2K Sports 2008 Annual Report Download - page 52

Gross profit as a percentage of net revenue increased significantly due to the release of Grand Theft Auto
IV in 2008, as this title was internally developed and the intellectual property is wholly-owned. Product
costs decreased as a percentage of net revenue, primarily due to the volume based manufacturing
discounts we received related to the release of Grand Theft Auto IV. Internal royalties increased as a
percentage of net revenue, again reflecting increased sales of our Grand Theft Auto titles.
Excluding the impact of Grand Theft Auto IV, product costs as a percentage of net revenue decreased
slightly, mainly due to the 2007 period which included a $5.2 million impairment charge related to
intellectual property. Software development costs and royalties decreased in 2008 as a percentage of net
revenue, mainly due to a larger share of revenues generated from internally developed titles. Internal
royalty costs as percentage of net revenues remained relatively consistent with the prior year. License costs
increased slightly as a percentage of net revenue due to both higher royalty expense and lower revenue
generated from our Major League Baseball license, partially offset by lower licensing rates in connection
with other 2008 titles, including Don King Presents: Prizefighter and Top Spin 3. Gross profit as a percentage
of net revenue, excluding the impact of Grand Theft Auto IV, increased by 2.3% in the 2008 period, mainly
due a higher proportion of internally developed titles including Bully: Scholarship Edition, Midnight Club:
Los Angeles, Sid Meier’s Civilization↦ Revolution↩, and Top Spin 3 and the continued success of Carnival
Games. In addition, in 2008 our NBA 2K9 title had higher gross margins than its predecessor game due to
higher revenues on a comparable amount of software development costs.
Revenue earned from licensing our intellectual property to third parties increased to $33.2 million in 2008
from $30.8 million in 2007, primarily due to our October 2008 release of Grand Theft Auto IV for the PS3
and Xbox 360 in Japan, which was partially offset by the July 2007 release of Grand Theft Auto: Liberty City
Stories for the PS2 and PSP in Japan. We recognize higher gross profit margins on revenue earned in
connection with licensing our products.
Revenue earned outside of North America accounted for approximately 43.5% of our net revenue in 2008
compared to 34.7% in 2007. This increase was primarily attributable to our simultaneous global release of
Grand Theft Auto IV and Midnight Club: Los Angeles for the PS3 and Xbox 360. Foreign exchange rates
increased revenue by approximately $20.4 million in 2008.
Distribution
%
(thousands of dollars) 2008 % 2007 % Increase Increase
Net revenue $307,936 100.0% $289,450 100.0% $18,486 6.4%
Cost of goods sold 280,716 91.2% 262,344 90.6% 18,372 7.0%
Gross profit $ 27,220 8.8% $ 27,106 9.4% $ 114 0.4%
Net revenue associated with software for current generation platforms increased $29.5 million and
hardware sales increased $16.8 million, reflecting increased availability of current generation platforms,
especially the Wii. In addition, PC software sales increased $6.8 million. Offsetting the current year
increases were lower sales of prior generation software of $19.1 million, reflecting a shift in consumer
demand for newer software. We experienced a decline in software sales for Nintendo handheld devices and
peripherals of $15.9 million.
In September 2008, we sold certain assets of our distribution segment, including warehouse management,
processing and value-added service operations of our distribution facility, to Ditan. In addition, we agreed
to outsource the pick, pack, ship and warehousing functions for our publishing and distribution businesses
to Ditan. This arrangement did not have a material impact on our gross margins in the current year but we
do anticipate improved gross margins in 2009 because the arrangement will then have been in effect for a
full year.
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