Roblox went public on March 10.
Courtesy of Roblox
Looking at the books is an important part of how any investor evaluates a business. But for videogame companies, making the numbers understandable is even tougher because of a long-running feud with the Securities and Exchange Commission.
The latest fight came to light Tuesday after a group of records related to Roblox (ticker: RBLX) became public. The correspondence, between the SEC and the company’s lawyers, laid out the details of why Roblox had to postpone its initial public offering from late January to early March.
The SEC had lots of questions about how the company recognized revenue from its digital goods and eventually told the company to make a change. That was the reason for the delayed listing.
One way Roblox makes money is by selling a digital currency, called Robux, that players spend within Roblox’s game. With Robux, they can buy all sorts of digital goods, ranging from ones consumed right away to others used over a longer period.
“It might sound strange to have both consumable and durable virtual goods, but yes there are,” accounting expert Paul Chaney told Barron’s. A durable virtual good, he said, could be an upgraded vehicle that players drive in a virtual environment; a consumable object might be rocks that players throw at monsters once before they disappear.
Roblox wanted to report the revenue from both sorts of digital goods at the same time—and did in its initial prospectus.
But the SEC has already determined videogame businesses should count the two goods separately—something the companies dislike, and Roblox tried to argue its way around. The industry standard is to recognize consumable goods immediately and defer durable goods sales over the service period of the item, Chaney said.
“Even if they are purchased in bundles, the standard revenue recognition in the industry is to separate them,” said Chaney, who is a professor at Vanderbilt University.
The SEC had the last word. Roblox had to separate the two forms of revenue, and defer the durable sales, according to the correspondence. But many videogame companies disagree with the practice.
One is Zynga (ZNGA). Earlier this year, chief executive Frank Gibeau explained his logic to Barron’s: The transaction for the goods happens immediately—the revenue comes in—and Zynga immediately pays out significant costs, such as fees, to Apple (AAPL) and Google (GOOGL).
For the financial statements, the costs for the digital goods show up in one period and the sales are pushed out over many quarters.
“From our view, averaging is at odds with the timing of consumption, and that is where we lost the argument,” Gibeau said. “That is why we believe it doesn’t show you the underlying profitability of the company.”
Because the SEC answered the revenue question years ago, Roblox’s challenge was out of the ordinary.
“A lot of the veteran CFOs in videogaming were all laughing and rolling their eyes, like, ‘oh yeah, the new kid is going to try it,’” Gibeau said. “Good luck.”
Roblox listed for $45 on March 10, and has advanced 45%, closing Tuesday at $65.17. The S&P 500 index gained 1.5% in the same period.
