🕹️ Roblox: User-generated gaming
Exploring the economics behind the multi-billion-dollar Metaverse
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Roblox (RBLX) recently reported its annual report.
Many observers misunderstand the platform, so I want to give you a closer look at how the company makes money, its near-term challenges and long-term opportunities.
Today, we’ll cover the following:
Roblox Q4 FY22.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
Metaverse has been a wildly overused word in the past three years.
It caused Mark Zuckerberg to rename Facebook (to Meta), and his Reality Labs initiative generated $14 billion in operating losses in FY22.
Matthew Ball has written fantastic essays and a book on the subject.
Here is the short version: the Metaverse is a virtual world where you can live your digital life. In theory, Ball explains, the Metaverse is:
Synchronous and live.
Unlimited in the number of users.
A fully functioning economy.
An experience that spans both the digital and physical worlds.
Populated by user-generated content and experiences.
Roblox, our topic du jour, has all of the above traits. But it’s critical to appreciate that Roblox is not a game. Instead, it’s a platform that connects users and creators.
Experiences available on Roblox are not built by internal studios or freelancers. Users themselves create them. Because of this focus on user-generated content, Roblox is more similar to YouTube and TikTok than Fortnite.
Over half of US kids under 16 were on Roblox in 2020, and the audience has continued to grow since then, reaching 59 million daily active users in 2022 (23% are in North America).
As a gaming industry veteran, I’ve always admired Roblox and its business model.
We discussed the free-to-play model and spender profiles in our article covering online dating. If you missed it, it’s a great place to start.
Roblox offers a robust virtual economy. It has its very own currency called Robux. This virtual currency can be bought with real-world money and then spent on the platform (special features, virtual items, pets, cars, you name it). The current exchange rate is $0.01 per Robux.
Developers earn a share of the Robux spent on the experiences they offer, which they can use on the platform or exchange for real-world currency at an exchange rate defined by the company. Of the 4.2 million creators on Roblox, 675 make over $100K annually.
Management shares three key business metrics:
👨👩👧👦 Daily Active Users (DAUs): Users who log in on a given day. It indicates the size of the audience on Roblox.
⏱️ Hours engaged: Time spent by users on the platform.
💵 Bookings: Overall dollar amount spent by users on the platform. Management also tracks the Average Bookings per Daily Active User (“ABPDAU”), reflecting spending trends at the user level.
The chart below illustrates where each dollar spent on Roblox goes:
App Store Fees ~23%: processing payment fees on operating systems like iOS (Apple), Android (Google and Amazon), or XBOX (Microsoft).
Developer share ~30%: Developer earnings based on Robux spent on their experiences or engagement-based payouts.
Platform hosting and support ~22%: Maintenance of the servers, customer experience, moderation, and acquisition.
Platform investment ~16%: Ongoing research & development.
Roblox share ~9%: What is left for Roblox before paying for ongoing services and operating costs
When reviewing the financials, it’s critical to understand how bookings (a non-GAAP metric) are recognized over time into revenue (a GAAP metric). For a definition of these terms, you can refer our article on How To Analyze an Income Statement.
The table below shows the mechanics of a user buying $30 worth of Robux.
A typical user will spend their $30 as follows:
Durable virtual items (like a cosmetic item, virtual hat, pet, or house) ~$28.
Consumable virtual items (for a specific action) ~$2.
While consumable items are immediately recognized as revenue, durable items are recognized over the average lifetime of a paying user. That lifetime is regularly re-evaluated based on engagement on the platform. As of the end of FY22, the lifetime of a paying user was 28 months. It has gone up over time as the platform matures.
Revenue from bookings spent on durable items would be recognized at a rate of $1 per month for 28 consecutive months. The revenue recognized in Month 1 is $1, and $27 is deferred to the future months.
As a result, bookings are a leading indicator of growth, while revenue is a lagging indicator. It takes about 2.5 years for bookings to be reflected in the revenue run rate.
The gross margin is misguiding. The cost of revenue only includes the app store payment processing fees. The depreciation of servers, infrastructure, and equipment is included in operating expenses (infrastructure, trust, and safety expenses). In addition, developer exchange fees are arguably a direct variable cost that should be included in the cost of revenue. So the implied gross margin is closer to 45% (as opposed to the ~75% reported by financial platforms).
The operating margin is deep in the red and worsening since the direct listing. While revenue is recognized over 28 months, fixed expenses hit the P&L right away. As a result, the margin profile of the business is also a lagging indicator. Don’t be fooled by the adjusted margin management presents because they exclude stock-based compensation expenses. To illustrate, in Q4 FY22, the adjusted EBITDA was $183 million or 20% of Bookings. However, if we include SBC, it was only $14 million or 2% of Bookings. Roblox is essentially a break-even business once we consider the impact of deferred revenue and keep the SBC expenses included.
Roblox benefits from network effects:
Content viral loop (better content, and more content over time).
Social Network viral loop (more people joining and playing together).
Let’s look at the most recent quarter.
1. Roblox Q4 FY22
DAU grew +19% Y/Y to 59 million.
Hours engaged grew +18% Y/Y to 12.8 billion.
Bookings grew +17% Y/Y to $899 million (+21% Y/Y fx neutral).
Average Booking per DAU declined by 2% Y/Y to $15.29.
Here is the bird’s-eye view of the income statement.
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