Roblox: Moving towards a long-term goal of 10% market share in game revenue! (3Q24 Conference Call Summary)

The following is the Q3 2024 summary for $Roblox(RBLX.US). For financial report interpretation, please refer to “The Key to Roblox's Growth is 'Breaking the Circle'”

1. Overview of Key Financial Indicators

2. Management Report

2.1 Business Key Progress

So far, there have been more than 30 improvements to safety and institutional systems. For example, in Q3, algorithm models were used to reduce harmful speech exposure, tools were provided to developers to adjust their product experiences, improvements were made to agent training to enhance the accuracy of voice chat and image review, and AI audits were implemented to combat misconduct.

For instance, our internally developed voice safety model is now available to the world on Hugging Face, having been downloaded over 10,000 times and adopted by many other organizations.

In September, we announced our medium- to long-term goal at the RDC, which is to achieve 10% of the global gaming market revenue on the Roblox platform. We believe this is achievable, and we are currently formulating plans to support the content that drives this goal.

2.2 Q3 Financial Report Situation

(1) The company's revenue for Q3 2024 was $919 million, a year-on-year increase of 29%, exceeding the previous guidance of $860-885 million.

(2) Bookings for Q3 were $1.129 billion, a year-on-year increase of 34%, also exceeding guidance.

(3) Daily active users (DAUs) reached a record of 88.9 million, a year-on-year increase of 27%; among them, the increase in the United States and Canada was significant, with a year-on-year growth of 26%; the Asia-Pacific region also saw high growth, with Japan (+59%) and India (+55%) being the most notable.

(4) Total user hours reached 20.7 billion, a year-on-year increase of 29%. The regions with significant growth were also North America and Asia-Pacific, with Japan growing by 69% year-on-year and India by 57%.

(5) In terms of operating expenses, the share allocated to developers was $232 million, a historical high, reflecting our commitment to creators. Other expenses related to infrastructure, trust, and safety construction increased by 4% year-on-year, compared to a 6% increase in the previous quarter.

We want to emphasize that the increase in infrastructure spending in Q3 compared to the previous quarter was mainly related to AI investments, including migrating more safety infrastructure to AI servers. Compared to last year, 14% of this year's revenue and 11% of Bookings were allocated to infrastructure, trust, and safety construction We have the ability to continue leveraging effects to increase profits.

Personnel costs (excluding SBC equity incentives) account for 22% and 18% of revenue and bookings, respectively, a decrease of 1 percentage point compared to last year, reflecting the control and management of personnel costs.

(6) Operating cash flow was $247.4 million, a year-on-year increase of 120%, exceeding guidance (between $147 million and $162 million). Free cash flow was $218 million, a year-on-year increase of 66%.

2.3 Growth points and major improvements observed this quarter

(1) We focus on the development of the "search and discovery" feature, enhancing the "discovery" algorithm with AI, which shows users more relevant content through improved personalized recommendations.

(2) We continue to improve the platform's ecosystem economy. Dynamic price floors and UGC content have been set for each developer, and we have launched price optimization features for creators with limited pricing experience.

(3) The stickiness of active users on the platform is increasing, and the churn rate is decreasing. Recently, we have been conducting the Halloween-themed "The Haunt" LiveOps event, which has attracted many new users. "The Haunt" showcases new technology for image capture within Roblox.

(4) The growth in active users stems from the continuous updates and enrichment of platform content over the past year. We have seen many gaming experiences become popular on the platform, such as "Rivales" and "Dress To Impress." "Rivales" is a shooting game, while "Dress To Impress" is a dress-up game.

In the future, we expect to see more types of gaming experiences appear on our platform, while continuing to achieve significant growth in our existing strong areas—sports, racing, shooting, open-world role-playing, etc. We expect to see the market share in sports and racing double, the market share in shooting games (including battle royale) double, and the market share in open-world and RPG areas double.

(5) Our collaboration with advertising measurement company DoubleVerify has begun, and in the third quarter, we added WPP to accelerate brand penetration. We also announced a partnership with Shopify.

(6) In September, we emphasized our growth goals and vision at the RDC—hoping that the Roblox platform's revenue could reach one-tenth of the gaming market (with a potential market size of $180 billion), which is $18 billion in bookings. Currently, Roblox's bookings for 2024 have just exceeded $4.3 billion, implying that there is still significant room for growth.

(7) We are leveraging AI, which is currently the core technology of our safety review system, and will become the core of all platform technologies in the future. In the third quarter, we announced the construction of 3D foundational models and open-source 3D AI generation models built at the RDC. We have already utilized artificial intelligence in Roblox Assistant, Code Assistant, and material and text generation 3. Analyst Q&A

3. Q&A

Q1: Discuss some new initiatives in the virtual economy ecosystem? For example, dynamic pricing, can this help creators achieve greater revenue returns? Besides this, what other initiatives benefit the Roblox platform and creators within the platform?

A: I would like to share some experiences we discovered during the launch of dynamic pricing. When we introduced dynamic pricing, we conducted a small experiment using our "price optimization tool." Generally, the system recommends lowering prices to help creators increase their revenue, and this is not a zero-sum game (meaning it is not a stock ecosystem where one gains at the expense of another). However, we also believe that each creator can independently adjust their product prices. Additionally, the AI-supported infrastructure and trust security system can also enhance efficiency.

Furthermore, we plan to launch paid games in December, where developers can receive different revenue shares based on different prices. For a charge of $9.99, developers receive 50%; for $29.99, developers receive 60%; and if charged at $49.99, developers can receive a 70% share of the revenue.

In the third quarter, the average payment amount per user on our platform increased by 6% year-on-year. Typically, the exploration of payment capacity does not yield immediate returns and requires a transition period. The payment revenue from former paying users also grew by 4% year-on-year, so we are seeing improvements in platform economics, which is a core metric that the team is currently very focused on.

Q2: When will the adjustments to content review tools and parental controls be launched? What impact will this have on spending scale? Will the launch of these tools affect user behavior?

A: Currently, we have not seen any impact on users from the adjustments in safety. Safety has been our primary focus and the area of our largest investment. We expect to release more versions before the end of this year, including improvements to our filter verification methods (which require parental consent for verification). You will see many new versions in the next two months.

Q3: Bookings grew by 34%, far exceeding your long-term growth model of 20%. You emphasized that in the past eight quarters, six quarters had bookings exceeding 20%. But it seems you do not anticipate a higher long-term growth rate? What growth rate do you consider appropriate for bookings?

A: We are satisfied with the 34% growth this quarter, with the gaming business growing by 28%, which is also fantastic. This is far above our guidance on investment day. What we are really seeking is just more time and consistency; we just don’t want to overreach. However, many of the things we discussed in the investor letter excite us, and the dynamics look very strong. But for us, we just need a little more time to ensure we see sustained growth above that target before we make changes.

Q4: I want to talk about the monetization growth we saw this quarter. The console and non-console metrics mentioned in the shareholder letter can help understand some information. Did the impact of the gaming console (the launch of the PlayStation version) drive seasonal fluctuations? How should we consider the contribution of advertising monetization to future revenue growth of over 20%? **

A: We have multiple measures running in parallel to promote user growth on the platform and increase participation duration. We also track monetization metrics and bookings size on an hourly basis (both of these metrics saw growth in the third quarter). Therefore, we increased the monetization rate in the third quarter and launched the PlayStation version.

As participation duration increases, the performance of the Roblox ecosystem on PlayStation is improving. The performance in the third quarter was driven by PlayStation, and at the same time, all devices, regions, ages, and genders on the platform are experiencing very strong growth. Thus, we believe that monetization will continue to improve.

In terms of profit guidance, we generally only predict a slight improvement in company profits because we are currently focused on continuing to expand our user base and engagement. However, ultimately, the pace of profit margin improvement will catch up.

Q5: After the collaboration with PubMatic and DoubleVerify, what are the next steps to continue building your product? Especially regarding expectations for advertising's contribution to bookings in 2025?

A: We mainly monetize traffic through three types of advertising: search ads, video ads, and allowing creators to sell products directly after collaborating with Shopify. We won't share too many details at this time, but this will drive our growth rate closer to our guidance.

As for advertising in 2025, we won't disclose details yet. We still maintain the 20% growth forecast we presented at last November's Investor Day. However, our long-term goal presented at the RDC is to have platform revenue account for 10% of the gaming market size, indicating that we are still very small this year, with significant growth opportunities ahead and a long way to go.

If we look at the current quarter's non-console business growth of 28%, we are currently advancing at twice the overall gaming market growth rate, which means we are increasing our market share.

Q6: Regarding Liveops events, is the current pace to hold one event per quarter? How do you measure the contribution of a specific event to changes in user engagement? How do you assess the contribution differences before the event?

A: The frequency of events is slightly more than once per quarter. We conduct events mainly to quickly identify high-quality creators on the platform and give them more exposure. We also used a certain technology in The Haunt event to showcase and highlight emerging technologies that will be launched across the platform.

For example, the current liveOps (Halloween "The Haunt") allows our platform users to snap pictures of their costumes, real screenshots or photos, and then vote on them in the center, all of which go through our security review system. We have many great ideas for future events, and we are working hard to maintain the diversity of our experience types. Therefore, the pace will be higher than once per quarter. I believe it is currently at a frequency higher than once per quarter.

Q7: You mentioned seeing diversity in gaming experiences on the TOP charts. How do you typically break existing categories at the end of the year to achieve more category breakthroughs? Typically, when will this be broken at the end of the year, and what is the ideal distribution of gaming experiences? **

A: Currently, the high-level gaming experience has a "slightly wider and flatter" category distribution. In the current high-level rankings, many new products have entered the TOP 25, such as Rivales and Dress To Impress, which have rapidly risen, indicating that our platform's age range is becoming broader and the crowd from around the world is increasing, leading to a flattening characteristic of category diversity. I believe this is a very healthy sign.

The distribution we see in the TOP 100 is even more extensive. There may be specific periods where the categories of the TOP 1 or TOP 5 games are very concentrated. Overall, I think this is healthy, especially when new games can enter and achieve scale and viral spread very, very quickly.

We will start to talk more about the range of categories on the platform; earlier we mentioned sports. We are tracking the range of categories in the top 100 and top 1000, where there are still some categories that are not our traditional strengths. Therefore, we are really working hard to ensure we are broader there. We will discuss this more in subsequent conference calls, but this is just the beginning, and I believe it will have a real impact.

Q8: Why has Roblox been so successful in console gaming this quarter? But hasn't Roblox been introduced on Xbox for a long time? PlayStation was only recently introduced; what factors do you see leading to this sudden growth change? How is user interaction performing on the console platform, or do users prefer to interact on other device platforms?

A: The real driving factor is our strategy. Immersive 3D content can be created and run on any device, and when we launched on PlayStation a year ago, there was already stunning content available. On the other hand, while we simply added the PlayStation version, it did double our console players. Additionally, for certain categories, we have a higher revenue share for developers.

We also benefited from a strong update and upgrade to Xbox at the end of last year. That is to say, the pure increment from PlayStation, combined with the increment after the Xbox hardware update, contributed to the peak growth of our console business this quarter.

For Q4 guidance, we assumed that console growth would no longer continue; while it may grow, we generally make cautious estimates. However, Xbox is in its product release cycle, and we expect rapid growth for Xbox in 2025, which is also expected to drive our growth.

Q9: Regarding the payment rate, I noticed that the proportion of daily paying users/DAU increased from 1.2% to 1.3% this quarter. Do you think improvements in features like search and dynamic pricing have helped guide more users to convert to paying?

A: Our economic team typically drives this by optimizing enjoyment and engagement on the platform. Sharing a trend you might expect to see, we have seen this drive for payments through initial experiments with dynamic pricing, and now we have rolled out this experiment to all creators, where creators can often achieve better business by lowering prices rather than raising them As time goes by, and as creators earn more money by lowering prices, people may see a trend where more individuals participate in the economy. I’m not saying this contributed to what we saw last quarter, but it’s a surprising result of our price optimization experiments and the results we are about to implement.

Secondly, the increase in the payment rate is attributed to the creator community and better search and discovery algorithms that present better content to users, making more relevant content more likely to convert into payments. We absolutely hope to have the ongoing ability to continue improving this, and over time, conversions should continue to grow, but it may not be linear.

Q10: From a long-term perspective, how do you think about your revenue model for AI?

A: We will launch a feature that designs 3D clothing through text and voice. Therefore, our AI model is built on our own large model, performing large-scale inference on our own infrastructure, providing AI not only in Roblox Studio but also at ultra-low costs to millions of users simultaneously.

Thus, the way we monetize all our foundational models, whether it’s 3D, scene generation, texture generation, code generation, or even text as a service, is about enhancing the quality of the actual 3D experience itself, retention, and innovation. So we focus on 3D generation, and we expect to see it implemented next year. This will be something creators can integrate into their experiences, hopefully for free. We shall see. But the hope is that because it will be so efficient and run on our own platform, we will see new types of games, and we will see AI integrated into many Roblox experiences.

Q11: How do you attribute the impressive growth this quarter? How much of it is due to enhancements in platform features rather than developers themselves creating breakthrough successful content?

A: I would say Roblox is like an ecosystem, and everything we are doing is improving the quality of the soil, the quality of the weather, and the quality of the sunlight, thereby creating a fertile platform for creators to assist them in creating amazing things. Therefore, whether it’s our improvements to the platform or the success of developers’ own creations, they happen in synergy. So when we set a goal of a 10% market share in revenue, it means we need to continuously create more conditions for developers within Roblox.

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