THQ 2006 Annual Report Download - page 20

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We rely on external developers for the development of some of our titles.
Some of our titles are developed by third-party developers. We have no direct control over the business,
finances and operational practices of these external developers. A delay or failure to complete the work
performed by external developers may result in delays in, or cancellations of, product releases. The future
success of externally developed titles will depend on our continued ability to maintain relationships and
obtain developer agreements on favorable terms with skilled external developers. Our competitors may
acquire the businesses of key developers or sign them to exclusive development arrangements. In either
case, we would not be able to continue to engage such developers’ services for our products, except for
those that they are contractually obligated to complete for us. We cannot guarantee that we will be able to
establish or maintain such relationships with external developers and failure to do so could result in a
material adverse effect on our business and financial results.
Defects in our gamesoftware could harm our reputationor decrease the market acceptance of our
products.
Our game software may contain defects. In addition, because we do not manufacture our games for
console platforms, we may not discover defects until after our products are in use by retail customers. Any
defects in our software could damage our reputation, cause our customers to terminate relationships with
us or to initiate product liability suits against us, divert our engineering resources, delay market acceptance
of our products, increase our costs or cause our revenue to decline.
We relyon a small number of customers that account for a significant amount of our sales.
Our largest single customer, Wal-Mart, accounted for 19% of our gross sales in fiscal 2006, 14% of our
gross sales in fiscal 2005 and 19% of our gross sales in fiscal 2004. A substantial reduction, termination of
purchases, orbusiness failure by any of our largest customers would have a material adverse effect on us.
Increased sales of used video game products could lower our sales.
Some of our customers, such as Blockbuster and Hollywood Video, specialize in renting video games.
These customers also may sell video games that have been rented by their customers after a certain period
of time following each title’s release. Increased sales of used video games, which are generally priced lower
than new video games, could negatively affect our sales of new titles and thus our revenues.
A significant portion of our revenue is derived from our international operations,which may subject us to
economic, political, regulatory and other risks.
In fiscal 2006 we derived 39% of our revenues from our international operations, up from 38% in fiscal
2005. We intend to continue expanding our international operations, which may subject us to many risks,
including: different consumer preferences, unexpected changes in regulatory requirements, tariffs and
other barriers, difficulties in staffing and managing foreign operations, and possible difficulties collecting
foreign accounts receivable. These factors or others could have an adverse effect on our future foreign
sales or the profits generated from these sales.
Sales generated by our international offices will generally be denominated in the currency of the country in
which the sales are made. To the extent our foreign sales are not denominated in U.S. dollars, our sales
and profits could be materially and adversely affected by foreign currency fluctuations.
Competition in the interactive software entertainment industry may lead to reduced sales of our products
and reduced market share.
Our industry is intensely competitive. We compete for both licenses to properties and the sale of games
with the platform manufacturers and other publishers. As a result of their commanding positions in the