Roblox: A Blockbuster Assist, Returning to the Ecosystem Breakthrough

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$Roblox(RBLX.US) released its Q2 FY2025 earnings before the U.S. market opened on July 31st. Overall, the performance was strong. Despite significant upward revisions in market expectations before the earnings report, the core growth metrics exceeded optimistic expectations. Roblox, already benefiting from favorable logic, took off with the help of an unexpected hit.

Key information in detail:

1. Guidance meets optimistic expectations: In the second quarter, a simulation game called "Grow a Garden" became a hit, reactivating the ecosystem's vitality. It not only attracted a large number of new non-young users but also boosted the activity of existing users.

However, the current performance is already reflected in the continuously rising stock price (Roblox's stock price has nearly doubled since the Q1 earnings report). The main concern for investors is whether the hit's benefits are sustainable. Therefore, future guidance in this earnings report is more critical.

In reality, management expects Q3 Bookings growth of 41-45% and full-year growth of 34%-37%, but it implies that Q4 growth will fall back to the 20-25% range. Meanwhile, buy-side expectations are not low, with expectations of 35%+ growth for Q3 and the full year (including an incremental 100-200 million from the GG hit for one quarter). From a full-year perspective, the guidance basically meets expectations. Although Q4 growth slows, it does not warrant a valuation cut.

2. Users return to breaking the circle trend: Beyond guidance, in terms of current performance, the most important indicator is the number of users (DAU). Previous misses in user numbers have caused significant stock price volatility.

In Q2, DAU exceeded 110 million, with a net increase of 14 million players quarter-on-quarter, 75% of whom are over 13 years old, and two-thirds are from Indonesia, the Philippines, and other Asian regions. However, "Grow a Garden" significantly boosted user time, with average time per user increasing by 12% year-on-year, most notably in North America and Asia.

If we estimate based on a DAU/MAU stickiness ratio of 20%, it means Roblox's overall traffic in Q2 may have approached 600 million, suggesting that management's goal of 1 billion is not a fantasy.

3. Continuously benefiting developers: In Q2, Roblox continued to create a healthy economic ecosystem by providing more development tools to developers and increasing the revenue share for developers, especially for high-quality game developers. In July, Roblox also launched a new creator incentive program, where developers who meet the requirements and participate in the program will receive 35% of the revenue from users purchasing Robux, whereas the normal share is only over 20%.

4. The real profitability situation is not bad: The short-term pace of loss reduction has slowed, with GAAP operating losses expanding to over 300 million in Q2, and the loss rate approaching 30%. However, the current strategy of benefiting developers to improve the healthy ecosystem is very correct, as it helps drive longer-term endogenous growth, so the market's tolerance for short-term losses is relatively high.

Adjusted EBITDA, excluding depreciation, interest, and stock-based compensation expenses, was 0.18 billion, with the profit margin declining by over 2 percentage points quarter-on-quarter. However, deferred revenue to be confirmed is high, and considering this part of the revenue, the Covenant Adj. EBITDA profit margin increased to 22% quarter-on-quarter, reflecting a more realistic operating situation. According to management's profit guidance for Q3 and the full year, profitability will continue to improve quarter by quarter in the second half of the year.

This is also evident from cash flow, with free cash flow growing by 58% year-on-year in Q2. Excluding the impact of a $30 million payment deferral, free cash flow would reach 207 million, up 85% year-on-year, accounting for 14% of current Bookings.

5. Overview of financial indicators

(Note: The following BBG consensus expectations are relatively outdated and do not fully reflect the market expectation adjustments before the earnings report and the more optimistic buy-side expectations (pricing side), so the actual beat magnitude is not that large.)

Dolphin Research's View

Currently, tracking Roblox in its high-growth, high-valuation stage, adding more monetization paths such as advertising is more accurately described as an "accelerator." With traffic in place, monetization is only a matter of time. The fundamental driver of endogenous growth is still the platform's own ecosystem expansion.

In other words, while the result indicators Bookings/Revenue are visible on the surface, the most critical forward-looking number to watch is "total user time." "Total user time" can be broken down into "DAU" and "time per user," both of which can be obtained from third-party data platforms with high-frequency data.

However, the cost of data collection is too high. If we further look for the "forward-looking within the forward-looking," we can directly return to the logic of game companies—looking at the product pipeline for hits. Compared to pure game companies, Roblox's biggest advantage is that it does not lack content supply, effectively nurturing a large group of developers. As long as the economic ecosystem is balanced, a positive cycle can form between creators and users, and Roblox, as a platform, can simply reap the benefits.

For Roblox, transitioning from a children's platform to a more mature general player platform requires addressing the content supply for mature players. The main operation to attract high-quality creators is to increase the revenue share, which is only about 20% (generally, the revenue share for upstream content developers is 30%-50%).

Therefore, when management clearly announced measures to benefit content creators in Q1 (increasing revenue share for high-quality games), our confidence in Roblox's long-term growth strengthened, which is fundamentally different from the logic of relying on quarterly Live-ops activities to stimulate short-term growth in 2024. Therefore, the emergence of big hits like "Grow a Garden" and "Steal a Brainrot" is surprising, but we also believe that in a healthy and beneficial ecosystem, there will be many more such high-quality products in the future.

In the medium to short term, the main focus is on the impact of Roblox's advertising monetization and Apple tax reform on performance, as well as the resilience of entertainment content in a turbulent macro environment:

Advertising monetization is currently mainly through cooperation with Google's ad bidding system and Shopify, launching two methods: video incentive ads and brand placement ads. The market expects advertising revenue to contribute 10% this year.

The Apple tax reform (introducing third-party payment methods, reducing the share in the U.S. to 0, and temporarily reducing it to 10-20% in the EU) mainly affects profitability. In the short term, it may bring some conversion friction (such as the link jump process weakening players' purchase intentions), but the improvement in profit quality is significant. Unlike Spotify, Roblox only started working on bypassing the App Store at the beginning of the year, so the positive impact of the Apple tax reform on Roblox will be greater.

Finally, let's talk about high valuation, which is subjective. Despite multiple tags of high growth, favorable conditions, and a profit-loss inflection point, Dolphin Research believes Roblox's valuation has always been high, and the Q2 hit is not the norm. So the question is, how much safety margin is appropriate?

With the current market cap of 95 billion, assuming a 20%+ Bookings growth rate in 2026, the EV/Bookings is 13x; if the EBITDA relative to Bookings profit margin is 25%, it means the current EV/Adj. EBITDA valuation is 52x.

Both relative to Bookings and EBITDA, it is significantly higher than peers. Assuming the 20% growth rate can continue, compared to a profit CAGR of 30% over the next 2-3 years, a 52x EV/EBITDA is also high, clearly indicating the market's more optimistic expectations for Roblox's future.

But rationally speaking, hits require probability, and to give oneself a safety margin, it is best to reduce or exclude the impact of hits. A 30% CAGR corresponds to a 30x EV/EBITDA, which may be more appropriate, with a maximum premium for the inflection point of loss reduction to 40x, meaning a valuation below 72 billion is relatively safe.

Below are Roblox's key indicator charts:

The adjusted EBITDA indicator, which also excludes SBC expenses, when restored to the original calculation method (i.e., adding net deferred revenue, which is deferred revenue minus deferred costs, to Adj. EBITDA), showed a year-on-year growth of 172% in Q2 Covenant Adj. EBITDA, with a profit margin (%Bookings) of 21.7%, an increase of nearly 10 points year-on-year.

Dolphin Research "Roblox" Historical Articles:

Earnings Reports

May 2, 2025 Earnings Report Commentary "Roblox: Turning the Metaverse, a True Fortress of Refuge?"

February 9, 2025 Conference Call Minutes "Roblox (Minutes): Benefiting Developers, Expanding the Ecosystem."

February 9, 2025 Earnings Report Commentary ""Kneeling" Roblox: Is the Ultimate Metaverse Flag Bearer Going to Fall?"

3Q24 Conference Call Minutes "Roblox: Moving Towards a 10% Market Share in Game Revenue! (3Q24 Conference Call Minutes)"

3Q24 Earnings Report Commentary "Roblox's Growth Achilles' Heel is "Breaking the Circle""

August 2, 2024 2Q24 Conference Call Minutes "Roblox: Cautious Guidance, Leaving Room (2Q24 Conference Call)"

August 2, 2024 2Q24 Earnings Report Commentary "Roblox: Guidance Raised, Why is the Market Still Dissatisfied?"

May 11, 2024 1Q24 Conference Call Minutes "Roblox: Revenue Guidance Lowered Out of Caution, Growth Recovered in Early April (1Q24 Conference Call Minutes)"

May 10, 2024 1Q24 Earnings Report Commentary "Roblox: Key Indicators Falter, Growth Doubts Arise Again"

February 8, 2024 4Q23 Conference Call Minutes "Roblox: Positive Growth Guidance Stems from Good User Data Performance (4Q23 Conference Call)"

February 8, 2024 4Q23 Earnings Report Commentary "Roblox: Growth and Loss Reduction, Not Wanting to Miss Either"

November 8, 2023 3Q23 Earnings Report Commentary "Roblox: Redeeming Itself in the Peak Season"

August 11, 2023 2Q23 Conference Call Minutes "Roblox: Prioritizing User Experience, Maintaining Ecosystem Expansion (2Q23 Conference Call Minutes)"

August 9, 2023 2Q23 Earnings Report Commentary "Roblox: Profit Bomb, Breaking Through High Valuation"

In-depth

July 18, 2023 "Betting on the Metaverse with Roblox, Is It Worth It?"

July 13, 2023 "Roblox: Unable to Swallow the "Big Pie" of the Metaverse"

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