Blizzard 2005 Annual Report Download - page 33

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Two฀factors฀that฀could฀affect฀future฀publishing฀and฀distribution฀net฀revenue฀performance฀are฀console฀hardware฀pricing฀and฀software฀pricing.฀As฀console฀hardware฀moves฀
through฀its฀life฀cycle,฀hardware฀manufacturers฀typically฀enact฀price฀reductions.฀Reductions฀in฀the฀price฀of฀console฀hardware฀typically฀result฀in฀an฀increase฀in฀the฀installed฀
base฀of฀hardware฀owned฀by฀consumers.฀Price฀cuts฀on฀Xbox,฀PS2฀and฀GBA฀hardware฀were฀announced฀in฀March,฀May฀and฀September฀2004,฀respectively.฀Historically,฀we฀
have฀also฀seen฀that฀lower฀console฀hardware฀prices฀put฀downward฀pressure฀on฀software฀pricing.฀While฀we฀expect฀console฀software฀launch฀pricing฀for฀most฀genres฀to฀hold฀
at฀$49.99฀through฀the฀calendar฀2005฀holidays,฀we฀believe฀we฀could฀see฀additional฀software฀price฀declines฀thereafter.
Distribution Net Revenues
(In thousands)
March 31, 2005
% of Consolidated
Net Revenues March 31, 2004
% of Consolidated
Net Revenues Increase/(Decrease) Percent Change
$333,128 24% $281,924 30% $51,204 18%
Distribution฀net฀revenues฀for฀the฀year฀ended฀March฀31,฀2005฀increased฀18%฀from฀the฀prior฀fiscal฀year,฀from฀$281.9฀million฀to฀$333.1฀million.฀Excluding฀the฀impact฀of฀the฀
changing฀foreign฀currency฀rates,฀our฀distribution฀net฀revenues฀increased฀9%฀year-over-year.฀About฀half฀of฀this฀increase฀was฀due฀to฀the฀positive฀impact฀of฀the฀year-over-year฀
strengthening฀of฀the฀EUR฀and฀the฀GBP฀in฀relation฀to฀the฀U.S.฀dollar.฀The฀increase฀was฀primarily฀due฀to฀the฀continued฀growth฀in฀the฀industry฀wide฀software฀market,฀an฀
increase฀in฀sales฀to฀mass฀merchants,฀as฀well฀as฀a฀change฀in฀the฀product฀mix.฀The฀mix฀of฀distribution฀net฀revenues฀between฀hardware฀and฀software฀sales฀varied฀year-over-year฀
with฀approximately฀13%฀of฀distribution฀net฀revenues฀from฀hardware฀sales฀in฀the฀year฀ended฀March฀31,฀2005฀as฀compared฀to฀28%฀in฀the฀prior฀fiscal฀year.฀This฀was฀mainly฀
attributed฀to฀an฀increase฀in฀business฀with฀large,฀mass-market฀customers฀that฀generate฀a฀higher฀percentage฀of฀sales฀from฀software.฀In฀both฀fiscal฀years,฀hardware฀sales฀
were฀principally฀comprised฀of฀sales฀of฀console฀hardware.฀The฀mix฀of฀future฀distribution฀net฀revenues฀will฀be฀driven฀by฀a฀number฀of฀factors฀including฀the฀occurrence฀of฀
further฀hardware฀price฀reductions฀instituted฀by฀hardware฀manufacturers,฀the฀introduction฀of฀new฀hardware฀platforms฀and฀our฀ability฀to฀establish฀and฀maintain฀distribution฀
agreements฀with฀hardware฀manufacturers฀and฀third-party฀software฀publishers.฀We฀expect฀our฀fiscal฀2006฀distribution฀results฀to฀be฀in฀line฀with฀fiscal฀2005.
Costs and Expenses
Cost of Sales—Product Costs
(In thousands)
March 31, 2005
% of Consolidated
Net Revenues March 31, 2004
% of Consolidated
Net Revenues Increase/(Decrease) Percent Change
$658,949 47% $475,541 50% $183,408 39%
Cost฀of฀sales—product฀costs฀represented฀47%฀and฀50%฀of฀consolidated฀net฀revenues฀for฀the฀years฀ended฀March฀31,฀2005฀and฀2004,฀respectively.฀In฀absolute฀dollars,฀cost฀
of฀sales—product฀costs฀increased฀39%฀due฀to฀significantly฀higher฀sales฀in฀fiscal฀2005฀as฀compared฀to฀fiscal฀2004.฀The฀primary฀factors฀affecting฀the฀reduction฀in฀the฀cost฀of฀
sales—product฀costs฀as฀a฀percentage฀of฀consolidated฀net฀revenues฀were:
•฀ ฀Increased฀ability฀to฀maintain฀premium฀pricing฀on฀“big฀proposition”฀titles฀for฀the฀year฀ended฀March฀31,฀2005.
•฀ ฀An฀increase฀in฀publishing฀net฀revenues฀from฀sales฀of฀PC฀titles฀by฀66%฀year-over-year.฀PC฀publishing฀revenues฀as฀a฀percent฀of฀publishing฀net฀revenues฀for฀the฀year฀
also฀grew฀from฀20%฀to฀21%.฀PC฀titles฀typically฀have฀lower฀product฀costs฀associated฀with฀them.
•฀ ฀A฀lower฀percentage฀of฀revenues฀generated฀from฀our฀distribution฀business,฀which฀is฀a฀lower฀margin฀business,฀in฀fiscal฀2005฀as฀compared฀to฀fiscal฀2004.
We฀expect฀cost฀of฀sales—product฀costs฀as฀a฀percentage฀of฀net฀revenues฀to฀slightly฀decrease฀as฀a฀percentage฀of฀revenue฀in฀fiscal฀2006฀as฀compared฀to฀fiscal฀2005.฀This฀
is฀primarily฀due฀to฀a฀lower฀percentage฀of฀revenue฀expected฀to฀be฀generated฀from฀our฀distribution฀business฀in฀fiscal฀2006,฀which฀is฀a฀lower฀margin฀business.฀We฀may฀also฀
continue฀to฀experience฀a฀benefit฀from฀changes฀in฀product฀mix฀in฀fiscal฀2006฀due฀to฀the฀focus฀on฀“big฀proposition”฀titles,฀for฀which฀we฀could฀benefit฀from฀higher฀retail฀pricing฀
and฀manufacturing฀volume฀discounts.
page 31
Activision, Inc. — 2005 Annual Report