Electronic Arts 2006 Annual Report Download - page 116

recognized. Cost of goods sold for our online products consists primarily of data center and bandwidth
costs associated with hosting our web sites, credit card fees and royalties for use of third-party properties.
Cost of goods sold for our web site advertising business primarily consists of ad-serving costs.
Cost of goods sold for Ñscal years 2006 and 2005 were as follows (in millions):
March 31, % of Net March 31, % of Net
2006 Revenue 2005 Revenue % Change
$1,181 40.0% $1,197 38.2% (1.3%)
In Ñscal 2006, cost of goods sold as a percentage of total net revenue increased 1.8 percent from
38.2 percent to 40.0 percent. As a percentage of total net revenue, the increase was primarily due to an
increase in our license royalties associated with new license agreements for our football titles.
We expect cost of goods sold as a percentage of total net revenue to increase during Ñscal 2007 as
compared to Ñscal 2006. Although there can be no assurance, and our actual results could diÅer
materially, we expect gross margin pressure as a result of (1) a decrease in average selling prices of titles
for current-generation platforms, (2) higher license royalty rates, and (3) amortization of our newly-
acquired intangible assets.
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.
Marketing and sales expenses for Ñscal years 2006 and 2005 were as follows (in millions):
March 31, % of Net March 31, % of Net
2006 Revenue 2005 Revenue $ Change % Change
$431 15% $391 13% $40 10%
Marketing and sales expenses increased by $40 million, or 10 percent, in Ñscal 2006 as compared to Ñscal
2005. The increase was primarily due to (1) an increase of $30 million in our marketing and advertising,
promotional and related contracted service expenses as a result of increased advertising to support our
titles, and (2) an increase of $11 million in personnel-related costs resulting from an increase in facilities
and headcount-related expenses in support of our marketing and sales functions worldwide.
Marketing and sales expenses included vendor reimbursements for advertising expenses of $41 million and
$42 million in Ñscal 2006 and 2005, respectively.
We expect marketing and sales expenses to increase in absolute dollars in Ñscal 2007 primarily due to our
adoption of SFAS No. 123R, which will require us to expense stock-based compensation.
General and Administrative
General and administrative expenses consist of personnel and related expenses of executive and
administrative staÅ, fees for professional services such as legal and accounting, and allowances for doubtful
accounts.
General and administrative expenses for Ñscal years 2006 and 2005 were as follows (in millions):
March 31, % of Net March 31, % of Net
2006 Revenue 2005 Revenue $ Change % Change
$215 7% $221 7% $(6) (3%)
General and administrative expenses decreased by $6 million, or 3 percent, in Ñscal 2006 as compared to
Ñscal 2005 primarily due to a decrease in employee-related costs resulting from charges taken in
connection with certain employee-related litigation matters in Ñscal 2005. This decrease was partially oÅset
by an increase in personnel-related expenses due to an increase in headcount costs as well as an increase
in professional and contracted services to support our business.
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