2K Sports 2008 Annual Report Download - page 51

Years Ended October 31, 2008 and 2007
Publishing
%
Increase/ Increase/
(thousands of dollars) 2008 % 2007 % (decrease) (decrease)
Net revenue $1,229,594 100.0% $692,341 100.0% $537,253 77.6%
Product costs 353,263 28.7% 248,744 35.9% 104,519 42.0%
Software development costs and
royalties 169,398 13.8% 136,485 19.7% 32,913 24.1%
Internal royalties 128,772 10.5% 28,892 4.2% 99,880 345.7%
Licenses 56,546 4.6% 58,569 8.5% (2,023) (3.5)%
Cost of goods sold(1) 707,979 57.6% 472,690 68.3% 235,289 49.8%
Gross profit $ 521,615 42.4% $219,651 31.7% $301,964 137.5%
(1) Includes $13,461 and $3,216 of stock-based compensation expense, respectively, included in software development costs and
royalties.
The increase in net revenue primarily reflects higher sales of titles from our Grand Theft Auto franchise
predominantly due to our release of Grand Theft Auto IV in the second quarter of 2008. Total net revenue
generated from our Grand Theft Auto titles was $581.4 million higher in the 2008 period. Our Midnight
Club franchise also contributed $66.7 million to the increase in net revenue in the 2008 period due to the
release of Midnight Club: Los Angeles in October 2008. In addition, we have seen continued success of our
Carnival Games franchise, which debuted in the fourth quarter of 2007 with Carnival Games for the Wii
and increased net revenue by $53.3 million in 2008 and growth in our family-oriented game market with
the release of Dora the Explorer and Go, Diego, Go! titles based on top rated Nickelodeon television shows
which contributed $17.3 million in net revenue in 2008. Furthermore, net revenue generated from our
sports business increased by $9.2 million due to our release of Top Spin 3 in 2008, partially offset by a
decrease in revenue due to the performance of our Major League Baseball franchise. These increases were
partially offset by lower revenue earned from our titles The Darkness, The Elder Scrolls IV↦, Fantastic Four:
Rise of the Silver Surfer and Ghost Rider↩ and which were $112.0 million higher in the prior period,
reflecting sales generated in connection with their release in the third quarter of 2007. Also, BioShock,
which was released on the PS3 in the fourth quarter of 2008 and on the Xbox 360 and PC in the fourth
quarter of 2007, had lower net revenue of $54.7 million in 2008 compared to 2007.
Consumer demand for the PS3, Xbox 360 and Wii systems increased in 2008, helping to boost our sales on
current generation platforms. Sales on current generation platforms accounted for approximately 82.3% of
our total net publishing revenue in the 2008 period. PS3 and Xbox 360 software sales for 2008 increased
from 2007 by $347.0 million and $281.5 million, respectively, primarily due to the success of Grand Theft
Auto IV. Wii software sales accounted for $112.0 million of our net publishing revenue in 2008, reflecting
higher sales of Carnival Games and an increase in the number of titles we released on the Wii such as
Major League Baseball↦ 2K8 and Top Spin 3. Sales on the prior generation platforms decreased by
$96.3 million, mainly reflecting decreased sales of Fantastic Four: Rise of the Silver Surfer and Grand Theft
Auto: Vice City Stories in 2008. We expect sales on the prior generation platforms to continue to decline as
a result of the hardware transition and have therefore reduced the number of titles in development for
these platforms. We have reduced pricing on several of our software titles for the prior generation
platforms as the current generation hardware installed base grows. Handheld sales increased by
$13.3 million, primarily due to the release of Midnight Club: LA Remix on the PSP and sales of our
Nickelodeon titles Dora the Explorer and Go, Diego, Go! and Carnival Games that released on the DS. PC
sales decreased by $52.5 million, primarily due to decreased sales of BioShock and The Elder Scrolls IV: The
Shivering Isles↩, which were released in 2007.
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