a quarter-on-quarter basis, with infrastructure costs showing the most significant optimization, with a year-on-year decrease of over 5 percentage points, followed by research and development expenses. Capex in the second quarter is still decreasing in absolute value, so the scale of infrastructure costs can continue to be adjusted in the future.

Moreover, more than half of the employee expenses are in the form of non-cash equity incentives, making it appear more friendly in terms of both Adj. EBITDA and cash flow. Since the second quarter of last year, the overall number of employees has continued to increase, leading to a 19% growth in SBC expenses in 2Q24. However, this ultimately has not had much impact on cash flow, and due to the continuous reduction in Capex, more cash has been squeezed out. Free cash flow in the second quarter was 112 million, while it was still in net outflow last year.

Adjusted EBITDA excluding SBC expenses, when restored to the original calculation method, showed a year-on-year growth of 304% in the second quarter, with a profit margin of 16%, an increase of nearly 1100bps year-on-year. Combined with the company's profit guidance for 2024, it implies a 550bps increase in Covenant Adj. EBITDA, exceeding the previous investor day management's optimization pace (100bps to 300bps/year).

Dolphin Research on "Roblox" Historical Articles:

Financial Reports

May 10, 2024 "Roblox: Revenue guidance lowered out of caution, growth rate recovered in early April (1Q24 conference call minutes)" Link

May 10, 2024 "Roblox: Key indicators falter, growth concerns arise again" Link

February 8, 2024 4Q23 conference call minutes "Roblox: Positive growth guidance from good user data performance (4Q23 conference call)" Link

February 8, 2024 4Q23 financial report review "Roblox: Growth and loss reduction, not willing to miss out on either" Link

November 8, 2023 3Q23 financial report review "Roblox: Taking advantage of the peak season to 'wipe away past shame'" Link

August 11, 2023 2Q23 conference call minutes "Roblox: User experience first, maintaining ecosystem expansion (2Q23 conference call minutes)" Link

August 9, 2023 2Q23 financial report review "Roblox: Profit disappointment, piercing through high valuation" [Link](https://longportapp.com/zh-CN/topics/8957168? In-depth

On July 18, 2023, "Is it worth betting on the metaverse with Roblox?"

On July 13, 2023, "Roblox: Can't swallow the 'big cake' of the metaverse"

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure