THQ 2008 Annual Report Download - page 55

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accounting fees incurred in connection with the investigation of our historical stock option grant
practices in fiscal 2007 and $2.9 million from the payroll tax effects of our historical stock option
grant practices investigation in fiscal 2007.
Costs and expenses as a percentage of net sales decreased by 4 points to 92% in fiscal 2007 from 96% in
fiscal 2006. This decrease was primarily due to product mix of higher priced titles and leverage of our
selling and marketing and general and administrative expenses.
Cost of Sales—Product Costs (in thousands)
Year Ended Year Ended
March 31, 2007 % of net sales March 31, 2006 % of net sales % change
$351,449 34.2% $287,946 35.7% 22.1%
Product costs primarily consist of direct manufacturing costs (including platform manufacturer license
fees), net of manufacturer volume rebates and discounts. Product costs as a percentage of net sales
decreased by 1.5 points in fiscal 2007 as compared to fiscal 2006. This decrease was primarily due to an
increase in sales from our premium priced PC games including Company of Heroes, S.T.A.L.K.E.R.:
Shadow of Chernobyl, Supreme Commander and Titan Quest. These PC games have lower product costs as
compared to most of our other platforms due to the lack of a platform manufacturer license fee.
Cost of Sales—Software Amortization and Royalties (in thousands)
Year Ended Year Ended
March 31, 2007 % of net sales March 31, 2006 % of net sales % change
$165,462 16.1% $116,371 14.4% 42.2%
Software amortization and royalties primarily consists of amortization of capitalized payments made to
third-party software developers and amortization of capitalized internal studio development costs.
Commencing upon product release, capitalized software development costs are amortized to software
amortization and royalties based on the ratio of current revenues to total projected revenues. In fiscal 2007
software amortization and royalties as a percentage of net sales increased by 1.7 points over fiscal 2006.
This increase was primarily due to a greater mix of current generation titles with higher development costs.
Cost of Sales—License Amortization and Royalties (in thousands)
Year Ended Year Ended
March 31, 2007 % of net sales 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
expensed at the higher of (1) the contractual royalty rate based on actual net product sales for such license
or (2) an effective rate based upon total projected revenue for such license. In fiscal 2007 license
amortization and royalties as a percentage of net sales decreased slightly versus fiscal 2006. The top selling
titles in fiscal 2007 were Cars and WWESmackDown vs. Raw 2007, both licensed properties. However, the
increased mix of net sales from games based on our owned intellectual properties including Saints Row,
Destroy All Humans! 2, Company of Heroes and Titan Quest lowered the overall rate as compared to fiscal
2006.
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