Blizzard 2005 Annual Report Download - page 34

Download and view the complete annual report

Please find page 34 of the 2005 Blizzard annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 92

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92

Cost of Sales—Software Royalties and Amortization
(In thousands)
March 31, 2005
% of Publishing
Net Revenues March 31, 2004
% of Publishing
Net Revenues Increase/(Decrease) Percent Change
$123,800 12% $59,744 9% $64,056 107%
Cost฀of฀sales—software฀royalties฀and฀amortization฀for฀the฀year฀ended฀March฀31,฀2005฀increased฀as฀a฀percentage฀of฀publishing฀net฀revenues฀from฀the฀prior฀fiscal฀year,฀
from฀9%฀to฀12%.฀In฀absolute฀dollars,฀cost฀of฀sales—software฀royalties฀and฀amortization฀for฀the฀year฀ended฀March฀31,฀2005฀also฀increased฀from฀the฀prior฀fiscal฀year,฀from฀
$59.7฀million฀to฀$123.8฀million.฀This฀increase฀was฀due฀to฀an฀increase฀in฀the฀number฀of฀titles฀released฀as฀well฀as฀an฀increase฀in฀the฀overall฀costs฀to฀develop฀games.฀This฀
compares฀to฀fiscal฀2004฀in฀which฀a฀higher฀proportion฀of฀revenues฀were฀derived฀from฀internally฀developed฀titles฀with฀lower฀associated฀game฀development฀costs.฀In฀fiscal฀
2006,฀we฀expect฀cost฀of฀sales—software฀royalties฀and฀amortization฀to฀decrease฀as฀a฀percentage฀of฀publishing฀net฀revenues฀as฀compared฀to฀fiscal฀2005฀as฀our฀fiscal฀2006฀
titles฀slate฀includes฀a฀higher฀percentage฀of฀internally฀developed฀titles.
Cost of Sales—Intellectual Property Licenses
(In thousands)
March 31, 2005
% of Publishing
Net Revenues March 31, 2004
% of Publishing
Net Revenues Increase/(Decrease) Percent Change
$62,197 6% $31,862 5% $30,335 95%
Cost฀of฀sales—intellectual฀property฀licenses฀for฀the฀year฀ended฀March฀31,฀2005฀increased฀in฀absolute฀dollars฀and฀as฀a฀percentage฀of฀publishing฀net฀revenues฀over฀the฀
same฀period฀last฀year,฀from฀5%฀to฀6%.฀The฀increases฀in฀both฀absolute฀dollars฀and฀as฀a฀percentage฀of฀publishing฀net฀revenues฀were฀due฀to฀the฀release฀of฀more฀titles฀with฀
associated฀licensed฀intellectual฀property฀as฀well฀as฀continued฀strong฀catalog฀sales฀of฀titles฀with฀associated฀licensed฀intellectual฀property฀compared฀to฀the฀titles฀released฀
in฀fiscal฀2004฀for฀which฀a฀higher฀proportion฀of฀revenues฀was฀derived฀from฀titles฀that฀were฀internally฀developed฀with฀no฀associated฀intellectual฀property.฀In฀fiscal฀2005฀we฀
released฀the฀following฀titles฀with฀associated฀intellectual฀property:฀
Spider-Man 2, Shrek 2, Shark Tale, X-Men Legends, THUG 2, Lemony Snicket’s A Series of Unfortunate Events
฀and฀
Doom 3
.฀In฀fiscal฀2004,฀
two฀ of฀ our฀ top฀ performing฀titles,฀
True Crime: Streets of L.A.
฀and฀
Call of Duty,
฀were฀ based฀ on฀our฀ wholly-owned฀ original฀ intellectual฀ property.฀In฀fiscal฀ 2006,฀ we฀expect฀cost฀ of฀
sales—intellectual฀property฀licenses฀to฀remain฀relatively฀flat฀as฀a฀percentage฀of฀publishing฀net฀revenues฀as฀compared฀to฀fiscal฀2005.
Product Development
(In thousands)
March 31, 2005
% of Publishing
Net Revenues March 31, 2004
% of Publishing
Net Revenues Increase/(Decrease) Percent Change
$86,543 8% $97,859 15% $(11,316) (12%)
Product฀development฀expenses฀for฀the฀year฀ended฀March฀31,฀2005฀decreased฀as฀a฀percentage฀of฀publishing฀net฀revenues฀from฀the฀prior฀fiscal฀year,฀from฀15%฀to฀8%.฀In฀
absolute฀dollars,฀product฀development฀expenses฀for฀the฀year฀ended฀March฀31,฀2005฀also฀decreased฀from฀the฀prior฀fiscal฀year,฀from฀$97.9฀million฀to฀$86.5฀million.฀The฀
decrease฀in฀product฀development฀as฀a฀percentage฀of฀publishing฀net฀revenues฀and฀in฀absolute฀dollars฀primarily฀resulted฀from฀a฀pre-tax฀charge฀of฀approximately฀$21฀million฀
taken฀in฀the฀third฀quarter฀of฀fiscal฀2004฀related฀to฀the฀cancellation฀of฀products฀which฀were฀believed฀to฀be฀unlikely฀to฀produce฀an฀acceptable฀level฀of฀return฀on฀our฀investment.฀
Excluding฀the฀impact฀of฀the฀pre-tax฀charge,฀product฀development฀expenses฀for฀the฀year฀ended฀March฀31,฀2005฀increased฀by฀approximately฀$9.7฀million.฀This฀increase฀
was฀attributable฀to฀higher฀game฀development฀costs฀as฀development฀time฀and฀team฀sizes฀as฀well฀as฀quality฀assurance฀time฀increased฀due฀to฀enhanced฀production฀values฀
and฀to฀support฀more฀complex฀and฀robust฀gaming฀experiences.฀We฀expect฀product฀development฀costs฀to฀increase฀in฀absolute฀dollars฀due฀to฀next-generation฀development฀
costs฀but฀stay฀constant฀as฀a฀percentage฀of฀revenues฀as฀we฀leverage฀the฀costs฀against฀bigger฀brands,฀sold฀in฀more฀markets,฀across฀more฀gaming฀devices.
page 32
Activision, Inc. — 2005 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations