THQ 2007 Annual Report Download - page 45

Download and view the complete annual report

Please find page 45 of the 2007 THQ 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 108

  • 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
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108

37
Cost of Sales—Software Amortization and Royalties (in thousands)
Year Ended
March 31, 2007 % of net sales
Year Ended
March 31, 2006 %of net sales %change
$165,46216.1% $116,371 14.4% 42.2%
Software amortization androyaltiesprimarily consists of amortization of capitalized payments made to
third-party software developersand amortization of capitalizedinternal studio development costs.
Commencing upon product release, capitalized software development costs areamortized to software
amortization and royalties based on the ratio of current revenues to total projected revenues. In fiscal 2007
software amortization and royalties as apercentage of net sales increased by 1.7 points over fiscal 2006.
This increasewasprimarily duetoagreatermix of newgenerationtitles with higher development costs.
Cost of Sales—License Amortization and Royalties (in thousands)
Year Ended
March 31, 2007 % of net sales
Year Ended
March 31, 2006 %of net sales %change
$99,533 9.7%$80,508 10.0%23.6%
License amortization and royalties expense consists of royalty payments due to licensors, which are
expensedat thehigher of (1) the contractualroyalty rate based on actual net product sales for such license
or (2) an effective rate based upon totalprojected revenue for such license. In fiscal2007license
amortization and royalties as a percentage of net sales decreased slightly versus fiscal 2006. Thetop selling
titles in fiscal 2007 were Cars andWWE® SmackDown vs. Raw 2007, both licensed properties. However,
the increased mix of net sales from games based on our owned intellectual propertiesincluding Saints Row,
Destroy All Humans!2,Company of Heroes andTitan Quest loweredthe overall rate as compared to fiscal
2006.
Cost of Sales—Venture Partner Expense (inthousands)
Year Ended
March 31, 2007 % of net sales
Year Ended
March 31, 2006 %of net sales %change
$16,730 1.6%$12,572 1.6% 33.1%
Venture partner expenseis related to thejoint license agreement that THQ and JAKKS Pacific, Inc.
(“JAKKS”) have with the WWE under which our role is to develop, manufacture,distribute, market and
sell WWE videogames. Venture partner expense increased by $4.2 million in fiscal 2007 as compared to
fiscal 2006. This increaseisdueto an overallincrease in net sales of gamesbasedupon theWWE license,
which is primarily due to the release of WWE ®SmackDown vs. Raw 2007 in fiscal 2007and the
introduction of this game to the new generation console Xbox360. See “Item 3—Legal Proceedings” for
information regarding our venture partner agreement.
Product Development (in thousands)
Year Ended
March 31, 2007 % of net sales
Year Ended
March 31, 2006 %of netsales %change
$97,105 9.5%$94,575 11.7%2.7%
Product development expense primarily consists of expenses incurred by internal development studios and
payments made to external development studios prior to products reachingtechnological feasibility.
Product development expense increasedby $2.5 million in fiscal 2007 as compared to fiscal2006. This
increaseis primarilydue to $3.4 millionof stock-based compensation expensedue to our adoption of