Many things about the videogame business have changed in the past decade. One very important thing hasn’t: Gamers still need to actually buy the games.
But tracking this important activity has become rather difficult, and not just because fewer games are being sold at retail stores. Most games these days have online functions that demand continual upgrades and, hence, bear costs for publishers. So accounting rules require some of the revenue generated from the sale of such games to be deferred over several months, and even more than a year in some cases.
Videogame publishers have gotten around this by reporting a form of adjusted revenue every quarter that includes the effect of deferrals. The practice doesn’t alter reported cash flows of the businesses. But those days are ending as regulators cast a more critical eye on metrics that don’t conform to generally accepted accounting principles, or GAAP.
Electronic Arts EA 0.75 % said last week that it will stop including such non-GAAP figures in its quarterly reports. Other videogame publishers are likely to follow suit. EA, Activision Blizzard ATVI 2.32 % and Take-Two Interactive TTWO 0.27 % will all report quarterly results next week.
To be sure, there are plenty of good reasons to be suspicious of non-GAAP numbers. But one problem in the videogame business is that revenue recognition rules tend to obfuscate how much game content is actually sold in a given period. This is an important metric, given that it is the economic activity on which the entire industry is based.
Take the case of EA, which has been reporting adjusted revenue in the same way for the past nine years. Online-enabled games have grown to account for the majority of its business, which still follows the seasonal fluctuations common in the industry. So the spread between GAAP and non-GAAP revenue can be wide in quarters when the release of a big game like “Madden NFL” causes more revenue to be deferred.
But these differences tend to smooth out over time. For EA, the difference between annual GAAP and non-GAAP revenues has averaged only 4% over the last nine years.
EA still will report changes in deferred revenue that—when combined with reported revenue—produces the same non-GAAP numbers. This will likely keep unofficial numbers prominent even if the companies themselves don’t break them out. Note that billings at cloud software companies are calculated the same way, and that metric is closely tracked by investors. Markets always seem to find a way to stay ahead of the game.
http://www.wsj.com
By Dan Gallagher
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