2K Sports 2009 Annual Report Download - page 51

League Baseball titles partially offset by impairments recorded in 2008. Internal royalties decreased from
the prior year period primarily due to decreased sales and profitability in our publishing business and a
change in the compensation structure at our Rockstar Games label, where internal royalties were previously
calculated using a net sales formula and are now calculated based on a profit share formula. License costs
increased as a percentage of net revenue as we are not expecting to generate the revenue necessary to
exceed the minimum commitments due under our license agreements with Major League Baseball entities.
As a result we accelerated the amortization of certain license costs related to the contract and impaired
development costs related to future titles. Additionally, we offered greater price concessions in the 2009
period, primarily due to the economic slowdown and increased pressure to reduce prices on certain titles.
Revenue earned from licensing our intellectual property to third parties and other ancillary revenues
decreased to $25.2 million for the year ended October 31, 2009 compared to $33.2 million in 2008,
primarily due to the October 2008 release of Grand Theft Auto IV for the PS3 and Xbox 360 in Japan. We
recognize substantially higher gross profit margins on revenue earned in connection with licensing our
products.
Publishing revenue earned outside of North America accounted for approximately $259.2 million (37.0%)
for the year ended October 31, 2009 compared to $534.7 million (43.5%) in the 2008 period. The
year-over-year decrease was primarily attributable to the release of Grand Theft Auto IV in the second
quarter of 2008. Foreign exchange rates reduced net revenue and gross profit by approximately
$28.7 million and $2.9 million, respectively, for the year ended October 31, 2009 compared to the year
ended October 31, 2008.
Distribution
Increase/ % Increase/
(thousands of dollars) 2009 % 2008 % (decrease) (decrease)
Net revenue $267,754 100.0% $307,936 100.0% $(40,182) (13.0)%
Cost of goods sold 250,082 93.4% 280,716 91.2% (30,634) (10.9)%
Gross profit $ 17,672 6.6% $ 27,220 8.8% $ (9,548) (35.1)%
Net revenue decreased $40.2 million for the year ended October 31, 2009 as compared to the same period
in 2008. The decrease was primarily attributable to a decrease of $26.0 million in hardware sales, a
decrease of $15.9 million in sales for prior generation software due to lower selling prices and declining
consumer spending on titles for the prior generation platforms, and lower PC software sales of
$6.1 million. This decrease was partially offset by an increase of $10.8 million in sales of Wii software as
consumers continued to shift their spending to this platform with the increasing popularity of casual
gaming.
Gross profit margins decreased in 2009 primarily due to our continued efforts to reduce the number of
units on hand in our warehouse by offering our customers reduced pricing on certain prior generation
software and hardware products as well as recording inventory write-downs of approximately $5.6 million
in the fourth quarter of 2009 compared to $3.7 million recorded in the third quarter of 2008. In addition
gross profit margins were negatively impacted by the additional cost of goods sold recognized in
conjunction with the third party distribution services agreement that we entered into in September 2008.
Prior to September 2008, we independently operated a distribution warehouse and our product
distribution costs were recorded in operating expenses. Partially offsetting our decreased gross profit
margin were software distribution service fees, which we received for acting as an agent on behalf of
another publisher. We recorded our distribution fee as revenue on a net basis. Foreign exchange rates
reduced net revenue and gross profit by approximately $2.8 million and $0.7 million, respectively, for the
year ended October 31, 2009.
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