Roblox Earnings Review: Q3’23

Estimated reading time: 9 minutes

Roblox has had a busy last couple weeks with an investor presentation and earnings results. There's been some new developments that deserve mention. Let's dig in.

You can read the latest quarterly highlights here: Roblox Q3'23 10-Q
Supplemental materials here: Roblox Q3'23 Supplemental Materials

Q3 '23 Highlights

First up, revenue is growing quite nicely:

All regions are growing at a steady clip but the US & Canada make up the majority of revenue. Others might see this concentration as a drawback, but I see it as a positive. A rising tide lifts all boats. Big spending by US & Canada help with much needed revenue:

The results greatly please me. We now have a longer time frame seeing revenue increase across every region over the last couple years. Pretty cool!

Total expenses, however, are another story. Cost of revenue, developer exchange fees, personnel costs, and infrastructure costs make total revenue seem like an appetizer:

When we look at these costs against revenue and against free cash flow we get a better picture of what's going on:

Spending is unacceptable.

Total operating expenses, unfortunately, now dwarf my previous emphasis on revenue upside, including essential spending on exchange fees. That leaves cutting costs in infrastructure and cost of revenue. This worries me for obvious reasons.

Metrics

US & Canada lead the way in spending, but not in Daily Active Users (DAUs):

Other metrics like engagement hours are very similar to DAU growth. One metric that isn't growing is average bookings per DAU, which was flat at $11.96:

Average booking per DAU across regions all tell us the same thing: users aren’t spending more, and that’s fine for now. Ideally I’d like to see these numbers grow as creators make more high-quality experiences.

Identity and Real-World Purchases

We have 70 million people coming every single day that have a digital identity that represents themselves. And we know that digital identity influences their physical selves.

Christina Wootton, Chief Partnership Officer

It's pretty cool seeing Roblox bring in new ways of advertising that isn't blunt-force like all the major streaming services currently have. Users can see an add on a billboard in game, and choose on whether or not to interact with it.

Here's some numbers on brands embracing Roblox:

Here is a user interacting with an ad in-game:

This reminds me of the novel Snow Crash. The real benefit here is both users and advertisers. I think that most people would trade away their privacy in an instant if it meant meaningful ads. Getting relevant ads is akin to guided exploration. You don't know what's out there until you see it, and advertising is a way for those companies that offer amazing products and services to get to you first instead of waiting to be found (which would likely never happen).

Roblox and AI

Roblox recently held their investor presentation where they offered a lot of fluff, but there were some gems that I'd like to share. The main talking point that grabbed me was the implementation of AI to help users become creators easier. It used to be that you had to have deep technical knowledge to even begin to build a game. Now Roblox is building out functionality that allows users to interact with AI to create code when building games.

A user can say "Make it rain" and the platform starts building the code to make it rain within the game created. Remember the holodeck in Star Trek? Things are headed this way. The only difference is, instead of having to build an entire holodeck, you can buy one for ~$300 from Meta.

Here are a couple examples of how experiences will be made using interaction with AI. First, we have making rain:

Then we have a more advanced request: creating an entire city with NPCs:

Seeing these new ways of creating experiences is more powerful than most realize. It unlocks more barriers that users had before creating experiences on Roblox. This is great news for the long term increase in DAUs, bookings, and revenue.

Performance

Price action over the last year has been spot on for a young company facing growing pains. Here is Roblox vs the S&P 500 over the last 12 months:

It's nice seeing Roblox outpace the market, but they are not out of the woods at all. The company executes nicely but they are priced to execute well. They need to nail it over the next 2-5 years to get to a place that I would call “comfortable”.

Let's look at the fundamentals, starting with quarterly FCF/S over time:

Fundamentals

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