Switch 2 Is Breaking Records — The Console Wars Aren’t Dead Yet

[music] Let's talk about a completely different console. Switch 2 has some amazing numbers. Crest.
Yeah. I mean, just quickly, Switch, they Nintendo announces the earning seasons as other people know, but the Switch 2 is off to a really strong start, like 10 million units, which is almost double what Switch One was at this point. So, of course, switch one had huge like supply chain issues and stock issues, but nonetheless, we haven't even hit the holiday season yet, and usually they double the sales over the holiday, so we could see them exiting the year with 20 million units sold. Um, they raised their guidance to 19 million, I think, and a lot of people think that they're just going to blow by that as well. Software sales were reasonably strong. Nintendo's looking good. Consoles are not dead. [laughter] That's many people want that to believe. So yeah, it should have a great holiday.
Yeah, I saw the raising the forecast

number. Super impressive. A lot of the sales had been more to the cord gamer and I don't know. Actually, my friend just bought it for her kids. So I guess it is starting to trickle down to that next family unit versus the Nintendo fanboy and girl.
Again, I what I've been telling my clients over the last year is that there's nothing else to buy this holiday, right? Like when you think about it, like
there's no big toy, there's no new console. Like if GTA were here and people were buying consoles to upgrade to GTA, like that would be a little bit more of a headwind for them. But I think Nintendo has its own window here to sell a [ __ ] ton of units and upgrade everybody and for something to put under the tree. And what maybe people don't know is that even though retail is dead from the eyes of gamers in a lot of ways because everyone's buying digital, but for holiday time, retail is still king. And when you go to Walmart, Target, Best Buy, all they're going to be doing is promoting Switch because that's the only thing that's going to get people into the door, right, from a gaming perspective. So, they'll push it pretty hard.

Yeah. my toy friends who I still have all my friends in the toy industry are just they've said the last year has been miserable because of the tariff talk and it's just like really decimated the toy industry to your point about from a toy perspective it's very difficult to have like that killer toy on shelf this year with the you know the tariff situation for them I feel bad which is why I do software and not physical goods anymore all right well speaking of another basically a digital toy that's going to most of the kids in the world. And funny, I was at Target and I saw a big giant displays stand for Roblox gift cards. So, here's what's going on with the I'll call it the paradox of Roblox. They're in their Q3 earnings from October 30th. So, kind of like last week, the numbers were really astonishing. It was their best ever numbers on a lot of metrics and still shockingly bad on others like losses of 257 million. The stock is down 20%. As

of, you know, yesterday closed the business. I don't I didn't look it up this morning. So, I'm going to do my best impression. I think you're going to say the reason for all of this that the investors are sick of, you know, those margins not being where they need to be and let's make some [ __ ] money, guys, right? Is that what you're going to say?
Basically.
Mhm.
So, they are making progress on market share. They now capture 3.2% 2% of the global gaming bookings, up from 2.3 from the previous year. They stated their goal being 10% of the global gaming market. So, three games are driving most of it. Grow a garden steel of Brain Rot and 99 Nights in the Forest, but seven of the top experiences reached more than 10 million DAUs during Q3. And so, it was those plus, you know, a bunch of other ones. They've paid out a billion to creators year-to date, so in nine months, which is pretty impressive. Apac drove most of the growth, but crash, you're going to love this. The US and

Canada had an increase in 47% in hours played. So, we are seeing some Western market growth. And I don't know what number to be the most impressed with. Maybe it's DAU, but Phil, you put in all the charts. So, can you walk us through those?
Yes. So, 103% year-over-year growth and free cash flow to $443 million, $46 million adjusted IBDA.
But here is the chart that blew me away. Right now, we're looking at DAOU. So, in Q3 2025, they hit 151 million DAU. that is up 70% year-over-year and is a 40 million DAU increase over Q2 2025. Oh my god. I I just like where do they keep finding these users and we'll see in a moment where they keep finding them because they provide regional breakdowns. And despite some of's previous warnings, they are also up 32%

year-over-year in US and Canada. So it's not just tier three regions, although that is where they're experiencing the strongest growth. So Europe is up 56% in terms of DAU year-over-year over-ear. AP pack is 108%. So it is true that they are growing more in other regions, but they still continue to grow in tier one regions. The age group, we've talked a lot about this over 13, under 13. A lot of people can lie. They can report different things, but they are still showing growth in the 13 plus age group, and it grew at a faster rate than the under 13.
Up 89% year-over-year. Let it go. Let it go. I'm just reporting. I'm just reporting what they report, Eric. Yeah, we'll do that. We'll do your second your asterisk, your asterisk is well well hurt. Wellard.
And here is the other thing that we've been keeping track of. It is stockbased compensation. It is flat. And I think this is a key part of the Roblox story is would they be able to get their costs under control? And when it comes to stockbased compensation, it was something that was growing and quarter over quarter it is largely flat. Now

that being said, they have other costs which have been growing as of course we'll see. I think some of the downturn in the stock price was due to a lot of their capex investments. And not only that, you got to remember that their marginal cost curve will always be tied to revenue because they had developerbased payouts, which is something that Spotify deals with quite a bit. The last thing I want to throw at you is this free cash flow number because is just it [snorts] is out of this world. $44 million in free cash flow in Q3 2025. That is more than double what they had in Q225. So, congrats to them. I am curious why the share price is down. I couldn't believe that Wall Street would expect something more. I think the things that we didn't see a lot of conversation about was the ads platform which has been in the background. The things that they ended up talking about was the viral experiences have driven a lot of this growth and remember those DIU numbers have been pretty steady. When we talk about grow a garden or steal a brain route, it doesn't look like flashes in the pan. The other thing they talked about was AI discovery in the platform driving a lot of this. So

solving a lot of the search costs that users find finding great games on the platform and dynamic price floors. Got a shout out on the Roblox marketplace. Congrats to the econ team. Absolutely slang. Every single quarter it seems like they're doing something that drives bottom line results. One last thing I'll throw in there was the webux. Remember you can still buy Roblox on the web now. They're taking advantage of direct to consumer too.
Yeah, it just impressive stuff. They've actually had a lot of employee shakeups at the higher levels. I think Chris, you've talked about the changes with product. Their head of partnerships left not too long ago and I get asked by my non-gaming friends and my gaming friends like what is going on with Roblox? How do I use it? And I just want to make sure that we say this out loud. My key piece of advice with Roblox is that this is a marketing platform for you and your game and your product or your brand. Likely not a revenue driving platform. Remember this is driven by you really have to have like a gamer experience that completely understands the play

pattern and the use case of this. So for all that is holy please do not make a gamer experience. Explore integrations look at brand opportunities first advertising is picking up rewarded video is picking up. So all of those are ways for you to use the platform without making a game. The eyeballs on this are huge as you can see. Gen Alpha is the best possible place for you to get in front of them. Like this is Roblox. The other thing I wanted to point out with Matthew Ball, we haven't talked about him in a while. He is the latest to post about this. So his tweet says Roblox's quarterly engagement hours are now about 82.5% as much as Netflix's. In Q325, Roblox was used more than it was the entire first year of the pandemic combined. Q2 2020 through Q1 2021. And so from the chart, you can also see that I think it's still 80% of the hours in the use case is on mobile a touch on console and I and think it's growing a

little bit as it's gotten to more console partners and obviously a little bit on on PC desktop, but this is a mobile platform that is absolutely reaching kids. So, uh, Mishka, I think you saw this tweet. What did you think? What's going on? So, there's a notion of this that I'm just going to quote the post said, "Roblox has a problem. Robux is becoming or always has been a non-monetizing unprofitable platform. Roblox has never made a profit in any quarter of its existence. In 21 years, Roblox has been solely investor supported and funded from 2004 to 2025. So just a you know take on this uneducated take which basically shares that they had a revenue of you know 1.4 billion and up by 450% bookings were 2 billion they were up by 70% and yet the net losses were over 250 million. So, I think the problem here is that people who post this, they don't

understand, as Eric said correctly, the difference between bookings and revenue and profit because bookings show the total value of Roblox purchases and them growing 70% is absolutely enormous because it means the players are spending and engaging and that is just growing. And the bookings mean that somebody buys Roboxes, but they're just not spending them right away. Nevertheless, that purchase has been made and so it shows it as a booking versus direct revenue. And in my opinion, this is one of the best signals of the platform health and the monetization power because players are putting down the cash to the platform faster than they were ever before. However, Roblox defers most of this into future revenue and and that is why the growth of these purchase not immediately seen as a hit in the income statement. And so revenue is what actually is recognized from the players consuming these Robuxes. And even there we can see

50% increase year-over-year. It's very stellar. And although the bookings are trailing, it means that there's a deferred revenue that is ballooning. So players will be spending more and those revenue will be growing. So the engine of spending of Robux is very strong. But the delivery meaning the conversion into recognized revenue has a time lag. And that's more of an accounting problem than the actual platform problem. And if this way, if the bookings are growing as sustained as they have till date and the costs are normalized as Phil was showing, the gap between those bookings and the actual revenue will become a tailwind for the future quarters and I don't understand how this is not recognized by Wall Street. So Chris, can you enlighten us?
[laughter]
Okay, so behind the numbers of an absolutely breathtaking quarter is a few things. One is they are not monetizing the audience better, right? They are monetizing it very consistently. Okay. And part of that growth that you so

eloquently described of a D AU by region was 80% growth on DAUs is rest of world, right? 32% is US. The difference between the monetization of the rest of world and US is [ __ ] dramatic, right? It's like $50 per user versus like 10 or something insanely low, right? So, if you're growing at the rest of world, it's far greater than you are at the US and Canada. You're basically losing money in a lot of ways because you're basically paying for the same amount of DAOU, right?
Incorrect. Because what you see when you look at their numbers, when you look at the average amount they make per payer per month, it's been steady at $20 basically their entire history. So when they should be adding more and more unprofitable cohorts from those tier 2 and tier three regions due to those compositional effects that you just described, which are true, the differences in monetization between region are dramatic, but when you aggregate it all, they've been steady at that $20 per payer per month,
but you're still the cost side of it.

I'm not the cost side of it is dramatic, right? because distributing games the way they do and how expensive it is to deliver this type of content on mobile is probably less expensive but still very expensive in rest of world as it is in the US right so
I agree
the cost side of it is so dramatic that like growing in rest of world is not good really for the P&L right so having said that they have become profitable but Wall Street all they give a [ __ ] about what's going to happen going forward not nearly what's happened in the past like you have to always keep that in mind. So in the report they basically suggested that they would have margin pressure going forward because they have to reinvest more into the infrastructure to support all these users, right? So I will say this until the cows come home, right? Like DAU MAU that is a [ __ ] vanity metric just in general, right? It's just not what is generating revenue. Again, the reason I

got bullish is on the stock is because advertising could unlock some revenue potential from that DAU MAU. But from Roblox perspective, it is very expensive. So when they say that they are have to reinvest even more money going forward, that means their margins are going to come down and that's reflected in some analysts and that's why the stock got just destroyed right overnight and plus it's been up so much recently. I was actually wondering since they invest so much in infrastructure and that's so important here and to your point like the cost per user is flat no matter where they come from if you're from India from the United States if you're from Europe they're all paying the same marginal cost profile despite the revenue being different of course that results in wildly different margins but do you think because there's all this competition in terms of AI for data centers that they're going to pay higher costs for their infrastructure going forward
probably and that could be part of it too right they're getting squeezed out by all this money that's chasing AI I that's possible. I could look into that actually in ter getting rid of all these deferrals and all this stuff and talking about gap revenue like fiscal 25 EBITDA

is going to be about 1.6 billion and that's like a 24% margin and next year Jeff is estimated that their their margins will go down to like 20%. Right? So from 22% from 24%. So that's why the stock got hurt was because their profitability is actually going down on a non-GAAP basis. That's why whoever made did that report that you were talking about Mishka is just completely causing all kinds of mess in terms of understanding the story really. The other part is that the big expenses that changed this year were the dev exchange expenses. So the dev exchange fees went up dramatically like I think from 900 million to 1.5 billion how much money they're giving to their developers. infrastructure and R&D ratio continued at the same kind of ratio but again they're not showing as much leverage on these investments as they could right because the revenue is not growing as much as the expenses revenue is growing faster than the expenses but not enough to really improve marginal

profit so anyway but they are profitable that is pretty clear and again margins are expected to climb next year so again what they need to do is see profitable growth right that's critical in the stock market right and that's what they need to see and they're not seeing that if they're saying that they're going to increase big spend next year, right? And so what I'm hoping is that advertising will start to kick in although it's going to take time and to scale it in a way and they have an audience issue but that's kind of like the hope in terms of scaling and like leveraging all this DAU MAU.
I've talked to some of the Roblox developers and the advertising revenue that they are seeing from this advertising program is extremely low. It's like onetenth of what mobile
isn't rewarded video. Didn't it just kind of kick in and a lot of people are in beta and
Yeah, it's going to take a while.
Yeah.
I mean, it could be years.
Exactly. And the developers, you know, they're 12, you know, for them a year is

a long time. [laughter] It's like a No, but but I just mean like it's it's uh the the in on paper it makes all the sense because everything is an ad network as we know but currently it's just not as interesting for the developers but again we have actually chief business officer of Roblox coming in on the podcast and that's one of my questions to him. So
I'm going to reiterate I know of a broken record on this. The age [ __ ] metrics on this platform are total [ __ ] [ __ ] Absolute 100% [ __ ] Right. There is no incentive for them to age verify properly on their platform. Everyone knows this internally, externally. Like I hate people who use that narrative that they're growing up the age demo. They're just not right. They're really not, you know? So I mean maybe in third world countries, you know, the then that makes sense, right? Because there's no alternative. So they can play these amazing experiences on mobile, right? But then that doesn't matter. Really, all that matters is the US is like, what

is the age demographic in the US? And I'm telling you, it ain't even near what this they're reporting on this. This this is total [ __ ] Okay.
[music]