Roblox: Growth and Reduced Losses, Neither Wants to Miss Out

Hello everyone, I'm Dolphin Research!

On February 7th, Roblox released its fourth-quarter earnings for the 2023 fiscal year before the US stock market opened:

Bookings in the fourth quarter exceeded expectations, mainly due to stronger holiday season consumer spending. The company's growth guidance for the first quarter and the full year of 2024 is also better than market expectations (Bloomberg's forecast for 2024 Bookings is slightly lower, around $4 billion).

Overall user metrics slightly exceeded expectations, mainly reflected in the 13+ age group (higher purchasing power), which drove the MoM increase in average consumer spending.

Profit performance was average, with a larger-than-expected increase in losses. However, Roblox's expense spending is more closely related to its revenue. Looking at the proportion of expenses to Bookings, there is still a trend of reducing losses. In addition, operating cash flow increased MoM due to seasonal factors, but with a significant YoY decline in capital expenditures, free cash flow continued to improve.

In other words, as long as Bookings remain strong, Roblox's operational issues are not significant. At the investor day at the end of last year, the company outlined a growth prospect: (1) Maintain an average annual compound growth rate of 20% for Bookings from 2025 to 2027. (2) Optimize adjusted EBITDA by 100-300bps annually in the next 3-5 years.

How will revenue growth be achieved?—In addition to expanding to more platforms (such as benefiting from Meta's Quest and Sony's Playstation in the short term), especially penetrating the 17+ age group and increasing user stickiness, the next step is to increase advertising monetization. Regarding the outlook for advertising revenue, the company's previous goal was to contribute $1 billion in revenue annually in the long term. So how is the short-term progress? This can be focused on during the conference call with management.

How to improve profitability?—Low-speed investment, focused investment. Roblox's capital expenditures have declined significantly for two consecutive quarters, further slowing down the growth rate of infrastructure costs. Although there is an increase in losses in the short term due to increased employee expenses, a significant portion of the employee expenses are non-cash outflows in the form of equity incentive costs. Therefore, under the seasonal expansion of Bookings that are not consumed in the current period, the overall operating cash flow situation has further improved.

Just like last quarter, Roblox continues to solidify investor confidence in the two aspects that the market cares most about: reducing losses and future growth. With a cash flow-friendly business model, Roblox can continue to patiently cultivate its ecosystem and enhance user stickiness.However, to truly turn around the profit and loss situation, the progress of advertising in the short term needs to be considered. In the medium to long term, it is necessary to attract more young and middle-aged users through the development of more mature and high-quality content created by developers, thereby increasing the average revenue per user and obtaining more advertising budget.

In terms of valuation, the market still implies relatively optimistic expectations for Roblox's prospects (24e EV/Rev 7x, valuation in the high range among gaming peers). For details, you can refer to our previous long-term assumption deduction and calculation ("Betting on the Metaverse with Roblox, is it worth it?"). We recommend focusing on Roblox's advertising business, which is expected to launch video ads in the first half of this year, including standard brand ads and incentive ads.

Rationally speaking, due to the differences in purchasing power and scale of user groups, it is more difficult for Roblox to do advertising compared to Netflix's cross-border advertising. Therefore, in the case of relatively full market expectations, the actual impact of the landing effect on valuation fluctuations is crucial. Dolphin Research believes that although the user profile is too young, with the improvement of this year's industry budget margin and Roblox's continuous expansion, we maintain a neutral to optimistic expectation for Roblox's advertising business.

Performance indicators at a glance:

Detailed interpretation of the financial report:

I. Core indicator Bookings growth accelerates

For Roblox, an excellent business model with subscription revenue upfront and a relatively large proportion (25%) of developer revenue sharing expenses lagging behind, in a normal operating cycle, it is sufficient to focus on Bookings and at most look at short-term trends based on deferred revenue.

In the fourth quarter, Bookings increased by 25% year-on-year, surpassing $1 billion for the first time, benefiting from strong consumer willingness to spend during the holiday season and accelerating growth on a quarter-on-quarter basis. Looking at deferred revenue, the net increase in the fourth quarter also reached a new high, with a year-on-year growth of 16%, ensuring short-term growth trends.

The company's guidance for Bookings in the first quarter and full year of 2024 also exceeded market expectations, with a growth of around 20% compared to this year. This is also the long-term outlook for steady growth that the management has maintained at the investor day in November last year, with an annual growth of 20%.2. The expansion of surface losses is not a problem

In the fourth quarter, Roblox's revenue growth was good, but the GAAP operating loss increased compared to the previous quarter, mainly due to the faster increase in employee expenses and developer revenue sharing.

However, expenses mainly follow the revenue, as Dolphin Research mentioned in the article "Roblox: Can't Swallow the "Big Cake" of the Metaverse". Therefore, looking at the change in expense rates from the perspective of "Expenses/Bookings" is more in line with the actual operating situation. If we compare operating profit to Bookings revenue, we can still see an overall trend of optimization. In the fourth quarter, except for the relatively stable payment channel fee rate and developer revenue sharing rate, other operating expense ratios have significantly decreased.

On the other hand, in terms of employee expenses, more than half are non-cash payments in the form of equity incentives, so whether it is from the perspective of Adj. EBITDA or cash flow, it will appear more friendly.

In the fourth quarter, adjusted EBITDA was 81 million, with a profit margin increase of 23% compared to the previous quarter, and a YoY increase of 300bps, which is in line with the management's optimization pace for the medium and long term (100-300bps/year).

In terms of high operating cash flow, the company deliberately reduced investment or implemented efficient and concentrated investment, resulting in a significant YoY decline in capital expenditures for two consecutive quarters. As a result, free cash flow achieved a net inflow of 78 million US dollars in the fourth quarter, showing significant improvement compared to the same period in previous years.

3. Strong willingness to shop during the holiday season

The expansion of Roblox's ecosystem traffic has always been relatively stable, but for an entertainment platform, the fourth quarter is not a peak season for acquiring new users due to students returning to school. Although Roblox's net increase in users in the fourth quarter was not significant, only 1.3 million, they all came from the user group aged 13 and above. This is the second consecutive year that the growth rate of users aged 13 and above has exceeded that of users aged below 13. The more older/adult users there are, the greater the help for advancing the advertising business.In terms of regional distribution, the user growth in the fourth quarter mainly came from Europe (such as Germany) and the Asia-Pacific region (such as Japan). Before the emergence of content that crosses new user circles, North America has basically become a mature market, and maintaining net growth has become more challenging.

Although user growth is moderate, user stickiness remains stable. The key is that the year-on-year growth in purchasing power per person has accelerated. The year-on-year growth in total user time in the fourth quarter still reached 21%, but the per capita time remained stable. Therefore, the high growth in bookings in the fourth quarter is more due to the increase in individual willingness to pay.

It is also because of the business model that is more favorable to cash flow that Roblox can continue to invest in user ecology more freely. In 2023, Roblox gradually overcame the base number dilemma caused by the decline of the epidemic dividend and returned to a dual-driven state of rising quantity and price.

Dolphin Research "Roblox" historical articles:

[Earnings Report]

November 8, 2023, 3Q23 Earnings Report Review "Roblox: Making a Comeback in the Peak Season"

August 11, 2023, 2Q23 Conference Call Summary "Roblox: Prioritizing User Experience and Expanding Ecosystem (2Q23 Conference Call Summary)"

August 9, 2023, 2Q23 Earnings Report Review "Roblox: Profit Warning, Piercing High Valuation"On July 18, 2023, "Is it worth it to bet on the metaverse with Roblox?" was published on Longbridge App. (Invite code: 032064)

On July 13, 2023, "Roblox: Can't swallow the "big cake" of the metaverse" was published on Longbridge App. (Invite code: 032064)

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