Roblox (Minutes): Give benefits to developers and expand the ecosystem

The following is the transcript of the Q4 2024 earnings call for $Roblox(RBLX.US). For an interpretation of the earnings report, please refer to “Kneeling” Roblox: The ultimate banner holder of the metaverse is also going down?

1. Overview of Key Financial Metrics

1. Decline in revenue and user metrics: Mainly due to the loss of console users and the impact of the ban in Turkey. Last year, the Playstation version was launched during the same period, and significant updates were made to the Xbox version. In November, there was a large-scale purchase of prepaid cards, which inflated the base.

In Q4, mobile and desktop bookings grew by 26% (without high base impact), while prepaid cards and console business were affected by the launch of PlayStation in October and November. However, in December, mobile and desktop bookings accelerated to a growth of 27%, while prepaid card and console bookings grew by 22%. After entering Q1 2025, the growth rate remained around 20%. Therefore, excluding the impact of PlayStation, the growth trend for consoles also remains strong.

2. Guidance

Working capital is mainly reflected in the difference between EBITDA and cash flow from operating activities. From an annual perspective, working capital does not have a significant impact on our business. However, looking at Q4 and Q1 separately, working capital has a very large impact on our business. In Q4, working capital was negative, so there was a significant difference in cash flow from operating activities. But in Q1, we expect working capital to be positive, mainly due to the confirmation of activities that occurred during the holiday period in Q4, affecting the change in working capital. Q4 EBITDA was 9% higher than the market consensus expectation.

Explaining this issue is to ensure that everyone understands how working capital flows and operates, and that cash flows related to holiday activities confirmed in Q1 will be recognized.

2. Management Report

We have exceeded expectations on all guidance metrics set during the Q3 earnings call and the 2023 Investor Day. We will show you the progress made in achieving the goal of “making Roblox platform revenue account for 10% of the global total.”

1. Current Performance

We achieved rapid growth in all key financial and operational metrics, exceeding guidance. Q4 revenue was $988 million, a year-on-year increase of 32%, higher than the upper end of our guidance range of $960 million. Q4 bookings were $1.362 billion, a year-on-year increase of 21%, also higher than the upper end of our guidance range of $1.361 billion In the fourth quarter, the daily active users (DAU) reached 85.3 million, a year-on-year increase of 19%.

We achieved over 50% year-on-year growth in both Japan and India, two very large markets. At the same time, as we continue to expand the age range of users on the platform, DAU for users aged 13 and above accounted for over 61%, a year-on-year increase of 26%. The user engagement duration in the fourth quarter was 18.7 billion hours, a year-on-year increase of 21%, with over 50% growth also achieved in Japan and India.

We have been very cautious regarding costs and capital expenditures, except for the "Developer Revenue Share" (DevEx), which grew by 25%. We shared over $922 million with the developer community in 2024, and in the fourth quarter, we shared $280 million through DevEx, a year-on-year increase of 27%. This is a historical high and part of our commitment to directing more funds to creators through the platform.

In terms of trust and safety as well as infrastructure, this includes our entire cloud services, supporting secure and stable AI, and our real-time operations. Spending in this area increased by 2% year-on-year but decreased by 2% compared to the third quarter, benefiting from improved efficiency. We are enhancing quality across all metrics, achieved through AI-driven quality and efficiency improvements and how we operate infrastructure in a streamlined manner. Spending in this area accounted for 13% of revenue and 9% of bookings, a decrease compared to last year. We have improved quality through AI-driven modernization, and we will share more related content later.

Excluding stock-based compensation, spending on personnel costs was $200 million, and we have been driving operational excellence. Spending in this area accounted for 20% of revenue and 15% of bookings, which has decreased compared to last year, both as a proportion of revenue and bookings.

In terms of operations, cash in the fourth quarter increased by 29% year-on-year, reaching $184 million. Free cash flow for the fourth quarter was $120 million, a year-on-year increase of 54%. All our metrics exceeded guidance expectations, with free cash flow surpassing the high-end guidance expectation of $115 million. Full-year free cash flow grew over five times from $124 million in 2023 to $641 million.

2. Recent Progress

In the first earnings call of 2024, we committed to enhancing performance, quality, real-time operations, discovery, and economic systems, which we believe have driven our continued growth. I want to emphasize again that from top to bottom, throughout the year, application launch times, crash rates, frame rates, overall application quality, etc., we believe all these contribute to higher engagement and consumption.

In terms of infrastructure quality, our uptime reached 99.999% in December, marking a new high point and reaffirming our commitment to engineering excellence. In real-time operations, we introduced platform real-time operations in 2024. We have seen a wealth of content from creators supporting real-time operations. This year, many outstanding contents have emerged. For example, "Fisch" has become a breakthrough hit game. NFL Universe has entered the top 25 in platform bookings. Paramount's "SpongeBob" also entered the top 25. We will discuss related content in more detail later.

In terms of discovery, we have committed to a transparent discovery mechanism, optimizing personalized results to serve everyone. I want to emphasize that this year, the growth rate of viewing time for content in the top 1000 exceeded that of the previous top 1000. This highlights the role of the discovery mechanism in matching people with quality content.

In terms of the economic system, we committed at the beginning of the year to drive hourly booking volume through a series of improvements. We launched a dynamic pricing floor and fully opened the UGC economic system to all creators, which means we have opened our virtual avatar marketplace to all creators. We also introduced price optimization within experiences. These initiatives have driven monetization globally. The booking volume per DAU, hourly booking volume, and booking volume per pair have all increased in 2024 compared to 2023. Recently, in the fourth quarter, we began offering more Robux to users who purchase outside of mobile platforms, essentially distributing Robux based on the cash ratio we receive during the purchase process. This improved the economic share we share with the developer community.

In terms of advertising and branding, we have seen e.l.f. Beauty advertising on our platform. Amazon is now also purchasing ads on our platform. Mr. Beast partnered with Beast Games to launch the Mr. Beast experience on TV and streaming. We have recruited key leaders for many advertising engineering and product awards. We are now integrated with Shopify. There was also a cool cultural collaboration moment, with 5 of the top 10 highest-grossing films of 2024 having related content creation on Roblox, including the recent "The Spirits of Baker Street" and "Magic Adventure."

In terms of safety, we have been continuously rolling out improvements, and this year we released over 43 updates. We also launched party products to bring people together on the platform and improved how we treat users of all ages within them.

In terms of AI, I just received the latest data on the AI pipelines and systems running on our platform, and there are now over 200. We have been working behind the scenes for over 4 years to enhance our safety and stability. One example of our innovation is that our voice safety model has been open-sourced on Hugging Face because we want others to benefit from our expertise in voice safety. It has been downloaded over 20,000 times.

We launched the virtual avatar auto-setup feature in the fourth quarter, which can transform any industry-standard 3D virtual avatar model into a fully functional Roblox avatar, including skeletal binding, facial animation support, and more. This is an early signal of Roblox's ability to use AI to convert text, images, and 3D objects into functional Roblox objects.

Additionally, Roblox Assistant was fully launched in the fourth quarter, allowing for conversational creation in Roblox Studio. ** Please stay tuned, as more content is coming soon.

At the RDC (Roblox Developer Conference), we shared a vision, that we believe we will see 10% of global game content running on the Roblox platform. Today, our market share is 2.4%, indicating that we have significant room for growth in driving platform development. We are witnessing a fundamental shift occurring in the gaming ecosystem, driven by our technological vision. This is a vision supported by 3D streaming that enables instant connection to 3D content. It allows for instant connectivity on any device, anywhere in the world. It enables developers to publish content to the cloud once and then have that content run in any language and on any platform, ultimately powered by AI.

In the end, this is not video streaming; it is low-latency 3D streaming, locally simulating virtual avatars and highly responsive 3D interactions. This truly provides more clarity for everyone on how we collaborate with creators. So please stay tuned.

I would like to share our plans for 2025 and beyond. As part of achieving the goal of having 10% of game content running on our platform, we are focusing on the types of games on Roblox. For example, types like virtual avatar simulation are already quite large in the gaming ecosystem. However, there are still significant opportunities in areas like role-playing, sports racing, action, and battle royale. We will truly drive platform technology, including performance and quality. We have announced a partnership program to support user acquisition both on and off the platform, complementing the natural growth on the platform. We are continuing to expand our economic system and share more relevant content with paid access games and our advertising economy.

Finally, I would like to briefly introduce the AI applications on our platform. Just like in the early days of Roblox, when we created an immersive 3D online multiplayer simulation game that began to support new game types emerging on Roblox, we believe AI will continue to do this.

We expect to launch text generation features available in Roblox experiences in the first quarter. This means creators will be able to leverage this to create AI-based characters. Therefore, we can imagine a virtual George Washington teaching history on Roblox, driven by text generation as a service. We also shared that we have a large amount of 3D data.

We will launch a 3D foundational model that is 3D native, based on state-of-the-art Transformer architecture, and trained on our data. We will provide this model in the studio. In the second quarter, we expect to expand 3D creation and 3D generation in experiences. This means a fashion creation game will start allowing everyone not only to mix and match outfits but also to generate 3D clothing through text prompts. So please stay tuned.

Finally, in terms of safety, this is the foundation of our company. We have high expectations for this year. I want to emphasize that the safety and stability of Roblox are not just for users under 13. When we talk about safety and stability, we mean every age group on the platform and integrate it into our approach So please continue to pay attention.

We continue to generate more operational leverage, even as we bring in world-class talent. We are expanding and improving our infrastructure, trust and safety systems, and driving economic development. I will hand the meeting over to Mike, but I do want to emphasize that we continue to drive revenue growth at over 20% while increasing cash flow, and we are moving towards achieving our goal of 10% of the gaming market, which almost provides us with four times the growth space.

III. Analyst Q&A Session

Q: How will you achieve your goal of capturing 10% of the video game market? If we categorize the existing video game market hierarchically, mobile, PC, and console. But within PC and console, there are different levels of production value, such as AAA, AA, A, and indie games. Which level of production value do you think Roblox developers will start to emulate in order to capture market share?

It is well known that the growth of the gaming market is not fast, while your growth rate is 20%. Therefore, it seems that Roblox developers may be capturing more share from the existing market. Can you help us think about how the future direction of content development will help you achieve your 10% goal?

A: I want to share how we think about this issue. First, when we talk about people creating 3D games and experiences, you mentioned capturing share, but we actually want more people to create on Roblox. They are also creating elsewhere, and we are seeing more and more licensed platforms, such as NFL Universe or Paramount's "SpongeBob Tower Defense," appearing alongside other gaming industries on our platform.

From a financial perspective, we are achieving this goal through an internal model, which is categorized by game type, the market size for each type, and our penetration rate in each type, ultimately achieving 10% of the market running on our platform.

Let me give you an example. Battle royale games on low-end mobile devices represent a fairly large market. We can list the top 4 to 5 battle royale games globally. We shared this at RDC and are driving technological innovation to support running battle royale games on low-end Android devices with 2GB of RAM in regions with poor network conditions like India. We believe that battle royale games on Roblox need to start faster, run smoother, and perform better under poor network conditions than traditional pre-compiled monolithic battle royale games.

At the same time, the architecture we are developing is a 3D streaming architecture linked to cloud services, which also leads to the concept that the same battle royale game running on a 2GB Android device should be able to run on high-end gaming PCs and stream assets at a higher quality. Therefore, we will not make any functional compromises in the mobile space (low-end Android performance) or high-end PC quality.

Because the cloud will ultimately be very important and will be able to dynamically adjust the quality of these experiences. Then, I want to say that in the third area, we are also starting to see more puzzle-like games appearing on the platform We believe that it is very important for technological breakthroughs to support games that traditionally rely on single-download experiences to run in a 3D streaming environment without compromising quality. This is also complementary to the economic goals we aim to achieve.

Regarding paid download games, their share has reached 70% in certain categories. This complements the functionality of search and discovery, as good search and recommendations can help push these features to the forefront.

You will also continuously see us collaborating with high-end developers who have previously released games on other traditional platforms, launching their works on the Roblox platform. We take this very seriously, and internally we are focusing on these operational metrics quarterly and by game type.

Q: I would like to ask about the advertising plan for 2025. Can you quantify the expected contribution of the advertising business in 2025, and is this included in the current outlook?

A: The proportion of the advertising business in the guidance numbers we announced today for 2025 is very small. When we feel that the advertising business is large enough, we will list it separately. We are in the middle of expanding our advertising product portfolio, including streaming video ads and user-generated video ads. The sponsored section on the homepage is already a growing business, and we have also launched shopping ads.

I want to emphasize the potential here; five of the top 10 box office movies in 2024 used Roblox to enhance engagement and inform users about upcoming events. Of course, we won't claim a direct correlation or causation here, but we do believe this is very exciting. Therefore, we feel we are on the right track. We have assembled a very outstanding team, and I think it is just a matter of time before we make more progress.

Q: I have two questions. Regarding personalized recommendations (discovery features), you have successfully launched these features over the past year, which clearly has a positive impact on player experience, business, and booking growth. But is the platform under some pressure due to higher real-time service demands? That is, from the developers' perspective, are they fatigued by the constant updates of content features?

The second question is, when we consider the improvement in profit margins for 2025, how much of this improvement is estimated to be due to cost leverage rather than operating expense leverage? Because you haven't hired many employees in 2024, I suspect this will increase in 2025.

A: First, I want to emphasize some things regarding search and discovery. We have communicated a lot with the creator community, and they place great importance on the transparency of our search and discovery algorithms so that they can see the content we reward. We committed to being highly transparent at the RDC, so stay tuned, as we believe we can be very transparent about effective discovery and how we run effective searches. This complements real-time operations, and we sometimes roll out updates.

I want to emphasize that we encourage all Roblox creators to make multiple small updates rather than one large-scale update. This is how we build Roblox. We release updates multiple times a day. Our progress in safety is 40 times a year. Therefore, I don't think we are causing developer fatigue On the contrary, we believe we are encouraging a healthy engineering practice.

In the upcoming year, as I mentioned in my opening remarks, we are now in a position where with our significant improvement in margins, our growth and expenses can track more closely with revenue growth. Therefore:

Based on our expected revenue growth, we can be quite aggressive in hiring this year compared to the past few years. We can increase employee costs in the mid-to-high single digits while still achieving good cost leverage on last year's basis.

Regarding infrastructure, trust, and safety. We will continue to reduce the costs of basic services and believe we can drive significant improvements on the cost line. So, the direct costs you mentioned and operating expenses, they are all operating expenses, and I see them more as fixed costs.

The variable costs in our business have always been our developer revenue share and sales costs. For a long time, we have been talking about unlocking operational leverage potential in sales expenses.

But we are still in the early stages of this journey, where differentiated pricing is undoubtedly the first step in that direction. Currently, the profit guidance we provide, improvements are primarily driven by operational leverage in IT&S, infrastructure, trust, and safety, and we are investing at a slightly lower rate than our expected revenue growth. Of course, it is also possible that we start to see some real operational leverage playing a role in sales costs (improvement in gross margins).

The leverage space created here allows us to share more incremental profits with the developer community while effectively sharing with investors and reporting cash flow on our income statement.

Q: The first question is about the trend of DAU (Daily Active Users). From the third quarter to the fourth quarter, DAU seems to have slightly declined, which appears to be reflected in most regions. So, what is the reason for the decline in DAU from the third quarter to the fourth quarter? Are there specific regions or content driving the platform worth noting?

The second question, I would like to further explore based on Clark's question. The increase in developer revenue share costs means higher costs for Roblox, according to the 2025 guidance, is differentiated pricing good or bad for gross margins?

A: Let me first address this question and share some trends you might see over the next 4 to 5 years as we aim to capture 10% of the gaming content space. We want to direct as much funding as possible to the developer community, which is a good economic strategy and helps drive growth on the platform. You will see us continually working to reduce sales costs, personnel costs, and the costs of infrastructure and trust and safety in the bookings, while not compromising on quality. Because what remains is cash, and the funds we can direct to developers.

Therefore, the better we can do this, the better. Rationalizing Robux pricing to be roughly associated with the amount of cash we receive is a good economic policy. It actually increases the amount of funds flowing to developers because it lowers our sales costs We see that consumers have responded in a rational manner, which has also facilitated growth. Therefore, in this regard, I hope to take a broader view; if we do our job well, the developer revenue share as a proportion of bookings will continue to rise slowly.

But this does not mean that profit margins will decline at the same time. We are talking about improving efficiency in the cost structure so that we can achieve both. The guidance indicates that we are still within the range of increasing by 100 to 300 basis points that we discussed previously at the end of 2023. Clearly, the numbers for this year, 2024, are much higher than this range, but this is mainly due to the leverage reduction in expenses.

This year, we are closely monitoring the sales cost leverage and are optimistic. We have not included this consideration in our guidance today.

In terms of users, in the fourth quarter, we again faced the high base effect from the launch of PlayStation and significant growth of Xbox. Since the end of last year, we have seen many user registrations and a lot of new DAUs on these two platforms. Therefore, as we enter the first quarter of 2025, we still need to deal with the high base. Additionally, it is particularly worth noting that we mentioned in our letter that the DAU growth in Eastern Europe is quite slow, mainly due to Turkey banning Roblox in August, resulting in a complete loss of Turkish users in the fourth quarter.

If you look at the growth of European users compared to the growth of bookings, the user growth in other regions globally is healthy. Of course, we have seen strong engagement and strong monetization, which translates into strong bookings growth.

I would also like to emphasize that our penetration rate in India is still relatively low, while DAU growth has exceeded 50%, which will be supplemented as the market grows in the future.

Q: I have two questions. The first question is, regarding AI tools, how is the feedback from developers (on development costs and efficiency)? How should we think about the adoption rate of these tools? Is it already significant? Or is it still very early? Do you expect adoption to accelerate? Will this impact the Roblox ecosystem by allowing developers to generate better returns or improve game development efficiency? Or both? That’s my first question.

The second question, Mike, could you please elaborate on some of the dynamic factors we are considering for the 1Q25 guidance? You mentioned some dynamic factors regarding the early or late quarters in your letter. But could you please provide more details so that we can better understand the different dynamic factors for the first quarter bookings guidance?

A: First, I want to talk about developers and their economic ecosystem. I want to emphasize that people are noticing what we consider to be an economic opportunity. A very large game on Roblox, "Brookhaven," was recently acquired by a very thoughtful and clever game studio (Voldex). So I want to highlight this. I believe these will all interact with each other. If we achieve our goal, which we believe we will, of having 10% of the game market content ecosystem run through our platform, that alone will increase the flow of funds to developers by about four times As I just mentioned, we hope to increase the proportion of bookings flowing to our creators, and there is an interaction between the two. Then, I think the third factor is that many of the top experiences created on Roblox are more efficient than traditional gaming spaces. This is because our cloud is integrated with our engine, and our automatic translation is also integrated with our engine.

Projects like Brookhaven can be said to be one of the largest virtual avatar simulation experiences in the world, larger than most independent virtual avatar simulation experiences, and it is actually created and operated by a very small team, translated globally, and runs on various devices. So this is really a triple factor. AI adds another factor on top of this, and we are seeing more and more creators adopting our assistants in our studios. We will see more of this. What I want to say is that we are very optimistic about the job market in the overall experience creation field, and if anything, we believe that this market will grow rather than shrink with the development of AI.

I will be going to Dubai next week to discuss the creative economy opportunities there, as job opportunities supported by our platform will continue to grow. So I think this is a quadruple factor, plus the acceleration of AI.

Regarding the second question, the dynamic factors considered in the 1Q25 guidance. Our guidance is that bookings will grow by approximately 22% to 24.5% in revenue bookings. This is based on the exit rate in the fourth quarter and what we see throughout the quarter, including the PlayStation launch we discussed earlier and some other events' impacts.

In terms of margins, continuous growth is implied here, again exceeding the 100 to 300 basis points we are accustomed to, more like an improvement of 300 to slightly above 400 basis points. So, we still see quite a high improvement in margin guidance.

What else is there for the first quarter and the whole year? January may be the fastest-growing month of the quarter.

Data growth at the beginning of the quarter is slightly easier. As you all remember from last year, March will be more difficult year-on-year due to the base effect, as this year we have to deal with last year's Easter. So, we will face the Easter base in March and then enjoy the growth brought by Easter in April.

So overall, due to the very good exit rate, and we see January very strong, this has already been included in the guidance. For the whole year, our current expectation is that the growth rate in the first half will be higher than in the second half, mainly because of the third quarter. We just went through a very strong third quarter of 2024.

Therefore, we are launching many new initiatives and hope these initiatives can drive growth beyond what is included in the full-year guidance and first-quarter guidance. But the third quarter is definitely the most challenging quarter for comparing data. We are confident we can meet this challenge. We are very confident about the growth for the whole year. Currently, the first quarter has the highest growth, the second and fourth quarters are growing well, and the third quarter is a very large number we need to deal with. We are ready. **

Q: I have two questions. First, what are your thoughts on the contribution of paid downloadable games to this year's booking volume, and their potential cannibalization effect on our core business? Second, regarding our argument of "increasing the average age of platform users," we still receive a lot of skepticism. Could you introduce your latest initiatives in this area to promote the development of more core and hardcore game content? Is acquisition a possibility to accelerate this development?

A: We see the arguments you mentioned in the data. I want to emphasize that, for example, this summer we shared the growth of users aged 13 and above. People are playing "Dress to Impress" in classrooms across all universities in the United States. So, we have seen continuous growth in users aged 13 and above. It is growing very rapidly, and we see projects like NFL Universe that are more appealing for a mature experience.

In terms of paid downloadable games, there is currently a lineup of creations waiting to be launched as paid downloadable games. We have not seen any cannibalization effect on other games. What we see is a global $187 billion game content market, including free game experiences, paid access experiences, and experiences monetized through advertising. We are providing a world-class system platform to cover all these categories.

If we are to achieve our goal of capturing 10% of the global gaming market without providing extensive economic opportunities, that is unimaginable. Therefore, we see this as value-added rather than cannibalistic.

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