2K Sports 2009 Annual Report Download - page 50

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Years Ended October 31, 2009 and 2008
Publishing
%
Increase/ Increase/
(thousands of dollars) 2009 % 2008 % (decrease) (decrease)
Net revenue $700,734 100.0% $1,229,594 100.0% $(528,860) (43.0)%
Product costs 236,680 33.8% 353,263 28.7% (116,583) (33.0)%
Software development costs and
royalties(1) 115,960 16.5% 169,398 13.8% (53,438) (31.5)%
Internal royalties 58,224 8.3% 128,772 10.5% (70,548) (54.8)%
Licenses 56,880 8.1% 56,546 4.6% 334 0.6%
Cost of goods sold 467,744 66.8% 707,979 57.6% (240,235) (33.9)%
Gross profit $232,990 33.2% $ 521,615 42.4% $(288,625) (55.3)%
(1) Includes $6,094 and $13,461 of stock-based compensation expense, respectively, included in software development costs and
royalties.
Net revenue decreased $528.9 million for the year ended October 31, 2009 as compared to the same period
in 2008, primarily due to lower sales of Grand Theft Auto IV released in April 2008 for the PS3 and
Xbox 360. Sales of our Grand Theft Auto franchise were $416.8 million lower for the year ended
October 31, 2009. The decrease in sales from Grand Theft Auto IV was partially mitigated by the 2009
releases of Grand Theft Auto: Chinatown Wars, Grand Theft Auto: Episodes from Liberty City as well as
downloadable episodes Grand Theft Auto IV: The Lost and Damned and Grand Theft Auto: The Ballad of
Gay Tony.
Excluding our Grand Theft Auto franchise, net revenue was lower by $112.1 million, primarily related to
titles that were released in 2008, such as those in our Midnight Club, Civilization, Carnival Games and
BioShock franchises, which collectively decreased $128.0 million compared to the prior year. Partially
offsetting the decrease in net revenues was the release of Borderlands in October 2009.
Net revenue generated by our 2K Sports products decreased $17.1 million compared to the prior year,
mainly reflecting lower sales of our 2008 release Top Spin 3, partially offset by better performance of NBA
2K10 compared to its predecessor title.
Net revenue on current generation platforms accounted for approximately 67.5% of our total net
publishing revenue for the year ended October 31, 2009 compared to 82.3% for the same period in 2008.
The decrease is primarily due to the release of Grand Theft Auto IV in April 2008 for the PS3 and
Xbox 360. PC software sales increased $37.9 million (92.1%) due primarily to the first quarter 2009 PC
release of Grand Theft Auto IV. Sales on prior generation platforms continued to decline, led by a 48.2%
decrease on PS2, reflecting wider acceptance of current generation platforms. We expect volume on prior
generation platforms to continue to decline as a result of the continued transition to current generation
hardware platforms and have therefore reduced the number of titles in development for these older
platforms. We have also continued to reduce pricing on software titles for the PS2 as the current
generation hardware installed base grows.
Gross profit as a percentage of net revenue decreased for the year ended October 31, 2009 as compared to
the same period the prior year, which included the initial release period of Grand Theft Auto IV, one of our
highest margin products. Product costs increased as a percentage of net revenue, primarily due to volume
based manufacturing discounts that were recorded in connection with our release of Grand Theft Auto IV
in the 2008 period. Additionally, software development costs and royalties increased as a percentage of net
revenue in 2009 as we incurred higher royalty costs associated with the increased number of externally
developed titles released in 2009, primarily related to the October 2009 release of Borderlands. Also,
software development costs and royalties were negatively impacted by impairments related to our Major
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