Q2 2026 Roblox Corp Earnings Call
Speaker #1: 6, earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
Speaker #1: If you'd like to ask a question during that time, simply press star, then the number 1 on your telephone keypad. We ask that you limit your initial question to 1.
Speaker #1: I will now turn the call over to Jaime Morris, Roblox Head of Investor Relations. Jaime?
Speaker #2: Good afternoon, everyone. Thank you for joining us to discuss our Q2 2026 results. With me today is Roblox's co-founder and CEO, David Baszucki. And our Chief Financial Officer, Naveen Chopra.
Speaker #1: Good afternoon, everyone. My name is Regina, and I will be your conference operator today. Welcome to Roblox's second quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise.
Speaker #2: Before we begin, I would like to remind you that our commentary today may include forward-looking statements which are subject to risk, uncertainties, and assumptions.
Speaker #1: After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during that time, simply press star, then the number 1 on your telephone keypad.
Speaker #2: It could cause actual results to differ materially from those described in our forward-looking statements. A description of these risks, uncertainties, and assumptions are included in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q.
Speaker #1: We ask that you limit your initial question to one. I will now turn the call over to Jamie Morris, Roblox Head of Investor Relations.
Speaker #1: Jamie?
Speaker #2: Good afternoon, everyone. Thank you for joining us to discuss our Q2 2026 results. With me today is Roblox's Co-Founder and CEO, David Baszucki, and our Chief Financial Officer, Naveen Chopra.
Speaker #2: You should not rely on our forward-looking statements as predictions of future events. And we disclaim any obligation to update these statements, except as required by law.
Speaker #2: Before we begin, I would like to remind you that our commentary today may include forward-looking statements, which are subject to risks, uncertainties, and assumptions.
Speaker #2: During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics can be found in our shareholder letter and supplemental materials which are available on our investor relations website.
Speaker #2: It could cause actual results to differ materially from those described in our forward-looking statements. A description of these risks, uncertainties, and assumptions is included in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q.
Speaker #2: With that, I'll turn the call over to Dave.
Speaker #3: Thank you. Good afternoon, and thank you for joining us. Today, I'll start with a few remarks about the quarter and then I'll turn it over to Naveen to discuss results and guidance.
Speaker #2: You should not rely on our forward-looking statements as predictions of future events. And we disclaim any obligation to update these statements, except as required by law.
Speaker #3: And then I'll conclude with some important updates about how we plan to achieve our long-term goals. We remain steadfast in our goal to capture 10% of the global gaming market and an even greater share of the U.S.
Speaker #2: During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics can be found in our shareholder letter and supplemental materials, which are available on our investor relations website.
Speaker #3: market. Against the backdrop of the incredible growth we delivered last year, in Q2 we delivered healthy year-over-year growth in users, hours, and cash flow.
Speaker #2: With that, I'll turn the call over to Dave.
Speaker #3: Thank you. Good afternoon, and thank you for joining us. Today, I'll start with a few remarks about the quarter, and then I'll turn it over to Naveen to discuss results and guidance. I'll then conclude with some important updates about how we plan to achieve our long-term goals.
Speaker #3: And while bookings growth fell within our guidance range, it was below our internal goal, which we will discuss in detail on today's call. Before I hand it over to Naveen, I want to give some updates on the business.
Speaker #3: We remain steadfast in our goal to capture 10% of the global gaming market and an even greater share of the U.S. market. Against the backdrop of the incredible growth we delivered last year, in Q2 we delivered healthy year-over-year growth in users, hours, and cash flow.
Speaker #3: First, let's talk about safety. In the first part of this year, we made the decision to age-check everyone on our platform and to limit chat only to those users who've age-checked.
Speaker #3: We've made significant progress this quarter, and as a result, age-check penetration has increased to 57% globally. And in the first countries where we rolled it out, Australia is approaching 80%.
Speaker #3: And well-bookings growth fell within our guidance range, it was below our internal goal, which we will discuss in detail on today's call. Before I hand it over to Naveen, I want to give some updates on the business.
Speaker #3: And the U.S. and U.K. are at 70%. With the under-18 segments, we're making enormous progress with the U.S. under-18 at 75%, and in addition, of course, to our filters, industry-leading safety we don't allow image sharing in chat, and in conjunction with age-check, we implemented age-banded communication.
Speaker #3: First, let's talk about safety. In the first part of this year, we made the decision to age-check everyone on our platform, and to limit chat only to those users who've age-checked.
Speaker #3: We've made significant progress this quarter, and as a result, age-check penetration has increased to 57% globally. In the first countries where we rolled it out, Australia is approaching 80%, and the U.S.
Speaker #3: We've also introduced new comms products. We'll share a bit more about that. And on the content side in June, we successfully rolled out age-based Roblox Kids and Select accounts.
Speaker #3: and U.K. are at 70%. With the under-18 segments, we're making enormous progress with the U.S. under-18 at 75%, and in addition, of course, to our filters, industry-leading safety, we don't allow image sharing in chat, and in conjunction with age-check, we implemented age-banded communication.
Speaker #3: We believe accurate age data amplifies our conviction in the long-term growth potential for the platform. On the discovery side, in the last few months, we shared with our community our strategic decision to focus our discovery algorithms directly on measured long-term retention, we have seen this impact monetization, primarily in the U.S.
Speaker #3: We've also introduced new comms products. We'll share a bit more about that. And on the content side, in June, we successfully rolled out age-based Roblox Kids and Select accounts.
Speaker #3: under-13 cohort, and this has been exemplified by a lower frequency of impressions with games that emphasize short-term monetization rather than long-term retention. It's still early, but our data shows a positive lift in quality, stickier engagement games, and the benefits of higher retention we believe outweigh the near-term impacts we're seeing.
Speaker #3: We believe accurate age data amplifies our conviction in the long-term growth potential for the platform. On the discovery side, in the last few months, we shared with our community our strategic decision to focus our discovery algorithms directly on measured long-term retention. We have seen this impact monetization, primarily in the U.S.
Speaker #3: As improved retention and engagement compound into future growth, I'm going to now turn it over to Naveen to address some specifics and then I'll be back to talk about our future plans.
Speaker #3: under-13 cohort, and this has been exemplified by a lower frequency of impressions with games that emphasize short-term monetization rather than long-term retention. It's still early, but our data shows a positive lift in quality, stickier engagement games, and the benefits of higher retention we believe outweigh the near-term impacts we're seeing, as improved retention and engagement compound into future growth.
Speaker #4: Thanks, Dave. I'm going to share a few details about the quarter, and then also discuss updates to our outlook. For the quarter, revenue grew 36% to $1.5 billion.
Speaker #4: And bookings grew 8% to $1.6 billion. As Dave mentioned, this was at the low end of our guidance, and we'll discuss more about that in a moment.
Speaker #4: We finished the quarter with $123 million DAUs, up 10% year over year. And hours grew 5% to $29 billion. In addition to building on the existing scale we have in the United States, we continued to see strong year-over-year growth in many international markets.
Speaker #3: I'm going to now turn it over to Naveen to address some specifics, and then I'll be back to talk about our future plans.
Speaker #4: Thanks, Dave. I'm going to share a few details about the quarter, and then also discuss updates to our outlook. For the quarter, revenue grew 36% to $1.5 billion, and bookings grew 8% to $1.6 billion, as Dave mentioned, this was at the low end of our guidance, and we'll discuss more about that in a moment.
Speaker #4: For example, DAUs in Japan grew 67%, and DAUs in India grew 64%. And similarly, hours growth in Japan and India was 61% and 59% respectively.
Speaker #4: We finished the quarter with $123 million DAUs, up 10% year over year. And hours grew 5% to $29 billion. In addition to building on the existing scale we have in the United States, we continued to see strong year-over-year growth in many international markets.
Speaker #4: We also saw users in Russia come back online as we were unblocked there late in the quarter. On the bottom line, operating cash flow was up 60% year on year, to $318 million.
Speaker #4: And free cash flow of $294 million was up 66% year over year. From a content perspective, our platform is getting more diversified while maintaining a steady velocity of new content.
Speaker #4: For example, DAUs in Japan grew 67%, and DAUs in India grew 64%. Similarly, hours growth in Japan and India was 61% and 59%, respectively.
Speaker #4: Case in point, three years ago, our top 10 games accounted for about 30% of all the hours engaged on Roblox. Today, the top 10 games account for approximately 20% of hours.
Speaker #4: We also saw users in Russia come back online as we were unblocked there late in the quarter. On the bottom line, operating cash flow was up 60% year on year, to $318 million.
Speaker #4: And in terms of user metrics, new user sign-up activity improved throughout the quarter. Benefiting from seasonality and the reinstatement of Roblox in Russia. Retention of existing users remained stable, and engagement hours were in line with our expectations.
Speaker #4: And free cash flow of $294 million was up 66% year-over-year. From a content perspective, our platform is getting more diversified while maintaining a steady velocity of new content.
Speaker #4: Monetization, however, as measured in bookings per hour, was below our forecast, particularly with under-13 cohorts. And was the primary factor impacting our bookings performance.
Speaker #4: Case in point, three years ago, our top 10 games accounted for about 30% of all the hours engaged on Roblox. Today, the top 10 games account for approximately 20% of hours.
Speaker #4: We attribute the unforeseen monetization shortfall to a greater-than-expected shift of engagement from high monetizing 2025 Vintage Viral Games to a combination of new and evergreen experiences with lower hourly monetization.
Speaker #4: And in terms of user metrics, new user sign-up activity improved throughout the quarter, benefiting from seasonality and the reinstatement of Roblox in Russia. Retention of existing users remained stable, and engagement hours were in line with our expectations.
Speaker #4: This underlying makeshift was compounded by changes in our recommendation algorithm, which optimizes for long-term retention and is therefore providing more impressions for highly retentive games at the expense of near-term monetization.
Speaker #4: Monetization, however, as measured in bookings per hour, was below our forecast, particularly with under-13 cohorts. And was the primary factor impacting our bookings performance.
Speaker #4: We attribute the unforeseen monetization shortfall to a greater-than-expected shift of engagement from high monetizing 2025 Vintage Viral Games to a combination of new and evergreen experiences with lower hourly monetization.
Speaker #4: And in Q2, the bookings impact of this trade-off on younger users was greater than we anticipated. Although these discovery changes add to the variability of our business, our testing suggests that the long-term benefit to retention will more than offset the short-term monetization hit.
Speaker #4: This underlying makeshift was compounded by changes in our recommendation algorithm, which optimizes for long-term retention and is therefore providing more impressions for highly retentive games at the expense of near-term monetization.
Speaker #4: Particularly as we continue to improve the algorithms, by doing things like using age-check data to better target recommendations by region and age cohort, which over time should help mitigate the monetization headwind we saw in Q2.
Speaker #4: And in Q2, the bookings impact of this trade-off on younger users was greater than we anticipated. Although these discovery changes add to the variability of our business, our testing suggests that the long-term benefit to retention will more than offset the short-term monetization hit.
Speaker #4: Another albeit less significant factor in the monetization shortfall was the impact of our decision to disable the sale of cross-experience game passes. Looking ahead to Q3, we expect sequential DAU trends to benefit from seasonality, the unblocking of Roblox in Russia, and our discovery changes.
Speaker #4: Particularly as we continue to improve the algorithms by doing things like using age-check data to better target recommendations by region and age cohort, which, over time, should help mitigate the monetization headwind we saw in Q2.
Speaker #4: But monetization weakness is likely to continue. And as a result, we forecast Q3 bookings to be between $1.58 and $1.65 billion. Which, given the tough comparisons, translates to a year-over-year decline of 14% to 18%.
Speaker #4: Another, albeit less significant, factor in the monetization shortfall was the impact of our decision to disable the sale of cross-experience game passes. Looking ahead to Q3, we expect sequential DAU trends to benefit from seasonality, the unblocking of Roblox in Russia, and our discovery changes.
Speaker #4: From a margin perspective, the reduction in bookings will result in fixed-cost deleveraging. Additionally, investments in AI-powered initiatives like Build, Roblox Reality, and Moments are expected to result in higher infrastructure costs.
Speaker #4: But monetization weakness is likely to continue, and as a result, we forecast Q3 bookings to be between $1.58 and $1.65 billion. Given the tough comparisons, this translates to a year-over-year decline of 14% to 18%.
Speaker #4: For Q4, increasing variability and continued updates to our platform lead to a wide range of potential outcomes. And therefore, we are not providing revised full-year guidance at this time.
Speaker #4: While our expectations for the remainder of the year have changed significantly, we have conviction that we're making the right trade-offs to continue our role as an industry disruptor.
Speaker #4: From a margin perspective, the reduction in bookings will result in fixed-cost deleveraging. Additionally, investments in AI-powered initiatives like Build, Roblox Reality, and Moments are expected to result in higher infrastructure costs.
Speaker #4: Investments in AI, content diversification, long-term retention, and safety though creating near-term friction position us to maximize our share of the global gaming market. With that, I'll pass it back to Dave to talk about some of our future plans.
Speaker #4: For Q4, increasing variability and continued updates to our platform lead to a wide range of potential outcomes. Therefore, we are not providing revised full-year guidance at this time.
Speaker #3: Thanks, Naveen. Since we started the company, we've been on a mission to support players around the world. And we believe the world needs more play we can all see it right now, given in light of really everything going on in the world.
Speaker #4: While our expectations for the remainder of the year have changed significantly, we have conviction that we're making the right trade-offs to continue our role as an industry disruptor.
Speaker #4: Investments in AI, content diversification, long-term retention, and safety—though creating near-term friction—position us to maximize our share of the global gaming market. With that, I'll pass it back to Dave to talk about some of our future plans.
Speaker #3: And this fundamental need is part of what gives really all of us conviction in Roblox's ability to deliver long-term growth in excess of 20%.
Speaker #3: We set our goal of expanding play everywhere with a target of 10% of global gaming running on Roblox. And in the US, we've shared that our goals to go well beyond 10%.
Speaker #3: Thanks, Naveen. Since we started the company, we've been on a mission to support players around the world. And we believe the world needs more play; we can all see it right now, given everything that's going on in the world.
Speaker #3: Today, we estimate that 20% of USA under-gaming revenue flows through Roblox. We've done this through the power of our platform and the creativity and diversity of user-generated content.
Speaker #3: And this fundamental need is part of what gives really all of us conviction in Roblox's ability to deliver long-term growth in excess of 20%.
Speaker #3: And in this cohort, we validated the power of our ability to unify discovery, economy, tools, engines, safety, and cloud infra. While we did experience softness in our younger users' monetization this quarter, we believe our monetization system is fundamentally strong and will compound over time, with additional levers including subscription and advertising revenues.
Speaker #3: We set our goal of expanding play everywhere, with a target of 10% of global gaming running on Roblox. In the US, we've shared that our goal is to go well beyond 10%.
Speaker #3: Today, we estimate that 20% of USA under-gaming revenue flows through Roblox. We've done this through the power of our platform and the creativity and diversity of user-generated content.
Speaker #3: We've established, unlike really any other company at our scale, our commitment to setting the global standard for safe digital engagement and with younger users in particular, long-term we believe this is a tremendous benefit to have such strength among younger cohorts.
Speaker #3: And in this cohort, we validated the power of our ability to unify discovery, economy, tools, engines, safety, and cloud infrastructure. While we did experience softness in our younger users' monetization this quarter, we believe our monetization system is fundamentally strong and will compound over time, with additional levers including subscription and advertising revenues.
Speaker #3: And this will contribute, we believe, to fuel long-term growth. The 18 and over-market is 80% of the 200 billion dollar global gaming market. And we believe we're uniquely poised to expand play in this 18 and over-market in the same way we have for under-18.
Speaker #3: We've established, unlike really any other company at our scale, our commitment to setting the global standard for safe digital engagement and with younger users in particular, long-term we believe this is a tremendous benefit to have such strength among younger cohorts, and this will contribute, we believe, to fuel long-term growth.
Speaker #3: Today, in the US, our 18 and up cohort represents nearly one-third of our now age-checked daily active users. And our US 18 to 34 cohort daily active users and ours are growing at approximately 40% year on year.
Speaker #3: The 18 and over market is 80% of the 200 billion dollar global gaming market, and we believe we're uniquely poised to expand play in this 18 and over market in the same way we have for under-18.
Speaker #3: And our 13 and up cohorts around the world continue to show strong growth. In addition to our viral growth worldwide in under-18, we have the opportunity to power 18 and up growth with increasing paid acquisition as we continue to improve product-market fit.
Speaker #3: Today, in the US, our 18 and up cohort represents nearly one-third of our now age-checked daily active users, and our US 18 to 34 cohort daily active users and ours are growing at approximately 40% year on year.
Speaker #3: And besides safety, the majority of our product and technical investments supporting growth in 18 and up also benefit younger audiences. We've recently launched three initiatives that will support our continued growth in the 18 and up market segment.
Speaker #3: And our 13 and up cohorts around the world continue to show strong growth. In addition to our viral growth worldwide in under-18, we have the opportunity to power 18 and up growth with increasing paid acquisition, as we continue to improve product market fit.
Speaker #3: First, as we shared, we're removing self-imposed limits on the types of games we support on Roblox. Second, we've redefined our app to align with physical play, including discovery, and third, we're reconnecting with our core promise that anyone can be a builder.
Speaker #3: And besides safety, the majority of our product and technical investments supporting growth in 18 and up also benefit younger audiences. We've recently launched three initiatives that will support our continued growth in the 18 and up market segment.
Speaker #3: First off, we want all types of gaming on Roblox. We're not that far away from having the technology in place to support the vast majority of games that people play online.
Speaker #3: On one end of the spectrum, we believe players are looking for multiplayer experiences that will ultimately mirror physical reality. Even since our start, we've had the goal of photorealism and unlimited multiplayer scale.
Speaker #3: First, as we shared, we're removing self-imposed limits on the types of games we support on Roblox. Second, we've redefined our app to align with physical play, including discovery. And third, we're reconnecting with our core promise that anyone can be a builder.
Speaker #3: And with our announcement of Roblox Reality, we're well on our way to being the first company to bring photorealistic multiplayer to life and to the masses.
Speaker #3: First off, we want all types of gaming on Roblox. We're not that far away from having the technology in place to support the vast majority of games that people play online.
Speaker #3: We see a future where games really will become indistinguishable from movies for certain types of games. And we can see this quality today in offline AI video tools.
Speaker #3: On one end of the spectrum, we believe players are looking for multiplayer experiences that will ultimately mirror physical reality. Even since our start, we've had the goal of photorealism and unlimited multiplayer scale, and with our announcement of Roblox Reality, we're well on our way to being the first company to bring photorealistic multiplayer to life and to the masses.
Speaker #3: We believe we'll soon see this in real-time with Roblox Reality. Now, gaming is also simultaneously spontaneous and single-player and 2D for many people. And up until today, we've been focused on 3D and we've held back on initiatives to support high performance 2D tooling and gameplay.
Speaker #3: Going forward, we're doubling down on our support for everything from 2D puzzle games to strategy. With Roblox Reality, and a focus on 2D performance, we're expanding the bookends of what we believe will be possible on Roblox.
Speaker #3: We see a future where games really will become indistinguishable from movies for certain types of games, and we can see this quality today in offline AI video tools.
Speaker #3: We believe we'll soon see this in real time with Roblox Reality. Now, gaming is also simultaneously spontaneous and single-player, and 2D for many people. Up until today, we've been focused on 3D, and we've held back on initiatives to support high-performance 2D tooling and gameplay.
Speaker #3: This week, we've announced a unified vision of our app that includes bringing video discovery and creation front and center to all users. We've announced this week we're integrating moments into our homepage for 16 and up users and we've begun testing for 16 up users in Canada, New Zealand, and Singapore.
Speaker #3: Going forward, we're doubling down on our support for everything from 2D puzzle games to strategy. With Roblox Reality, and a focus on 2D performance, we're expanding the bookends of what we believe will be possible on Roblox.
Speaker #3: We're expanding the moments feed to include short form influencer video, in addition to game captures, and we believe ultimately moments will be available for all with appropriate and safe educational content for younger players.
Speaker #3: This week, we've announced a unified vision of our app that includes bringing video discovery and creation front and center to all users. We've announced this week we're integrating Moments into our homepage for users 16 and up, and we've begun testing for users 16 and up in Canada, New Zealand, and Singapore.
Speaker #3: Ultimately, we'll expand moments with tiles that let users watch creators or view live gameplay in real-time so you can see what your friends are playing.
Speaker #3: Our early test shows substantial gains in moments user retention and we're very optimistic about moments. We'll ultimately be moving to full 3D games in the moments tab and this will become integrated with games created through Build.
Speaker #3: We're expanding the Moments feed to include short-form influencer video, in addition to game captures, and we believe ultimately Moments will be available for all, with appropriate and safe educational content for younger players.
Speaker #3: Together with Build, this means you can watch a game in action and then play it with one tap, creating really a unique path all the way from discovery to this new wave of content from Build.
Speaker #3: Ultimately, we'll expand moments with tiles that let users watch creators or view live gameplay in real time, so you can see what your friends are playing.
Speaker #3: On the communication side, continuing our dialogue from last quarter, we're committed to leveraging our world-class industry-leading safety infra to build the highest quality integrated voice video and text comms on the Roblox platform.
Speaker #3: Our early test shows substantial gains in moments user retention and we're very optimistic about moments. We'll ultimately be moving to full 3D games in the moments tab, and this will become integrated with games created through Build.
Speaker #3: We've already shipped global chat and Quick Words. And today, a significant portion of our users still do utilize off-platform communication tools. Our roadmaps to provide users the option to video chat with friends or stream with their Roblox avatar.
Speaker #3: Together with Build, this means you can watch a game in action and then play it with one tap, creating really a unique path all the way from discovery to this new wave of content from Build.
Speaker #3: On the communication side, continuing our dialogue from last quarter, we're committed to leveraging our world-class industry-leading safety infra to build the highest quality integrated voice, video, and text comms on the Roblox platform.
Speaker #3: Because all comms that originate within Roblox will accompany users as they move between games, they deliver a safer, richer more immersive connection than any off-platform alternative.
Speaker #3: We've already shipped Global Chat and Quick Words, and today, a significant portion of our users still do utilize off-platform communication tools. Our roadmap is to provide users the option to video chat with friends or stream with their Roblox avatar.
Speaker #3: And as a first step in Q3, we'll be deploying inexperienced friend chat which brings real-time text messaging directly into any Roblox game. Creating a game is much more complicated than writing code.
Speaker #3: Games are built with code, images, graphics, audio tracks, 3D scenes, avatars, and of course with enormous creativity. We believe we have a unique opportunity to accelerate game creation based on our integrated and vertical stack.
Speaker #3: Because all communications that originate within Roblox will accompany users as they move between games, they deliver a safer, richer, more immersive connection than any off-platform alternative.
Speaker #3: Last week, we announced Build, an extension of our vision that everyone in the world can be a game builder and we're leveraging our internally generative AI models to create a conversational interface so anyone who can imagine something can describe it and shape it with others and then ultimately bring it to a playable experience to life in minutes.
Speaker #3: And as a first step in Q3, we'll be deploying inexperience friend chat which brings real-time text messaging directly into any Roblox game. Creating a game is much more complicated than writing code.
Speaker #3: Games are built with code, images, graphics, audio tracks, 3D scenes, avatars, and, of course, with enormous creativity. We believe we have a unique opportunity to accelerate game creation based on our integrated and vertical stack.
Speaker #3: For the creators that are already building with us, we believe this will be about practical leverage, helping them build faster, and to reach the right audience more effectively.
Speaker #3: Last week, we announced Build, an extension of our vision that everyone in the world can be a game builder and we're leveraging our internally generative AI models to create a conversational interface so anyone who can imagine something can describe it and shape it with others, and then ultimately bring it to a playable experience to life in minutes.
Speaker #3: Build will be fully integrated with Roblox Studio and the AI-powering Build will allow users to start an experience in Build and ultimately finish it in Roblox Studio.
Speaker #3: We're already live in New Zealand with Build. I just want to highlight that we're seeing a large number of creations flowing through the system already.
Speaker #3: Literally people fulfilling our vision of you make the game. Now, just as coding it's not just the model, but we believe with Build it's the integration of a harness, tools, and skills and ultimately our vision is many models unified in one harness using our cloud backend and infra to come full circle.
Speaker #3: For the creators that are already building with us, we believe this will be about practical leverage—helping them build faster and reach the right audience more effectively.
Speaker #3: Build will be fully integrated with Roblox Studio and the AI-powering Build will allow users to start an experience in Build and ultimately finish it in Roblox Studio.
Speaker #3: The other cool thing about Build is it really integrates with what we said about removing the bookends. Many people who are using Build will want to build 2D experiences or 3D and Build will leverage this with our backend to support everything in between.
Speaker #3: We're already live in New Zealand with Build. I just want to highlight that we're seeing a large number of creations flowing through the system already.
Speaker #3: Literally, people fulfilling our vision of "you make the game." Now, just as coding—it's not just the model—but we believe with Build, it's the integration of a harness, tools, and skills. Ultimately, our vision is many models unified in one harness, using our cloud backend and infra to come full circle.
Speaker #3: Given our discovery focus on long-term retention, we're comfortable that we're in a position to appropriately surface the high-quality creations with Build even as the quality of creation increases.
Speaker #3: We're really navigating a period of normalization we believe following a year of massive growth. We have tremendous scale and engagement which presents us with a unique opportunity to amplify our long-term potential.
Speaker #3: The other cool thing about Build is it really integrates with what we said about removing the bookends. Many people who are using Build will want to build 2D experiences or 3D, and Build will leverage this with our backend to support everything in between.
Speaker #3: To capitalize on this momentum, we're doubling down on our vision that the world needs more play and we're bringing to life really the original vision of our company which is you make the game.
Speaker #3: Given our discovery focus on long-term retention, we're comfortable that we're in a position to appropriately surface the high-quality creations with Build, even as the quality of creation increases.
Speaker #3: By expanding our global audience, broadening our content offering, and deepening engagement for our users and creators. I've never been more excited about our mission and more excited and confident in the road ahead.
Speaker #3: We're really navigating a period of normalization, we believe, following a year of massive growth. We have tremendous scale and engagement, which presents us with a unique opportunity to amplify our long-term potential.
Speaker #3: With that, we'll pass back to the operator for questions.
Speaker #1: We will now begin the question and answer session. To ask a question, press star, then the number one on your telephone keypad. We ask that you limit your initial question to one.
Speaker #3: To capitalize on this momentum, we're doubling down on our vision that the world needs more play, and we're bringing to life the original vision of our company, which is: you make the game.
Speaker #1: Our first question will come from the line of Matthew Cost with Morgan Stanley. Please go ahead.
Speaker #3: By expanding our global audience, broadening our content offering, and deepening engagement for our users and creators. I've never been more excited about our mission, and more excited and confident in the— we'll pass back to the operator for questions.
Speaker #2: Great. Thanks very much for taking the questions. I guess you've done a really helpful job on this call laying out what the long-term vision of what you're trying to build with the algorithm changes and the kits and select accounts.
Speaker #2: You've done a great job of explaining what that meant to get to over the long term. I guess between here and there, what are you watching and what should investors be watching to help determine when the engagement headwinds from those changes have peaked?
Speaker #1: We will now begin the question-and-answer session. To ask a question, press star and the number one on your telephone keypad. We ask that you limit your initial question to one.
Speaker #1: Our first question will come from the line of Matthew Cost with Morgan Stanley. Please go ahead.
Speaker #2: And then sort of connected to that, when we think about the expectation of user growth sequentially in the third quarter, is that justifunction of seasonality or are there any improvements in the trajectory as you've exited the second quarter?
Speaker #2: Great, thanks very much for taking the questions. I guess you've done a really helpful job on this call, laying out what the long-term vision is of what you're trying to build with the algorithm changes and the kids and select accounts.
Speaker #2: Thank you.
Speaker #3: I have a list. Davine, do you have a list? Do you want me to go first or do you want to go first?
Speaker #2: You've done a great job of explaining what that's meant to get to over the long term. I guess between here and there, what are you watching, and what should investors be watching to help determine when the engagement headwinds from those changes have peaked?
Speaker #2: You can go first and I'll catch the last couple parts of that question.
Speaker #3: Yeah. Hey Matthew, great question. I think a couple things to watch. In our U18 segment, we've laid out on this call really where we're going and that includes we believe finally we'll be fulfilling that original vision of you make the game.
Speaker #2: And then sort of connected to that, when we think about the expectation of user growth sequentially in the third quarter, is that just a function of seasonality or are there any improvements in the trajectory as you've exited the second quarter?
Speaker #3: Not every user can figure out how to use Studio or make a game. What we see already in New Zealand is more people per day on Build than on Studio.
Speaker #2: Thank you.
Speaker #3: Do you want me to go first, or do you want to go first?
Speaker #2: You can go first and I'll catch the last couple of parts of that question.
Speaker #3: And we do think ultimately AI creation of gaming is going to be something that sits side by side playing games. So I think watch for frequency.
Speaker #3: Yeah. Hey, Matthew. Great question. I think a couple of things to watch. In our U18 segment, we've laid out on this call really where we're going, and that includes we believe finally we'll be fulfilling that original vision of you make the game.
Speaker #3: In under 18, we also expect to be fairly generous in the amount of AI or tokens in the build process. But for those users that are using Build all day long, we will within our Roblox Plus subscription add the ability to increase what will be called tokens somewhere else.
Speaker #3: Not every user can figure out how to use Studio or make a game. What we see already in New Zealand is more people per day on Build than on Studio.
Speaker #3: We'll have our own name for it. So watch our subscription. For under 18 as well, and then I would say also as we roll out continued comms platform, watch for that.
Speaker #3: And we do think, ultimately, AI creation of gaming is going to be something that sits side by side with playing games. So I think, watch for frequency in under 18.
Speaker #3: Over 18, we are laser focused on a couple cohorts in that and the growth rate in those cohorts. And we're laser focused on the type of content that's being created by our creator ecosystem that we believe will be more and more retentive in those cohorts.
Speaker #3: We also expect to be fairly generous in the amount of AI or tokens in the Build process. But for those users that are using Build all day long, we will, within our Roblox Plus subscription, add the ability to increase what will be called tokens somewhere else.
Speaker #3: So I would watch the growth rates in over 18. I shared a bit of what they are today. Because those point to 80% of the market that we believe we can do the same thing in as we've done under 18.
Speaker #3: We'll have our own name for it. So watch our subscription. For under 18 as well, and then I would say also as we roll out continued comms platform, watch for that.
Speaker #3: Over 18, we are we're laser focused on a couple of cohorts in that and the growth rate in those cohorts. And we're laser focused on the type of content that's being created by our creator ecosystem that we believe will be more and more retentive in those cohorts.
Speaker #2: And then just to address a couple of the things you asked about, Matt, in terms of sort of the near-term friction and then DOU trends, I just would clarify you talked about near-term engagement friction.
Speaker #2: That's really not what we're seeing. We're actually pretty happy with the engagement trends that we've seen. I talked about some of the health that we've seen in sign-ups, retention, etc.
Speaker #3: So, I would watch the growth rates in over 18. I shared a bit of what they are today, because those point to 80% of the market that we believe we can do the same thing in as we've done under 18.
Speaker #2: So engagement looks good. The weakness that we saw that was inconsistent with what we expected when we put our original plans together for the quarter was really around monetization.
Speaker #2: And then, just to address a couple of the things you asked about, Matt, in terms of the near-term friction and DOU trends, I just would clarify—you talked about near-term engagement friction.
Speaker #2: And that is going to continue as we continue to evolve some of what we're doing around discovery and recommendations. The DOU trends themselves, seasonality is definitely a big factor there.
Speaker #2: That's really not what we're seeing. We're actually pretty happy with the engagement trends that we've seen. I talked about some of the health that we've seen in sign-ups, retention, et cetera.
Speaker #2: We're going to get a full quarter benefit from having Russia back online. And so those are probably the two big ones that I would highlight with respect to DOU trends.
Speaker #2: So engagement looks good. The weakness that we saw—that was inconsistent with what we expected when we put our original plans together for the quarter—was really around monetization.
Speaker #1: Our next question will come from the line of Ken Gawrelski with Wells Fargo. Please go ahead.
Speaker #2: And that is going to continue as we continue to evolve. Some of what we're doing around discovery and recommendations. The DOU trends themselves, seasonality is definitely a big factor there.
Speaker #3: Thank you. Two, if I may, please. Could you maybe first touch upon the updates to the discovery engine? You did a good job of explaining that in the letter.
Speaker #3: But maybe if you could talk about when you expect to see some of these longer-term retention benefits, filtering into both engagement gains and also potentially monetization gains.
Speaker #2: We're going to get a full quarter benefit from having Russia back online. And so those are probably the two big ones that I would highlight with respect to DOU trends.
Speaker #1: Our next question will come from the line of Ken Gurawski with Wells Fargo. Please go ahead.
Speaker #3: Just if you could walk us through kind of maybe the timeline and your expectations there. And then a second, if I may, please. Naveen, could you just talk about as we're going through this transition and it's and the push for over 18 and new content, could you talk to us about any changes you might expect in the cost structure?
Speaker #3: Thank you. Two, if I may, please. Could you maybe first touch upon the updates to the discovery engine? You did a good job of explaining that in the letter.
Speaker #3: But maybe if you could talk about when you expect to see some of these longer-term, the longer-term retention benefits, filtering into both engagement gains and also potentially monetization gains.
Speaker #3: How either from either a DevEx standpoint, from a tech standpoint, a platform standpoint, how might the financial profile of the business look in success 12 to 24 months out relative to the prior 12 to 18 months?
Speaker #3: Just if you could walk us through kind of maybe the timeline and your expectations there. And then second, if I may, please. Naveen, could you just talk about as we're going through this transition and it's and the push for over 18 and new content, could you talk to us about any changes you might expect in the cost structure?
Speaker #3: Thank you.
Speaker #4: I'll start with the discovery algorithms. I touched on as we continue to refine discovery what any discovery algorithm is really trying to do is connect users with experiences that both drives long-term enterprise value and simultaneously gives signals to creators of what types of experiences are rewarded with discovery.
Speaker #3: How either from either a DevEx standpoint, from a tech standpoint, a platform standpoint, how might the financial profile, the business look in success 12 to 24 months out relative 12 to 18 months?
Speaker #4: So it's a complicated process. It involves both feedback to creators as well as feedback to users. And watching social, we've implemented an improved our algorithms over the last few months has been resounding support in the feeling that we're moving more and more to evergreen-type games games that keep players around for a long-term essentially the exact opposite of what might be called not that we've saying we had it, but more clickbaity or kind of cash grabby type games.
Speaker #3: Thank you.
Speaker #4: I'll start with the discovery algorithms. I touched on as we continue to refine discovery what any discovery algorithm is really trying to do is connect users with experiences that both drives long-term enterprise value and simultaneously gives signals to creators of what types of experiences are rewarded with discovery.
Speaker #4: So it's a complicated process. It involves both feedback to creators as well as feedback to users. And watching social, we've implemented and improved our algorithms over the last few months. There has been resounding support in the feeling that we're moving more and more to evergreen-type games—games that keep players around for the long term. Essentially, the exact opposite of what might be called—not that we're saying we had it—but more clickbaity or kind of cash-grabby type games.
Speaker #4: We want to be as far into evergreen segment as we can. We made the decision as we started going down this next gen to go longer into the timeframe to measure signals longer.
Speaker #4: We made the decision to use that feedback loop to update the algorithm even as we're running additional tests. And we've really churned our discovery system from something that's baked in to something that in a way is constantly self-improving and self-estimating our best guess at what user game pairs will drive the best long-term retention.
Speaker #4: We want to be as far into the evergreen segment as we can. We made the decision as we started going down this next-gen path to extend the time frame so we could measure signals for a longer period.
Speaker #4: We're balancing that more and more with what we think is the optimal mix of long-term retention and long-term monetization and in our experiments as Naveen said, we can see shorter-term reductions in monetization, but then crossover points and longer-term improvements.
Speaker #4: We made the decision to use that feedback loop to update the algorithm even as we're running additional tests. And we've really churned our discovery system from something that's baked in to something that in a way is constantly self-improving and self-estimating our best guess at what user game pairs will drive the best long-term retention.
Speaker #4: We're not going to share exactly what the crossover points is, but this is the reason we implemented and have gone with this. So it's directly measured retention.
Speaker #4: It's less projecting. It's more direct measure of both retention and monetization. And one other thing is we introduced build and we expect the volume of creations to grow much higher on Roblox.
Speaker #4: We're balancing that more and more with what we think is the optimal mix of long-term retention and long-term monetization and in our experiments as Naveen said, we can see shorter-term reductions in monetization, but then crossover points and longer-term improvements.
Speaker #4: We believe this algorithm is very resilient to both finding great new build games that will be playable by all. And simultaneously not flooding users with games that might have an AI kind of name to them, that aren't as long-term retentive.
Speaker #4: We're not going to share exactly what the crossover point is, but this is the reason we implemented and have gone with this. So it's directly measured retention.
Speaker #2: All right. And then Ken, with respect to your question on the cost structure, there's a couple of important things to highlight here. First, our view of the long-term margin potential of the business really has not changed, meaning the kinds of things that are going to drive margin expansion over time are still in place.
Speaker #4: It's less projecting. It's more direct measure of both retention and monetization. And one other thing is we introduced build and we expect the volume of creations to grow much higher on Roblox.
Speaker #4: We believe this algorithm is very resilient to both finding great new build games that will be playable by all. And simultaneously not flooding users with games that might have an AI kind of name to them, that aren't as long-term retentive.
Speaker #2: Obviously, continued bookings growth, generates fixed cost leverage, we continue to expect to see mixed to lower-cost platforms that will help COGS. And DevEx increases are something that we do intend to continue to pursue, but those ultimately are a function of us realizing fixed cost leverage in other parts of the business.
Speaker #2: All right. And then, Ken, with respect to your question on the cost structure, there are a couple of important things to highlight here. First, our view of the long-term margin potential of the business really has not changed, meaning the kinds of things that are going to drive margin expansion over time are still in place.
Speaker #2: So that's point one. Point two in call it the near to medium term, the investments that we're making in a lot of AI-powered product enhancements I do expect to result in some elevated levels of infrastructure expense.
Speaker #2: Obviously, continued bookings growth generates fixed cost leverage. We continue to expect to see a mix of lower-cost platforms that will help COGS. DevEx increases are something that we do intend to continue to pursue, but those ultimately are a function of us realizing fixed cost leverage in other parts of the business.
Speaker #2: But it's important to realize that unlike our infra expense historically, this is more of a fixed cost. Because historically, infrastructure investments have been a function of hours and users on our platform.
Speaker #2: These infrastructure costs are largely being driven by model training. And so we're moving aggressively in that direction, but over time, we expect given the sort of more fixed cost nature of that, as bookings grow, we'll start to see leverage on those infrastructure investments as well.
Speaker #2: So that's point one. Point two: in the near to medium term, the investments that we're making in a lot of AI-powered product enhancements, I do expect to result in some elevated levels of infrastructure expense.
Speaker #2: But as you saw in the Q3 guidance, there is going to be some pressure in the short to medium term as a result of the incremental cloud GPU capacity that we need there.
Speaker #2: But it's important to realize that, unlike our infra expense historically, this is more of a fixed cost because historically, infrastructure investments have been a function of hours and users on our platform.
Speaker #2: These infrastructure costs are largely being driven by model training. And so we're moving aggressively in that direction, but over time, we expect given the sort of more fixed cost nature of that, as bookings grow, we'll start to see leverage on those infrastructure investments as well.
Speaker #1: Our next question will come from the line of Eric Sheridan with Goldman Sachs. Please go ahead.
Speaker #5: Thanks so much for taking the question. I appreciate all the comments about the progress you're making towards being 10% of the gaming market or maybe even more.
Speaker #5: In North America, how do you think about the competitive landscape continues to evolve both within gaming, but also among younger users where this sort of conflicting narratives about being online versus offline and gaming versus non-gaming in terms of time spent?
Speaker #2: But as you saw in the Q3 guidance, there is going to be some pressure in the short to medium term as a result of the incremental cloud GPU capacity that we need there.
Speaker #5: And how do you think continually about positioning yourself relative to both the gaming landscape, but even a more broader definition for the competition for time and engagement?
Speaker #1: Our next question will come from the line of Eric Sheridan with Goldman Sachs. Please go ahead.
Speaker #5: Thanks so much for taking the question. I appreciate all the comments about the progress you're making towards being 10% of the gaming market, or maybe even more.
Speaker #5: Thanks so much.
Speaker #4: I really think the broader definition is a bigger thing than Roblox. And it is our vision that the world needs more play. And play is something that people do with each other.
Speaker #5: In North America, how do you think about the competitive landscape continues to evolve both within gaming, but also among younger users where this sort of conflicting narratives about being online versus offline and gaming versus non-gaming in terms of time spent?
Speaker #4: It's something that involves not just playing, but creating. It involves being with others, communicating with others, being yourself and watching them. And really, as we've redesigned our app and brought both build as well as moments to the homepage, it's really part of that vision of mirroring the physical world with what's happening in our digital world of supporting play.
Speaker #5: And how do you think continually about positioning yourself relative to both the gaming landscape, but even a more broader definition for the competition for time and engagement?
Speaker #5: Thanks so much.
Speaker #4: I really think the broader definition is a bigger thing than Roblox. And it is our vision that the world needs more play, and play is something that people do with each other.
Speaker #4: We think just like in the real world where play involves sometimes creating the game I'm optimistic that we're going to see a volume of creation with build.
Speaker #4: It's something that involves not just playing, but creating. It involves being with others, communicating with others, being yourself and watching them. And really, as we've redesigned our app and brought both Build as well as Moments to the homepage, it's really part of that vision of mirroring the physical world with what's happening in our digital world of supporting play.
Speaker #4: Unlike any volume we've ever seen with Roblox Studio, while at the same time, pro devs and devs making extremely complex properties will utilize all of the capabilities of build as they move to large teams and studio to build much more complex type creation.
Speaker #4: So I do think what is gaming is changing. I think we're going to enter an era just like 10 years ago where most of us didn't know how to edit video and now all young people essentially many of them know how to edit video on their phone.
Speaker #4: We think, just like in the real world where play involves sometimes creating the game, I'm optimistic that we're going to see a volume of creation with Build.
Speaker #4: Unlike any volume we've ever seen with Roblox Studio, while at the same time, pro devs and devs making extremely complex properties will utilize all of the capabilities of Studio as they move to large teams and Studio to build much more complex type creation.
Speaker #4: The same thing I think is going to happen in gaming where really with AI acceleration, everything from 2D puzzle games to complex 3D multiplayer games are going to be created on mobile enhanced in Roblox Studio.
Speaker #4: And that's going to really change the whole landscape, I believe, of what gaming is. So I do think the use of today are changing.
Speaker #4: So I do think what is gaming is changing. I think we're going to enter an era just like 10 years ago where most of us didn't know how to edit video and now all young people essentially many of them know how to edit video on their phone.
Speaker #4: I think play is universal. And I believe we're moving towards that original vision of really everyone on our platform is a creator and a builder.
Speaker #4: The same thing, I think, is going to happen in gaming, where really, with AI acceleration, everything from 2D puzzle games to complex 3D multiplayer games are going to be created on mobile, enhanced in Roblox Studio.
Speaker #1: Our next question will come from the line of Chris Scholl with UBS. Please go ahead.
Speaker #3: Great. Thank you. Naveen, we've seen you announce the buyback since the last earnings call. Just as free cash flow for the business scales in the coming years, can you remind us how you think about capital allocation and how you'll prioritize buybacks with organic investment and M&A?
Speaker #4: And that's going to really change the whole landscape, I believe, of what gaming is. So I do think the use of today are changing.
Speaker #3: And what impact does any if any, does the stock performance have on your willingness to maybe lean in further on the buyback relative to alternative uses of capital?
Speaker #4: I think play is universal. And I believe we're moving towards that original vision of really everyone on our platform is a creator and a builder.
Speaker #3: Thank you.
Speaker #2: Yeah, sure. I think it's we're pretty clear with respect to our capital allocation strategy, meaning the first and foremost for us is making sure that we have the ability to aggress to aggressively invest in organic growth.
Speaker #1: Our next question will come from the line of Chris Scholl with UBS. Please go ahead.
Speaker #3: Great. Thank you. Naveen, we've seen you announce the buyback since the last earnings call. Just as free cash flow for the business scales in the coming years, can you remind us how you think about capital allocation and how you'll prioritize buybacks with organic investment and M&A?
Speaker #2: That largely takes the form of R&D, people, tokens, infrastructure, things of that nature. We try to be very diligent and very efficient with all of those investments, but we also recognize we live in a very rapidly changing world right now.
Speaker #3: And what impact does any if any, does the stock performance have on your willingness to maybe lean in further on the buyback relative to alternative uses of capital?
Speaker #3: Thank you.
Speaker #2: And we're going to keep a lot of dry powder to make sure that we can be highly nimble with respect to organic investment. That being said, when we look at our balance sheet, and our free cash flow trends, we have a lot of firepower to do both what I just said with respect to organic investment, but also to support a buyback and potentially M&A.
Speaker #2: Yeah, sure. I think it's we're pretty clear with respect to our capital allocation strategy, meaning the first and foremost for us is making sure that we have the ability to aggress to aggressively invest in organic growth.
Speaker #2: That largely takes the form of R&D, people, tokens, infrastructure, things of that nature. We try to be very diligent and very efficient with all of those investments, but we also recognize we live in a very rapidly changing world right now.
Speaker #2: Our M&A historically has been largely focused on acquiring technical talent. And we have ample ability to continue to do that, but also potentially bigger things in the future to the extent there's strategic or industrial logic to it.
Speaker #2: And we're going to keep a lot of dry powder to make sure that we can be highly nimble with respect to organic investment. That being said, when we look at our balance sheet, and our free cash flow trends, we have a lot of firepower to do both what I just said with respect to organic investment, but also to support a buyback and potentially M&A.
Speaker #2: In terms of stock price performance affecting how we think about the buyback, two comments on that. One, the way we have structured our buyback, which is largely to offset dilution from employee equity grants, does result in us effectively buying more stock when the stock price goes down, buying less when the stock price goes up.
Speaker #2: Our M&A historically has been largely focused on acquiring technical talent and we have ample ability to continue to do that, but also potentially bigger things in the future to the extent there's strategic or industrial logic to it.
Speaker #2: So there is some sort of natural adjustment built into the mechanism. We do have the ability to accelerate that or supplement it. And those are obviously things that we'll continue to evaluate.
Speaker #2: In terms of stock price performance affecting how we think about the buyback, two comments on that. One, the way we have structured our buyback, which is largely to offset dilution from employee equity grants, does result in us effectively buying more stock when the stock price goes down, buying less when the stock price goes up.
Speaker #1: Our next question will come from the line of Omar Dessouky with Bank of America. Please go ahead.
Speaker #3: Mike, thank you. I think you guys explained clearly why you gave your third quarter guide. But I was hoping that you could give us perhaps some guardrails around the fourth quarter and the full year, given that you're not guiding the full year anymore.
Speaker #2: So there is some sort of natural adjustment built into the mechanism. We do have the ability to accelerate that or supplement it. And those are obviously things that we'll continue to evaluate.
Speaker #3: Number one, is 26 still a growth year? Would you be comfortable telling investors that 2026 bookings will be higher than 2025 bookings in total?
Speaker #1: Our next question will come from the line of Omar Daszucki with Bank of America. Please go ahead.
Speaker #3: And when we think about those factors that caused you to give your third quarter guide, how has the fourth quarter how are those factors going to improve or trend in the fourth quarter?
Speaker #3: Hi, thank you. I think you guys explained clearly why you gave your third quarter guide. But I was hoping that you could give us perhaps some guardrails around the fourth quarter and the full year, given that you're not guiding the full year anymore.
Speaker #3: What's getting better in the fourth quarter versus the third quarter? Just to kind of help us put some guardrails around what the fourth quarter could look like.
Speaker #3: Number one, is 26 still a growth year? Would you be comfortable telling investors that 2026 bookings will be higher than 2025 bookings in total?
Speaker #2: Yeah. I'll take that, Omar. As I said, we're not going to provide guidance for the fourth quarter right now simply because of all of the moving pieces that I think we articulated both in our letter and some of our comments.
Speaker #3: And when we think about those factors that caused you to give your third quarter guide, how has the fourth quarter how are those factors going to improve or trend in the fourth quarter?
Speaker #2: We feel good about where things are trending in the long term. We are navigating, as Dave said, both normalization from last year and also a number of platform changes across discovery, safety, and now launching some very meaningful new products with things like build and moments.
Speaker #3: What's getting better in the fourth quarter versus the third quarter? Just to kind of help us put some guardrails around what the fourth quarter could look like.
Speaker #2: Yeah, I'll take that, Omar. As I said, we're not going to provide guidance for the fourth quarter right now simply because of all of the moving pieces that I think we articulated both in our letter comments.
Speaker #2: And the reality is it's very early days for many of those new initiatives. There's no model that we can look at that's going to say, here's exactly what they're going to do over the next three to six months.
Speaker #2: And we want to make sure that we're moving as quickly as we can on all of those initiatives. So you have to assume that the things we do in Q3 and Q4 are going to be consistent with what we said we want to accomplish over the long term.
Speaker #2: We feel good about where things are trending in the long term. We are navigating, as Dave said, both normalization from last year and also a number of platform changes across discovery, safety, and now launching some very meaningful new products with things like build and moments.
Speaker #2: But we can't give you any more specific guidance than what I've shared.
Speaker #2: And the reality is it's very early days for many of those new initiatives. There's no model that we can look at that's going to say, here's exactly what they're going to do over the next three to six months.
Speaker #1: Our next question will come from the line of Clark Lampen with BTIG. Please go ahead.
Speaker #3: Thanks very much. Appreciate you guys taking the question. Maybe Naveen sort of the first of two questions if I may would be in the shareholder letter you mentioned you were comfortable based on the internal testing that longer retention would ultimately overcome a reduction in hourly monetization.
Speaker #2: And we want to make sure that we're moving as quickly as we can on all of those initiatives. So you have to assume that the things we do in Q3 and Q4 are going to be consistent with what we said we want to accomplish over the long term.
Speaker #3: Could you elaborate a little bit more on that? Or maybe what you had seen when you had run those sort of comparisons? Second one is very quick.
Speaker #2: But we can't give you any more specific guidance than what I've shared.
Speaker #3: Just on Morpheus, could you help us think about either the magnitude of financial commitment or potentially help size the IPS headwind that we might see this year?
Speaker #1: Our next question will come from the line of Clark Lampin with BTIG. Please go ahead.
Speaker #3: Thank you very much. I appreciate you taking the question. Maybe, Naveen, the first of two questions, if I may. In the shareholder letter, you mentioned you were comfortable, based on internal testing, that longer retention would ultimately overcome a reduction in hourly monetization.
Speaker #3: Thanks very much.
Speaker #2: Yeah. So on the first one, I think Dave talked about this a little bit too. So maybe just to put a little bit of a finer point on it, we've been running a lot of experiments and continuing to evolve these algorithms.
Speaker #3: Could you elaborate a little bit more on that? Or maybe what you would seen when you had run those sort of comparisons? Second one is very quick.
Speaker #2: And what we have seen when we sort of A/B test them relative to people on call it older discovery algorithm, is that very quickly there is a change in user retention which ultimately that's a compounding effect for our business because ultimately more users is what drives the robotic flywheel.
Speaker #3: Just on Morpheus, could you help us think about either the magnitude of financial commitment, or potentially help size the IPS headwind that we might see this year?
Speaker #3: Thanks very much.
Speaker #2: Yeah, so on the first one, I think Dave talked about this a little bit too. So maybe just to put a little bit of a finer point on it, we've been running a lot of experiments and continuing to evolve these algorithms.
Speaker #2: But also shows up relatively quickly in incremental hours of engagement. However, there is a pretty immediate hit to dollars per hour. That's sort of the monetization metric that we look at.
Speaker #2: And what we have seen when we sort of A/B test them relative to people on, call it, the older discovery algorithm is that very quickly there is a change in user retention, which ultimately has a compounding effect for our business, because ultimately more users is what drives the Robotic flywheel.
Speaker #2: And we do believe that based on the curves that we've seen with call it a few weeks of data for each of these experiments, that those lines cross.
Speaker #2: Meaning the benefit of the incremental retention will more than outweigh the short-term hit to bookings. We're not going to put a specific timeline on that right now.
Speaker #2: In part because we're continuing to evolve those algorithms. And our focus right now is actually on finding ways to improve the algorithm such that we can reduce the near-term bookings impact while retaining the retention benefit.
Speaker #2: But also shows up relatively quickly in incremental hours of engagement. However, there is a pretty immediate hit to dollars per hour. That's sort of the monetization metric that we look at.
Speaker #2: And we do believe that, based on the curves that we've seen with, call it, a few weeks of data for each of these experiments, those lines cross—meaning the benefit of the incremental retention will more than outweigh the short-term hit to bookings.
Speaker #2: And there are some promising irons in the fire on that. But too early to say exactly what the impact will be.
Speaker #3: Yeah. Okay. No, I was just going to add the longer out we look at signals and directly measure them, the longer we pick up not just early revenue, but longer revenue in conjunction with that retention, we are trying to optimize a blend of long-term retention and long-term monetization that's directly measured as opposed to overly extrapolating from short-term monetization signals that may be chatty and putter out.
Speaker #2: We're not going to put a specific timeline on that right now in part because we're continuing to evolve those algorithms. And our focus right now is actually on finding ways to improve the algorithm such that we can reduce the near-term bookings impact while retaining the retention benefit.
Speaker #2: And there are some promising irons in the fire on that, but too early to say exactly what the impact will be. And then go ahead, Dave.
Speaker #2: And then Clark, with respect to the second part of your question, on the magnitude of the infra investments and sort of the headwinds of those grades, I think you asked the question in the context of Morpheus.
Speaker #4: No, I was just going to add the longer out we look at signals and directly measure them, the longer we pick up not just early revenue, but longer revenue in conjunction with that retention, we are trying to optimize a blend of long-term retention and long-term monetization.
Speaker #2: Morpheus is one small part of many different AI initiatives that we have going on. So I'm going to answer the question sort of bigger picture.
Speaker #2: And probably the simplest way to think about it is if you look at our margin guidance for Q3 and you look at the margin compression relative to the year ago period, I would say that about half of that is just fixed cost leveraging coming off the back of the bookings reduction.
Speaker #4: That's directly measured as opposed to overly extrapolating from short-term monetization signals that may be chatty and putter out.
Speaker #2: And then Clark, with respect to the second part of your question, on the magnitude of the infra investments and sort of the headwind of those grades, I think you asked the question in the context of Morpheus.
Speaker #2: And the other half is related to these investments in AI. And those are the things that power new features like build and moments. A lot of the improvements we're making on safety as well as training models for things like robotic reality.
Speaker #2: Morpheus is one small part of many different AI initiatives that we have going on. So I'm going to answer the question sort of bigger picture.
Speaker #2: And probably the simplest way to think about it is if you look at our margin guidance for Q3 and you look at the margin year-ago period, I would say that about half of that is just fixed cost leveraging coming off the back of the bookings reduction.
Speaker #2: So all really important exciting stuff that requires incremental investment.
Speaker #3: And I want to highlight with Morpheus, the significance of what we're working towards. Our goal is to provide photorealistic multiplayer gaming which does not exist in the world today.
Speaker #2: And the other half is related to these investments in AI. And those are the things that power new features like build and moments. A lot of the improvements we're making on safety as well as training models for things like robotic reality.
Speaker #3: On one end of the spectrum, we're starting to have offline video models that start to approach a 4K movie. On the other end, 3D gaming technology is getting better and better and better, but is not quite photorealistic.
Speaker #2: So, all really important, exciting stuff that requires incremental investment.
Speaker #3: We believe a hybrid approach which is both 3D synchronization in the cloud with end kind of user super upsampling to get to photorealistic is the ultimate way to do this.
Speaker #4: And I want to highlight with Morpheus, the significance of what we're working towards. Our goal is to provide photorealistic multiplayer gaming which does not exist in the world today on one end of the spectrum we're starting to have offline video models that start to approach a 4K movie.
Speaker #3: And the cost of infra here will initially be offset by subscription. Games will run both in regular Roblox mode as well as in super upsampled Morpheus video photoreality mode.
Speaker #4: On the other end, 3D gaming technology is getting better and better and better, but is not quite photorealistic. We believe a hybrid approach, which is both 3D synchronization in the cloud with end-user super upsampling to get to photorealistic, is the ultimate way to do this.
Speaker #3: And we will initially expect to charge subscription to access that.
Speaker #1: Our next question will come from the line of Clay Griffin with Moffat Nathanson. Please go ahead.
Speaker #4: Greg, good afternoon. Dave, I'm curious to get your thoughts on how you see the 2D content that you're enabling with some of the announcements that you've made today.
Speaker #4: And the cost of infrastructure here will initially be offset by subscription. Games will run both in regular Roblox mode as well as in super-upsampled Morpheus video photoreality mode.
Speaker #4: And typically, we'd like to think of mobile as more of a single-player experience in many cases. So do you envision 2D mobile content being sort of an acquisition funnel for players that are outside of your platform today?
Speaker #4: And we will initially expect to charge a subscription to access that.
Speaker #4: Or do you think that there's demand for that type of content on the platform today? And how do you think about what might make 2D content on Roblox differentiated from the typical kind of 2D mobile experience today?
Speaker #1: Our next question will come from the line of Clay Griffin with Moffat Nathanson. Please go ahead.
Speaker #5: Hey, Cray. Good afternoon. Dave, I'm curious to get your thoughts on how you see the 2D content that you're enabling with some of the announcements that you've made today.
Speaker #3: Yeah. I think when we take a step back and go to that original vision of you make the game there's a really good conjunction.
Speaker #5: And typically, we'd like to think of mobile as more of a single-player experience in many cases. So do you envision 2D mobile content being sort of an acquisition funnel for players that are outside of your platform today?
Speaker #3: We believe between what we're doing with build and with what we say about removing the bookends of the type of content we want on our platform.
Speaker #5: Or do you think that there's demand for that type of content on the platform today? And how do you think about what might make 2D content on Roblox differentiated from the typical kind of 2D mobile experience today?
Speaker #3: When we start putting build in front of people, they don't constrain themselves to saying, "I want to build a 3D multiplayer obby course or I want to build a puzzle game where you do this or I want to build a multiplayer obstacle course game." So there's really a great intersection in supporting all that people want to build on build.
Speaker #4: Yeah, I think when we take a step back and go to that original vision of you make the game there's a really good conjunction, we believe, between what we're doing with build and with what we say about removing the bookends of the type of content we want on our platform.
Speaker #3: The other thing is I think many people don't differentiate necessarily between a 2D single-player game, a 2D multiplayer game, a two and a half D orthographic game, a 3D multiplayer game.
Speaker #4: When we start putting build in front of people, they don't constrain themselves to saying, "I want to build a 3D multiplayer obby course," or "I want to build a puzzle game where you do this," or "I want to build a multiplayer obstacle course game." So there's really a great intersection in supporting all that people want to build on Build.
Speaker #3: They just think of play. And as we get into more and more older cohorts, some of those cohorts have an ample appetite for 2D.
Speaker #3: But we believe huge advantages in any experience that's built on Roblox runs in multiple languages, runs around the world, is socially enabled, is backed by our economy, is backed by our infra.
Speaker #4: The other thing is I think many people don't differentiate necessarily between a 2D single-player game, a 2D multiplayer game, a two-and-a-half D orthographic game, a 3D multiplayer game.
Speaker #3: And can intermingle throughout them. So what we see this really as just approaching having a wide range of gaming on the platform. And ultimately, it works with build in that we're not going to limit what people can build when they go and imagine creating a game and showing it to their friends.
Speaker #4: They just think of play. And as we get into more and more older cohorts, some of those cohorts have an ample appetite for 2D.
Speaker #4: But we believe there are huge advantages in any experience that's built on Roblox that runs in multiple languages, runs around the world, is socially enabled, is backed by our economy, and is backed by our infrastructure.
Speaker #1: Our next question comes from the line of Andrew Morock with Raymond James. Please go ahead.
Speaker #5: Hi. Thanks for taking my questions. Maybe one, can you please talk a bit about the differences in monetization patterns between under 13 players and other cohorts that may have driven an outsized impact this quarter?
Speaker #4: And can intermingle throughout them. So what we see this really as just approaching having a wide range of gaming on the platform. And ultimately, it works with build in that we're not going to limit what people can build when they go and imagine creating a game and showing it to their friends.
Speaker #5: Was it specifically related to the viral hits from last year? Or is it a general rule that these younger users are maybe more volatile in their monetization patterns?
Speaker #2: Yeah. I'll take that. I think it's more the former, meaning if you just look at sort of the percentage of hours consumed on the platform last year, that was coming from these very large and high monetizing viral hits.
Speaker #1: Our next question comes from the line of Andrew Morock with Raymond James. Please go ahead.
Speaker #6: Hi, thanks for taking my questions. Maybe just one—can you please talk a bit about the differences in monetization patterns between under-13 players and other cohorts that may have driven an outsized impact this quarter?
Speaker #6: Was it specifically related to the viral hits from last year, or is it a general rule that these younger users are maybe more volatile in their monetization patterns?
Speaker #2: It was very concentrated. And those games did appeal in particular to younger users. And so when we have seen this mix shift from with those games getting replaced by, call it, games with more normal levels of monetization, that shows up most significantly with these younger users.
Speaker #2: Yeah, I'll take that. I think it's more the former, meaning if you just look at sort of the percentage of hours consumed on the platform last year, that was coming from these very large and high monetizing viral hits, it was very concentrated.
Speaker #2: I don't think there is anything sort of structurally with respect to changes in younger user behavior. It's really just the games that are popular at this point in time don't have that sort of very elevated level of monetization that we saw last year.
Speaker #2: And those games did appeal in particular to younger users. And so when we have seen this mix shift from with those games getting replaced by, call it, games with more normal levels of monetization, that shows up most significantly with these younger users.
Speaker #1: Our final question will come from the line of Aaron Lee with Macquarie. Please go ahead.
Speaker #6: Hey. Thanks for taking the question. Appreciate it. Maybe just to touch on incubator and the 18-plus initiatives. It seems like that's progressing nicely. Can you just talk about what you've learned through this process so far and maybe how that informs how this program could evolve going forward or any other initiatives in the pipeline to really drive this business forward?
Speaker #2: I don't think there is anything sort of structurally with respect to changes in younger user behavior. It's really just the games that are popular at this point in time don't have that sort of very elevated level of monetization that we saw last year.
Speaker #3: Yeah. I'll comment on it. We have a lot of content coming not just from incubators but also studio partners and our existing community. We do see ultimately as a UGC platform, the power of that.
Speaker #1: Our final question will come from the line of Aaron Lee with Macquarie. Please go ahead.
Speaker #7: Hey, thanks for taking the question. Appreciate it. Maybe just to touch on incubator and the 18-plus initiatives. It seems like that's progressing nicely. Can you just talk about what you've learned through this process so far and maybe how that informs how this program could evolve going forward or any other initiatives in the pipeline to really drive this business forward?
Speaker #3: But we do also see the ability almost from a sales engineering or a expansion of how we see DevRel to be very intimate with the top creators on our platform and to be very intimate with them as we help guide them to what performs well on our platform.
Speaker #4: Yeah, I'll comment on it. We have a lot of content coming not just from incubators, but also studio partners and our existing community. We do see ultimately as a UGC platform, the power of that.
Speaker #3: We really have a focus on a lot of the tech we've recently introduced. With our incubators, we've introduced the ability for much higher performance avatars for much higher performance worlds that run very well on low-end Android.
Speaker #4: But we do also see the ability, almost from a sales engineering or an expansion of how we see DevRel, to be very intimate with the top creators on our platform and to be very intimate with them as we help guide them to what performs well on our platform.
Speaker #3: As well as on high-end PC, we've introduced a compositing technology called Slim that allows very complicated avatars to run at high performance on phones.
Speaker #3: So all of this working with these partners, we believe is a huge technical opportunity for them to build games for us. And of course, they're also working on our DevEx premium of 50% for games consumed over 18.
Speaker #4: We really have a focus on a lot of the tech. We've recently introduced with our incubators we've introduced the ability for much higher performance avatars for much higher performance worlds that run very well on low-end Android.
Speaker #3: So really, it's not just the incubator. It's many of our corporate studios we're working with as well as our existing developer community. And we're seeing great quality coming out of them.
Speaker #4: As well as on high-end PCs, we've introduced a compositing technology called Slim that allows very complicated avatars to run at high performance on phones.
Speaker #1: That concludes the question and answer session. And I'll hand the call back over to Dave Bazooki for closing comments.
Speaker #4: So all of this, working with these partners, we believe is a huge technical opportunity for them to build games for us. And of course, they're also working on our DevEx premium of 50% for games consumed over 18.
Speaker #3: Hey. Once again, thank you for all the great questions. It really is an exciting time for us as we move towards fulfilling that original vision we had when we started the company of you make the game and really for everyone around within Roblox helping to support more play everywhere around the world.
Speaker #4: So really, it's not just the incubator. It's many of our corporate studios we're working with as well as our existing developers community. And we're seeing great quality coming out of them.
Speaker #3: Thank you again for your questions and attention.
Speaker #1: That concludes the question and answer session. And I'll hand the call back over to Dave Baszucki for closing comments.
Speaker #4: Hey, once again, thank you for all the great questions. It really is an exciting time for us as we move towards fulfilling that original vision we had when we started the company of 'you make the game,' and really for everyone within Roblox, helping to support more play everywhere around the world.
Speaker #4: Thank you again for your questions and attention.
