THQ 2011 Annual Report Download - page 37

points in fiscal 2010. The decrease in cost of sales was primarily due to a decrease in software amortization and royalties expense
because of non-cash charges of $63.3 million in fiscal 2009 related to the write-off of capitalized software for games that were
cancelled as part of our fiscal 2009 business realignment and additional amortization expense in fiscal 2009 as a result of lower
projected gross sales on various titles. Additionally, the decrease in cost of sales as a percent of net sales in fiscal 2010 was due
to sales of games at higher average selling prices compared to fiscal 2009, led by the release of UFC 2009 Undisputed.
Cost of Sales—Product Costs (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$318,590
RIQHWVDOHV
35.4%
)LVFDO<HDU(QGHG
0DUFK
$338,882
RIQHWVDOHV
40.8%
FKDQJH
(6.0)%
Product costs primarily consist of direct manufacturing costs, including platform manufacturer license fees, net of manufacturer
volume rebates and discounts. In fiscal 2010, product costs as a percentage of net sales decreased 5.4 points compared to fiscal
2009.
The decrease as a percent of net sales in fiscal 2010 was primarily due to sales of UFC 2009 Undisputed on Xbox 360 and PS3,
at a premium price (e.g. MSRP of $59.99 in the United States). This title was the primary driver of our net sales in fiscal 2010
and had a higher average selling price compared to titles released in fiscal 2009.
Cost of Sales—Software Amortization and Royalties (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$196,956
RIQHWVDOHV
21.9%
)LVFDO<HDU(QGHG
0DUFK
$296,688
RIQHWVDOHV
35.7%
FKDQJH
(33.6)%
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 2010, software amortization and royalties as a percentage of net sales decreased 13.8 points
compared to fiscal 2009. The decrease was primarily due to higher amortization in fiscal 2009 due to non-cash charges of
$63.3 million related to the write-off of capitalized software for games that were cancelled as part of our fiscal 2009 business
realignment and additional amortization expense in fiscal 2009 as a result of lower projected gross sales on various titles. Also
contributing to the decrease was lower development costs on UFC 2009 Undisputed in relation to its total projected gross sales
compared to most titles recognized in fiscal 2009.
Cost of Sales—License Amortization and Royalties (amounts in thousands)
)LVFDO<HDU(QGHG
0DUFK
$110,503
RIQHWVDOHV
12.3%
)LVFDO<HDU(QGHG
0DUFK
$102,773
RIQHWVDOHV
12.4%
FKDQJH
7.5%
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 and fiscal 2009 is venture
partner expense totaling $14.5 million and $19.7 million, respectively (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 represented 69% and 66% of our total net sales in fiscal 2010 and fiscal 2009, respectively.
Excluding joint venture expense, license amortization and royalties expense as a percent of net sales in fiscal 2010 compared to
fiscal 2009 increased slightly, primarily due to the higher mix of sales from titles based on licensed properties.
Fiscal 2010 venture partner expense included a $29.5 million one-time charge and a $24.2 million one-time benefit. Excluding
these one-time items, venture partner expense recorded in fiscal 2010 would have been $9.2 million, which reflected a 40% lower
payment rate, compared to fiscal 2009. (See “Note 18 — Joint Venture and Settlement Agreements ” in the notes to the consolidated
financial statements included in Item 8 for further discussion of these one-time items.)
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