"Sliding Kneel" Roblox: Is the ultimate banner holder of the metaverse going to fall?

Hello everyone, I am Dolphin Jun!

$Roblox(RBLX.US) On February 6th, Eastern Time, Roblox released its Q4 results for the fiscal year 2024 before the US stock market opened. Due to user data and bookings falling short of expectations, the pre-market saw a panic drop of up to 30%, although it later recovered some of the losses, ultimately closing down 10%.

The question arises, why is the market so fearful of the miss in DAU and bookings? What psychological reassurances did the company provide to help regain some investor confidence? Dolphin Jun will interpret the Q4 financial report based on the shareholder letter and the earnings call.

Specifically, here are the core insights:

1. User activity unexpectedly fell short of expectations: The first three quarters saw impressive performance from Roblox, largely due to exceptional user engagement. However, in Q4, despite the Live-ops activities, such as "The Haunt" in October and "Winter Spotlight" in December, both DAU and user hours fell short of expectations, with seasonal fluctuations significantly greater than last year, raising concerns about the sustainability of Roblox's ecosystem expansion.

According to management's explanation, the decline in user activity primarily stems from the console side. Starting in October 2023, Roblox introduced a PlayStation version and made extensive updates to the Xbox version, coupled with a series of operational activities, leading to a brief surge in console users over the past year. Therefore, a natural decline was inevitable in Q4.

Additionally, the Turkish government's ban in August also contributed to some user loss.

However, management also revealed that from late December to January, console user activity rebounded. In October, Roblox announced the establishment of an office in Turkey and hired a professional team, which is expected to help negotiate a turnaround.

It is worth mentioning that although the overall scale of active users declined month-over-month, the average user hours continued to grow by 2.5%, indicating that Roblox remains highly attractive to its loyal users.

2. The proportion of users aged 13 and above reaches a new high: Due to the back-to-school season in Q4 and the restriction of private messaging features for child users (which require parental authorization), there was a net loss of users under 13. This has resulted in the proportion of users aged 13 and above reaching 61%, a new high.

With Roblox's improved developer incentive mechanisms and the introduction of AI tools, more mature content is expected to be created, attracting and retaining more adult users.

3. Bookings dragged down by DAU, but rebounded by the end of the quarter: In Q4, the year-on-year growth rate of bookings fell to 21%, slightly below market expectations. The slowdown in growth is attributed to a high base and the significant decline in user activity during Q4. However, following the rebound in console user activity at the end of the year, the growth rate of bookings also rebounded accordingly. Management revealed that in December, the growth rate of bookings from console users rebounded to 22%, while mobile users maintained a high growth rate of 27% Therefore, for the guidance of Q1 2025, the management's outlook remains a growth rate of over 20%, with expected bookings reaching 1.13 to 1.15 billion, a year-on-year increase of 22% to 25%, slightly exceeding the market expectation of 1.1 billion. Meanwhile, it is expected that total bookings for 2025 will reach 5.2 to 5.3 billion, representing a year-on-year growth of 19% to 21%. Compared to 2024, the growth rate is slightly slowing down, but the goal of maintaining a high growth rate of 20% is still upheld.

4. Steady efficiency improvement in Q4, with a focus on cost reduction this year: Profit performance is the area where this earnings report exceeded expectations. Both gross profit and operating profit have significantly improved in absolute value and profit margin, surpassing market expectations. The adjusted EBITDA profit margin ultimately increased by 500 basis points year-on-year, higher than the company's previous guidance of optimizing by 100-300 basis points.

Specifically, the improvement in profit margin mainly comes from controlling operating expenses, which means improving operational efficiency, including optimization in personnel costs and infrastructure safety expenses. It is worth mentioning that although overall expenses have decreased, the company's revenue-sharing costs to developers have risen along with bookings (maintaining a 21% revenue share for developers).

This point was emphasized multiple times by management during the conference call: Improving the economic ecosystem for developers is very important for the long-term development of Roblox, so in the future, more revenue sharing may continue to be given to developers.

Regarding the profit targets for Q1 and 2025, management still maintains a year-on-year improvement pace of 100 to 300 basis points, but the conference call revealed that cost reduction considerations were not included. Therefore, the improvement space here is expected to exceed guidance. In addition to continuing strict control over expenses (though personnel costs will see single-digit growth), there will also be cost optimization—At the beginning of this year, Roblox started guiding users to recharge through the official website, providing more Robux incentives to bypass the "Apple tax" and "Google tax" on mobile platforms.

5. Overview of Financial Indicators

Dolphin Investment Research Perspective

Clearly, the market is dissatisfied with the quarterly report, as the desire for an increase in DAU and bookings has not materialized. However, the reason for the subsequent recovery of some losses is related to management's statement that "data warmed up from the end of the year to January, mid-term bookings growth guidance remains at 20%, and the pace of profit improvement is expected to exceed guidance."

Looking back at 2024, Roblox has actually done a lot, especially regarding the developer ecosystem. This includes launching dynamic pricing (adjusting the prices of virtual items in the Marketplace based on supply and demand), Roblox Assistant (an AI assistant that can create content through text dialogue), and the discount recharge method introduced at the beginning of the year to bypass the Apple tax, enriching the economic ecosystem for developers To enhance user engagement, Roblox has launched multiple Live-ops events, movie collaborations, voice assistant features, and has promptly addressed issues related to pedophilia by implementing private messaging that requires parental consent.

Therefore, since the first half of last year, Dolphin has maintained a positive outlook on Roblox's short to medium-term fundamentals, and the market began to develop more optimistic expectations after the impressive performance in the third quarter. The decline in user activity in the fourth quarter was indeed somewhat unexpected. However, the lesson learned is that we cannot rely solely on linear projections, especially before earnings reports. Roblox's valuation has already risen to $50 billion, which is a high valuation compared to the 2025 performance EV/EBITDA of 50x (but with a future three-year CAGR growth rate of around 25%-30%), so we need to be cautious about potential inflection points in growth (high base switching).

Setting aside valuation, Dolphin remains confident in Roblox's development prospects. The mid-term logic is that under the trend of AI, platforms with pure tool attributes are more likely to be disrupted, but platforms with traffic ecosystems and usage scenarios will likely benefit from AI for a longer period, although the ultimate outcome is uncertain. For Roblox, the continuous release of AI tools (Roblox Assistant, and the upcoming text generation creation model and 3D video creation model) can help the platform's content mature at a faster pace, thereby attracting more adult users and achieving higher monetization (high payment + high advertising conversion).

In the short term, DAU and bookings have already rebounded since the end of the year. The fourth quarter has shown that the stickiness of loyal users is still increasing, per capita monetization efficiency is improving, and more importantly, Roblox's operational efficiency and scale effects have been demonstrated to the market through the past year's performance. Additionally, the strategy to guide users around the Apple tax has not only achieved higher gross margins but has also increased the revenue share for developers, which is expected to incentivize developers to produce more high-quality games and enrich the platform ecosystem.

During the conference call, management repeatedly emphasized that the current strategy is to provide developers with more incentives (revenue sharing) and support (development tools) to achieve their long-term goal—platform revenue accounting for 1/10 of the entire industry. Dolphin mentioned in the early in-depth analysis that Roblox's developer revenue share (20%) is too low to attract high-quality developers skilled in creating mature content. Looking at it now, the company's strategy is on the right path to grow and strengthen.

However, the correct fundamentals also need to be paired with the "correct" valuation. Currently, after the decline, Roblox has fallen back to an EV/EBITDA valuation level of 40x/32x for 2025/2026, but the second half of 2025 will still experience a period of high base pressure, so in the short term, the valuation is not low, and it may be prudent to wait for more safety cushions. If we extend the cycle, based on management's guidance of a 20% annual increase in revenue, maintaining this growth expectation for several years, and a long-term market share of 10%, which is a fourfold increase from the current level, then for high-risk tolerant investors, after a moderate adjustment, it is still possible to remain positive. **

Detailed Interpretation of Financial Report

I. Decline in Bookings Growth

For Roblox, which has a subscription revenue model with a significant proportion of operating expenses (generally 20-21% compared to Bookings) attributed to developer revenue sharing, it is sufficient to focus on Bookings during normal operating cycles, with perhaps a glance at deferred revenue to assess short-term trends.

Although there were live-ops activities in the fourth quarter, such as "The Haunt" and "Winter Spotlight," user activity was very subdued due to factors like console user attrition and the Turkish ban. Despite an increase in average spending per user due to dynamic pricing and AI-enhanced personalized recommendations, Bookings ultimately suffered, with growth significantly slowing.

Revenue saw some acceleration compared to the third quarter due to a higher consumption and recognition of items during the period.

From the perspective of deferred revenue, the net increase in the fourth quarter still showed some seasonal rebound, but the year-on-year growth rate was lower than Q3, likely also affected by some user-side issues.

However, the company also mentioned that in December and January, user data and Bookings data showed a rebound, with console revenue year-on-year growth returning to 22%, and mobile revenue growth maintaining at 27%.

Therefore, the Bookings guidance for Q1 2025 and the full year 2025 is slightly above market expectations: The guidance range for Q1 Bookings is set at 1.125 to 1.15 billion, slightly higher than the consensus expectation (1.095 billion), implying a growth rate of 21.8 to 24.5%, showing some acceleration compared to Q4.

The expected growth rate for Bookings for the full year 2025 is projected at 19% to 21.3%, continuing to maintain the medium-term target of 20% annual growth set during the 2022 Investor Day.

II. Console User Attrition & Turkish Ban, Decline in DAU In the fourth quarter, both DAU and total user duration fell short of expectations, with seasonal fluctuations significantly greater than last year, raising market concerns about the sustainability of Roblox's ecosystem expansion.

According to management's explanation, the decline in user activity primarily stems from the console side. Starting in October 2023, Roblox introduced a PlayStation version and made extensive updates to the Xbox version, coupled with a series of operational activities, leading to a mini-boom in console users for nearly a year. Therefore, by the fourth quarter, a natural attrition was inevitable.

In addition, the Turkish government's ban in August also created some user gaps.

However, management also revealed that from late December to January, console user activity rebounded. At the same time, in October, Roblox announced the establishment of an office in Turkey and hired a professional team, hoping to lobby for a turnaround.

In the fourth quarter, the overall net decrease in users was 3.6 million, with more than half of the decrease coming from users under 13 years old. On one hand, compared to the third quarter, which was mainly during the summer vacation, students generally returned to school in the fourth quarter, leading to a natural decline in Roblox's sequential users. On the other hand, to avoid issues related to pedophilia, Roblox implemented functional restrictions on private messaging for users under 13 in October, allowing private messaging only with parental consent, which may have impacted the activity of child users.

By the end of the fourth quarter, the total number of users across all platforms fell to 85.3 million, with users aged 13 and above accounting for 61%, reaching a new high. Considering that video ads are only displayed to users aged 13 and above, the expansion trend of this user group is still quite important and needs to be continuously monitored.

In terms of user stickiness, the average daily duration per user in the fourth quarter increased by 2.5% year-on-year to 2.47 hours/day, continuing to maintain an upward trend. Total user duration was mainly dragged down by DAU, with year-on-year growth rate slowing.

3. Q4 steadily improves efficiency, with a focus on cost reduction this year

In the fourth quarter, operating losses were 244 million, significantly better than market expectations. As an off-season, the loss rate shrank significantly to below 25%. Breaking down the expenditure details, it mainly stems from strict control over costs beyond developer revenue sharing: Research and development expenses, management expenses, and sales expenses all grew at a single-digit rate. The infrastructure safety fees, which rose in the previous quarter, have returned to their original contraction trend after completing the restrictions on children's private chat functions (Capex investment has been declining since the second half of 2023, with only a slight uptick in Q4).

In terms of revenue share, the developer revenue share seems to be rising rapidly. However, in reality, the developer share is based on revenue, specifically Bookings, and currently maintains around 21% of Bookings revenue. However, the company repeatedly mentioned in this conference call that it will further increase the revenue share for developers in the future.

Regarding the guidance for Q1 and the full year:

The Q1 guidance for Covenant-EBITDA profit margin has increased nearly 400 basis points from last year's 9.5% to 13.2%, and the full-year guidance for 2025 profit margin has increased from 18.5% to 20%, an increase of 150 basis points.

The improvement here mainly comes from cost control (though personnel costs will see single-digit growth). The conference call revealed that cost reduction considerations were not included. Therefore, management believes that the expected profit improvement could exceed the guidance, reaching an optimization of 300 to 400 basis points.

In addition, earlier this year, Roblox began guiding users to recharge through the official website, offering more Robux incentives to bypass the "Apple tax" and "Google tax" on mobile platforms. A simple calculation shows that if 10% of revenue bypasses the Apple tax, the impact on terminal EBITDA would also increase by about 10%, allowing for more revenue sharing to developers.

In addition, more than half of the employee expenses are non-cash equity incentive payments, so whether looking at Adj. EBITDA or cash flow, it appears to be more favorable. Although the market value surged in the fourth quarter, the total expense for employee SBC equity incentives only increased by 3% year-on-year and decreased quarter-on-quarter, reflecting either optimization of employee presence or a reduction in benefits.

Ultimately, free cash flow reached 120 million, seemingly contrary to the trend of EBITDA, mainly influenced by changes in working capital such as receivables and payables, as well as an increase in Capex during the period.

Similarly, the adjusted EBITDA metric excluding SBC expenses, when restored to the original calculation method (which means adding net deferred revenue to Adj. EBITDA, i.e., deferred revenue - deferred costs), showed a year-on-year growth of 47% in Covenant Adj. EBITDA for the fourth quarter, which also significantly slowed due to a high base. The profit margin (%Bookings) was 28%, an increase of nearly 500 bps year-on-year.

At the same time, due to the gradual contraction and optimization of SBC, the equity dilution ratio in the fourth quarter further fell to 2.3%.

Dolphin Investment Research "Roblox" Historical Articles:

Financial Report

2024 Q3 Conference Call Summary “Roblox: Moving Towards a Long-Term Goal of 10% Market Share in Game Revenue! (Q3 2024 Conference Call Summary)”

2024 Q3 Financial Report Review “Roblox's Growth Key is 'Breaking the Circle'”

2024 August 2 Q2 2024 Conference Call Summary “Roblox: Cautious Guidance, Just to Leave Room (Q2 2024 Call)” August 2, 2024 2Q24 Financial Report Review: Roblox: Why is the market still dissatisfied despite the raised guidance?

May 11, 2024 1Q24 Conference Call Summary: Roblox: Revenue guidance lowered out of caution, growth rate has recovered since early April (1Q24 Conference Call Summary)

May 10, 2024 1Q24 Financial Report Review: Roblox: Key metrics falter, growth doubts arise again

February 8, 2024 4Q23 Conference Call Summary: Roblox: Positive growth guidance stems from strong user data performance (4Q23 Conference Call)

February 8, 2024 4Q23 Financial Report Review: Roblox: Not wanting to miss out on growth or loss reduction

November 8, 2023 3Q23 Financial Report Review: Roblox: Seizing the peak season to "clear the past shame"

August 11, 2023 2Q23 Conference Call Summary: Roblox: User experience first, maintaining ecological expansion (2Q23 Conference Call Summary)

August 9, 2023 2Q23 Financial Report Review: Roblox: Profit shock, breaking through high valuations

In-depth

July 18, 2023: Is it worth betting on the metaverse with Roblox? On July 13, 2023, "Roblox: Unable to Swallow the 'Big Pie' of the Metaverse"

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