THQ 2011 Annual Report Download - page 34

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the impact of changes in deferred net revenue and related costs, license amortization and royalties expense would have increased
3.5 points as a percent of net sales in fiscal 2011 compared to fiscal 2010. (See “Note 18 — Joint Venture and Settlement
Agreements” in the notes to the consolidated financial statements included in Item 8 for further discussion of the one-time items.)
This increase was primarily due to impairment charges of $30.3 million recorded in the three months ended December 31, 2010.
These impairments resulted from our reevaluation of sales expectations on kids movie-based licensed titles given the recent
significant industry-wide slowdown in sales of console titles aimed at children, particularly movie-based kids titles. Also
contributing to the increase in license amortization and royalties expense as a percent of net sales in fiscal 2011 compared to fiscal
2010 was a high effective license amortization rate on Megamind in fiscal 2011. These increases were partially offset by a change
in our sales mix towards more owned intellectual properties in fiscal 2011 compared to fiscal 2010.
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Our operating expenses were $281.4 million in fiscal 2011 and $282.7 million in fiscal 2010. Fiscal 2011 operating expenses
included an 18.3% increase in selling and marketing expenses compared to fiscal 2010, primarily due to the launch of uDraw.
These higher selling and marketing expenses were offset by decreases in product development, general and administrative, and
restructuring expenses.
Product Development (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$79,374
RIQHWVDOHV
11.9%
)LVFDO<HDU(QGHG
0DUFK
$87,233
RIQHWVDOHV
9.7%
FKDQJH
(9.0)%
Product development expense primarily consists of expenses incurred by internal development studios and payments made to
external development studios prior to products reaching technological feasibility. Once a product has reached technological
feasibility the related development costs are capitalized to software development. Product development expense decreased $7.9
million in fiscal 2011 compared to fiscal 2010. The decrease was primarily due to a shift in our mix of products under development
to a higher portion of technologically feasible products. The decrease was also due to a reduction in product development for the
legacy wireless platforms which excludes our continued investment in the development of products for use on smart-phones.
Selling and Marketing (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$156,075
RIQHWVDOHV
23.5%
)LVFDO<HDU(QGHG
0DUFK
$131,954
RIQHWVDOHV
14.7%
FKDQJH
18.3%
Selling and marketing expenses consist of advertising, promotional expenses, and personnel-related costs. Selling and marketing
expenses increased $24.1 million and by 8.8 points as a percent of net sales in fiscal 2011 compared to fiscal 2010. The increase
on a dollar basis was primarily due to promotional efforts to support the launch of uDraw and increased advertising support for
our catalog titles and our future releases. These increases were partially offset by lower personnel related costs.
The increase in selling and marketing expenses as a percent of net sales was primarily due to promotional efforts to support certain
titles that were released late in the fourth quarter of fiscal 2011 for which the related revenues were deferred. Also contributing
to the increase as a percent of net sales was:
• higher advertising support for UFC Undisputed 2010 in fiscal 2011 relative to its net sales compared to UFC 2009 Undisputed
in fiscal 2010,
• an increase in advertising support for our catalog titles in fiscal 2011 relative to their net sales compared to fiscal 2010, and
• an increase in advertising support for our future releases.
General and Administrative (amounts in thousands)
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0DUFK
$45,356
RIQHWVDOHV
6.8%
)LVFDO<HDU(QGHG
0DUFK
$57,879
RIQHWVDOHV
6.4%
FKDQJH
(21.6)%
General and administrative expenses consist of personnel and related expenses of executive and administrative staff and fees for
professional services such as legal and accounting. General and administrative expenses decreased in fiscal 2011 by $12.5 million,
25