THQ 2007 Annual Report Download - page 34

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26
take advantageof the unique featuresets of the new consoles, handhelds and PC. Our strategy to reach
core gamers focuses on theXbox 360, PS3 and PC platforms. Our mass-market brands aretargeted
primarily for theNintendo Wii, PS2 and DS platforms. We plan to publish some of our licensed brands,
such as WWE and Disney•Pixar across all viable platforms.
Software development. The new generation consoles have increasedfunctionality(e.g., realistic
environmentsand artificialintelligence) over their legacy counterparts. The increased functionality
delivers a more excitinggamingexperience butadds complexitytothe development of videogamesfor
these new consoles. This complexity increases the overall cost to developthese games and accordingly,
during fiscal 2008, we expect ouraverage software development costs to increase as we develop more
games for thesenew consoles.
Products. In order to increaserevenues while facing higher development costs, we believe that it is more
important than everinour industry to have a robust and diversified product portfolio. In recent years, we
have focused our efforts on growing both our owned intellectual properties and our licensed brands. As a
result of these efforts, we believe that we can continue to grow our revenues at or above themarket growth
rate in our industry.
International growth.Over the past few years, sales of video games outside of the United States have
grown significantly. In fiscal 2007, internationalsales growth droveapproximately $110.1 million of our
overall netsales increase of $220.3million. The international installed baseof video game platforms
continues to increase and we are focusedon expanding our international presence by identifying territories
where we see opportunity and establishing a direct sales presence to seize such opportunities. In addition
to our sales forcepresence, we are focused on releasing andaggressively marketing titles with international
appeal. We continue to evaluate new business opportunities in the Asia Pacific region.
Incrementalrevenue opportunities. Digital content creation and distribution is an emergingrevenue source
in our industry. We expectseveral of our games in fiscal 2008 to include in-gameadvertising. In fiscal 2007,
we began offering our first PC titles via digital distribution channels and provided digital downloads of new
content after shippingSaints Row. We are focused on growing these sources of incremental revenue in the
future. Additionally,we re-positioned our wireless business for future growth, adding new brands and
developmentcapabilities to thebusiness.
Critical Accounting Estimates
TheManagement’s Discussion and Analysis of Financial Condition and Results of Operations discusses
our consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in theUnited States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affectthe reported amounts of
assets and liabilities and thedisclosureof contingent assets andliabilities at thedate of the consolidated
financial statements and the reported amounts of revenues and expensesduring thereporting period. The
estimatesdiscussedbelow are considered by management to be critical because they areboth important to
the portrayal of our financial condition and results of operations andbecause their application places the
most significant demands on management’s judgment, with financialreporting results relying on estimates
about theeffect of matters that are inherently uncertain. Specific risks for thesecritical accounting
estimates are described in the followingparagraphs. For all of theseestimates, management cautions that
actual results may differ materially from these estimates under differentassumptions or conditions.
Accounts receivable allowances. We derive revenuefrom sales of packaged software for video game
systems and personal computers and sales of contentandservices for wireless devices. Product revenue is
recognized net of allowances for price protection and returns and various customer discounts. We typically
only allow returns for our personal computer products; however, we may decide to provide price
protection or allow returns forour video game systems or personal computer products after we analyze:
(1) inventory remaining in theretail channel, (2) the rate of inventory sell-through in theretail channel,