Roblox Corporation

Good morning. My name is Dennis, and I will be the conference operator today. At this time, I would like to welcome everyone to the Roblox Secondary 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Stephanie Notami, Director of Financial Communications. Please go ahead.

Stephanie Notami Good morning, everyone, and thank you for joining our Q&A session to discuss WorldBlox's Q2 2022 results. With me today is Roblox CEO Dave Bezouki and CFO Mike Guthrie. Before we start, I want to remind everyone that yesterday after market close, we published a shareholder letter and earnings results on our investor relations website at ir.roblox.com. On this call, we will make some brief opening remarks and reserve the rest of the time for your questions. For our webcast participants, please note the question icon at the bottom of your screen where you can type in your questions. We'll do our best to take as many questions as possible in the time we have allotted today. On today's call, we may be making forward-looking statements, including but not limited to our expectations of our business, future financial results, and business and financial strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in our forward-looking statements, and such risks are described in our risk factors included in our SEC filings, including our Form 10-K filed for our first quarter ended March 31, 2022. You should not rely on our forward-looking statements as predictions of future events. We disclaim any obligation to update any forward-looking statements except as required by law. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued yesterday, as well as in our supplemental slides, copies of which can be found on our Investor Relations website. This call is being webcast, and it will be archived on our website shortly afterwards. With that, I'll turn it over to...

And we followed this up with July, which was absolutely the in Roblox history, including all peak COVID times. And the month of July was a peak across regions. Our DAUs were 58.5 million, about 26% year-on-year.

And our hours of engagement were 4.7 billion hours, 95% year-on-year.

I want to highlight that this year-on-year growth included our core U.S. Canada market with DAUs up 15% year-on-year. and hours up 23%, and bookings up 14% year-on-year in July.

We continue to see accelerating growth year-on-year globally, and as greater than 13 users on the platform become more prevalent, this is a good harbinger of the potential size of this market and why we continue to be so optimistic. And then finally, we exited June bookings up to 8% year-on-year and July. This is powered by amazing content and our amazing community and continued innovation on the technology side. On the content side, we are approaching 50% of our top more over $13.

than under 13 players. And our developer community, with our hours per month, is up 32% year-on-year. We continue to see great brand experiences, side-by-side the amazing Roblox experience.

And more and more of these are self-serve. I'll highlight some of the brands we shared with this last quarter, including Gucci Town, which had over 30 million visits since March. We saw Tommy play from Tommy Hilfiger with over 7 million visits since June. Wimbledon released Wimbledon World, and Spotify Islands was released, which is a persistent space with artist appearances. I want to highlight that we are getting to the point where our 17 through 24 cohort is going to pass our 9 through 12 cohort in size.

Now, the 17 through 24 cohort is larger. But once again, this is a great signal of the potential size of our market across all ages.

This growth, in addition to being powered by our amazing content developers and our amazing viral community, is supported by our innovative tech, some of which is iterative and measurable, including improvements to our Roblox translation system, including the quality and personalization of our search and discovery system, And even including things that might not be readily noticeable, such as the speed that our mobile app and game joints occur in, just raw performance. On the vision side, our layered clothing system is just a first step to very highly personalized avatars across the platform. Our voice system is rolling out and is a great sign of really the future of how people will communicate on platforms like Roblox. And our physically-based material system has been widely acclaimed by our developers as the next step in taking Roblox to a more realistic look and feel. Finally, I want to highlight that we continue to work on innovative, immersive, native monetization systems, and we do expect to be rolling out a test of our immersive advertising system sometime later this year. You'll notice in our announcement we are making investments in infrastructure.

We are building a worldwide cost, performance, and reliability

leading infrastructure, including active performance around the world. And I want to highlight that infrastructure performance contributes to our growth with an example of the recent data center we deployed in India. Finally, we continue to hire at the same rate we did in H1 and are optimistic about continuing to bring great talent into the company. With that, we will move on to your questions. Thank you.

Thank you. And as a reminder, in order to ask a question, simply press star, then the number one on your telephone keypad. And we'll first go to Drew Crum from Stiefel. Please go ahead.

Okay, thanks. Hey, guys, good morning. So, Dave, in your shareholder letter and your preamble, you noted your fastest growth demographic in the U.S. and Canada was that 17- to 24-year-old segment. Can you remind us how this cohort monetizes relative to others on the Roblox platform? And then I have a follow-up.

Hey, Drew, it's Mike. Just getting into the numbers, in the month of July, that 17- to 24-year-old cohort in the U.S., and we measure this on a bookings-per-hour basis, was actually just slightly ahead of our core 9-12 demographic, which historically has been our peak monetizing age demo. Now, we expected that. Over time, we always said that the older users who have more direct control over their spend become more prominent on the market, they would monetize better, and we certainly saw that in July.

Got it. Thanks, Mike. And then, Dave, maybe a more broad question. During this current earnings cycle, several video game publishers have cited weaker trends across mobile gaming, with Roblox being a free-to-play model. What are your thoughts on how the business should perform during a period of economic weakness? Thanks.

Yeah, I want to highlight one of the wonderful things about Roblox is we're not a game and we're not really even a game platform. We're a future human co-experience platform. And a lot of what people do on Roblox is come together to be together, to connect, to socialize. We're starting to see people supporting educational experiences. We have traditionally been neutral, i.e. immune to these types of economic cycles. We have a robust economy. We've been through these cycles before, and we've been relatively immune to them.

We'll move next to David Karnofsky at J.P. Morgan. Please go ahead.

Hi, thanks for the question. I'm wondering if you could just discuss the ongoing rollout of voice chat, how developers and players are responding to it, and how that might be impacting frequency for some of the older cohorts. And then just as a follow-up, you mentioned a test of immersive advertising later this year. Just wondering if you could expand on the scope of that. and what that potentially implies for rollout or when you might be able to update investors on kind of a longer opportunity there.

Yeah, I want to highlight consistent with our values and the way we've run Roblox since the early days, safety and civility is a high priority here. We are rolling voice out. It is partially rolled out now with older players with validated IDs, and we're opening that up. aperture, we can measure increased engagement from the people using voice. And so we're very optimistic about what's happening there. The vision of immersive advertising has been around for a long time, and this is both performance as well as brand advertising. We are going to be rolling out tests ultimately along both of these lines. And it's the notion that in an immersive 3D space, there's a lot less friction when we see appropriate advertising, just like we would in the real world, a billboard ad, for example, which we can scale across all the experiences on Roblox. But we're also optimistic now that we see many brands establishing a presence in Roblox that some of these brands will also want performance marketing, which is a way for, in the appropriate case, for people to be able to go to one of our brand partners directly from someone else's 3D experience. So we're really optimistic about this, and we love the idea of, in a gentle way, complementing our already very healthy economy with an additional potential revenue source.

Thank you. We'll move next to Clark Lampin with BTIG. Please go ahead.

Thanks a lot. Good morning. I wanted to come back to, you know, the sort of success that you're seeing with 17-plus users. Just because we are seeing, you know, a lot of signs of success with aging out, both in terms of aggregate BAUs and engagement. Could you give us more of a sense for how those users are engaging differently versus younger ones? Are they spending time in different experiences or are they monetizing more passively or using different hardware? Any color you could provide would be appreciated. And then, Mike, just given you guys made some comments around sort of CapEx trends over the balance of the year, Could you give us a sense for infrastructure investment projects? Is this really a 22 endeavor, or is this something that we can see sort of stretching into 23 and beyond? Anything you can say about cash flow and CapEx would be appreciated. Thanks.

Yeah, I'll start off on the experiences. I noted that of the top 1,000 experiences on our platform, 481 now have more 13 and up players than under 13 players. Our developer community is amazingly responsive. The quality of the content that they're creating is getting better and better, both based on their sophistication, the size of their teams, as well as our tool set. and our infrastructure, and we can see more and more experiences in those top thousand that are very heavily targeted to older players. So like any healthy market, given the size of our developer economy, we are seeing developers respond with those experiences. And in addition, we have a pipeline of experiences that are very aligned with the types of things older players might want to do coming through our game fund. I want to highlight that across our platform, the vision for a platform like this goes way beyond playing games. We know right now, for example, in the midst of COVID, people use robots as a communication tool to be together when they can't be together physically. We can see partners like FIRST Robotics now getting ready to launch educational experiences for people who can't build robots with the physical kids. And we ultimately, you know, all of our brand partners, including our music partners, are using Roblox as a way for people to go to concerts together. So the vision of this category is bigger than Play, and as you correctly note, there's a lot of different use patterns we see across the platform.

And Clark, CapEx will be spread across the balance of this year and next year. So we'll certainly be investing in infrastructure across both periods. Timing of spend, you know, we give a rough estimate of what it would look like for the back half of the year, but we'll definitely have incremental spend in 2023. But we view it as incredibly productive, and it's partially driven by just the Yes, substantial growth in our user base and a desire to get to even more economical infrastructure, so more performance, more reliable, and more efficient for us. Thank you.

We'll move next to Matthew Kost, AdMorgan Stanley. Please go ahead. Thank you.

Great, thanks for taking the questions. So one for Dave, one for Mike. Dave, just there's some language in the letter about key investments and product initiatives that drove a positive impact for July. You touched on in the prepared remarks, but I wonder if you could just give any more detail about what specific products you think were the most impactful for July. And then for Mike, just wondering how should we think about the pathway for margins from here as you continue to invest in new hires and infrastructure? Thank you.

Sure.

yeah you know our growth is powered by the the content created by our community by the core virality of our product which is great content coupled with a viral loop and then with innovative technology all of the the things i measured are early signals our layered clothing system is an early signal towards hyper-personalized avatars that more and more might look like you, might be of various styles that are supported by our creator community. So this is a first step. And on voice, once again, would highlight long-term, we see more and more people potentially using voice as we roll this out. There are also under the covers, coupled with the visionary type we're working on, How quickly can you join a Roblox experience? So we can see our translate system. We can see search and discovery. We can see raw mobile app performance. We can see our game engine performance all contributing to growth as we go forward. And up and down our product stack, there continues to be big things we're working on. We'll share some of these at Investor Day. But we have a lot of other, you know, visionary things in the pipeline. We've said publicly that this doesn't really stop until we're supporting a 50,000-person concert. That photorealism in real time was simulated audio and video. So there's a huge runway for technical innovation in this space.

And then, Matthew, you asked a question about margins. So let me address that, and then I want to make another comment here. You know, during sort of peak periods, let's go back. Prior to COVID, The scaling that we saw during COVID, the business tended to run in EBITDA margins in the mid-teens pretty consistently. And as we scaled up during COVID, those margins basically doubled, and we found ourselves in the 30% range. And we were really clear at the time that that was not state-to-state margins for us, and we saw an enormous amount of opportunity to invest. But the top line was growing so quickly that, you know, it was very difficult to almost bring the margins down. What we've chosen to invest in are the things that we see incredibly high ROI, hiring great people, pushing more in the economics for our developer community, which is clearly bearing fruit today and will continue to do so in the investment in infrastructure. Today, as we've been incredibly consistent in our investments and the top line has flattened as we're coming out of COVID and now it's started to pick up again, obviously margins are going to move around. What's consistent is that we're investing for the long run and that we have the economics and liquidity to continue to do that. I suspect that when we get into 2023 and we're no longer, you know, dealing, hopefully no longer dealing with COVID comparisons or non-COVID comparisons, we'll start to see the top line grow at a rate that will allow us to produce, you know, really healthy EBITDA margins. We will, however, continue to invest in infrastructure next year.

So free cash flow margins will be down, but overall operating margins, I think, will go back up and we'll be in a healthy place.

But we'll continue to invest for the future. I do want to make one quick comment. You had in your note this morning, you said that you expect elevated SBC will continue to drive scrutiny on the risk of dilution from new higher retention SPAC grants. Maybe we'll just remove any scrutiny. We've been really clear. We were in the letter. We've been tracking this as a management team, as operating executives, And we spent an enormous amount of time structuring our compensation plans and our recruiting plans. We worked with our board. We saw this coming, and we've been really clear that we would keep share dilution under 5%. The good news here is you've got shareholders on this side of the table, and so we are as dilution-sensitive as any company. shareholder who is out there on the call. So we're going to continue to recruit great talent. We're going to continue to compensate our people. And we're also going to watch the dilution and keep it under 5% and hopefully, you know, do even a little bit better than that. So I don't think there should be any undue speculation or concern there.

We'll move next to Omar Dessouki with Bank of America. Please go ahead.

Hi, guys. Okay, so can you please give me an update on the level of adoption of layered clothing among your players, number one? And number two, back in March, shortly after its launch, you had showed that the purchases of layered clothing items did not cannibalize purchases of existing 2D and 3D clothing items, and that was at the GDC. I wanted to ask you whether that is still the case, And number three, do you have a sense yet for when 3D-layered clothing will be coming to the community at large? And I have a follow-up question after that.

Yeah, I'll go high level, and then I'll see if Mike has the numbers floating around on that.

Taking a step back and peeking at the vision of where this is going,

is ultimately every avatar every head every piece of clothing on our platform is created by the community historically almost all of this was created by roblox and we're just about through that transition where everything is made by the community the final one that you're going to see rolling out is avatars themselves being created by our community as well and that'll bring us full circle and you'll see a an amazingly new look. So we are very optimistic that this is not viewed as a necessary cannibalization situation as much as where is the future here. And the future is everyone has a hyper-realistic avatar. It looks just like them. You can imagine all the ways we might build an avatar, including using a camera on a device, using ML, using developers themselves. There's a lot of interesting and exciting ways in the future we'll build avatars, coupled with a lot of clothing that is more and more created by our community. So this is the right direction. It is the big vision. Ultimately, all of the clothing on our platform will be 3D clothing. And there will still be an opportunity for users to create clothing, but it will be painting on 3D clothing rather than long-term using our traditional 2D clothing. I don't know, Mike, if we are sharing any numbers on the adoption, but ultimately we expect 100% of users to be using layered clothing.

Yeah. So Omar, let's give you a couple of quick numbers and just some trends. I think that's the most important thing, but it's a good question. So as of June 30, we had over 100 million users that had actually acquired a layered clothing item. and we've been doing tests to look at the economic output of those users and how they behave, and we've clearly seen it being accretive to bookings and Robux spent. So we'll get more data as that becomes a bigger and bigger part of the business, but so far the early indications are high levels of adoption and high performance within the user base that does acquire the items.

Okay, thank you. And then along the same kind of topic, You released dynamic heads towards the end of June. And I was wondering, and you also said, I believe, in the release, that dynamic heads would be available in the Avatar store at some point in the fourth quarter, which is new information.

Will users buy heads with a subset of emoticons? motions that are animated on their faces.

What exactly will the buyers on Roblox be buying?

Yeah, let's take a big visionary step here. And we acquired a company called Lumi over a year ago. And you can check out the types of demos and the technology they create. But it ultimately drives towards the vision that for those users who so choose on our platform, in addition to having their avatars be more personalized and more animated like themselves, The opportunity to actually have the heads and faces of those avatars animate in sync with optionally the use of the camera on your device or lip syncing. We share demos of this. I've done meetings this way. It's absolutely immersive and engaging in the future of where this is all going. Dynamic heads are one part of this and the rollout will occur in various steps. One is developer tooling. The next step is very simple things like emojis and really emotes actually and the ability to have a pre-canned animation on your head. and ultimately full tracking of that. We always think long term, first and foremost, about engagement, retention, and really frequency and making our experiences better. Because our bookings tend to scale with bookings per hour, we expect the more engagement we get, the better this is going to really be. There is huge opportunity for dynamic heads in our marketplace, and at the same time, I want to highlight that we're primarily thinking about this long-term as increasing engagement. But it's going to be overall positive in both dimensions. And then I don't know, Mike, if you want to share anything on top of that.

No, I think we'll report more as we have more data and maybe touch on this investor day next month.

Got it. Thanks very much.

Thanks a lot.

We'll move next to Bernie McTernan at Needleman Company. Please go ahead.

Great. Thanks for taking the questions. Maybe just to start, if you could talk about the product improvements to Search and Discovery. Spoke about it on the last call, and I think it helped with some of the age-up content this quarter. So if you could just detail when the improvements happened during the quarter and if there's still more improvements to come, just looking forward to full quarter benefits in the third quarter. Yeah.

I want to highlight that one of our values is take the long view, but one of our values is get stuff done. These improvements are happening every day. They are not forklift drops. They are a constant weekly improvement in the way we do search and discovery. There is so much opportunity here because as people come to our platform from different regions, from different ages, from different interests, There's an amazing opportunity to personalize the types of experiences they see when they first join our platform as well as when they become mature users. And we have a lot of signals that you might not find on a traditional platform, including what are your friends doing, what do people like you do, what have you done in the past. This is constantly improving. We are more and more getting personalized. We are ultimately trying to share experiences with everyone on the platform that will keep long-term enterprise value. And this is occurring both in cold start as well as in warm start for more mature players on the platform. So to go full circle on your answer every day, I will add that one of the things we have done in the last quarter, we shared that we were going to do it, is more and more move to the efficient frontier where we have historically been 100% engagement based on our discovery and search.

We believe there is an efficient frontier.

where engagement is balanced with monetization that drives the overall health of our platform. And really, when we have two experiences that are both retaining well, that are both predictive of the same play time, we are nudging towards that experience that monetizes better in that type of situation, which is what the Efficient Frontier is about.

Understood. Thank you. And then just as a follow-up, in the past, you've spoken about the weekend versus weekday usage, and that gave you confidence to be able to grow following the tough COVID comps. Can you talk about what you're seeing for weekday versus weekend usage now that you're at peak engagement again?

I want to just highlight that our long-term growth has so much opportunity. It's not predicated on weekdays or weekends. Even in our most healthy long-term cohorts, which would be U.S., Canada, 9 through There's a lot of headroom there, given that traditional Roblox users aren't using Roblox every day as a communication tool. So there's a lot of room on frequency within our traditional audience. As you can see, the growth rates in our 13 and up and 17 through 24 cohorts that cohort of 17 to 100 is much larger than the cohort of 9 through 12. And so there is also amazing headroom amongst older players on our platform to complement the headroom we have in our traditionally strong cohorts based on frequency.

Yeah, just adding to that, You know, when COVID started, our core age demos spiked up very quickly, and especially what we were making up for in other places. We've now gotten to the point where we've crested back to the point where we're on an absolute level.

Those cohorts are now growing around the world. And importantly, in the U.S.

and Canada, because that's where, you know, there's a more significant amount of work and of bookings in the U.S. and benefiting from growth in 17 to 24, 13 to 16, and all the older YouTube bases.

So we're in a great position where finally now on an absolute basis, not really.

We're now at a point where all of that growth that we've benefited from during COVID, we've absorbed. We've obviously retained the vast majority of it on Fridays, Wednesdays, and Fridays and Saturdays as well.

So, yeah, I think we're hopefully going to be healthy and go on living our lives.

We'll be more or less done with COVID comparisons here.

Great. Thank you both.

We'll move next to Eric Sheridan at Goldman Sachs. Please go ahead.

Thanks so much for taking the question. Maybe talk a little bit about what you're building on the advertising side as another means of monetization, and how should we be thinking about a mixture of both investments on the advertising side, building relationships with advertisers, and what you see as some of the revenue output of that as we look out over the next couple of years. Thanks so much.

I want to highlight the opportunity on our platform, both for traditional experience developers who are new developers creating new games and experiences on our platform, as well as brands who are establishing presence for people to interact with clothing, people to interact with music, people to interact with beauty, people to interact with a wide range of things.

potentially even monetized within those experiences.

So traditionally, a lot of these experienced developers and brands have been saying, how do I boost more? How do I get more traffic to my experience? How do I do a test? How do I reliably bring a billion users to the data in this experience? And this is the wonderful opportunity for native, immersive, non-obtrusive advertising in our platform. Imagine we are at one of our most popular Roblox experiences. Imagine a AAA partner has a small pop-up in the town square and Players will be able to choose whether to stop by, use that pop-up or portal or door, use experiences, experience something new, pick up some free merch, and then pop back to the experience they're playing.

So this is a very scalable brand advertising. Given that we did 4.7,

engagement in the month of July even at very conservative you know gentle ways of initially trying this with top-notch potential there relative I said before this has been always a visionary type of advertising it's a in the way of a user or add friction like some other types of advertising. And we believe it will actually be a fun and positive way that will complement our experiences.

And Eric, the end of that was your question on are we scaling up the team internally to, you know, covering the brands. Is that the last part of your question?

Yeah, I think that's the highlight. Yeah, I'll say two things and then maybe finish. We are building traditionally what has powered Roblox is the notion that at its foundation we build self-service. And self-service is always more difficult to build than bespoke things. Our Roblox's success is we are a self-service platform for experience creators. The product direction for this advertising system will also be self-service But it will be complemented by our amazing brand team. We have a great team. It's scaling. We have amazing people who are working with the Gucci's and the Tommy Hilfiger's to us in this new form of advertising to the platform. And we expect to continue building this amazing brand team. It will not be a sales team. It will be a consultative team to help people who are doing self-service and exploring our platform.

Yeah, I would just add, this is a team that's been in place for a while. These discussions with brands have been going on for quite a while, and we really do see it above and beyond just an ad sales organization. It's very strategic. And we've been talking with brands about the overall benefit of immersive engagement on our platform in multiple ways. You've heard us talk about this before. We have had incredibly high-quality brands more or less experimenting on our platform in a new medium, which is really exciting. to monetize these too quickly. I think we've learned a ton, and the team's done a great job, and the quality of the brand that we've been working with has just been first class.

We'll move next to Matthew Thornton with Truist Securities. Please go ahead.

Hey, good morning, David and Mike. This is Steve Farquhar from Matt Thorne. Two questions, if I could. Can you talk about how we should think about the incremental monetization efforts laying around and impacting the second half of 2022, examples being sponsored search, commercial ads, and commerce? Also, how should we think about what normal seasonality is for August and September, and any growth compare issues you would call out for the second half of 2022? Thank you.

Hey, Steve. Let me take the last questions and work in reverse. So we noted in the letter that Omicron happened in Q4 of last year. So we're just making sure that everybody is aware and doing their own homework. uh as we go into the fourth quarter obviously we've got a lot of momentum from may to june and june to july we expect that to continue the normal shape of the curve in terms of the third quarter is what you saw last year which is that from july to august typically august is you know flat to slightly down 2%, let's say, off of July. That's sort of the normal seasonality. And that's really because, of course, people start to go back to school. And so later, as the month goes on, you start to see the absolute numbers going down. It doesn't mean the growth rates will go down. It just means the absolute numbers will go down. And so it ends up being somewhere around 1% to 2%. September is full-blown back-to-school, and on a sequential basis, typically, last year as an example, we were down 15% September from August. But that's totally normal seasonality, completely expected. So I think the shape of the curve this year will be Very, very similar. Q4 of last year, we had an unusual October, so I just want to make sure everyone goes back and does their homework. We had an outage, so you've got to look at the numbers. We reported a lot of information on October last year. November, things start to pick back up around Thanksgiving, and then December is obviously a huge month with the holidays, and I suspect that we're going to see the exact same trends this year because generally those have been the seasonal trends that we've seen over the years.

Yeah, I just want to highlight we'll be testing our immersive advertising system sometime this year, we believe, right now. We don't expect that to contribute to our booking. I do want to highlight the things I have mentioned that are iterative improvements that we're constantly making, including translate quality, search and discovery quality, efficient frontier. Those types of things may have small incremental improvements, but that's something we're doing all the time.

We'll move next to Brandon Rose with LightShed Partners. Please go ahead.

Thanks, Brandon Ross. Just looking at your DevEx fees, I think this is the first quarter that they actually went down as a percentage of bookings as far back as we have a window into.