A Positive Outlook For Roblox

How Mobile Gaming Headwinds Affected Take-Two and EA

In this Metacast episode, Aaron Bush, Seb Park, join your host Maria Gillies to dive into the latest earnings from EA and Take-Two. The group also discusses some of the recent layoffs around gaming, as well some of the latest headlines and trends they’re noticing across the industry.

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#1: A Positive Outlook for Roblox

Roblox’s stock had it tough this week taking a 15% plunge in pre-market trading following their quarterly earnings announcement. The main storyline was that operating costs were higher than expected, despite DAUs and bookings up double digit percentages from the same quarter last year. In the face of a declining economic climate, Roblox achieved steady growth so this appeared to be a harsh penalty from the stock market, but there’s more to the story.

What Caused The Drop?

The drop was really a correction off a rally in October when Roblox teased bookings and daily active user growth without disclosing the losses. The higher than expected losses were a function of the operating costs–primarily personnel–being higher than expected (Roblox hired 600 new employees in the last year, increasing their costs by $160.3 million from 12 months ago).

It may have come as a surprise to Wall Street, but with the scope of opportunity for Roblox to solidify its competitive moat including “aging-up” and investing in new opportunities for monetization, costs could be expected to increase. My takeaway from the Q3 earnings call is that Roblox is executing on its focus areas despite a suboptimal macroeconomic environment.

Aging Up

The “aging up question” is one we’ve highlighted a couple times and it is trending in the right direction — the 13+ cohort grew by 34% from a year-ago, compared to overall DAU growth of 24% YoY. Over the last year, Roblox has been focused on catering to an older audience by encouraging more human-like avatars, introducing new custom material variants, and funding experiences that push the boundaries of visual fidelity on the platform. It appears to be paying off.

*Source: Roblox Q3’22 - Supplemental Materials*

Monetization Outlook

Despite DAUs and bookings being up, average bookings per daily active user fell 11% to $11.94. This comes as no surprise given the broader industry slump and macroeconomic conditions, and I believe there’s a couple reasons to be optimistic of continued growth in the future:

Limited edition items — If the NFT craze showed us anything, it’s that scarcity in the digital world absolutely drives perceived value. This appears to be the case for Roblox with CEO/Founder Dave Bazucki mentioning on the earnings call that one limited item was trading for $20,000 on Roblox’s marketplace. Previously, limited items could only be offered by Roblox, but soon Roblox will be allowing the broader developer base to make limited items as well.
In-game advertisements — Roblox paid downloads sits around 40% of total users according to data.ai. In-game ads (virtual billboards within experiences) are an opportunity to start monetizing the rest of the player base. It still remains to be seen how effective this advertising will be and what brands will be willing to pay per impression, but this is reason to believe that Roblox’s continued DAU growth will convert into future revenue growth.
In-game commerce — Looking further out, Roblox shared plans at RDC22 to enable in-game ecommerce. Players will be able to walk into an in-game store, try on a digital item and then purchase the physical version. This has the potential to change a $0.50 purchase into a $50 purchase. Roblox will have to effectively navigate app store fees with physical items having a marginal cost, but I think this has tremendous potential for even deeper monetization.

These new monetization opportunities couldn’t come sooner as bookings growth (which Roblox recommends as the most timely indication of transaction volume on the platform) has slowed for several quarters now. Bookings growth is particularly critical to maintain the healthy developer economy, and thus, the company’s content flywheel.

Fortunately, there is another major revenue stream emerging for the developer economy to capture in the face of slowed growth that Dave Bazucki emphasized on the earnings call.

Brands Quietly Funding Innovation

Dave Bazucki called out that Roblox is “participating with Elton John in a new persistent world called Elton John Presents 'Beyond the Yellow Brick Road', that premiered last Thursday…showing the extent to which Roblox brands have become ubiquitous in the music and brand industry.” The value of these brands would not immediately show up in an earnings call as brands work directly with Roblox developers and pay them directly to create experiences. These brand activations drive very little of overall engagement, but they are funding innovation on the platform through the fees paid directly to Roblox developers. I don’t see brands going away anytime soon, as the engagement is far superior to other brand advertising opportunities (5-20 minutes of play versus a 30-second ad on Youtube) for roughly the same cost.

In the short term, bookings growth has slowed for Roblox as we see a slowing across the games industry. However, the stickiness of Roblox’s product (30% — M12 retention according to data.ai), plus new monetization opportunities on the horizon means that we should expect to see bookings take off when the tech comes online, and even more so when the macroenvironment improves. (Written by David Taylor)

#2: Weekly News Round-Up

Nexon Reports Earnings: After spending much of 2021 focusing on investment in future growth, it seems as though Nexon’s bets have begun to payoff. Reporting 28% year-over-year increase in revenue, the company posted its best Q3 ever earlier this week, driven largely by growth from FIFA Online 4 and Maplestory in Korea. Nexon has always relied on its core IP to do the heavy lifting when it comes to company performance, but their growing focus on high-quality, live-ops-centric mobile experiences seems to be yielding better results than expected. Mobile revenues are up 95% YoY in Korea alone, driven largely by what Nexon calls “PC-like” retention rates. Its a savvy play that seemingly shifts the company’s moneymakers into stable, constantly-updating titles in an effort to distance Nexon from the narrative of being a “hits-driven business.” While the usual suspects still continue to do most of the work for the company, I suspect the infrastructure thee company is building here will be well served in preparing them to rapidly scale new titles in the future.

Unity Reports Earnings: On the heels of closing its merger with IronSource this week, Unity announced its Q3 results. On the surface, it was rough — revenue growth of 13% was dragged down by Operate Solution’s -7% decline (mainly from the ongoing broken ad algorithm issues), losses widened, and stock-based compensation represented a staggering 48% of quarterly revenue. It’s no surprise that Unity’s stock is still down 85% from its highs. However, the stock has rebounded roughly 50% since its earnings were released, because management stated that Operate Solutions‘ issues are largely in the rearview mirror and that the company is taking steps toward profitability. This is definitely a positive, but there’s more work to go. The company will need to quickly integrate IronSource’s team and ad mediation platform, continue cutting back expenses (more layoffs?), focus its reinvestments on the highest value R&D, brace through the ongoing mobile gaming slump, and avoid more value destructive deals (like Weta from last year). Unity has great technologies, but we’re hoping these steps can help it become a better business.

Square Enix Reports Earnings: It’s a mixed earnings season for one of Japan’s largest players. While Square did see over 15B Yen in YoY growth on net income, both net sales and operating income decreased. The biggest culprit for the decline is an underperformance in the company’s “HD Games” segment — which includes its non-MMO and Mobile titles. The earnings reports acknowledged the growing need for Square Enix to find ways to diversify its business, a fact the company is well aware of as it highlighted in its earnings. Explorations in blockchain gaming, cloud platforms, an expanded publishing arm, and a reallocation of resources into more global-centric titles show that some shuffling is occurring internally to try and right the ship. That being said, Square Enix will have to find ways besides Final Fantasy XIV to smooth its success away from hits-driven console titles.

🎮In Other News…

💸Funding & Acquisitions:

Earnings: Roblox | Unity | AppLovin | Bandai | Nexon | Square Enix | Nintendo
Everybuddy raised a $15M Series A led by Makers Fund. Link
Anything World raised $7.5M. Link

📊Business:

FTX imploded. Link
Riot Games will no longer publish games through Garena in Southeast Asia. This comes after Riot acquired Wargaming’s Sydney studio. Link
EU opens a more detailed inquiry into the Microsoft x Activision acquisitions. Link
Homa Games expands to web3 tech. Link

🕹Culture & Games:

New evolution of the CoD battle pass — choose your own adventure. Link
Gears of War is getting a Netflix adaptation. Link
League of Legends’ Worlds Championships peaked at 5.15M viewers. Link
Ash’s journey come to a resounding culmination, 25 years later. Link

👾Miscellaneous Musings:

Japan’s PC gaming market doubled in three years. Link
The 19-year-old who makes $10K a month writing GTA role-playing scripts. Link
Square Enix is reinventing itself. Link
Hardware sales 2021 vs. 2022. Link

This Week In Naavik Pro

Looking for more great games industry analysis? Check out Naavik Pro!

This past week the Naavik Pro team published:

A deconstruction of MARVEL Contest of Champions — and why it’s been such a dominant mobile F2P action game.
Three deconstructions on hyped upcoming blockchain games: Aurory, Genopets, and Cross the Ages
Analyses on Wildlife Studios’ affiliate studio strategy, the staffing changes at Dapper Labs and Mythical Games, and Hyperplay’s pursuit to make wallets more interoperable in desktop games.
An updated game radar with takes on Angry Birds Racing and Goddess of Victory: Nikke.

Next week we’re publishing our new monthly market update for blockchain games, a mini-deconstruction of Boom Beach: Frontlines, an analysis of what FTX’s fallout means for web3 games, earnings updates from Playtika and Unity, and Microsoft’s investment into Wemade. And there’s much more coming after that!

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