Blizzard 2005 Annual Report Download - page 42

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Cost฀of฀sales—software฀royalties฀and฀amortization฀for฀the฀year฀ended฀March฀31,฀2004฀decreased฀as฀a฀percentage฀of฀publishing฀net฀revenues฀from฀the฀prior฀fiscal฀year,฀
from฀13%฀to฀9%.฀In฀absolute฀dollars,฀cost฀of฀sales—software฀royalties฀and฀amortization฀for฀the฀year฀ended฀March฀31,฀2004฀also฀decreased฀from฀the฀prior฀fiscal฀year,฀from฀
$79.2฀million฀to฀ $59.7฀million.฀ The฀decrease฀in฀absolute฀dollars฀ reflects฀that฀there฀ were฀approximately฀fifteen฀major฀titles฀released฀in฀fiscal฀2004฀ as฀compared฀to฀ over฀
twenty฀in฀fiscal฀2003.฀The฀decrease฀in฀the฀percentage฀reflects฀the฀strong฀performance฀of฀our฀internally฀developed฀key฀fiscal฀2004฀third฀quarter฀releases.
Cost of Sales—Intellectual Property Licenses
(In thousands)
March 31, 2004
% of Publishing
Net Revenues March 31, 2003
% of Publishing
Net Revenues Increase/(Decrease) Percent Change
$31,862 5% $45,002 7% $(13,140) (29%)
Cost฀of฀sales—intellectual฀property฀licenses฀for฀the฀year฀ended฀March฀31,฀2004฀decreased฀in฀absolute฀dollars฀and฀as฀a฀percentage฀of฀publishing฀net฀revenues฀over฀the฀
same฀period฀last฀year,฀from฀7%฀to฀5%.฀The฀decreases฀reflect฀the฀fact฀that฀two฀of฀our฀top฀performing฀titles฀in฀fiscal฀2004,฀
True Crime: Streets of L.A.
฀and฀
Call of Duty,
฀were฀based฀
on฀ our฀ wholly-owned฀ original฀ intellectual฀ property.฀ Additionally,฀ during฀ fiscal฀ 2003,฀ we฀ recorded฀ an฀ approximate฀ $7.0฀ million฀ charge฀ related฀ to฀ an฀ assessment฀ of฀ the฀
recoverability฀of฀certain฀of฀our฀investments฀in฀long-term฀licensing฀agreements.
Product Development
(In thousands)
March 31, 2004
% of Publishing
Net Revenues March 31, 2003
% of Publishing
Net Revenues Increase/(Decrease) Percent Change
$97,859 15% $56,971 9% $40,888 72%
Product฀development฀expenses฀for฀the฀year฀ended฀March฀31,฀2004฀increased฀as฀a฀percentage฀of฀publishing฀net฀revenues฀from฀the฀prior฀fiscal฀year,฀from฀9%฀to฀15%.฀In฀
absolute฀ dollars,฀ product฀development฀expenses฀for฀ the฀year฀ended฀ March฀31,฀2004฀also฀ increased฀from฀the฀ prior฀fiscal฀ year,฀from฀$57.0฀million฀to฀ $97.9฀million.฀The฀
increase฀in฀product฀development฀as฀a฀percentage฀of฀publishing฀net฀revenues฀and฀in฀absolute฀dollars฀resulted฀from:
•฀ ฀A฀$21฀million฀game฀cancellation฀charge฀recorded฀in฀the฀fiscal฀2004฀third฀quarter.฀We฀executed฀a฀realignment฀of฀our฀product฀portfolio฀driven฀by฀the฀evolution฀of฀the฀video฀
game฀market,฀which฀is฀increasingly฀dominated฀by฀high-quality฀products฀that฀are฀based฀on฀recognizable฀franchises฀and฀supported฀with฀big฀marketing฀programs.฀We฀
completed฀a฀comprehensive฀review฀of฀our฀product฀portfolio฀in฀which฀we฀evaluated฀each฀product฀based฀on฀a฀number฀of฀criteria,฀including:฀the฀strength฀of฀the฀franchise,฀
the฀projected฀product฀quality,฀the฀potential฀responsiveness฀of฀the฀product฀to฀aggressive฀marketing฀support฀and฀the฀financial฀risk฀in฀the฀event฀of฀product฀failure.฀As฀
a฀result฀of฀this฀review,฀we฀believed฀that฀we฀had฀an฀extensive฀slate฀of฀high-potential฀properties฀in฀development.฀However,฀we฀found฀that฀certain฀projects฀had฀a฀lower฀
likelihood฀of฀achieving฀acceptable฀levels฀of฀operating฀performance฀and฀that฀continued฀pursuit฀of฀these฀projects฀would฀create฀a฀substantial฀opportunity฀cost฀as฀it฀
related฀to฀our฀slate฀of฀high-potential฀projects.฀Accordingly,฀in฀the฀three฀months฀ended฀December฀31,฀2003,฀we฀cancelled฀the฀development฀of฀ten฀products฀that฀we฀
believed฀were฀unlikely฀to฀produce฀ an฀ acceptable฀level฀of฀return฀on฀our฀ investment.฀In฀connection฀with฀the฀cancellation฀of฀these฀products,฀we฀recorded฀a฀pre-tax฀
charge฀of฀approximately฀$21฀million.
•฀ ฀Our฀increased฀emphasis฀on฀product฀quality฀and฀the฀lengthening฀of฀product฀development฀schedules.฀To฀maintain฀the฀competitiveness฀of฀our฀products฀and฀to฀take฀
advantage฀of฀increasingly฀sophisticated฀technology฀associated฀with฀new฀hardware฀platforms,฀we฀have฀increased฀the฀amount฀of฀time฀spent฀play-testing฀new฀products,฀
conducted฀more฀extensive฀product฀quality฀evaluations฀and฀lengthened฀product฀development฀schedules฀to฀allow฀time฀to฀make฀the฀improvements฀indicated฀by฀our฀
testing฀and฀evaluations.฀We฀are฀focused฀on฀improved฀game฀quality,฀and฀in฀many฀cases,฀this฀has฀resulted฀in฀an฀increase฀in฀product฀development฀costs.
•฀ ฀The฀increase฀in฀absolute฀dollars฀is฀also฀due฀to฀an฀increase฀in฀studio฀employee฀incentive฀compensation฀as฀a฀result฀of฀the฀strong฀performances฀of฀key฀fiscal฀2004฀
title฀releases.
page 40
Activision, Inc. — 2005 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations