Electronic Arts 2004 Annual Report Download - page 44

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In Ñscal 2004, cost of goods sold as a percentage of net revenue decreased by 5.9 percentage points to
37.3 percent from 43.2 percent for Ñscal 2003 primarily due to a 3.3 percent decrease in product costs and a
2.8 percent decrease in royalty rates.
The 3.3 percent decrease in product costs was primarily a result of:
䡵Lower co-publishing and distribution product costs, as a percentage of net revenue, due to a higher
mix of co-publishing titles relative to distribution titles in Ñscal 2004. Co-publishing titles generally
have higher gross margins than distribution titles. Lower co-publishing and distribution costs, as a
percentage of net revenue, increased total gross margin by 1.6 percent in Ñscal 2004.
䡵Lower average manufacturing costs increased total gross margin by 1.0 percent in Ñscal 2004.
䡵Lower period costs primarily due to improved inventory management in North America. Lower
period costs increased total gross margin by 0.5 percent in Ñscal 2004.
The 2.8 percent decrease in royalty rates was primarily the result of:
䡵Decreased third-party development royalties primarily due to a higher mix of titles developed
internally rather than externally in Ñscal 2004. SigniÑcant titles that were developed internally in
Ñscal 2004 for which a comparable title had been developed externally in Ñscal 2003 included James
Bond 007: Everything or Nothing and The Lord of the Rings; The Return of the King. We estimate
that lower development royalties increased gross margin by 1.9 percent, which was spread across
multiple platforms.
䡵Lower license royalties, as a percentage of net revenue, as Need for Speed Underground, our highest
grossing title of Ñscal 2004, had a signiÑcantly lower license royalty rate than Harry Potter and the
Chamber of Secrets, our highest grossing title of Ñscal 2003. Lower license royalties, as a
percentage of net revenue, increased total gross margin by 1.1 percent in Ñscal 2004.
We expect cost of goods sold as a percentage of net revenue to increase in Ñscal 2005 as a result of (1) a
gradual decrease in the average selling price due to the current-generation lifecycle, (2) overall product mix,
and (3) higher license royalties as a percentage of net revenue.
Marketing and Sales
Marketing and sales expenses consist of personnel-related costs and advertising, marketing and promotional
expenses, net of advertising expense reimbursements from third parties. In Ñscal 2003, marketing and sales
expense also included the amortization of the carriage fees payable for the distribution of our online games
on AOL, which we are no longer required to pay. See Note 7 of the Notes to Consolidated Financial
Statements, included in Item 8 hereof.
Marketing and sales expenses for Ñscal years 2004 and 2003 (in thousands):
March 31, % of Net March 31, % of Net
2004 Revenue 2003 Revenue $ Change % Change
$370,468 12.5% $332,453 13.4% $38,015 11.4%
Marketing and sales expenses increased by 11.4 percent in Ñscal 2004 as compared to Ñscal 2003 primarily due
to:
䡵An increase in our advertising, contract services and promotional expenses of $38.0 million as we
incrementally increased our advertising campaigns to support the release of new titles.
䡵A 13.6 percent increase in average headcount to further support the growth of our marketing and
sales functions worldwide, which resulted in an increase to personnel-related costs of approximately
$16.5 million.
The increase in marketing and sales expenses was partially oÅset by the discontinuance of carriage fee
payments to AOL, which resulted in a decrease of $17.9 million.
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