Roblox: Positive Growth Guidance Stemming from Strong User Data Performance (4Q23 Earnings Call)

Here is the summary of the earnings conference call for the fourth quarter of 2023 for Roblox. For an interpretation of the earnings report, please refer to "Roblox: Growth and Reduced Losses, Don't Want to Miss Out" (link: Roblox: Growth and Reduced Losses, Don't Want to Miss Out).

1. Review of Key Financial Information:

1. Detailed Content of the Earnings Conference Call:

2.1 Executive Management Statement of Key Information:

1. Financial Data:

In the fourth quarter, DAU reached 71.5 million, a YoY growth of 22%;

Engagement hours reached 155 billion, a YoY growth of 21%;

Revenue reached $749 million, a YoY growth of 30%;

Bookings reached $1.1 billion, a YoY growth of 25%, achieving quarterly bookings of over $1 billion for the first time.

For the fiscal year 2023, DAU grew by 22% YoY, engagement hours grew by 22% YoY, revenue grew by 26% YoY, and bookings reached $3.5 billion, a YoY growth of 23%.

a) CS: Achieved net cash flow from operating activities of $143 million, with seasonal characteristics, a YoY growth of 20%; net liquidity of $2.2 billion, significant increase in free cash flow due to reduced capital expenditures.

b) IS: In terms of revenue, Q4 total bookings reached $112.7 million, a YoY growth of 25%; in terms of expenses, the growth rates of labor costs and infrastructure costs, which are the two major fixed costs, were lower than the growth rate of bookings; adjusted EBITDA reached $259 million.

c) Contribution margin guidance: The actual Q4 margin rate is approximately 23%, about 270 basis points higher than the same period last year; the midpoint margin rate guidance for the full year is 13.4%, 110 basis points higher than last year.

1. DAU Analysis: In the fourth quarter, DAU performed well, driven by innovation and investment in the platform.

a) By age group: DAU for users aged 13 and above accounted for over 58%, with a MoM growth of 28%.

b) By region: DAU in the United States and Canada grew by 17%, DAU in Japan grew by 45%, and DAU in India grew by 59% YoY.3) International Expansion Plan: This includes establishing infrastructure based on safety and civilization; AI-driven language translation models are being developed for real-time AI chat translation; developer subscription services have been launched. We are committed to transforming our Avatar platform into a fully UGC platform.

1. Ongoing Innovations: In terms of social aspects, we are continuously expanding the circle of friends; in immersive communication, we are improving voice functionality; in Avatar, in addition to layered clothing, we are adding facial animation penetration and voice chat penetration; in AI, we have launched the Roblox Assistant (AI-agent) and will also introduce more real-time image, voice, and chat moderation AI.

2.2 Q&A Analyst Questions and Answers

Q: I would like to know how the potential layoffs of game developers in the video game industry in 2024 could benefit you. Some industry experts estimate that over 10,000 workers will be unemployed in the video game industry in 2023. According to Kotaku, in January alone, over 6,000 people were laid off, including 2,000 from Microsoft. I would like to know if you have noticed more mobile app and PC game developers joining the Roblox developer community in the fourth quarter of last year or January this year than before. What measures has Roblox taken in 2024 to attract talent from the video game industry to join your ecosystem?

A: There are two aspects to discuss regarding this question. First, this year, we will continue to recruit internally within the company.

Second, over the past few years, the creator community on Roblox has been growing and earning substantial income, whether they are in the top 10, top 100, or top 1,000. So the situation you are asking about has been happening for several years.

With the growth of our bookings, there are increasing economic opportunities on our platform. Therefore, we believe that without considering layoffs, our creator community will continue to grow.

Q: With the significant growth in bookings in the fourth quarter, can you share some insights on the growth driven by advertising? Additionally, I would like to know the progress on the additional features and measurement tools that you mentioned yesterday.

A: I will start by discussing it from a holistic perspective. We have a plan this year to provide more tools and capabilities to our partners so that they can better measure and understand the platform.

In the fourth quarter, we achieved growth in advertising within Bookings. We set a quarterly advertising goal internally within the company. While we won't disclose specific details, we are very focused on scaling this market in the coming year.

We will only start disclosing specific financial data related to advertising when it becomes materially significant to our financial results. Although we are very pleased with the progress, we have not reached that point yet.

Q: You have been working on increasing the age range of your user base, which remains one of the most important concerns for investors. In your opinion, what is the biggest factor in attracting and retaining more mature users? Is it higher quality or more innovative content? Additionally, I am interested in how different age groups engage on the platform. How do you view your audience?Understanding the differences in gameplay and spending habits among different age groups can be very meaningful.

First of all, I would like to emphasize that we have been in this industry for two, three, or four years and have gained considerable experience. A few years ago, the majority of users on our platform were under the age of 13, so seeing growth in users over the age of 13 is a very positive sign.

We attribute this to many factors, including platform quality, search and discovery features, organic growth of new and existing players, and player retention and growth. We have also observed that older players' gaming habits are generally similar to what we have observed in the existing gaming and communication market. We have noticed that certain groups tend to engage in gaming experiences on PCs for longer periods of time, while others prefer social interaction on mobile devices. Therefore, the good news is that the patterns we see on Roblox are similar to the very large market, including the overall gaming market and the overall social communication market. There is no specific factor, but rather a combination of factors that contribute to growth based on retention and viral growth of new players globally.

Over the long term, the growth rate of mature users has consistently been higher than that of young users. In terms of behavior, they now make up the majority of the user base and this has been the case every quarter. In terms of user behavior, mature users are more likely to spend more time on the platform and are more inclined to make purchases compared to young users. Therefore, in the long run, this will help improve the platform's monetization level.

It is worth noting that we can subjectively see the expansion of content that may intuitively attract mature players, including realistic combat types and fashionable attire. I have already posted some content about these attributes on Twitter.

Q: Can you provide some background information on the network effect you mentioned in the shareholder letter? Specifically, how many people in your user base are using voice tools or the recent text translation feature? And how much impact do these tools have on user behavior? The revenue growth we have seen in daily active users this quarter, will this growth continue? If so, do you have any recent new content or virtual items about to be released? Are there any factors driving growth that you particularly want to emphasize or highlight?

A: I don't have specific data on the number of voice daily active users at the moment. We achieved a 161% year-on-year growth in voice daily active users this quarter. Our internal metrics show that users who use voice have significantly higher retention rates, engagement levels, and other metrics. Therefore, there is a network effect, meaning that as the proportion of users using voice increases, we observe corresponding improvements in other metrics.

Regarding the question of daily active user bookings, my main focus is on the volume of bookings and the growth in bookings. If the growth rate of daily active users is slightly faster, this number may slightly decrease. If the growth rate is slightly slower, this number may slightly increase. Roblox's economic team is working on plans that are more attractive than what I have seen before, and we are optimistic about our ability to continuously improve the platform's monetization.Q: I want to go back to the advertising aspect. I know it's still too early for quantification, but can you give us an idea of the main indicators we should focus on as you develop this opportunity? Whether it's market research or brand case studies, what key signs should we pay attention to? What are your considerations for the development of our direct sales team? How should we approach this issue? How is the construction progress in this process? Are you ready to enter the market?

A: I will share some key signs. One sign worth paying attention to is the approximate growth of the number of advertising brands on our platform based on our experience. This year, from the platform's perspective, you will see that we are providing more measurement capabilities to our partners to track the effectiveness of brand advertising. We have mentioned that we are conducting experiments related to physical shopping, but the specific launch date has not been determined yet. We believe this will ultimately create a complete closed-loop effect for advertisers.

Regarding the platform, we do not have specific numbers on the development progress yet. In the fourth quarter, we hired Stephanie Latham, who leads an excellent team. We are expanding this brand partnership team to prepare for market entry. In fact, I just met with them yesterday, and they performed exceptionally well.

We all want to take this opportunity to introduce this emerging organization. It is constantly evolving and attracting new talents who are highly talented and passionate. How we will showcase milestones when we reach important revenue levels is something we will continue to focus on.

Currently, the pure number of engagements is a more accurate way to observe. The number of brands that started working with us in the fourth quarter has been increasing, and their quality and depth of engagement are excellent. Therefore, we will talk more about this issue in the coming quarters.

Q: I would like to know your latest thoughts on emerging platforms, augmented reality elements, spatial computing, etc., such as Quest 3 and Apple's Vision Pro platform. How do you consider continuing to expand user distribution channels and provide fresh experiences in the medium to long term?

A: I am very proud to be involved in the Quest project with Meta and PlayStation in the fourth quarter, which highlights our vision that immersive 3D connectivity and communication should be achievable on mobile phones, tablets, computers, VR headsets, and game consoles. We can extend to other platforms that we have not yet ventured into, and these are logical candidates. Vision Pro is obviously an interesting choice. There are also other candidates that you are all aware of.

Furthermore, looking ahead, we are excited about the real connectivity and communication capabilities being built on our platform, including our open-source Roblox Connect, which showcases a wide range of communication APIs. We are also aware that as these platforms become more popular, some communication features may go beyond VR and expand into the MR and AR fields.A: 是的，调整后的 EBITDA 主要反映了历史调整后的 EBITDA 加上递延收入的变化。除了递延收入之外，我们没有进行其他调整。这样的调整可以更准确地反映我们的财务状况和业绩。A: Yes, that's correct. On page 36 of the supplementary materials, you can see this number. In the shareholder letter, the adjusted EBITDA number may look a bit strange because deferred revenue is not included. You need to add deferred revenue to it, and then you will get Covenant Adjusted EBITDA, which is usually the number we talk about.

Q: I think you mentioned this before, the conversion rate between your EBITDA and operating cash flow has always been close to 100%. Is this trend expected to continue in 2024 and beyond? Also, what are your expectations for capital expenditures this year?

A: Yes. It's just a timing difference, related to the timing of working capital and operating cash flow. The first and fourth quarters have the most significant impact. The fourth quarter is the accumulation of working capital, while in the first quarter, there are large receipts. So, there is a significant difference between these quarters.

The expected capital expenditures for this year are $180 million, and as mentioned earlier, we have already stated that a portion of it is related to real estate. Not all capital expenditures are used for infrastructure, and our infrastructure investment has significantly decreased.

Q: Profit margins are expanding now, and free cash flow is once again significantly positive. You are now facing a quite challenging issue of having a considerable amount of excess cash. What are your thoughts on this excess cash? What is your view on capital allocation when considering capital deployment?

A: We now have a good cash position, and whether it is excessive for a company like ours is a matter of perspective. We value having a strong balance sheet because it ensures that we have sufficient cash reserves. This way, we can be prepared for any needs or opportunistic investments that may arise.

At the same time, we are in a good position to continue investing in the business and achieving growth, even though our funding primarily comes from operating activities. So, for now, we are satisfied with the condition of our balance sheet. We don't believe there is a lot of excess cash. Our capital allocation is mainly focused on investing in infrastructure, engineering, and products, and we can do that from the company's operating cash flow. It's a good position to be in.

Q: You mentioned that subscriptions are a newly introduced tool. I'm curious if you think this is an important tool for monetization and if it could potentially impact developers' ability to create new types of experiences. Overall, how long does it usually take for you to integrate new tools into the process of developers creating new experiences when you launch them for developers?

A: We haven't disclosed detailed numbers, but the subscription model aligns well with the platform vision we have created, which is to give many developers multiple choices in monetization. We have observed how many of the top 20 developers on the platform are now offering internal experience subscriptions, and you may be able to find out if we have shared this information. We have also seen a high adoption rate of the subscription model among our creator community. These subscription models enable individual creators to create a sustainable revenue stream, whether users are paying through mobile payments, credit cards, or other forms of recurring payments. We believe this will contribute to the long-term monetization of the platform.We believe that the subscription model is helpful for user retention, and developers can use this model according to their own preferences. As for your second question, I don't think there is a fixed answer. It is difficult to accurately determine how long it will take for developers to adopt the new features we create for them. They will decide how to use these tools based on their own pace and business needs. Our job is to provide them with these tools and visibility, and they will launch these features according to their own needs and pace.

Q: Obviously, Apple has made some changes regarding the commission rate of the App Store in the European Union. Does this have any impact on you?

A: Regarding this matter, we pay close attention to all our business partners, including Microsoft, Google, Apple, Amazon, and other platforms.

First, all the strategies and guidelines we provide assume that these foundations have not changed.

Second, these partners are still good partners for us.

Third, we are reviewing the EU's ruling to determine if it is meaningful for us.

Fourth, we hope that any future fee adjustments can be allocated as much as possible to our creator community, while also leaving a portion of the benefits as the company's revenue to sustain operations and development. Therefore, if there are possible changes in the future, we believe it will help drive our creator community.

Q: First of all, what is your view on the accelerated pre-orders in the US market? I remember last year there were some thoughts that there might have been some excess performance due to gift card promotions. So, is there a similar situation this time?

Secondly, there are 3 million new paid users added in this quarter. Where do these users mainly come from, and are there any significant changes from a geographical or age perspective?

A: Regarding the second question, there haven't been any major geographical shifts. We have seen strong growth in paid users across various regions. Part of the reason is that mature markets like the US and Canada have experienced rapid growth in users.

As we mentioned before, their monetization effect is slightly better. As for why there was such strong pre-order performance in the fourth quarter, we believe it is because our growing user base is becoming more active. The content is continuously becoming richer and of higher quality. The platform is expanding.

In the fourth quarter, we launched content on some new platforms, which obviously had an impact. But overall, these factors have been driving long-term business growth.

Currently, our DAU (Daily Active Users) ratio in the 13+ market is 58%. Considering the overall market size of gaming, immersive communication, and social connections, you can calculate the potential market size of this age group compared to the under 13 market. We attach great importance to the growth in this area because the market size of users in this age group is crucial for us.

Q: First, I have some questions about expenses, especially in terms of infrastructure and trust and security. The efficiency in this quarter reached a very high level, accounting for 11% of total pre-orders. I would like to know how you consider this number in internal evaluations. Is it based on per user, per hour, or per dollar of pre-orders?A: We will approach this question from multiple angles. Ultimately, cost of service is the metric we use and the metric our team has. The infrastructure team has this metric and they are working hard to reduce it. Currently, it is around 11%, and with increased efficiency and greater utilization of artificial intelligence, we expect this number to remain at a high single-digit level in the coming years. It has been a good lever in recent times, and we still believe there is more work to be done in this area.

Q: You provided some great information about developer transaction fees earlier, and it is clear that any savings in revenue costs will be reinvested into DevEx. However, looking solely at DevEx itself, I noticed that the proportion of DevEx in this quarter is below 20%, the first time in over two years. I would like to know your thoughts on the driving factors behind this, and whether other aspects remain unchanged. Even if there are no changes in app store fees, do you expect it to still be a percentage of revenue that increases?

A: DevEx is almost on par with the fourth quarter of the same period last year. It was around 20% in the fourth quarter of last year, and it is also around 20% in the fourth quarter of this year. So I haven't seen any significant changes. There are some seasonal factors affecting this number, but overall, we always want to invest more economic benefits into DevEx.

I would like to share what we discussed in the Q2 2023 earnings conference call six months ago. Our vision is that we want the growth rate of annual bookings to be faster than costs, faster than infrastructure and certain other expenses, and faster than personnel costs. The remaining impact includes the company's profit and its impact on creators. The more efficient we are in the first three aspects, the more we can seek expansion in the latter two aspects in the future, which is to increase the company's leverage and support for creators.

Q: Regarding the growth in average bookings per DAU, especially in Europe and other regions, are there any specific driving factors? Both regions remained very strong in the fourth quarter and had accelerated growth.

A: As users spend more time and money on the platform, their spending will naturally increase. We have a group of high-quality mature and young users. As the number of mature users increases globally, they tend to have a higher propensity to spend. Additionally, the importance of high-quality content on the platform is evident.

This is thanks to our developer team building excellent content that users are willing to pay for. Therefore, this trend has been developing for some time and moving in the right direction. As I mentioned earlier, our economic team is taking a series of measures to further improve this metric.

Furthermore, in terms of the economic team, we are also committed to improving the quality of service provided by payment providers. Additionally, I would like to emphasize that in terms of business expansion, we have made significant progress in promoting prepaid cards globally over the past year.

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