2K Sports 2008 Annual Report Download - page 56

Although consumer demand for the PS3 system did not increase as quickly as anticipated in 2007, revenue
for our titles for that platform accounted for $66.2 million, or 9.6%, of our net publishing revenue.
Nintendo’s Wii system sold at a stronger than expected rate in 2007; our software sales for the Wii system
accounted for $35.5 million, or 5.1%, of our net publishing revenue in 2007. Software sales for the
Xbox 360 accounted for 29.7% of net revenue and increased $31.2 million, or 17.9%, again reflecting the
2007 sales of BioShock for this platform of $63.1 million, offset by a decrease of $34.4 million in sales of
The Elder Scrolls IV: Oblivion. Software sales for the PSP handheld system decreased $68.9 million in 2007,
primarily due to the strong sales of Grand Theft Auto: Liberty City Stories in 2006. Sales for the PS2 and
Xbox prior generation systems decreased $81.2 million due to the continuing hardware transition and
increased availability of the PS3 and Xbox 360. We have also continued to reduce prices of our software
titles for the PS2 and Xbox platforms as the current generation hardware installed base grows. Software
sales for PC declined $31.6 million, or 25.3%, primarily due to a $28.7 million decrease in revenue for sales
of The Elder Scrolls IV: Oblivion for PC, and a $14.1 million decrease in sales of our Sid Meier’s Civilization
series, both of which were released in 2006. The decrease was partially offset by sales of BioShock for the
PC of $22.0 million in 2007.
Product costs as a percentage of net revenue remained relatively consistent compared to 2006. Software
development costs decreased in 2007, reflecting the above average external royalty costs for The Elder
Scrolls IV: Oblivion and approximately $18.8 million of impairment charges for unreleased titles in 2006.
We recorded $4.1 million of impairment charges for unreleased titles in 2007. In addition, in 2007 we were
able to realize a significant increase in the gross profit margin of our internally developed titles,
particularly BioShock and our sports products. Both Major League Baseball 2K7 and our NBA 2K series had
significantly higher gross margins than their predecessor games due to higher revenues on a comparable
amount of software development costs. Internal royalty expense was lower as a percentage of net revenue
in 2007 as a result of fewer Rockstar titles being released and significantly lower sales of Grand Theft Auto
products. License expense was a greater percentage of net revenue in 2007, reflecting the releases of
All-Pro Football 2K8, Fantastic Four: Rise of the Silver Surfer, Ghost Rider and The Darkness, compared to 24:
The Game, The Da Vinci Code, and Torino 2006↩ in 2006. Sports licensing costs, however, were a lower
percentage of net revenue, particularly for our baseball titles where we had a greater number of products
released and higher overall revenues than in 2006.
Revenue earned from licensing our intellectual property to third parties increased to $30.8 million in 2007
from $10.9 million in 2006, primarily related to our January 2007 release of Grand Theft Auto: San Andreas
for the PS2 and the July 2007 release of Grand Theft Auto: Liberty City Stories for the PS2 and PSP in
Japan. We recognize substantially higher gross profit margins on revenue earned in connection with
licensing our products.
Revenue earned outside of North America accounted for approximately $239.9 million in 2007 compared
to $305.1 million in 2006. The year-over-year decrease was primarily attributable to a decrease in sales of
Grand Theft Auto: Liberty City Stories and The Elder Scrolls IV: Oblivion. Foreign exchange rates benefited
revenue by approximately $18.7 million in 2007.
Distribution
%
(thousands of dollars) 2007 % 2006 % Increase Increase
Net revenue $289,450 100.0% $284,525 100.0% $4,925 1.7%
Cost of goods sold 262,344 90.6% 258,815 91.0% 3,529 1.4%
Gross profit $ 27,106 9.4% $ 25,710 9.0% $1,396 5.4%
Distribution revenue associated with software sales for current generation platforms increased
$23.3 million, which reflected the releases of PS3 and Wii hardware in the first quarter of 2007 and the
continuing increase in the installed base of the Xbox 360. Current generation software also has higher
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