THQ 2010 Annual Report Download - page 30

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22
environment and declines in sales of games in the music category, and for the handheld and PS2 gaming
platforms. Despite these challenging market conditions and a weak macroeconomic environment, THQ
gained worldwide market share in the twelve months ended March 31, 2010.
The installed base of gaming hardware in North America and Europe was approximately 300 million units as
of December 31, 2009, up 26% year over year, according to IDG. We expect North America and Europe
retail software sales to be roughly flat in calendar 2010 versus 2009. We expect growth in our business
during fiscal 2010 from sales of video games on the growing installed base of the PS3 and Xbox 360
platforms, which generally have higher average selling prices than games sold on other platforms; however,
we also expect continued declines in sales of games for the handheld and PS2 gaming platforms.
Sales of Used Video Games
Large retailers, such as GameStop, have increased their focus on selling used video games, which provides
higher margins for the retailers than sales of new games. This focus reduces demand for new copies of our
games. We believe customer retention through compelling online play and downloadable content offers may
reduce consumers’ propensity to trade in games.
Increasing Shift to Online Content and Digital Downloads
The interactive entertainment software industry is delivering a growing amount of games, downloadable
content and product add-ons by direct digital download through the Internet and gaming consoles. We
believe that much of the growth in the industry will come via online distribution such as massively multi-player
games (both subscription and free-to-play), casual micro-transaction based games, paid downloadable
content and digital downloads of games. Accordingly, we plan to continue integrating a digital strategy into
all of our key franchises.
Sales Concentration of Top Titles
During the last fiscal year, the majority of money spent by consumers on video game software was spent on
select top titles. We expect this trend to continue into fiscal 2011. Additionally, the cost to develop video
games, especially Core Games, has increased significantly over the last few years. Current generation
consoles have functionality that allows us to deliver exciting gaming experiences at high quality levels, but
this increased functionality also increases the overall cost to develop games. Accordingly, our software
development costs have increased as we developed more games for these consoles. Because of the
demand for select “hit” titles and the increased Core Game development investment, we believe that it is
important to focus our Core Game development efforts on bringing a smaller number of high-quality,
competitive products to market. This focus may lower our net sales and profitability in any given quarter, as
we generally aim to ship games only when we believe the quality is high and the competitive window is most
advantageous.
Foreign Currency Exchange Rates Impact on Results of Operations
Approximately 38% of our net sales for fiscal 2010 was produced by sales outside of North America. We are
exposed to significant risks of foreign currency fluctuation, primarily from receivables denominated in foreign
currency, and are subject to transaction gains and losses, which are recorded as a component in determining
net income. The income statements of our non-U.S. operations are translated into U.S. dollars at the month-
to-date average exchange rates for each applicable month in a period. To the extent the U.S. dollar
strengthens against foreign currencies, as it did during fiscal 2010, the translation of these foreign currency
denominated transactions results in decreased net sales, operating expenses and income from our non-U.S.
operations. Similarly, our net sales, operating expenses and income from our non-U.S. operations will
increase if the U.S. dollar weakens against foreign currencies.
Seasonality
The interactive entertainment software industry is highly seasonal. Sales are typically significantly higher
during the third quarter of our fiscal year, due primarily to the increased demand for interactive games during
the holiday buying season.