Even the prominent ones are facing setbacks, is it the end for Roblox?

(This article was authored by Dolphin Research, and published by Titanium Media with authorization)

By Dolphin Research

Roblox's Q1 earnings report showed a major setback, with the biggest issue being a significantly lowered growth forecast. The trigger for the significant slowdown in growth was regulatory oversight on children in various countries/regions, but fundamentally, there were also reasons tied to a weakening game product cycle.

Before the earnings release, the market, based on close tracking of platform data, had already braced itself for short-term pressures (reflected in the continuously pressured stock price), but the actual management guidance turned out to be even more pessimistic. Although we believe that there is precedent for management intentionally lowering guidance and adopting a conservative stance, the guidance still indicates that clarity on short-term growth has declined, and high growth potential has been weakened.

Specifically:

1. Downward revision of growth guidance:Compared to the previous quarter, this time around, management has lowered revenue expectations but raised profitability (reduced losses) for the full year 2026. However, Roblox currently needs to prove its growth potential the most, so the downward adjustment in growth is still the hardest for the market to accept — management has adjusted Q2 and full-year Bookings revenue growth to 8%-12%.

A 10% revenue growth is already considered a level for a relatively mature platform, and Dolphin君 believes that by putting Q2 and full-year growth in the same guidance range, management may be reflecting a decline in visibility on short-term growth, hence providing a rather cautious forecast for the entire year.

2. Stricter regulation + fewer hit games leading to a decline in user activity:User metrics such as daily active users and quarterly usage hours were below expectations in Q1. Given that third-party data tracking exists, institutions had somewhat anticipated this. Following Russia, countries like Indonesia and Brazil also implemented child user protection measures at the end of March and beginning of April, coupled with fewer new hit games, which might result in continued deterioration of user metrics on a quarter-over-quarter basis.

3. Compliance adjustments and the pain of offering concessions to developers:The first quarter saw multiple compliance settlement fees, costing an additional $57 million. Meanwhile, to address regulatory concerns regarding child protection, Roblox established age-tiered accounts, which could inadvertently increase friction during the registration and login process, impacting Roblox’s user scale expansion and stickiness.

To counteract these user scale challenges, the newly launched PLUS membership offers users a 10% discount, but this discount does not affect developers' revenue share, meaning they receive full incentives. This implies that the platform will bear more cost pressure (in Q1, developer revenue share increased from last year's 22-23% to 24%).

Although offering concessions to developers is beneficial for the long-term healthy development of the ecosystem, it also brings short-term performance pressure. There were notable optimizations in R&D expenses in Q1, but most were offset by higher developer revenue shares and administrative costs including compliance fees, resulting in only a 4 percentage point contraction in operating loss.

Finally, using a metric that better reflects true profitability — Covenant adj. EBITDA, which excludes SBC expenses and includes changes in deferred revenue — came in at $420 million, slightly above consensus estimates, representing 24% of total revenue.

4. Financial Indicators Overview

Dolphin's Perspective

The flurry of child protection regulations introduced in the first quarter directly disrupted Roblox's growth momentum. Additionally, the December newcomer 'Escape Tsunami' showed mediocre follow-up performance, falling short compared to last year’s hits like 'Grow a Garden' and 'Steal a Brainrot,' failing to continue the product cycle that had been ongoing for over a year. This caused Roblox's user metrics to 'collapse' again—losing 12 million users during the Q1 peak season. Management forecasts a further sequential decline in Q2.

This is highly unfavorable to Roblox's growth narrative. The second and third quarters will not only continue to feel the impact of these factors but will also face high base pressure from last year’s product cycle. Prior to the earnings report, funds had already adjusted downward their expectations for Roblox’s user growth and performance based on third-party data tracking, which has weighed on the stock price recently. However, management's conservative full-year guidance has added more concerns to the market.

The 20% plunge after-hours already signals short-term risk-averse sentiment. After the drop, Roblox is valued at just $31.6 billion, corresponding to 5.3x PS or 27x P/FCF according to management's conservative guidance. Despite the earnings downgrade, the valuation has become cheaper than last quarter, effectively eliminating most of the previous premium.

From an absolute valuation perspective over a longer horizon, it has given up some of the safety margin we hoped for last quarter. If operations improve going forward and incentives to developers lead to more hit games (the direction is clear, but timing remains uncertain), then earnings could still exceed guidance.

Dolphin君 believes that considering Roblox's long-term platform value and management’s historical performance, the likelihood of exceeding guidance is relatively high.However, it is also important to consider the recent decline in short-term capital confidence, along with the impact of child policy implementations in regions like Indonesia.

Therefore, it is advisable to wait for 2-3 weeks of high-frequency data performance before making further judgments. We will provide regular follow-up commentary in the community channel, which you can follow.

Below are Roblox's detailed metrics

In the first quarter, DAU fell by 12 million people to 132 million on a quarterly basis. Due to compliance issues with child supervision (which Russia began enforcing at the start of the year) and the mediocre performance of the December newcomer 'Escape Tsunami,' the deterioration in user metrics was higher than the market expected.

Total user engagement time also declined by 11% on a quarterly basis. On average per user, year-on-year growth was only 3%, showing a significant slowdown compared to Q4, highlighting more clearly the lack of hit game content.

Roblox Bookings, which represents the amount users actually paid during the period, better reflects the platform's monetization power compared to revenue, as revenue is adjusted based on bookings and recognition formulas (non-consumables are deferred over the user’s platform lifespan, while consumables are recognized in the current period).

Bookings increased by 43% year-over-year in the first quarter. After recognizing a portion of the revenue for the period, there remains $6.6 billion in deferred bookings yet to be recognized, of which $4.4 billion needs to be recognized within one year. The company has guided Q2 and full-year 2026 Bookings growth to be between 8%-12%, a significant reduction from the previous quarter’s guidance.

The GAAP operating loss for the platform in the first quarter was close to $300 million, slightly reduced from the previous quarter. Specifically:

Research and development expenses increased by 12%, the lowest increase among all categories, and the R&D expense ratio also decreased by 7 percentage points. Developer revenue sharing, which accounts for a larger proportion, aligned with the strategy of benefiting developers, further weighing on profitability by 3 percentage points. Administrative expenses surged 75% year-over-year in the first quarter due to several compliance settlement costs.

Ultimately, if we adjust Roblox's true earning ability based on cash inflows and outflows of bookings—using Covenant Adj. EBITDA as a tracking metric—This equates to incoming bookings offset by basic operational cash expenditures, leaving residual retained cash.

The difference between this and the general Adj. EBITDA lies in the addition of deferred revenue, while subtracting deferred costs brought by channel fees.For a third-party platform like Roblox, which needs to share revenue with developers and pay channel fees based on transaction volume, this metric is more suitable for reflecting its earning power.

Otherwise, it would be due to an excessively long deferral period(Non-consumable virtual goods are generally recognized over 27 months based on the average user lifecycle), and the mismatch between revenue and expense cycles (revenue is deferred, but developer royalties are not) leads to discrepancies., underestimating the cash flow advantages inherent in its business model.As of the end of the first quarter, total revenue from the past four quarters was less than 5.3 billion, with quarterly operating losses still exceeding 300 million. However, free cash flow was nearly 600 million, and net cash on the books accumulated to nearly 4.4 billion.

The final calculation shows Covenant Adj. EBITDA for the first quarter at 420 million, accounting for 24% of Bookings, with seasonal effects, up 8 percentage points year-over-year. The company's guidance for 2026 projects this profit at 2.88 to 3.01 billion, with a profit margin relative to Bookings of 40%, higher than the current level (Q1's profit margin excluding regulatory compliance costs was 22%), implying that the company will continue to tighten operating expenses other than developer royalties, such as sales expenses, administrative expenses, and infrastructure safety costs.

52K Views