There's no real secret to how Roblox (RBLX +1.80%) managed to outperform analysts' expectations for gross bookings last quarter. "It really is a combination of more users spending more time with us and spending more money," CFO Michael Guthrie said during the company's Q1 earnings call.
The math is simple, and it suggests gross bookings -- a key metric for Roblox -- will continue to accelerate going forward after falling during the first half of 2022. The figure providing the greatest confidence in that regard is average bookings per daily active users (ABPDAU). And that number is just starting to contribute to Roblox's growth.
The drop in bookings per user
Roblox posted strong growth in bookings per DAU during the height of the COVID pandemic, but it's seen pressure on the metric recently due to a number of factors.
Roblox experienced a drop in hours of engagement per user as COVID restrictions eased. With more in-person activities, the platform commanded less time from its main users. It also continued to add new users during that period. New users typically spend less time on the platform per day than those who have used Roblox for a long time.
On top of that, many of those new users came from markets with less spending power than Roblox's core markets, like the United States, Canada, and Western Europe. Indeed, 60% of Roblox users were from the U.S., Canada, or Europe two years ago. That number is 50% today, with much of Europe's growth coming from Eastern countries.
The combined result is declining bookings per DAU. ABPDAU fell every quarter from the Q3 2021 until the end of 2022. But the metric saw a slight uptick last quarter.
NYSE: RBLX
Key Data Points
Getting users to spend more
Getting users to spend more on Roblox is simple: increase time spent, and increase how much users spend per hour.
Roblox grew hours per DAU for the first time since Q1 2021 last quarter. That's a continuation of a trend management saw in Q4, when engagement among younger users in its core markets -- the U.S., Canada, the U.K., Scandinavia, and Australia/New Zealand -- surpassed the peaks experienced in the early days of the pandemic.
I believe engagement growth is a product of Roblox's network effect. As more people join the platform, it becomes more engaging. It's a lot more fun to play with your friends than with strangers.
What's more, an expanding user base makes the platform increasingly attractive to developers, giving users more options for experiences on Roblox. As such, investors should expect engagement to continue to improve going forward, especially as newer cohorts mature.
Roblox is also doing a good job of driving engagement among older users, who generally have more disposable income. Time spent on the platform by users over 13 has gone from 49% two years ago to 58% last quarter.
Management broke out ABPDAU by region for the first time last quarter. It shows strong growth across every region except Europe. The key there is expansion and growth in Eastern Europe, which monetizes at much lower rates than Western European markets. While the U.S. managed to show gains in ABPDAU in the fourth quarter last year, its first-quarter increase (of 5%) was surpassed by both Asia-Pacific (7%) and the Rest of World (11%) regions.
Investors should expect slow improvements in ABPDAU going forward as mature markets like the U.S. and Western Europe continue to expand, but that growth is offset by faster user growth in emerging markets like Eastern Europe.
Achieving operating leverage
During the earnings call, management said it expects bookings gains to exceed its overhead expense growth starting in the first quarter of 2024. Getting to that point will allow it to start producing strong operating income results, as revenue growth will exceed any uptick in expenses.
That said, Roblox's operating loss widened to $290 million in the first quarter, despite strong revenue growth. That reflects the continued investments management's made to expand the user base and put monetization trends back on track.
As it shows improved operating leverage next year and beyond, investors should be rewarded with strong profits, margin expansion, and growth. That all stems from boosting ABPDAU while expanding the user base.
Even after the run-up in its share price, long-term investors still have an opportunity to buy this metaverse stock.
