2K Sports 2004 Annual Report Download - page 25

Net Sales. The increase in net sales was attributable to growth in our publishing business.
The increase in publishing revenues was primarily attributable to sales of Grand Theft Auto: San Andreas
for the PlayStation 2, which was released in October 2004. Sales of sports titles for the PlayStation 2 and
Xbox also contributed to the increase in publishing revenues. We expect continued growth in our publishing
business for fiscal 2005. Publishing revenues in fiscal 2004 and 2003 include licensing revenues of $20,104
and $25,002, respectively.
Products designed for video game console platforms accounted for 93.1% of fiscal 2004 publishing revenues
as compared to 81.2% for fiscal 2003. Products designed for PC platforms accounted for 2.7% of fiscal 2004
publishing revenues as compared to 17.2% for fiscal 2003. We anticipate that our platform mix will remain
heavily weighted towards console platforms, but may fluctuate from period to period.
Distribution revenues are derived from the sale of third-party software titles, accessories and hardware. The
decrease in distribution revenues was attributable to lower PlayStation 2 console hardware sales due to
reduced availability in the market. The lack of PlayStation 2 hardware also resulted in fewer customer
orders for PlayStation 2 software. In addition, we experienced lower sales of value-priced product for the
PlayStation, which is nearing the end of its hardware lifecycle. These decreases were partially offset by
growth in value and frontline software. We expect that distribution operations will grow at a rate consistent
with industry trends.
International operations accounted for approximately $310,379 or 27.5% of net sales for fiscal 2004 compared
to $288,753, or 27.9% of net sales for fiscal 2003. The increase in absolute dollars was primarily attributable
to sales of Grand Theft Auto: San Andreas for the PlayStation 2. We expect international sales to continue to
account for a significant portion of our revenues. Higher foreign exchange rates benefited net sales by
approximately $35,826.
Cost of Sales
Years ended October 31,
2004
%of
Sales 2003
%of
Sales Increase
%
Incr
Product costs ........................ $619,685 55.0 $537,257 52.0 $ 82,428 15.3
Royalties ............................. 114,073 10.1 89,294 8.6 24,779 27.8
Software development costs ......... 15,922 1.4 11,003 1.1 4,919 44.7
Total cost of sales ................... $749,680 66.5 $637,554 61.7 $112,126 17.6
Product Costs. The increase in product costs was primarily attributable to higher costs associated with
products designed for console platforms. Product costs increased as a percentage of sales due to a change
in the mix of our publishing business, which reflected a smaller percentage of higher margin PC business
compared to the prior year. In addition, we also introduced sports titles at a value price point which resulted
in a relatively low margin. Product costs for fiscal 2003 included a charge of $7,892 relating to the
impairment of intangibles related to certain products in development.
Royalties. The increase in royalties was primarily due to third-party royalties associated with sports titles
and increased expenses related to a royalty program based on product sales for certain of our internal
development personnel.
Software Development Costs. Software development costs increased due to the release of a greater number of
internally developed titles during fiscal 2004 resulting in higher amortization of capitalized costs. Fiscal 2004
also includes a write off of $3,020 for a project that was abandoned during the year.
In future periods, cost of sales may be adversely affected by manufacturing and other costs, price competition
and by changes in product, sales mix and distribution channels.
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