Roblox’s growth engine stalls as players leave and bookings fall 12 per cent

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MUMBAI: Roblox has just shown what happens when a viral party ends and the guests go home. The gaming platform reported results for the quarter ended September 30th, and the headline looks decent. Revenue rose 16 per cent to $1.57bn, from $1.36bn a year ago. The trouble is hiding underneath.

Start with the people. Daily active users fell 9 per cent to 138m, against 152m in the same quarter last year. Every region shrank. US and Canada lost 10 per cent, Europe 5 per cent, Asia-Pacific 9 per cent and the rest of the world 11 per cent. Hours engaged dropped 15 per cent to 33.8bn. Last year’s surge, powered by a handful of viral games, is now being compared against itself, and it hurts.

Bookings, the cash-like measure that tells you what players actually spent, fell 12 per cent to $1.70bn. That is the first year-on-year decline in the data provided, and it follows an 8 per cent rise in the second quarter and a 43 per cent jump in the first. US and Canada bookings dropped 13 per cent, Europe 12 per cent, Asia-Pacific 7 per cent and the rest of the world 8 per cent.

Why is revenue up while bookings are down? Roblox books revenue slowly, spreading it over the 27-month average life of a paying user. So last year’s bumper bookings are still trickling into this year’s revenue. The change in deferred revenue tells the story: it added just $136m this quarter, against $573m a year ago, a fall of 76 per cent. Revenue is a rear-view mirror. Bookings are the windscreen.

Spending per user is slipping too. Average bookings per daily user fell 3 per cent to $12.29. In US and Canada it dipped 4 per cent to $38.52, and in Europe it fell 7 per cent to $11.20. Asia-Pacific rose 2 per cent to $5.37 and the rest of the world 3 per cent to $5.07. The payer base shrank as well. Average monthly unique payers fell 16 per cent to 30.3m. Those who still pay are spending a little more, with average bookings per payer up 5 per cent to $18.69.

Now the bills. Total costs and expenses rose 12 per cent to $1.86bn, from $1.66bn. Cost of revenue grew 7 per cent to $318m. Developer exchange fees, what Roblox pays creators who cash out their earnings, fell 6 per cent to $403m, or 26 per cent of revenue. Infrastructure and trust and safety costs rose 5 per cent to $385m. Stripped of staff pay, depreciation and share awards, the core infrastructure and safety spend grew 24 per cent to $258m, or 16 per cent of revenue. Roblox is paying more to keep children safe and servers running while fewer of them turn up.

Research and development rose 9 per cent to $435m. General and administrative costs climbed 40 per cent to $203m, partly because of $49m in legal settlements with certain states and territories over youth consumer protection and digital safety. The company excludes these from adjusted earnings, arguing they are rare and unpredictable. Investors may feel that child-safety litigation is becoming a habit.

The big surprise is sales and marketing. Spending jumped 66 per cent to $111m, from $67m a year ago, and it was nearly double the $61m of the previous quarter. It is the biggest single quarterly figure in the data and 7 per cent of revenue. Roblox is plainly spending to win back users and to push efforts such as advertising on the platform. Whether the money works will show in the next set of numbers. Headcount rose to about 3,400, from about 3,000, and personnel costs excluding share awards rose 12 per cent to $281m.

The loss narrowed, though. The net loss was $230m, against $258m a year ago, or 32 cents a share. Loss from operations was $283m, a little under last year’s $296m. Interest income of $60m on a $6.2bn pile of cash and investments helped. Adjusted EBITDA, a measure that strips out many costs, tripled to $138m from $46m. Note that it ignores $298m of stock-based pay and the $49m legal bill. Roblox has now beaten its own definition of profit while still losing real money.

Cash was healthier. Operating cash flow fell 28 per cent to $395m, but free cash flow of $364m was still strong, down 18 per cent. Capital spending collapsed to $31m from $104m, which flatters the figure. Net cash and investments stood at $5.2bn, after $1.0bn of debt.

The outlook is the sting. For the fourth quarter Roblox guides revenue of $1.47bn to $1.58bn, up 4 per cent to 12 per cent. Bookings are seen at $1.89bn to $2.00bn, down 10 per cent to 15 per cent. It expects a net loss of $363m to $423m and an adjusted EBITDA loss of $10m to $70m. Capital spending is set to leap to $380m, which would push free cash flow to a negative $105m to $190m. After a year of cheap growth, the bill is arriving.

Share count is a minor worry. Fully diluted shares rose 2 per cent to 755m.

The hit game that lifted Roblox is cooling, the audience is thinner and the marketing budget is fatter. Management needs the next blockbuster, and soon.