Roblox Guided Bookings Down as Much as 18% and Withdrew Its Full-Year Outlook. The Algorithm Change Behind It Was Deliberate.

Roblox (NYSE: RBLX) told investors Thursday to expect third-quarter bookings of $1.576 billion to $1.653 billion, a decline of 14% to 18% from a year ago. It also declined to offer a full-year outlook, accelerating a planned shift to quarterly only guidance.

Shares fell about 27% Friday, hitting a fresh 52-week low near $34.

Management says part of the damage is self-inflicted, on purpose.

In April, the gaming platform began updating its "Recommended For You" discovery algorithm to optimize for long-term player retention, judging games on 28 days of player behavior instead of seven. A separate change, disabling the sale of cross-experience game passes, added a smaller drag.

The company's shareholder letter says the change "intentionally provides more impressions for highly retentive games at the expense of near term monetization." And the hit landed hardest among younger players in the U.S. and Canada, where the falloff in spending per hour was larger than management anticipated.

Image source: Getty Images.

Still, the quarter itself was better than the reaction suggests. Revenue rose 36% year over year to $1.47 billion, because bookings from earlier quarters are recognized as revenue over time. But bookings, the measure of what players spent now, grew just 8%, at the low end of the company's own guidance.

Meanwhile, daily active users climbed 10% to 123 million, hours engaged rose 5% to 29 billion, and the net loss narrowed to $185 million from $280 million a year ago. Free cash flow grew 66% to $294 million, and the company holds $6.1 billion in cash and investments.

But with no annual outlook, each quarterly bookings number now carries the full weight of the story. Management's bet is that longer retention eventually more than makes up for the lower spending per hour, and it says internal testing supports that.

Until the reported numbers show it, though, the market is treating the strategy as a cost rather than an investment. The $6.1 billion in cash gives management plenty of time to make its case. The proof, however, will have to arrive one quarter at a time.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox. The Motley Fool has a disclosure policy.