THQ 2011 Annual Report Download - page 33

&RVWRI6DOHV
Cost of sales decreased $106.5 million, or 17%, in fiscal 2011 compared to fiscal 2010. This dollar-basis decrease was primarily
due to lower product costs and lower software development amortization resulting from the deferral of costs related to the changes
in our deferred net revenue. Also contributing to the dollar-basis decrease was a reduction in the number of units shipped in fiscal
2011 compared to fiscal 2010, primarily of kids movie-based licensed games. As a percent of net sales, cost of sales increased
8.5 points in fiscal 2011 compared to fiscal 2010; this increase was primarily due to impairment charges on kids movie-based
licenses and higher product costs as a percent of net sales as further discussed below.
Cost of Sales—Product Costs (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$272,021
RIQHWVDOHV
40.9%
)LVFDO<HDU(QGHG
0DUFK
$318,590
RIQHWVDOHV
35.4%
FKDQJH
(14.6)%
Product costs primarily consist of direct manufacturing costs, including platform manufacturer license fees, net of manufacturer
volume rebates and discounts. In fiscal 2011, product costs as a percentage of net sales increased 5.5 points compared to fiscal
2010. The increase as a percent of net sales was primarily due to lower average net selling prices on our titles sold in fiscal 2011
compared to fiscal 2010, particularly on UFC Undisputed 2010 compared to UFC 2009 Undisputed. Also contributing to the
increase was a change in our sales mix in fiscal 2011 towards more catalog and distribution titles which generally have higher
product costs relative to their net sales. Catalog titles made up a larger portion of our sales mix in fiscal 2011 due to the release
of certain titles, late in the fourth quarter of fiscal 2011, for which the related revenue was deferred and will be recognized in the
first half of fiscal 2012. Additionally, our sales mix in fiscal 2011 included uDraw, which has a higher product cost per unit relative
to its average net selling price, compared to our software products.
Cost of Sales—Software Amortization and Royalties (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$129,237
RIQHWVDOHV
19.4%
)LVFDO<HDU(QGHG
0DUFK
$196,956
RIQHWVDOHV
21.9%
FKDQJH
(34.4)%
Software amortization and royalties expense 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 expense based on the ratio of current gross sales
to total projected gross sales. In fiscal 2011, software amortization and royalties expense as a percentage of net sales decreased
2.5 points compared to fiscal 2010. The decrease was primarily due to net sales of uDraw, which had low development costs.
Partially offsetting the decrease in software development amortization as a percent of net sales were higher title cancellation and
impairment charges in fiscal 2011 compared to fiscal 2010. In fiscal 2011 we had charges totaling $9.9 million related to the
cancellation of Company of Heroes Online and WWE Online (see "Note 10 — Restructuring and Other Charges" in the notes to
the consolidated financial statements included in Item 8) and impairment charges of $7.0 million. In fiscal 2010 we had charges
totaling $7.9 million related to titles that were cancelled in connection with the fiscal 2009 realignment plan.
Cost of Sales—License Amortization and Royalties (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$118,287
RIQHWVDOHV
17.8%
)LVFDO<HDU(QGHG
0DUFK
$110,503
RIQHWVDOHV
12.3%
FKDQJH
7.0%
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
net sales for such license. Also included in license amortization and royalties expense in fiscal 2010 is venture partner expense
totaling $14.5 million (see “Note 2 — Summary of Significant Accounting Policies” in the notes to the consolidated financial
statements included in Item 8). Net sales from our licensed properties, excluding the impact of changes in deferred net revenue,
represented 65% and 70% of our total net sales in fiscal 2011 and fiscal 2010, respectively.
Excluding one-time items recorded in fiscal 2010 that netted to a charge of $5.3 million in venture partner expense, and excluding
24