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Roblox IPO: 5 things to know about the tween-centric gaming platform

Roblox Corp. is planning an initial public offering amid strong momentum as millions of tweens and teenagers are glued to their mobile devices during the COVID-19 pandemic.

The San Mateo, Calif.-based gaming platform features a variety of “3-D digital worlds” that are built by users and developers, providing virtual communities where users can play with friends. Roblox
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acknowledged in its official paperwork with the Securities and Exchange Commission that it is experiencing a huge boost from users isolated during shelter-in-place policies related to coronavirus, but seeks to appeal to a wider, and older, audience to continue growing when things go back to “normal.”

Roblox originally filed for an IPO on Nov. 19, after disclosing a month before that it was beginning the process. Roblox said in the original filing that it sought to raise up to $1 billion; this figure is typically a placeholder that will be updated in later filings, but suggests a larger fundraising goal than the typical large IPO, which uses a $100 million target.

Roblox expects to trade under the ticker “RBLX” on the New York Stock Exchange. There are six banks underwriting the deal, led by Goldman Sachs, Morgan Stanley, and J.P. Morgan. 2020 has been a good year for IPOs with the Renaissance IPO ETF
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up 94% for the year to date, compared with a 12% gain in the S&P 500 index
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and a 35% rise in the tech-heavy Nasdaq Composite Index
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Here are five things to know about Roblox as it becomes a public company.

If you don’t have tweens, you’ve probably never heard of it

If you haven’t heard of Roblox, you probably haven’t been around a pre-teen much in recent years. The company said that more than half of its 31.1 million daily users are younger than 13 years old. Back in 2018, the service claimed about 12 million daily users.

Since most online accounts require users to be at least 13, the company has faced criticism for inappropriate content on its service. In the prospectus, Roblox said it uses a human review team to screen content and has reviewed more than 68 million “assets” in the first nine months, and has “had a human respond” to more than 9 million customer inquiries within 10 minutes on average. The company hopes to appeal to older users and to retain current users as they grow up.

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“We ultimately aim to be a brand that serves all ages,” the company said in its SEC filing. “An early sign of what is possible: our 17 to 24-year-old user age group grew faster than our core under 13 age group in the nine months ended September 30, 2020.”

COVID-19 generated a huge boost of traffic

When the pandemic hit, Roblox growth exploded as tweens and others who were sheltering in place flocked to the online community. The number of daily users surged 82% over the past 12 months and the average user was on the service for more than two-and-a-half hours a day.

“We have experienced rapid growth … given our users have been online more as a result of global COVID-19 shelter-in-place policies,” the company said.

In the first nine months of 2020, Roblox said DAUs, or daily average users, grew to 31.1 million from 17.1 million in the same period during 2019. Year-over-year, Roblox reported 17.6 million DAUs in 2019, compared with 12 million in 2018.

Similarly, total hours spent on Roblox more than doubled to 22.2 billion in the first nine months of 2020, compared with 10 billion in the same period in 2019. Year-over-year, users spent 13.7 billion hours on Roblox in 2019, versus 9.4 billion in 2018.

Its revenue is derived from the model that has Epic Games fighting Apple

Roblox makes money by using a virtual currency called “Robux” that users buy to upgrade avatar and make purchases, but that developers also use within the platform. That means Roblox pays a lot of money to third-party distributors like Apple Inc. and Alphabet Inc. at a time when those practices are being disputed by others.

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Back in August, the popular videogame “Fortnite,” made by Epic Games, was banned from Apple’s
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App Store and Alphabet’s
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+1.22%

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Google Play stores because Epic tried to work around the 30% cuts the companies were getting from in-game purchases, and loudly disputed the practice.

Roblox said it also pays 30% of its one-time purchases to both Apple and Google when they are made on the respective stores. The company said for the first nine months of 2020, 34% of its revenue came from Apple store purchases and 18% from Google store purchases. That’s compared with 30% of revenue from Apple store purchases and 18% from Google store purchases in 2019.

The company said its bookings surged 171% to $1.24 billion in the first nine months of 2020, compared with $458 million in the same period in 2019. From 2018 to 2019, bookings grew 39%. If defines bookings as “sales of our virtual currency which we record as deferred revenue and then recognize that revenue over the estimated average lifetime of a paying user.”

Booking per DAU rose to $39.93 in the first nine months of 2020 from $26.75 in the year-earlier period.

In a nod to COVID-19’s part in the surge, the company said: “We do not expect these activity levels to be sustained, and in future periods we expect growth rates for our revenue to decline.”

Read: Unity Software IPO: 5 things to know about the videogame-engine company

As revenue has soared, losses have widened

While Roblox reported a 68% surge in revenue for the first nine months of 2020, losses for the period more than quadrupled.

Roblox reported revenue of $588.7 million and a loss of $203.2 million in the period, compared with $349.9 million in revenue and a loss of $46.3 million for the first nine months of 2019. Roblox reported revenue of$488.2 million and a narrower loss of $86 million in 2019, compared with revenue of $312.8 million and a loss of $97.2 million in 2018.

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The biggest culprits in 2020’s widening loss were payments to content developers and administration fees connected with the run up to the IPO.

“Developer exchange fees track closely with our overall bookings performance as more users on the platform and Robux purchased by our users drives more Robux earned by developers and creators,” the company said in its filing.

Those fees soared 190% to $209.2 million in the first nine months of 2020 compared with the same period a year ago.

In the same period, general and administrative fees soared 125% to $64.9 million. While $27.7 million of that increase was due to higher personnel costs including stock-based compensation expenses, the company also cited “an increase in headcount in our finance, accounting, people, IT and legal functions associated with our anticipated public offering.”

Early investors get a big upper hand

The IPO is for Class A shares, which get one vote per share, as opposed to Class B shares that get 20 votes per share and are convertible to Class A shares.

Those Class B shares belong mostly to early investors, the first of which were Altos Ventures and First Round Capital. Altos has a 23.9% stake in the company with 114.3 million shares and First Round has a 7% stake with 33.6 million shares.

Later investors include Meritech Capital Partners and Index Ventures. Meritech owns an 11.6% stake at 55.3 million shares, while Index has an 11.1% stake at 53.1 million shares.

Tiger Global Management, which entered the picture in 2018, has an 8.2% stake at 39.3 million shares.

Earlier in the year, Andreessen Horowitz led a $150 million investment round in the company but doesn’t even break into the list of “greater than 5%” stockholders.

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