Roblox(RBLX) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides a comprehensive overview of Roblox Corporation's financial performance, condition, and related disclosures for the periods presented Item 1. Financial Statements (Unaudited) This section presents Roblox's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity, and cash flows, with detailed notes on accounting policies and key financial items Condensed Consolidated Balance Sheets This section provides a snapshot of Roblox's financial position, detailing assets, liabilities, and equity as of September 30, 2023, compared to December 31, 2022 Condensed Consolidated Balance Sheets (as of September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------- | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $580,049 | $2,977,474 | | Short-term investments | $1,576,293 | — | | Total current assets | $2,969,456 | $3,838,604 | | Total assets | $5,754,130 | $5,375,487 | | Liabilities | | | | Deferred revenue—current portion | $2,208,531 | $1,941,943 | | Total current liabilities | $2,795,135 | $2,480,835 | | Total liabilities | $5,634,276 | $5,070,452 | | Equity | | | | Total Stockholders' equity | $119,854 | $305,035 | - Cash and cash equivalents decreased significantly from $2.98 billion at December 31, 2022, to $580.05 million at September 30, 2023, primarily due to substantial purchases of investments[36][54] - Total assets increased by $378.64 million, from $5.38 billion to $5.75 billion, driven by increases in short-term and long-term investments, property and equipment, and operating lease right-of-use assets[36] Condensed Consolidated Statements of Operations This section details Roblox's financial performance, including revenue, costs, and net loss, for the three and nine months ended September 30, 2023, compared to the prior year Condensed Consolidated Statements of Operations (Three Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Revenue | $713,225 | $517,707 | 37.7% | | Total cost and expenses | $1,013,263 | $817,714 | 23.9% | | Loss from operations | $(300,038) | $(300,007) | (0.0%) | | Net loss attributable to common stockholders | $(277,158) | $(297,798) | (6.9%) | | Net loss per share (basic and diluted) | $(0.45) | $(0.50) | (10.0%) | Condensed Consolidated Statements of Operations (Nine Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Revenue | $2,049,335 | $1,646,048 | 24.5% | | Total cost and expenses | $2,953,209 | $2,267,933 | 30.2% | | Loss from operations | $(903,874) | $(621,885) | 45.3% | | Net loss attributable to common stockholders | $(828,248) | $(634,440) | 30.5% | | Net loss per share (basic and diluted) | $(1.35) | $(1.07) | 26.2% | - Interest income significantly increased by 186% for the three months and 494% for the nine months ended September 30, 2023, primarily due to higher average invested amounts and rising interest rates[38][240] Condensed Consolidated Statements of Comprehensive Income/(Loss) This section presents Roblox's comprehensive income and loss, including other comprehensive income components, for the three and nine months ended September 30, 2023 Condensed Consolidated Statements of Comprehensive Income/(Loss) (Three Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------- | :----------- | :----------- | | Consolidated net loss | $(278,808) | $(301,902) | | Other comprehensive income/(loss), net of tax | $(1,769) | $1,064 | | Total comprehensive loss, including noncontrolling interests | $(280,577) | $(300,838) | Condensed Consolidated Statements of Comprehensive Income/(Loss) (Nine Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------- | :----------- | :----------- | | Consolidated net loss | $(833,597) | $(642,656) | | Other comprehensive income/(loss), net of tax | $(16,142) | $1,921 | | Total comprehensive loss, including noncontrolling interests | $(849,739) | $(640,735) | - Other comprehensive income/(loss) shifted from a gain of $1.06 million in Q3 2022 to a loss of $1.77 million in Q3 2023, primarily due to net change in unrealized losses on available-for-sale marketable securities[41] Condensed Consolidated Statements of Stockholders' Equity This section outlines the changes in Roblox's stockholders' equity, including additional paid-in capital and accumulated deficit, for the nine months ended September 30, 2023 Changes in Stockholders' Equity (Nine Months Ended September 30, 2023) | Metric | Balance Dec 31, 2022 (in thousands) | Issuances/Expense (in thousands) | Net Loss (in thousands) | Balance Sep 30, 2023 (in thousands) | | :-------------------- | :------------------- | :---------------- | :------- | :------------------- | | Additional Paid-In Capital | $2,213,603 | $664,557 | — | $2,878,160 | | Accumulated Deficit | $(1,908,307) | — | $(828,248) | $(2,736,555) | | Total Stockholders' Equity | $305,035 | $617,288 | $(833,597) | $119,854 | - Stock-based compensation expense was a significant contributor to additional paid-in capital, totaling $617.29 million for the nine months ended September 30, 2023[46] - Total stockholders' equity decreased from $305.04 million at December 31, 2022, to $119.85 million at September 30, 2023, primarily due to the consolidated net loss of $833.60 million[46] Condensed Consolidated Statements of Cash Flows This section summarizes Roblox's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | | :-------------------- | :----------- | :----------- | | Net cash provided by operating activities | $314,875 | $250,077 | | Net cash used in investing activities | $(2,773,964) | $(276,623) | | Net cash provided by financing activities | $61,266 | $41,832 | | Net increase/(decrease) in cash and cash equivalents | $(2,397,425) | $17,207 | - Net cash provided by operating activities increased by $64.8 million, or 25.9%, for the nine months ended September 30, 2023, compared to the same period in 2022[54] - Net cash used in investing activities dramatically increased from $(276.62) million in 2022 to $(2.77) billion in 2023, primarily due to $2.5 billion in net investment purchases[54][256] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures regarding Roblox's accounting policies, revenue recognition, acquisitions, and other financial statement items - Roblox operates a human co-experience platform where users interact in user-generated 3D experiences, acquiring virtual items with Robux, while developers use Roblox Studio to create and monetize experiences and items[56] - The estimated paying user life, crucial for revenue recognition of durable virtual items, was updated from 23 months to 25 months in Q1 2022, and then to 28 months in Q3 2022, decreasing revenue by $111.0 million and cost of revenue by $25.5 million for the three months ended September 30, 2022[63][64] - Developer Exchange Program minimum Robux requirement was reduced from 100,000 to 50,000 in January 2022, and further to 30,000 in January 2023, to incentivize developers and creators[66] Revenue by Region (Three Months Ended September 30) | Region | 2023 Amount (in thousands) | 2023 Percentage | 2022 Amount (in thousands) | 2022 Percentage | | :-------------------------------- | :------------------------- | :-------------- | :------------------------- | :-------------- | | United States and Canada | $458,563 | 65% | $341,519 | 66% | | Europe | $128,412 | 18% | $92,347 | 18% | | Asia-Pacific | $73,772 | 10% | $48,573 | 9% | | Rest of world | $52,478 | 7% | $35,268 | 7% | | Total | $713,225 | 100% | $517,707 | 100% | - Durable virtual items accounted for 92% of Roblox Platform revenue for the three months ended September 30, 2023, and 91% for the nine months ended September 30, 2023[79] - The Company acquired Speechly, Inc. on September 18, 2023, for $10.1 million, primarily for its speech recognition software focused on voice moderation, recognizing $7.5 million in goodwill[91][92][93] Goodwill Changes (Nine Months Ended September 30, 2023) | Metric | Carrying Amount (in thousands) | | :-------------------- | :-------------- | | Balance as of Dec 31, 2022 | $134,335 | | Additions from acquisitions | $7,536 | | Foreign currency translation adjustments | $(71) | | Balance as of Sep 30, 2023 | $141,800 | Amortization Expense for Finite-Lived Intangible Assets | Period | 2023 (in thousands) | 2022 (in thousands) | | :----- | :------------------ | :------------------ | | Three Months Ended Sep 30 | $5,200 | $4,200 | | Nine Months Ended Sep 30 | $14,200 | $12,000 | - Total property and equipment, net, increased from $592.35 million at December 31, 2022, to $709.38 million at September 30, 2023, primarily due to investments in servers, related equipment, and leasehold improvements[106] - Stock-based compensation expense totaled $220.02 million for the three months and $617.29 million for the nine months ended September 30, 2023, representing a significant portion of total expenses[132] - The CEO Long-Term Performance Award, granted in February 2021, has an estimated grant date fair value of $20.19 per share, with total stock-based compensation expense of approximately $232.2 million to be recognized over a derived service period of 3.45-5.38 years[137] - Roblox China Holding Corp., a joint venture with Tencent, issued $30.0 million in debt (2026 Notes) on May 10, 2023, funded by Roblox ($15.3 million) and Songhua ($14.7 million), bearing 6.0% interest[157][158] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Roblox's business model, key operating metrics, and a detailed analysis of financial performance for the three and nine months ended September 30, 2023, compared to the prior year, highlighting growth drivers and significant changes in accounting estimates and operational investments Overview This section describes Roblox's "human co-experience" platform, its core components, and primary investment areas for growth and platform improvement - Roblox operates a 'human co-experience' platform comprising the Roblox Client, Roblox Studio, and Roblox Cloud, focused on connecting a billion people with optimism and civility through user-generated 3D digital worlds[167][168][169] - A small portion of users are payers; in Q3 2023, only approximately 870,000 of 70.2 million average DAUs were daily unique paying users, with average daily bookings per DAU at $0.13 and average daily bookings per daily unique paying user at $10.48[170] - Primary investment areas include the developer and creator community, and the people, technology, and infrastructure to improve the Platform, reflected in operating costs such as payment processing, compensation, developer earnings, and direct infrastructure[171] Key Metrics This section details the operating and non-GAAP financial measures Roblox uses to evaluate its business performance and trends Operating Metrics This section describes the key operating metrics, such as Daily Active Users (DAUs) and Hours Engaged, used to measure audience size and platform engagement - Roblox tracks DAUs (Daily Active Users) as a key indicator of audience size and engagement, broken out by geographic region to understand global engagement[174] - Hours engaged, defined as time spent by users on the platform in experiences and features like chat and avatar personalization, is tracked as an indicator of user engagement[175] Non-GAAP Financial Measures This section explains non-GAAP financial measures like bookings and free cash flow, providing a reconciliation to their most directly comparable GAAP measures - Bookings, a non-GAAP measure, represents sales activity without certain non-cash adjustments, primarily from virtual currency sales, providing a timelier indication of operating trends than GAAP revenue, which is recognized over the estimated average lifetime of a paying user (28 months as of Sep 30, 2023)[192][193] Reconciliation of Revenue to Bookings (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $713,225 | $517,707 | $2,049,335 | $1,646,048 | | Change in deferred revenue | $130,957 | $187,991 | $360,112 | $336,928 | | Other | $(4,729) | $(3,982) | $(15,489) | $(10,152) | | Bookings | $839,453 | $701,716 | $2,393,958 | $1,972,824 | - Free cash flow, defined as net cash from operating activities less capital expenditures and intangible asset purchases, was $45.91 million for the nine months ended September 30, 2023, a significant improvement from $(20.38) million in the prior year[195][196] Change in Accounting Estimate This section details the impact of changes in the estimated paying user life on revenue and cost of revenue recognition - The estimated paying user life was updated from 23 months to 25 months in Q1 2022, and then to 28 months in Q3 2022, decreasing revenue by $111.0 million and cost of revenue by $25.5 million for the three months ended September 30, 2022[198] - For the nine months ended September 30, 2022, these changes resulted in a decrease in revenue of $329.7 million and a decrease in cost of revenue of $76.4 million, while the estimated paying user life remained 28 months for the three and nine months ended September 30, 2023[199] Components of Results of Operations This section explains the primary drivers and accounting treatment for Roblox's revenue, cost of revenue, developer exchange fees, and various operating expenses - Revenue is primarily generated from virtual item sales (Robux) and recognized over the estimated average lifetime of a paying user or upon consumption of virtual items[201] - Cost of revenue mainly consists of third-party payment processing fees, which are deferred and recognized over the same period as revenue, with the company aiming to use efficiencies to increase developer earnings[205][206] - Developer exchange fees represent amounts earned by qualified developers and creators who can exchange Robux for real-world currency, with the minimum Robux requirement reduced to 30,000 in January 2023 to incentivize the community[207][208] - Infrastructure and trust & safety expenses cover data center operations, technical infrastructure, and personnel, with the company planning to increase investment for scalability, aiming for operating leverage long-term[210][211] - Research and development expenses, primarily personnel costs, are expected to increase due to headcount growth for new features, but the company plans to slow headcount growth for operating leverage starting FY2024[212] - General and administrative expenses, including personnel and professional services, are expected to increase in the foreseeable future to support business growth, despite moderated headcount growth in FY2024[213] - Sales and marketing expenses are projected to increase to support business growth through developer relations and brand partnerships[214] Results of Operations This section provides a detailed analysis of Roblox's financial performance across key revenue and expense categories for the three and nine months ended September 30, 2023 Revenue This section analyzes the growth in Roblox's revenue, highlighting the drivers behind the increases for the three and nine months ended September 30, 2023 Revenue Growth (in thousands) | Period | 2023 Revenue | 2022 Revenue | % Change | | :-------------------- | :----------- | :----------- | :--------- | | Three Months Ended Sep 30 | $713,225 | $517,707 | 38% | | Nine Months Ended Sep 30 | $2,049,335 | $1,646,048 | 25% | - Revenue increased by $195.5 million (38%) for the three months and $403.3 million (25%) for the nine months ended September 30, 2023, driven by higher amortization of prior period deferred revenue and increased bookings[221][222] - The increase in bookings was primarily due to a higher average number of daily unique paying users, which grew from approximately 768,000 in Q3 2022 to 870,000 in Q3 2023[221] Cost of revenue This section examines the changes in Roblox's cost of revenue, identifying the factors contributing to its increase for the three and nine months ended September 30, 2023 Cost of Revenue Growth (in thousands) | Period | 2023 Cost of Revenue | 2022 Cost of Revenue | % Change | | :-------------------- | :------------------- | :------------------- | :--------- | | Three Months Ended Sep 30 | $163,581 | $126,437 | 29% | | Nine Months Ended Sep 30 | $477,451 | $405,226 | 18% | - Cost of revenue increased by $37.1 million (29%) for the three months and $72.2 million (18%) for the nine months ended September 30, 2023, mainly due to higher payment processing fees from increased bookings[224][225] - The increase was partially offset by a shift towards distribution channels with lower processing fees and the impact of increased estimated paying user life[224][225] Developer exchange fees This section analyzes the growth in developer exchange fees, linking it to bookings growth and changes in non-USD pricing for the periods presented Developer Exchange Fees Growth (in thousands) | Period | 2023 Fees | 2022 Fees | % Change | | :-------------------- | :-------- | :-------- | :--------- | | Three Months Ended Sep 30 | $170,719 | $151,470 | 13% | | Nine Months Ended Sep 30 | $519,002 | $441,740 | 17% | - Developer exchange fees increased by $19.2 million (13%) for the three months and $77.3 million (17%) for the nine months ended September 30, 2023, driven by growth in bookings[227][228] - The growth in bookings outpaced the growth in developer exchange fees, primarily due to changes in non-USD pricing[227][228] Infrastructure and trust & safety This section details the increase in infrastructure and trust & safety expenses, attributing it to personnel costs, data center investments, and moderation efforts Infrastructure and Trust & Safety Expenses Growth (in thousands) | Period | 2023 Expenses | 2022 Expenses | % Change | | :-------------------- | :------------ | :------------ | :--------- | | Three Months Ended Sep 30 | $218,968 | $190,986 | 15% | | Nine Months Ended Sep 30 | $655,051 | $490,576 | 34% | - Expenses increased by $28.0 million (15%) for the three months and $164.5 million (34%) for the nine months ended September 30, 2023[229][230] - Key drivers include increased personnel costs (including stock-based compensation) due to headcount growth, higher data center and technical infrastructure expenses, and increased moderation and customer support costs[229][230] Research and development This section analyzes the significant increase in research and development expenses, primarily driven by personnel costs and headcount growth in engineering and product teams Research and Development Expenses Growth (in thousands) | Period | 2023 Expenses | 2022 Expenses | % Change | | :-------------------- | :------------ | :------------ | :--------- | | Three Months Ended Sep 30 | $321,613 | $235,551 | 37% | | Nine Months Ended Sep 30 | $912,469 | $625,070 | 46% | - Expenses increased by $86.1 million (37%) for the three months and $287.4 million (46%) for the nine months ended September 30, 2023[231][232] - This growth was primarily due to a $71.0 million increase in personnel costs (including $44.2 million in stock-based compensation) for the three months, reflecting continued headcount growth in engineering, design, and product teams, and higher facilities-related costs[231][232] General and administrative This section details the increase in general and administrative expenses, attributing it to personnel costs, professional services, and an impairment charge General and Administrative Expenses Growth (in thousands) | Period | 2023 Expenses | 2022 Expenses | % Change | | :-------------------- | :------------ | :------------ | :--------- | | Three Months Ended Sep 30 | $97,508 | $81,165 | 20% | | Nine Months Ended Sep 30 | $291,279 | $217,613 | 34% | - Expenses increased by $16.3 million (20%) for the three months and $73.7 million (34%) for the nine months ended September 30, 2023[233][234] - Drivers include increased personnel costs (including stock-based compensation), professional services, withholding taxes, and a $7.0 million impairment charge related to a sub-lease agreement for San Mateo headquarters[233][234] Sales and marketing This section analyzes the growth in sales and marketing expenses, primarily due to increased advertising, promotional activities, and personnel costs Sales and Marketing Expenses Growth (in thousands) | Period | 2023 Expenses | 2022 Expenses | % Change | | :-------------------- | :------------ | :------------ | :--------- | | Three Months Ended Sep 30 | $40,874 | $32,105 | 27% | | Nine Months Ended Sep 30 | $97,957 | $87,708 | 12% | - Expenses increased by $8.8 million (27%) for the three months and $10.2 million (12%) for the nine months ended September 30, 2023[235][236] - This was primarily due to increased advertising and promotional expenses, and higher personnel costs including stock-based compensation[235][236] Interest income, interest expense, other income/(expense), net, and provision for/(benefit from) income taxes This section details changes in interest income, interest expense, other income/expense, and income tax provisions for the three and nine months ended September 30, 2023 Interest and Other Income/Expense (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income | $36,442 | $12,764 | $102,288 | $17,206 | | Interest expense | $(10,268) | $(10,005) | $(30,409) | $(29,895) | | Other income/(expense), net | $(4,262) | $(4,302) | $(1,425) | $(7,732) | | Provision for/(benefit from) income taxes | $682 | $352 | $177 | $350 | - Interest income increased significantly by 186% (three months) and 494% (nine months) due to higher average invested amounts and rising interest rates[240] - Other income/(expense), net, for the nine months ended September 30, 2023, included a $5.0 million business interruption insurance recovery related to a Q4 2021 Platform outage[242] Liquidity and Capital Resources This section discusses Roblox's principal sources of liquidity, debt obligations, and future capital needs, including the issuance of Senior Notes and Covenant Adjusted EBITDA - As of September 30, 2023, principal liquidity sources were cash, cash equivalents, and short-term/long-term investments totaling $3.1 billion, primarily for working capital, capital expenditures, and acquisitions[243] - The company issued $1.0 billion in 3.875% Senior Notes due 2030, with net proceeds of $987.5 million for general corporate purposes, and the indenture includes covenants limiting indebtedness to amounts not exceeding the greater of $4.0 billion and 3.5x Covenant Adjusted EBITDA[245][246] Covenant Adjusted EBITDA (in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Consolidated net loss | $(278,808) | $(301,902) | $(833,597) | $(642,656) | | Depreciation and amortization | $53,600 | $34,052 | $153,611 | $87,545 | | Stock-based compensation expense | $220,022 | $161,359 | $617,288 | $420,042 | | Change in deferred revenue | $130,957 | $187,991 | $360,112 | $336,928 | | Covenant Adjusted EBITDA | $81,064 | $50,876 | $172,051 | $173,441 | - The company expects to continue incurring operating losses due to investments in technology infrastructure but believes existing cash, investments, and operating cash flow will be sufficient for the next 12 months[251][252] Cash Flows This section summarizes Roblox's cash flow activities, detailing changes in operating, investing, and financing cash flows for the nine months ended September 30, 2023 Summary of Cash Flows (Nine Months Ended September 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :-------------------- | :----------- | :----------- | | Operating activities | $314,875 | $250,077 | | Investing activities | $(2,773,964) | $(276,623) | | Financing activities | $61,266 | $41,832 | - Operating cash flow increased to $314.9 million in 2023, driven by a $360.1 million increase in deferred revenue and a $93.2 million decrease in accounts receivable, offset by increases in deferred cost of revenue and operating lease liabilities[255] - Investing activities used $2.77 billion, primarily due to $2.50 billion in net investment purchases, $255.5 million in capital expenditures, and $13.5 million in intangible asset purchases[256] - Financing activities provided $61.3 million, mainly from common stock issuances ($47.3 million) and debt proceeds from the Roblox China Holding Corp. joint venture ($14.7 million)[257] Off-Balance Sheet Arrangements This section discloses Roblox's off-balance sheet arrangements, including available letters of credit, and confirms no relationships with unconsolidated entities - The company has $11.8 million in available letters of credit related to operating leases, which are not reflected on the balance sheet[258] - Roblox does not have relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements[258] Contractual Obligations and Commitments This section outlines Roblox's contractual commitments, including operating leases and purchase obligations, and notes a new significant hosting services agreement - Contractual commitments include operating leases for office and data center facilities, with no material changes since December 31, 2022, other than ordinary course business[259] - Other purchase obligations primarily consist of non-cancelable contracts with data center hosting providers and software vendors, including a new agreement in June 2023 committing $450.0 million for hosting services over three years[260] Critical Accounting Policies and Estimates This section highlights Roblox's critical accounting policies and estimates, focusing on revenue recognition and recent accounting pronouncements Revenue Recognition This section details Roblox's revenue recognition policies, particularly for virtual item sales and the critical estimate of average paying user lifetime - Revenue is primarily from virtual item sales (Robux) on the Roblox Platform, recognized when control of the service is transferred to the customer[265][266] - Durable virtual items revenue is recognized ratably over the estimated average lifetime of a paying user (28 months as of December 31, 2022), while consumable items are recognized as consumed[270][273] - The estimated average lifetime of a paying user is a critical judgment, influenced by historical retention data, user behavior, competition, and platform availability[270] Recent Accounting Pronouncements This section discusses the adoption of new accounting standards and their impact on Roblox's financial statements - The company adopted ASU 2021-08 on January 1, 2023, regarding accounting for contract assets and liabilities in business combinations, which did not materially impact financial statements[76] - No other recently issued accounting pronouncements are expected to have a material impact on the condensed consolidated financial statements[77] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Roblox's exposure to market risks, primarily from fluctuations in interest rates and foreign currency exchange rates, and outlines its strategies for managing these risks Interest Rate Risk This section assesses Roblox's exposure to interest rate fluctuations on its debt securities and fixed-rate notes, and its investment policy - As of September 30, 2023, Roblox held $2.5 billion in debt securities (short-term and long-term investments), where a hypothetical 100 basis points increase in interest rates would decrease their fair value by approximately $21.3 million[274] - The 2030 Notes have a fixed interest rate, so there is no financial statement risk from interest rate changes for this debt[276] - The company's investment policy focuses on capital preservation and liquidity, not speculative trading[275] Foreign Currency Exchange and Inflation Risk This section confirms no significant changes to Roblox's foreign currency exchange risk or inflation risk disclosures during the nine months ended September 30, 2023 - No significant changes to foreign currency exchange risk or inflation risk disclosures were reported during the nine months ended September 30, 2023[277] Item 4. Controls and Procedures This section details management's evaluation of the effectiveness of Roblox's disclosure controls and procedures and internal control over financial reporting, concluding they were effective as of September 30, 2023 Evaluation of Disclosure Controls and Procedures This section states management's conclusion that Roblox's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023 - Management, including the CEO and CFO, concluded that Roblox's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023[278] Changes in Internal Control Over Financial Reporting This section confirms that no material changes in internal control over financial reporting occurred during the three months ended September 30, 2023 - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the three months ended September 30, 2023[279] Inherent Limitations on Effectiveness of Controls and Procedures This section acknowledges the inherent limitations of controls and procedures, emphasizing that they provide reasonable, not absolute, assurance of achieving objectives - Management acknowledges that controls and procedures, no matter how well designed, can only provide reasonable assurance of achieving objectives due to inherent limitations and resource constraints[280] PART II. OTHER INFORMATION This section covers additional disclosures beyond financial statements, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings This section refers to Note 10 of the financial statements for information on legal proceedings, claims, and litigation in the ordinary course of business, for which the company has accrued immaterial losses - Roblox is involved in legal proceedings and has accrued for immaterial losses related to probable litigation matters where the loss amount can be reasonably estimated[123][124] - The maximum possible loss for all matters cannot be reasonably estimated due to varying stages of litigation and inherent uncertainties[124] Item 1A. Risk Factors This section outlines significant risks and uncertainties that could materially and adversely affect Roblox's business, financial condition, results of operations, and growth prospects, categorized into general business risks, government regulations, intellectual property, stock ownership, debt, and other general risks Risk Factors Summary This section provides a high-level overview of Roblox's key risks, including financial performance, operational challenges, regulatory compliance, and governance issues - Key risks include a history of net losses, fluctuating financial results, dependence on mobile operating systems, delayed revenue recognition, evolving legal/regulatory requirements (privacy, data security, content), and the need to maintain a safe online environment for children[284] - Operational risks involve platform security compromises, reliance on key personnel (CEO David Baszucki), intense competition, and the challenges of international expansion[284] - Financial and governance risks include potential material weaknesses in internal controls, currency exchange rate fluctuations, the dual-class stock structure concentrating voting control, and the ability to service debt obligations[284][286] Risks Related to Our Business Generally This section details a broad range of risks impacting Roblox's general business operations, including financial performance, platform reliance, user engagement, security, and international expansion - Roblox has a history of net losses, with an accumulated deficit of $2.74 billion as of September 30, 2023, and expects continued losses due to significant investments in growth, infrastructure, and stock-based compensation[287] - Quarterly results are highly seasonal, with highest bookings in Q4 due to holidays and increased engagement in summer months (June-August), making financial predictions difficult[289] - The company's rapid growth in prior periods, partly due to COVID-19, has moderated, and future growth rates may not be indicative of past performance, with sustaining growth dependent on enhancing developer tools, expanding user/developer base, and introducing new revenue streams like advertising[290][291] - Roblox relies heavily on mobile operating systems (Apple App Store, Google Play Store) for 30% and 17% of its revenue, respectively, where changes in platform policies, fees (up to 30%), or interoperability could significantly harm user retention, growth, and monetization[292][297] - Revenue recognition for durable virtual items is spread over the estimated average lifetime of a paying user (28 months), meaning business changes are not immediately reflected in operating results[300] - The success of Roblox's business model depends on providing a safe online environment, especially for children (42% of DAUs under 13), where failure to prevent age-inappropriate content or negative publicity could severely damage its reputation and financial performance[304][307][308] - Outages, disruptions, or degradations in platform services (e.g., the 3-day outage in Oct 2021) can harm user engagement, reputation, and financial results, despite company investments in infrastructure to mitigate such risks[313] - Future growth relies on continuous innovation and offering attractive features for developers and safe experiences for users, with the increasing use of AI, including generative AI, presenting both opportunities and risks (e.g., flawed algorithms, security incidents)[317][318][341] - The platform's security is a critical concern, with risks from malware, ransomware, hacking, and social engineering, where compromises could lead to data loss, reputational damage, litigation, and significant costs, despite ongoing investments in security measures[321][322][324][325] - The COVID-19 pandemic initially boosted engagement but growth rates have moderated, and future impacts remain uncertain, with potential for reduced user engagement or discretionary spending[327][328] - Reliance on a small percentage of total users for a significant majority of revenue and bookings makes the business vulnerable if these paying users reduce Robux purchases or new paying users are not attracted[340] - International expansion, a critical strategy, exposes Roblox to risks like weaker spending in developing countries (potentially decelerating ABPDAU growth), compliance with diverse regulations, and geopolitical instability[342][343][345] - User metrics (DAUs, hours engaged, etc.) are based on internal data and estimates, subject to inherent measurement challenges and potential inaccuracies, which could harm reputation and business decisions[346][347][348][349] - Unauthorized, fraudulent, or illegal use of Robux and digital goods (e.g., credit card fraud leading to 3.4% chargebacks in Q3 2023) can reduce revenue, increase costs, and damage user experience[350][351][352] - The interactive entertainment market is highly competitive, with Roblox competing for users, developers, and creators against major tech and gaming companies, where failure to provide compelling advantages could lead to loss of content and users[354][355][356][357] - The China joint venture with Tencent faces risks from U.S.-China trade tensions, Chinese government regulations (e.g., limits on screen time for minors), and potential withdrawal of publishing licenses, which could impair or eliminate operations in China[379][380][382][383] - Fluctuations in currency exchange rates, especially the appreciation of the U.S. dollar, can negatively impact reported revenue from international markets and user purchasing power, as 35% of Q3 2023 revenue was from outside the U.S. and Canada[385][386] - Acquisitions and investments in other companies are part of the business strategy but carry risks of significant management attention, business disruption, dilution to stockholders, and failure to achieve anticipated benefits[387] - The company's net operating loss carryforwards ($2.03 billion federal, $893.0 million state as of Dec 31, 2022) may be limited by ownership changes or expire before full utilization, harming financial results[390] - Stock-based compensation expense, including the CEO Long-Term Performance Award ($232.2 million estimated value), significantly increases expenses and may require substantial funds for tax withholding obligations upon vesting[395][396][397] Risks Related to Government Regulations This section addresses risks associated with evolving government regulations, including export controls, tax laws, data privacy, content moderation, virtual currencies, and anti-corruption laws - Roblox is subject to export control, trade sanctions (e.g., OFAC), and import laws, where non-compliance or new restrictions (e.g., due to the war in Ukraine) could limit platform access in certain regions and lead to liability or reputational harm[398] - Changes in tax laws, such as the OECD's Pillar Two framework (15% global minimum tax) or the EU's DAC7, could increase compliance costs, affect effective tax rates, and impact operating results[400] - Governmental agencies may restrict access to platforms or the internet, impose content restrictions, or require local presence/data storage, which could lead to user loss, increased costs, or functional limitations[401] - Roblox is subject to complex and evolving privacy, data security, and data protection laws globally (e.g., GDPR, UK GDPR, LGPD, PIPL, CCPA, CPRA), where non-compliance can result in significant fines (up to 4-6% of global revenue), litigation, and reputational damage[404][405][407][408][409] - The company faces risks from laws and regulations regarding content (e.g., violence, 'loot boxes'), which are often ambiguous and evolving, with new regulations like the EU's Digital Services Act potentially increasing compliance costs and requiring content moderation changes[412][413] - Legal and regulatory restrictions on virtual currencies like Robux could adversely affect the platform, as deeming Robux a security would require significant platform redesign and could lead to enforcement actions[415] - Compliance with anti-corruption, anti-bribery (e.g., FCPA, UK Bribery Act), and anti-money laundering laws is critical, especially with international expansion, where violations could lead to criminal/civil liability, investigations, and reputational harm[419][420][422] Risks Related to Intellectual Property This section outlines risks concerning intellectual property, including infringement claims, protection of proprietary rights, and the use of open-source software - Claims of intellectual property infringement by third parties could lead to liability, significant costs, and injunctive relief, potentially forcing Roblox to limit platform access or pay substantial damages/royalties[429][430] - Reliance on legal protections like DMCA and CDA for user-generated content may change, increasing exposure to copyright infringement claims, with the EU's Copyright Directive and Digital Services Act potentially imposing more stringent content monitoring obligations[423][426][431][432] - Failure to protect or enforce intellectual property rights (patents, trademarks, trade secrets) could allow competitors to replicate technology, diminish brand value, and require expensive, time-consuming litigation[435][436] - Use of open-source software carries intellectual property risks, as certain licenses may require public disclosure of proprietary source code or impose other unanticipated conditions, potentially harming the business[439] Risks Related to Ownership of our Class A Common Stock This section discusses risks associated with owning Roblox's Class A Common Stock, including price volatility, concentrated voting control, anti-takeover provisions, and lack of dividends - The public trading price of Class A common stock is volatile, influenced by market fluctuations, operating performance, analyst coverage, and external events (e.g., war, pandemics), potentially leading to investment losses[440][442] - The dual-class stock structure concentrates voting control in the Founder, David Baszucki, limiting other stockholders' ability to influence corporate matters and potentially affecting the stock's trading price or inclusion in certain indices[443][444] - Delaware law and company bylaws contain anti-takeover provisions that could discourage, delay, or prevent a change in control, potentially depressing the market price of Class A common stock[446][447] - The company's bylaws designate Delaware courts and federal district courts as exclusive forums for certain disputes, which may limit stockholders' ability to choose a favorable judicial forum[448][449][451] - Additional issuances of stock, for business growth or acquisitions, could result in significant dilution for existing stockholders[453] - Roblox does not expect to pay dividends in the foreseeable future, meaning investors must rely on stock price appreciation for returns[454] Risks Related to the Notes and our Indebtedness This section addresses risks associated with Roblox's debt obligations, including the ability to service debt and the potential adverse impacts of indebtedness on financial flexibility - Roblox may not generate sufficient cash flow to service its debt obligations, including the $1.0 billion 2030 Notes, potentially requiring refinancing or restructuring at less favorable terms[455][456] - Indebtedness could adversely impact the company by dedicating substantial cash flow to debt service, limiting funds for growth, imposing restrictive covenants, and increasing vulnerability to economic downturns[458] General Risks This section covers various general risks, including legal proceedings, catastrophic events, and macroeconomic factors like inflation and global economic conditions - Legal proceedings and claims, including those related to intellectual property, consumer protection, and platform safety, can be costly, time-consuming, and harm reputation, regardless of outcome[458] - Catastrophic events (natural disasters, cyber-attacks, pandemics) could disrupt operations, cause system interruptions, and lead to significant losses not fully covered by insurance[459] - Rising inflation and volatile global economic conditions (e.g., war in Ukraine, tensions with China) can increase expenses, reduce consumer spending, and impact financial results, with exposure to uninsured cash balances in financial institutions also posing a risk[461][462][463] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds were reported[465] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities - No defaults upon senior securities were reported[466] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures - No mine safety disclosures were reported[467] Item 5. Other Information This section discloses that Amy Rawlings, Chief Accounting Officer, adopted a Rule 10b5-1 trading plan on August 28, 2023, for the sale of up to 40,928 shares of Class A Common Stock - On August 28, 2023, Amy Rawlings, Chief Accounting Officer, adopted a Rule 10b5-1 trading plan to sell up to 40,928 shares of Class A Common Stock, expiring September 30, 2024[468] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, certifications, and XBRL interactive data files - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, the Deferred Compensation Plan, certifications from the Principal Executive and Financial Officers, and various XBRL documents[471][472] Signatures This section contains the official signatures, certifying the accuracy and completeness of the financial report - The report was signed on November 8, 2023, by Michael Guthrie, Chief Financial Officer of Roblox Corporation[475]