Roblox & Revenue Recognition

09 Mar 2021

Roblox direct listing delayed because of revenue accounting policy disagreement.

Parents, there’s a good chance that you know a lot about Roblox by now. A popular online gaming platform for kids, it is the thing that starts the family conversation around limits to screen time, the power of addiction, and the human need for fresh air and sunshine. Many of us should thank Roblox for helping to open up those dialogues with our kids. I know I do.

The fun is just beginning for adults, though. Starting on March 10, public investors can enjoy Roblox by purchasing their common stock RBLX. It is a big moment for the company, and they had a few bumps in the road in getting here. Since one of them relates to the company’s revenue recognition policies - a topic we care about at Scribal - we’ll look at what happened and why the SEC required the company to amend their S-1 before allowing them to proceed.

Let’s start with the way the economics of Roblox works. With many digital products, the user pay for access to an experience. S/he can then log in, do various things, come back later, log in again and do more things. This is true enough for Roblox, but with a slight twist. Kids can sign up and access the platform for free. But they can also buy Robux, the company’s virtual currency, to enhance their experience in various ways. The company’s revenues are related to the purchase and use of Robux for additional capabilities rather than just accessing the free platform and playing games.

So the first question around revenue is whether the company should record a sale when the user buys Robux. The simple answer is no, as this event is a prepayment allowing the user to enjoy those enhanced capabilities later on.

That leaves the question of what these additional capabilities entail when users spend their Robux. If the user spends them on clothing for their avatar, they can see these accessories and enjoy them any time they are logged in. These uses of Robux the company refers to as “virtual durable goods” since they are not session- or game-specific. The user continues to benefit from the purchase of virtual durables as long as they use the platform.

But other uses of Robux are purchases that are useful within a single session. For example, the user quaffs a life-sustaining potion while playing an adventure game. Once used, there is no future benefit. Roblox calls these “virtual consumable goods”.

While noting the differences between the two, the company still chose to record all revenue the same way: in even amounts over the projected period users typically access the platform - 23 months. But the SEC wanted to see the distinction between virtual durable and consumable goods made within Roblox’s revenue policy before signing off. Accordingly, consumables should be considered as earned when the user performs the requisite action. In the example above, that would be when the user buys the in-game potion.

It appears that Roblox could not obtain the granular details to distinguish between the two types of virtual goods and so chose a single basis of estimation. And this is a common enough case: it isn’t always that the company misunderstands the economic implications of what they are delivering. More often, it is the more mundane question of where to spend their investment dollars - build a better product for customers or build deeper analytics for reporting? Sometimes that is a hard tradeoff. It’s 20/20 hindsight, but if you own equity in Roblox today, you might have wished that the company was able to pull revenue event data from the platform a little bit earlier. That might have meant bringing shares to the public market at an even more advantageous time to sell.