2K Sports 2003 Annual Report Download - page 24

Our quarterly operating results may vary significantly, which
could cause our stock price to decline. We have experienced, and
may continue to experience, wide fluctuations in quarterly operating
results. The interactive entertainment industry is highly seasonal, with
sales typically higher during the fourth calendar quarter (our fourth
and first fiscal quarters), due primarily to the increased demand for
games during the holiday buying season. Our failure or inability to
introduce products on a timely basis to meet seasonal fluctuations in
demand will harm our business and operating results. These fluctua-
tions could also cause our stock price to decline. Other factors that
cause fluctuations include:
• delays in the introduction of new titles;
• the size and timing of product and business acquisitions;
• variations in sales of titles designed to operate on particular
platforms;
• development and promotional expenses relating to the introduc-
tion of new titles;
• availability of hardware platforms;
• the timing and success of title introductions by our competitors;
• product returns and price concessions; and
• the timing of orders from major customers.
Our expense levels are based, in part, on our expectations regard-
ing future sales and therefore our operating results would be harmed
by a decrease in sales or a failure to meet our sales expectations.
The uncertainties associated with interactive entertainment software
development, manufacturing lead times, production delays and the
approval process for products by hardware manufacturers and other
licensors make it difficult to predict the quarter in which our products
will ship and therefore may cause us to fail to meet financial expecta-
tions. In future quarters, our operating results may fall below the
expectations of securities analysts and investors. In this event, the
market price of our common stock could significantly decline.
The interactive entertainment software industry is cyclical, and
we may fail to anticipate changing consumer preferences. Our
business is subject to all of the risks generally associated with the
interactive entertainment software industry, which has been cyclical in
nature and has been characterized by periods of significant growth
followed by rapid declines. Our future operating results will depend
on numerous factors beyond our control, including:
• the popularity, price and timing of new software and hardware
platforms being released and distributed by us and our
competitors;
• international, national and regional economic conditions, particular-
ly economic conditions adversely affecting discretionary consumer
spending;
• war, acts of terrorism and military action, which could adversely
affect consumer preferences in entertainment;
• changes in consumer demographics;
• the availability and popularity of other forms of entertainment; and
• critical reviews and public tastes and preferences, all of which
change rapidly and cannot be predicted.
In order to plan for acquisition and promotional activities, we
must anticipate and respond to rapid changes in consumer tastes and
preferences. A decline in the popularity of interactive entertainment
software or particular platforms could cause sales of our titles to
decline dramatically. The period of time necessary to develop new
game titles, obtain approvals of manufacturers and produce finished
products is unpredictable. During this period, consumer appeal of a
particular title may decrease, causing product sales to fall short of
expectations.
Rapidly changing technology and platform shifts could hurt
our operating results. The interactive entertainment industry in
general is associated with rapidly changing technology. As more
advanced platforms achieve market acceptance, consumer demand
for software for older platforms declines.
We are devoting significant development resources primarily
on products designed for Sony’s PlayStation 2 and Microsoft’s Xbox.
If consumer demand for these platforms declines generally or as a
result of the next hardware transition cycle, we may experience lower
than expected sales or losses from products designed for these
platforms.
A number of software publishers who compete with us have devel-
oped or are currently developing software for use by consumers over
the Internet. Future increases in the availability of such software or
technological advances in such software or the Internet could result
in a decline in platform-based software and impact our sales. Direct
sales of software by major publishers over the Internet would materi-
ally adversely affect our distribution business.
It is difficult to anticipate hardware development cycles and we
must make substantial development and investment decisions well in
advance of the introduction of new hardware products. If new hard-
ware products are delayed or do not meet our expectations for con-
sumer acceptance, we may not be able to recover our investment and
our business and financial results could be adversely affected.
Our business is dependent on publishing arrangements with
third parties. Our success depends on our ability to identify and
develop new titles on a timely basis. We have entered into agree-
ments with third parties to acquire the rights to publish and distribute
interactive entertainment software. These agreements typically require
us to make advance payments, pay royalties and satisfy other condi-
tions. Our advance payments may not be sufficient to permit devel-
opers to develop new software successfully. In addition, software
development costs, promotion and marketing expenses and royalties
payable to software developers have increased significantly in recent
years and reduce the potential profits derived from sales of our soft-
ware. Future sales of our titles may not be sufficient to recover
advances to software developers, and we may not have adequate
financial and other resources to satisfy our contractual commitments.
If we fail to satisfy our obligations under these license agreements,
the agreements may be terminated or modified in ways that may be
burdensome to us.
TAKE-TWO INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Dollars in thousands, except per share amounts)
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