TAKE TWO INTERACTIVE SOFTWARE INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained herein, which are not historical facts including
statements relating to our proposed acquisition of Zynga Inc. (the
"Acquisition"), are considered forward-looking statements under federal
securities laws and may be identified by words such as "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "potential," "predicts,"
"projects," "seeks," "should," "will," or words of similar meaning and include,
but are not limited to, statements regarding the outlook for our future business
and financial performance. Such forward-looking statements are based on the
current beliefs of our management as well as assumptions made by and information
currently available to them, which are subject to inherent uncertainties, risks,
and changes in circumstances that are difficult to predict. Actual outcomes and
results may vary materially from these forward-looking statements based on a
variety of risks and uncertainties including the uncertainty of the impact of
the COVID-19 pandemic and measures taken in response thereto; the effect that
measures taken to mitigate the COVID-19 pandemic have on our operations,
including our ability to timely deliver our titles and other products, and on
the operations of our counterparties, including retailers, including digital
storefronts and platform partners, and distributors; the effects of the COVID-19
pandemic on consumer demand and the discretionary spending patterns of our
customers as the situation with the pandemic continues to evolve; the impact of
reductions in interest rates by the Federal Reserve and other central banks,
including on our short-term investment portfolio; the impact of potential
inflation; volatility in foreign currency exchange rates; the occurrence of any
event, change or other circumstances that could give rise to the termination of
the merger agreement for the acquisition; the inability to obtain our or Zynga's
respective stockholder approval or the failure to satisfy other conditions to
completion of the proposed acquisition, including receipt of regulatory
approvals, on a timely basis or at all; risks that the proposed acquisition
disrupts each company's current plans and operations; the diversion of the
attention of the respective management teams of Take-Two and Zynga from their
respective ongoing business operations; the ability of either Take-Two, Zynga or
the combined company to retain key personnel; the ability to realize the
benefits of the proposed acquisition, including Net Bookings opportunities and
cost synergies; the ability to successfully integrate Zynga's business with
Take-Two's business or to integrate the businesses within the anticipated
timeframe; the outcome of any legal proceedings that may be instituted against
Take-Two, Zynga or others related to the proposed acquisition; the amount of the
costs, fees, expenses and charges related to the proposed acquisition; other
risks included herein; as well as, but not limited to, the risks and
uncertainties discussed under the heading "  Risk Factors  " included in Part I,
Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31,
2021; and our other periodic filings with the Securities and Exchange
Commission. All forward-looking statements are qualified by these cautionary
statements and speak only as of the date they are made. We undertake no
obligation to update any forward-looking statement, whether as a result of new
information, future events, or otherwise.
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is provided in addition to the accompanying Condensed
Consolidated Financial Statements and notes to assist readers in understanding
our results of operations, financial condition, and cash flows. The following
discussion should be read in conjunction with the MD&A and our annual
consolidated financial statements and the notes thereto, included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2021.
Overview
Our Business
We are a leading developer, publisher, and marketer of interactive entertainment
for consumers around the globe. We develop and publish products principally
through Rockstar Games, 2K, Private Division, and T2 Mobile Games. Our products
are currently designed for console gaming systems, PC, and Mobile including
smartphones and tablets. We deliver our products through physical retail,
digital download, online platforms, and cloud streaming services.
We endeavor to be the most creative, innovative, and efficient company in our
industry. Our core strategy is to capitalize on the popularity of video games by
developing and publishing high-quality interactive entertainment experiences
across a range of genres. We focus on building compelling entertainment
franchises by publishing a select number of titles for which we can create
sequels and incremental revenue opportunities through virtual currency, add-on
content, and in-game purchases. Most of our intellectual property is internally
owned and developed, which we believe best positions us financially and
competitively. We have established a portfolio of proprietary software content
for the major hardware platforms in a wide range of genres, including action,
adventure, family/casual, role-playing, shooter, sports, and strategy, which we
distribute worldwide. We believe that our commitment to creativity and
innovation is a distinguishing strength, enabling us to differentiate our
products in the marketplace by combining advanced technology with compelling
storylines and characters that provide unique gameplay experiences for
consumers. We have created, acquired, or licensed a group of highly recognizable
brands to match the broad consumer demographics that we serve, ranging from
adults to children and game enthusiasts to casual gamers. Another cornerstone of
our strategy is to support the success of our products in the marketplace
through innovative marketing programs and global distribution on platforms and
through channels that are relevant to our target audience.
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Our revenue is primarily derived from the sale of internally developed software
titles and software titles developed by third parties. Operating margins are
dependent in part upon our ability to release new, commercially successful
software products and to manage effectively their development and marketing
costs. We have internal development studios located in Australia, Canada, China,
Czech Republic, Hungary, India, Serbia, Spain, South Korea, the United Kingdom,
and the United States.
Software titles published by our Rockstar Games label are primarily internally
developed. We expect Rockstar Games, our wholly-owned publisher of the Grand
Theft Auto, Max Payne, Midnight Club, Red Dead Redemption, and other popular
franchises, to continue to be a leader in the action/adventure product category
and to create groundbreaking entertainment. We believe that Rockstar Games has
established a uniquely original, popular cultural phenomenon with its Grand
Theft Auto series, which is the interactive entertainment industry's most iconic
and critically acclaimed brand and has sold-in over 365 million units. Our most
recent installment, Grand Theft Auto V, which was released in 2013, has sold-in
nearly 160 million units worldwide and includes access to Grand Theft Auto
Online. Red Dead Redemption 2, which has been a critical and commercial success
that set numerous entertainment industry records, has sold-in more than 40
million units worldwide. Rockstar Games is also well known for developing brands
in other genres, including the L.A. Noire, Bully, and Manhunt franchises.
Rockstar Games continues to expand on our established franchises by developing
sequels, offering downloadable episodes, and additional content. Rockstar Game's
titles are published across all key platforms, including mobile.
Our 2K label has published a variety of popular entertainment properties across
all key platforms and across a range of genres including shooter, action,
role-playing, strategy, sports and family/casual entertainment. We expect 2K to
continue to develop new, successful franchises in the future. 2K's internally
owned and developed franchises include the critically acclaimed, multi-million
unit selling BioShock, Mafia, Sid Meier's Civilization, and XCOM series. 2K also
publishes successful externally developed brands, such as Borderlands. 2K's
realistic sports simulation titles include our flagship NBA 2K series, which
continues to be the top-ranked NBA basketball video game, the WWE 2K
professional wrestling series, and PGA TOUR 2K. In March 2020, 2K announced a
multi-year partnership with the National Football League encompassing multiple
future video games that will be non-simulation football game experiences. 2K
also publishes mobile titles, such as WWE SuperCard.
Our Private Division label is dedicated to bringing titles from the industry's
leading creative talent to market and is the publisher and owner of Kerbal Space
Program and OlliOlli World. Kerbal Space Program 2 is planned for release in
fiscal year 2023. Private Division also released The Outer Worlds and Ancestors:
The Humankind Odyssey.
T2 Mobile Games includes Socialpoint, Playdots, and Nordeus, which publish
popular free-to-play mobile games that deliver high quality, deeply engaging
entertainment experiences and generates revenue from in-game sales and in-game
advertising. T2 Mobile Games' titles include Dragon City, Monster Legends, Two
Dots, and Top Eleven.
We acquired Nordeus Limited on June 1, 2021, for consideration having an
acquisition date fair value of $289.8 million, consisting of $132.9 million in
cash, the issuance of 0.5 million shares of our common stock, and a contingent
earn-out consideration arrangement that requires us to pay up to an aggregate of
$153.0 million in cash if Nordeus achieves certain performance measures over the
12- and 24-month periods following the closing (See   Note 15 - Acquisitions
of our Condensed Consolidated Financial Statements). Founded in 2010, Nordeus is
a mobile games company based in Belgrade, Serbia, best known for Top Eleven,
which has over 240 million registered users.
We are continuing our strategy in Asia to broaden the distribution of our
existing products and expand our online gaming presence, especially in China and
South Korea. 2K has a multi-year license from the NBA to offer an online version
of the NBA simulation game in China, Taiwan, South Korea, and Southeast Asia.
NBA 2K Online, our free-to-play NBA simulation game that is based on the console
edition of NBA 2K, which was co-developed by 2K and Tencent, is the top online
PC sports game in China with more than 55 million registered users. We have
released two iterations of NBA 2K Online and continue to enhance the title with
new features.
We have expanded our relationship with the NBA through the NBA 2K League. This
groundbreaking competitive gaming league is jointly owned by us and the NBA and
consists of teams operated by actual NBA franchises. The NBA 2K League follows a
professional sports league format: head-to-head competition throughout a regular
season, followed by a bracketed playoff system and a finals match-up. The NBA 2K
League's fourth season concluded in September 2021.
Trends and Factors Affecting our Business
Product Release Schedule.  Our financial results are affected by the timing of
our product releases and the commercial success of those titles. Our Grand Theft
Auto products in particular have historically accounted for a significant
portion of our revenue. Sales of Grand Theft Auto products generated 32.3% of
our net revenue for the nine months ended December 31, 2021. The timing of key
releases, such as our Grand Theft Auto product releases, may affect our
financial performance on a quarterly and annual basis.
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Economic Environment and Retailer Performance.  We continue to monitor the
evolution of the COVID-19 pandemic, including economic conditions that may
unfavorably affect our businesses, such as deteriorating consumer demand,
pricing pressure on our products, credit quality of our receivables, and foreign
currency exchange rates. The COVID-19 pandemic has affected and may continue to
affect our business operations, including our employees, customers, partners,
and communities, and there is substantial uncertainty in the nature and degree
of its continued effects over time. During fiscal year 2021, as in the final
quarter of fiscal year 2020, we noted a positive impact to our results that we
believe was partly due to increased consumer engagement with our products
because of the COVID-19 pandemic related business closures and movement
restrictions, such as "shelter in place" and "lockdown" orders, implemented
around the world, as well as the online accessibility and social nature of our
products. However, we cannot be certain as to the duration of these effects, the
impact of vaccination efforts or of the lifting of certain restrictions, and the
potential offsetting impacts of deteriorating economic conditions and decreased
consumer spending generally. While we expect that engagement trends will
continue to be higher than they were pre-pandemic, we expect a moderation of the
trends that have benefited our industry as the return to normalcy continues to
unfold.
Based on our concern for the health and safety of our teams, we have developed
and continue to develop plans to help mitigate the negative impacts of the
pandemic on our business, including transitioning the vast majority of our teams
to working from home. We are taking a prudent approach relating to our return to
office cadence and planning. Some of our offices are open, and we plan for the
majority of our offices to reopen in the coming months. Given the evolving
dynamics of the COVID-19 pandemic, we continue to adhere to safety standards in
the planning and implementation of our return to office. To date, our plans have
resulted in minimal disruption. However, despite largely positive outcomes to
date, these efforts may ultimately not be effective, and a protracted economic
downturn may limit the effectiveness of our mitigation efforts. Any of these
considerations described above could cause or contribute to the risks described
under the heading "  Risk Factors  " included in Part I, Item 1A of our Annual
Report on Form 10-K for the fiscal year ended March 31, 2021, and could
materially adversely affect our business, financial condition, results of
operations, or stock price. Therefore, the effects of the COVID-19 pandemic will
not be fully reflected in our financial results until future periods, and, at
this time, we are not able to predict its ultimate impact on our business.
Additionally, our business is dependent upon a limited number of customers that
account for a significant portion of our revenue. Our five largest customers
accounted for 79.2% and 77.4% of net revenue during the nine months ended
December 31, 2021 and 2020, respectively. As of December 31, 2021 and March 31,
2021, our five largest customers comprised 74.7% and 77.6% of our gross accounts
receivable, respectively, with our significant customers (those that
individually comprised more than 10% of our gross accounts receivable balance)
accounting for 59.1% and 69.2% of such balance at December 31, 2021 and
March 31, 2021, respectively. We had two customers who accounted for 41.9% and
17.2%, respectively, of our gross accounts receivable as of December 31, 2021
and two customers who accounted for 50.4% and 18.8%, respectively, of our gross
accounts receivable as of March 31, 2021. The economic environment has affected
our customers in the past and may do so in the future, including as a result of
the COVID-19 pandemic. Bankruptcies or consolidations of our large retail
customers could adversely affect our business, due to uncollectible accounts
receivables and the concentration of purchasing power among the remaining large
retailers. The COVID-19 pandemic may lead to increased consolidation as larger,
better capitalized competitors will be in a stronger position to withstand
prolonged periods of economic downturn and sustain their business through the
financial volatility. Certain of our large customers sell used copies of our
games, which may negatively affect our business by reducing demand for new
copies of our games. While the online and downloadable content that we now offer
for certain of our titles may serve to reduce used game sales, we expect used
game sales to continue to adversely affect our business.
Hardware Platforms.  We derive most of our revenue from the sale of products
made for video game consoles manufactured by third parties, which comprised
72.4% of our net revenue by product platform for the nine months ended December
31, 2021. The success of our business is dependent on consumer acceptance of
these platforms and the continued growth in their installed base. When new
hardware platforms are introduced, such as those released in November 2020 by
Sony and Microsoft, demand for interactive entertainment playable on older
platforms typically declines, which may negatively affect our business during
the market transition to the new consoles. The new Sony and Microsoft consoles
provide "backwards compatibility" (i.e., the ability to play games for the
previous generation of consoles), which could mitigate the risk of such a
decline. However, we cannot be certain how backwards compatibility will affect
demand for our products. Further, the COVID-19 pandemic or other events have
affected and may continue to affect the availability of these new consoles,
which may also affect demand. We manage our product delivery on each current and
future platform in a manner we believe to be most effective to maximize our
revenue opportunities and achieve the desired return on our investments in
product development. Accordingly, our strategy is to focus our development
efforts on a select number of the highest quality titles for these platforms,
while also expanding our offerings for other platforms such as tablets,
smartphones, and online games.
Online Content and Digital Distribution.  The interactive entertainment software
industry is delivering a growing amount of content through digital online
delivery methods. We provide a variety of online delivered products and
offerings.
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Virtually all of our titles that are available through retailers as packaged
goods products are also available through direct digital download (from digital
storefronts we own and others owned by third parties) as well as a large
selection of our catalog titles. In addition, we aim to drive ongoing engagement
and incremental revenue from recurrent consumer spending on our titles through
virtual currency, add-on content, and in-game purchases. We also publish an
expanding variety of titles for tablets and smartphones, which are delivered to
consumers through digital download. As disclosed in our "Results of Operations,"
below, net revenue from digital online channels comprised 89.9% of our net
revenue for the nine months ended December 31, 2021. We expect online delivery
of games and game offerings to continue to grow and to continue to be the
primary part of our business over the long term.
Recent Developments.
Potential Acquisition.  On January 9, 2022, we entered into a definitive merger
agreement to acquire Zynga, a leading developer of mobile games. Under the terms
and subject to the terms of the merger agreement, Zynga stockholders will
receive $3.50 in cash and a number of shares of our common stock for each share
of Zynga at the closing. The transaction is valued at $9.86 per share of Zynga
common stock equal to the exchange ration (ranging from 0.0350 to 0.0406, as
further described below)based on the market closing as of January 7, 2022,
implying an enterprise value of $12.7 billion. The transaction includes a collar
mechanism on the equity consideration, so that if our 20-day volume weighted
average price ("VWAP") ending on the third trading day prior to closing is in a
range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver
total consideration of $9.86 per Zynga share. If the VWAP exceeds the higher end
of that range the exchange ratio would be 0.0350 per share and if the VWAP falls
below the lower end of that range, the exchange ratio would be 0.0406 per share.
As part of the transaction, we have received aggregate committed financing of
$2.7 billion from J.P. Morgan and certain other lenders, and we intend to fund
the cash component of the transaction through a combination of cash from our
balance sheet as well as proceeds of new debt issuance.

The transaction, which is expected to close during our first quarter of fiscal
year 2023 ended June 30, 2022, is subject to approval by Take-Two and Zynga
stockholders, the receipt of required regulatory approvals, and other customary
closing conditions, including antitrust clearances.
Content Release Highlights
During fiscal year 2022, 2K released NBA 2K22, Private Division released Hades
physically on consoles and OlliOlli World, and Rockstar released Grand Theft
Auto: The Trilogy - The Definitive Edition.
To date we have announced that, during the remainder of fiscal year 2022,
Rockstar Games will release Grand Theft Auto V and a standalone version of Grand
Theft Auto Online for the PS5 and Xbox Series X|S, and 2K will release WWE 2K22
and Tiny Tina's Wonderlands.
In addition, throughout the year, we expect to continue to deliver new content
for our franchises. We will also continue to invest in opportunities that we
believe will enhance and scale our business and have the potential to drive
growth over the long-term.
Critical Accounting Policies and Estimates
Our most critical accounting policies, which are those that require significant
judgment, include revenue recognition; price protection and allowances for
returns; capitalization and recognition of software development costs and
licenses; fair value estimates including valuation of goodwill, intangible
assets, and long-lived assets; valuation and recognition of stock-based
compensation; and income taxes. In-depth descriptions of these can be found in
our   Annual Report on Form 10-K   for the fiscal year ended March 31, 2021.
Recently Adopted and Recently Issued Accounting Pronouncements
See   Note 1 - Basis of Presentation and Significant Accounting Policies   for
further discussion.
Operating Metric

Net Bookings

We monitor Net Bookings as a key operating metric in evaluating the performance
of our business. Net Bookings is defined as the net amount of products and
services sold digitally or sold-in physically during the period and includes
licensing fees, merchandise, in-game advertising, strategy guides, and publisher
incentives. Net Bookings were as follows:
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                                                  Three Months Ended December 31,                                                           Nine Months Ended December 31,
                                                                      Increase/              % Increase/                                                       Increase/             % Increase/
                               2021                  2020             (decrease)             (decrease)                 2021                 2020             (decrease)             (decrease)
Net Bookings            $    866,123             $ 814,282          $    51,841                       6.4  %       $ 2,562,405          $ 2,768,066          $ (205,661)                     (7.4) %


For the three months ended December 31, 2021, Net Bookings increased by $51.8
million as compared to the prior year period due primarily to an increase in Net
Bookings from our Grand Theft Auto franchise, including Grand Theft Auto: The
Trilogy - The Definitive Edition, which released in November 2021, and Top
Eleven, which was part of the Nordeus acquisition in June 2021. These increases
were partially offset by a decrease in Net Bookings from our Mafia and PGA TOUR
2K franchises, The Outer Worlds, and our WWE 2K franchise.
For the nine months ended December 31, 2021, Net Bookings decreased by
$205.7 million as compared to the prior year period due primarily to a decrease
in Net Bookings from our NBA 2K, PGA TOUR 2K, and Mafia franchises, The Outer
Worlds, and our WWE 2K, our Red Dead, Borderlands franchises. These decreases
were partially offset by an increase in Net Bookings from Top Eleven and Two
Dots.
Results of Operations
The following tables set forth, for the periods indicated, our Condensed
Consolidated Statements of Operations, net revenue by geographic region, net
revenue by platform, net revenue by distribution channel, and net revenue by
content type:
                                                      Three Months Ended December 31,                                                  Nine Months Ended December 31,
(thousands of dollars)                            2021                                  2020                                      2021                                      2020
Net revenue                        $       903,252           100.0  %       $ 860,889            100.0  %       $     2,574,796                 100.0  %       $ 2,533,341           100.0  %
Cost of goods sold                         350,379            38.8  %         346,244             40.2  %             1,136,776                  44.2  %         1,255,438            49.6  %
Gross profit                               552,873            61.2  %         514,645             59.8  %             1,438,020                  55.8  %         1,277,903            50.4  %
Selling and marketing                      135,286            15.0  %         139,906             16.3  %               375,159                  14.6  %           338,376            13.4  %
General and administrative                 130,706            14.5  %          98,624             11.5  %               362,484                  14.1  %           292,230            11.5  %
Research and development                   116,656            12.9  %          86,428             10.0  %               310,458                  12.1  %           233,752             9.2  %
Depreciation and amortization               15,996             1.8  %          14,007              1.6  %                44,642                   1.7  %            40,116             1.6  %
Business reorganization                        123               -  %            (377)               -  %                   546                     -  %              (138)              -  %
Total operating expenses                   398,767            44.1  %         338,588             39.3  %             1,093,289                  42.5  %           904,336            35.7  %
Income from operations                     154,106            17.1  %         176,057             20.5  %               344,731                  13.4  %           373,567            14.7  %
Interest and other, net                     (5,629)           (0.6) %           1,098              0.1  %                (7,228)                 (0.3) %            12,022             0.5  %
Gain on long-term investments, net           3,662             0.4  %          39,291              4.6  %                 6,054                   0.2  %            38,636             1.5  %
Income before income taxes                 152,139            16.8  %         216,446             25.1  %               343,557                  13.3  %           424,225            16.7  %
Provision for income taxes                   7,642             0.8  %          34,198              4.0  %                36,507                   1.4  %            54,151             2.1  %
Net income                         $       144,497            16.0  %       $ 182,248             21.2  %       $       307,050                  11.9  %       $   370,074            14.6  %


                                                 Three Months Ended December 31,                                                 Nine Months Ended December 31,
                                             2021                                  2020                                    2021                                      2020
Net revenue by geographic
region:
United States                 $       534,869            59.2  %       $ 528,324            61.4  %       $     1,542,975                 59.9  %       $ 1,502,397            59.3  %
International                         368,383            40.8  %         332,565            38.6  %             1,031,821                 40.1  %         1,030,944            40.7  %
Net revenue by platform:
Console                       $       665,535            73.7  %       $ 656,079            76.2  %       $     1,864,058                 72.4  %       $ 1,909,033            75.4  %
PC and other                          133,907            14.8  %         135,565            15.7  %               409,554                 15.9  %           439,511            17.3  %
Mobile                                103,810            11.5  %          69,245             8.0  %               301,184                 11.7  %           184,797             7.3  %
Net revenue by distribution
channel:
Digital online                $       795,715            88.1  %       $ 743,141            86.3  %       $     2,315,618                 89.9  %       $ 2,204,401            87.0  %
Physical retail and other             107,537            11.9  %         117,748            13.7  %               259,178                 10.1  %           328,940            13.0  %
Net revenue by content:
Recurrent consumer spending   $       547,788            60.6  %       $ 552,320            64.2  %       $     1,683,703                 65.4  %       $ 1,569,070            61.9  %
Full game and other                   355,464            39.4  %         308,569            35.8  %               891,093                 34.6  %           964,271            38.1  %


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Three Months Ended December 31, 2021 Compared to December 31, 2020
                                                                                                               Increase/              % Increase/
(thousands of dollars)                 2021                %                2020                %              (decrease)             (decrease)
Net revenue                        $ 903,252             100.0  %       $ 860,889             100.0  %       $    42,363                       4.9  %
Internal royalties                   172,766              19.1  %         137,657              16.0  %            35,109                      25.5  %
Software development costs and
royalties (1)                         43,057               4.8  %          83,514               9.7  %           (40,457)                    (48.4) %
Licenses                              61,507               6.8  %          57,917               6.7  %             3,590                       6.2  %
Product costs                         73,049               8.1  %          67,156               7.8  %             5,893                       8.8  %
Cost of goods sold                   350,379              38.8  %         346,244              40.2  %             4,135                       1.2  %
Gross profit                       $ 552,873              61.2  %       $ 514,645              59.8  %       $    38,228                       7.4  %

(1) Includes $9,445 and $13,100 of stock-based compensation expense in 2021 and 2020, respectively, in software development costs and license fees.

For the three months ended December 31, 2021, net revenue increased by $42.4
million as compared to the prior year period. The increase was due to an
increase in net revenue of (i) $71.6 million from our Grand Theft Auto
franchise, including Grand Theft Auto: The Trilogy - The Definitive Edition,
which released in November 2021, (ii) $16.7 million from Top Eleven, which was
part of the Nordeus acquisition in June 2021, and (iii) $12.0 million from Two
Dots. These increases were partially offset by a decrease in net revenue of (i)
$18.0 million from our Mafia franchise, (ii) $13.2 million from our NBA 2K
franchise, (iii) $10.7 million from our PGA TOUR 2K franchise, and (iv) $10.2
million from The Outer Worlds.

Net revenue from console games increased by $9.5 million and accounted for 73.7%
of our total net revenue for the three months ended December 31, 2021, as
compared to 76.2% for the prior year period. The increase was due to an increase
in net revenue from our Grand Theft Auto franchise, partially offset by a
decrease in net revenue from our NBA 2K, Mafia, PGA TOUR 2K, WWE 2K,
Borderlands, and Red Dead franchises, The Outer Worlds, and our BioShock
franchise. Net revenue from PC and other decreased by $1.7 million and accounted
for 14.8% of our total net revenue for the three months ended December 31, 2021,
as compared to 15.7% for the prior year period. The decrease was due to a
decrease in net revenue from The Outer Worlds and our Civilization and Mafia
franchises, partially offset by an increase in net revenue from our Red Dead and
NBA 2K franchises. Net revenue from mobile increased by $34.6 million and
accounted for 11.5% of our total net revenue for three months ended December 31,
2021, as compared to 8.0% for the prior year period. The increase was due
primarily to an increase in net revenue from Top Eleven, Two Dots, and our NBA
2K franchise.

Net revenue from digital online channels increased by $52.6 million and
accounted for 88.1% of our total net revenue for the three months ended December
31, 2021, as compared to 86.3% for the prior year period. The increase was due
to an increase in net revenue from our Grand Theft Auto franchise, Top Eleven,
Two Dots, and our Red Dead franchise, partially offset by a decrease in net
revenue from our Mafia franchise, The Outer Worlds, and our PGA TOUR 2K
franchise. Net revenue from physical retail and other channels decreased by
$10.2 million and accounted for 11.9% of our total net revenue for the three
months ended December 31, 2021, as compared to 13.7% for the same period in the
prior year period. The decrease in net revenue from physical retail and other
channels was due primarily to a decrease in net revenue from our NBA 2K, Mafia,
PGA TOUR 2K, WWE 2K, and Red Dead franchises, partially offset by an increase in
net revenue from our Grand Theft Auto franchise.

Recurrent consumer spending is generated from ongoing consumer engagement and
includes revenue from virtual currency, add-on content, and in-game purchases.
Net revenue from recurrent consumer spending decreased by $4.5 million and
accounted for 60.6% of net revenue for the three months ended December 31, 2021,
as compared to 64.2% of net revenue for the prior year period. The decrease in
net revenue from recurrent consumer spending is due primarily to a decrease in
net revenue from our NBA 2K, Grand Theft Auto, and Borderlands franchises,
Monster Legends, and our Civilization franchise, partially offset by an increase
in net revenue from Top Eleven and Two Dots. Net revenue from full game and
other increased by $46.9 million and accounted for 39.4% of net revenue for the
three months ended December 31, 2021 as compared to 35.8% of net revenue for the
prior year period. The increase in net revenue from full game and other was due
primarily to an increase in net revenue from our Grand Theft Auto franchise,
partially offset by a decrease in net revenue from our Mafia and PGA TOUR 2K
franchises, and The Outer Worlds.
Gross profit as a percentage of net revenue for the three months ended December
31, 2021 was 61.2% as compared to 59.8% for the prior year period. The increase
in gross profit as a percentage of net revenue was due to lower development
royalties and lower amortization of capitalized software development cost, both
due primarily to the timing of releases, partially offset by higher internal
royalties due to the timing of when royalties are earned.
Net revenue earned outside of the United States increased by $35.8 million and
accounted for 40.8% of our total net revenue for the three months ended December
31, 2021, as compared to 38.6% in the prior year period. The increase in net
revenue outside of the United States was due to an increase in net revenue from
our Grand Theft Auto franchise and Top Eleven, partially offset by a decrease in
net revenue from our Mafia franchise. Changes in foreign currency exchange rates
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increased net revenue by $4.1 million and increased gross profit by $3.0 million
for the three months ended December 31, 2021 as compared to the prior year
period.
Operating Expenses
                                                             % of net                                % of net            Increase/             % Increase/
(thousands of dollars)                     2021              revenue               2020              revenue             (decrease)             (decrease)
Selling and marketing                  $ 135,286                 15.0  %       $ 139,906                 16.3  %       $    (4,620)                    (3.3) %
General and administrative               130,706                 14.5  %          98,624                 11.5  %            32,082                     32.5  %
Research and development                 116,656                 12.9  %          86,428                 10.0  %            30,228                     35.0  %
Depreciation and amortization             15,996                  1.8  %          14,007                  1.6  %             1,989                     14.2  %
Business reorganization                      123                    -  %            (377)                   -  %               500                   (132.6) %
Total operating expenses(1)            $ 398,767                 44.1  %       $ 338,588                 39.3  %       $    60,179                     17.8  %


(1) Includes stock-based compensation expense, which was allocated as follows
(in thousands):
                                2021         2020
Selling and marketing         $ 7,189      $ 4,131
General and administrative     16,478       15,538
Research and development       13,232        8,347


Changes in foreign currency exchange rates increased total operating expenses by
$3.6 million for the three months ended December 31, 2021, as compared to the
prior year period.
Selling and marketing
Selling and marketing expenses decreased by $4.6 million for the three months
ended December 31, 2021, as compared to the prior year period, due primarily to
(i) lower overall marketing expense for our NBA 2K franchise, Red Dead Online,
and Borderlands 3, partially offset by higher overall marketing expenses for Top
Eleven, Grand Theft Auto: The Trilogy - The Definitive Edition, and Grand Theft
Auto Online, and (ii) lower customer service expenses. These decreases were
partially offset by an increase in personnel expenses for additional headcount.
General and administrative
General and administrative expenses increased by $32.1 million for the three
months ended December 31, 2021, as compared to the prior year period, due
primarily to increases in (i) personnel expenses for additional headcount, (ii)
the fair value of the contingent earn-out liability related to our acquisition
of Nordeus (refer to   Note 15- Acquisitions  ), (iii) rent expenses for
additional locations and lease renewals, and (iv) IT expenses for cloud-based
services.
General and administrative expenses for the three months ended December 31, 2021
and 2020 included occupancy expense (primarily rent, utilities and office
expenses) of $9.3 million and $6.8 million, respectively, related to our
development studios.
Research and development
Research and development expenses increased by $30.2 million for the three
months ended December 31, 2021, as compared to the prior year period, due
primarily to increases in personnel expenses due to increased headcount,
including related to our recent acquisitions.
Depreciation and Amortization
Depreciation and amortization expenses increased by $2.0 million for the three
months ended December 31, 2021 as compared to the prior year period, due
primarily to IT infrastructure.
Business reorganization
For the three months ended December 31, 2021, business reorganization expense
increased by $0.5 million as compared to the prior year period and was not
material.
Interest and other, net
Interest and other, net was expense of $5.6 million for the three months ended
December 31, 2021, as compared to income of $1.1 million for the prior year
period. The change was due primarily to (i) foreign currency losses in the
current year period as compared to gains in the prior year period and (ii) lower
interest income on our available-for-sale securities.
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Gain on long-term investments, net
Gain on long-term investments, net decreased by $35.6 million for the three
months ended December 31, 2021 as compared to the prior year period. The
decrease was due primarily to the sale of a portion of one of our investments
and the resulting change in value based on the observable price in the prior
year period, partially offset by changes in value based on the observable price
changes of our long-term investments in the current year period.
Provision for Income Taxes
The provision for income taxes for the three months ended December 31, 2021 is
based on our projected annual effective tax rate for fiscal year 2022, adjusted
for specific items that are required to be recognized in the period in which
they are incurred. The provision for income taxes was $7.6 million for the three
months ended December 31, 2021 as compared to $34.2 million for the prior year
period.

When compared to the statutory rate of 21.0%, the effective tax rate of 5.0% for
the three months ended December 31, 2021 was due primarily to excess tax
benefits of $9.9 million on employee stock-based compensation, tax benefits of
$9.7 million from tax credits, and a tax benefit of $7.2 million related to
geographic mix of earnings.
In the prior year period, when compared to our statutory rate of 21%, the
effective tax rate of 15.8% for the three months ended December 31, 2020 was due
primarily to a tax benefit of $7.1 million from tax credits and excess tax
benefits of $3.4 million from employee stock-based compensation offset by the
geographic mix of earnings.
The change in the effective tax rate, when compared to the prior year period's
effective tax rate, is due primarily to increases in tax benefits from tax
credits, excess tax benefits from employee stock-based compensation the current
period, and by the geographic mix of earnings.
The accounting for share-based compensation will increase or decrease our
effective tax rate based on the difference between our share-based compensation
expense and the deductions taken on our tax return, which depends on the stock
price at the time of the employee award vesting. Since we recognize excess tax
benefits on a discrete basis, we anticipate that our effective tax rate will
vary from quarter to quarter depending on our stock price in each period.
We anticipate that additional excess tax benefits or shortfalls from employee
stock compensation, tax credits, and changes in our geographic mix of earnings
could have a significant impact on our effective tax rate in the future. In
addition, we are regularly examined by domestic and foreign taxing authorities.
Examinations may result in tax assessments in excess of amounts claimed and the
payment of additional taxes. We believe our tax positions comply with applicable
tax law, and that we have adequately provided for reasonably foreseeable tax
assessments. It is possible that settlement of audits and/or the expiration of
the statute of limitations could have an impact on our effective tax rate in
future periods.
On March 11, 2021, the American Rescue Plan Act of 2021 (the "ARPA") was
enacted. The ARPA, among other things, includes provisions to expand the IRC
Section 162(m) disallowance for deduction of certain compensation paid by
publicly held corporations. Effective for tax years starting after December 31,
2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover
the next five most highly compensated employees. The ARPA did not have a
material impact on our Condensed Consolidated Financial Statements for the three
months ended December 31, 2021. The Company continues to evaluate the potential
impact the ARPA may have on its operations and consolidated financial statements
in future periods.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic
Security Act (the "CARES Act"), which provides numerous tax and other stimulus
measures that generally support the U.S. economy. The CARES Act did not have a
material impact on our Condensed Consolidated Financial Statements.
Net income and earnings per share
For the three months ended December 31, 2021, net income was $144.5 million, as
compared to $182.2 million in the prior year period. Diluted earnings per share
for the three months ended December 31, 2021 was $1.24, as compared to diluted
earnings per share of $1.57 in the prior year period. Diluted weighted average
shares of 116.7 million were 0.6 million shares higher as compared to the prior
year period, due primarily to normal stock compensation activity, including
vests as well as grants and forfeitures in the prior year being fully
outstanding in the current year period, partially offset by shares repurchases.
See   Note 11 - Earnings Per Share   to our Condensed Consolidated Financial
Statements for additional information.
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Nine Months Ended December 31, 2021 Compared to December 31, 2020
                                                                                                                   Increase/             % Increase/
(thousands of dollars)                 2021                 %                  2020                 %             (decrease)              (decrease)
Net revenue                       $ 2,574,796              100.0  %       $ 2,533,341             100.0  %       $   41,455                        1.6  %
Internal royalties                    477,730               18.6  %           479,524              18.9  %           (1,794)                      (0.4) %
Software development costs and
royalties (1)                         274,963               10.7  %           374,332              14.8  %          (99,369)                     (26.5) %
Licenses                              198,041                7.7  %           206,880               8.2  %           (8,839)                      (4.3) %
Product costs                         186,042                7.2  %           194,702               7.7  %           (8,660)                      (4.4) %
Cost of goods sold                  1,136,776               44.2  %         1,255,438              49.6  %         (118,662)                      (9.5) %
Gross profit                      $ 1,438,020               55.8  %       $ 1,277,903              50.4  %       $  160,117                       12.5  %

(1) Includes $31,831 and $61,529 of stock-based compensation expense in 2021 and 2020, respectively, in software development costs and license fees.

For the nine months ended December 31, 2021, net revenue increased by $41.5
million as compared to the prior year period. The increase was due to an
increase in net revenue of (i) $97.9 million from our Grand Theft Auto
franchise, including Grand Theft Auto: The Trilogy - The Definitive Edition
which released in November 2021, (ii) $66.5 million from Two Dots, (iii) $48.9
million from our NBA 2K franchise, and (iv) $28.8 million from Top Eleven, which
was part of the Nordeus acquisition in June 2021. These increases were partially
offset by a decrease in net revenue of (i) $45.9 million from our Mafia
franchise, (ii) $35.7 million from our Red Dead franchise, (iii) $34.8 million
from our Borderlands franchise, (iv) $30.4 million from our PGA TOUR 2K
franchise, (v) $17.1 million from our Civilization franchise, (vi) $14.1 million
from our WWE 2K franchise, (vii) $11.6 million from The Outer Worlds, and (viii)
$7.6 million from our BioShock franchise.

Net revenue from console games decreased by $45.0 million and accounted for
72.4% of our total net revenue for the nine months ended December 31, 2021, as
compared to 75.4% for the prior year period. The decrease was due to a decrease
in net revenue from our Mafia, Borderlands, Red Dead, PGA TOUR 2K, WWE 2K, and
BioShock franchises, and The Outer Worlds, partially offset by an increase in
net revenue from our Grand Theft Auto and NBA 2K franchises. Net revenue from PC
and other decreased by $30.0 million and accounted for 15.9% of our total net
revenue for the nine months ended December 31, 2021, as compared to 17.3% for
the prior year period. The decrease was due to a decrease in net revenue from
our Grand Theft Auto, Civilization, Mafia, and XCOM franchises, and The Outer
Worlds, partially offset by an increase in net revenue from our NBA 2K
franchise. Net revenue from mobile increased by $116.4 million and accounted for
11.7% of our total net revenue for nine months ended December 31, 2021, as
compared to 7.3% for the prior year period. The increase was due primarily to an
increase in net revenue from Two Dots, Top Eleven, and our NBA 2K franchise.

Net revenue from digital online channels increased by $111.2 million and
accounted for 89.9% of our total net revenue for the nine months ended December
31, 2021, as compared to 87.0% for the prior year period. The increase was due
to an increase in net revenue from our Grand Theft Auto franchise, Two Dots, our
NBA 2K franchise, and Top Eleven, partially offset by a decrease in net revenue
from our Mafia, Red Dead, Borderlands, PGA TOUR 2K, and Civilization franchises.
Net revenue from physical retail and other channels decreased by $69.8
million and accounted for 10.1% of our total net revenue for the nine months
ended December 31, 2021, as compared to 13.0% for the prior year period. The
decrease was due to a decrease in net revenue from our Mafia, Borderlands, Red
Dead, PGA TOUR 2K, WWE 2K, and NBA 2K franchises, partially offset by an
increase in net revenue from our Grand Theft Auto franchise.

Recurrent consumer spending is generated from ongoing consumer engagement and
includes revenue from virtual currency, add-on content, and in-game purchases.
Net revenue from recurrent consumer spending increased by $114.6 million and
accounted for 65.4% of net revenue for the nine months ended December 31, 2021,
as compared to 61.9% of net revenue for the prior year period. The increase was
due to an increase in net revenue from Two Dots, our NBA 2K franchise, our Grand
Theft Auto franchise, and Top Eleven, partially offset by a decrease in net
revenue from our Borderlands and Red Dead franchises. Net revenue from full game
and other decreased by $73.2 million and accounted for 34.6% of net revenue for
the nine months ended December 31, 2021 as compared to 38.1% of net revenue for
the prior year period. The decrease was due to a decrease in net revenue from
our Mafia, PGA TOUR 2K, Red Dead, and WWE 2K franchises, and The Outer Worlds,
partially offset by an increase in net revenue from our Grand Theft Auto
franchise.
Gross profit as a percentage of net revenue for the nine months ended December
31, 2021 was 55.8% as compared to 50.4% for the prior year period. The increase
in gross profit as a percentage of net revenue was due to lower development
royalties and lower amortization of capitalized software development costs, both
due primarily to the timing of releases. Offsetting the increase in gross profit
as a percentage of net revenue were impairments recognized against some of our
capitalized software balances for nine months ended December 31, 2021. (See

Note 8 – Software development costs and licenses of our condensed consolidated financial statements).

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Net revenue earned outside of the United States increased by $0.9 million, and
accounted for 40.1% of our total net revenue for the nine months ended December
31, 2021, as compared to 40.7% in the prior year period. The increase in net
revenue outside of the United States was due to an increase in net revenue from
Top Eleven, our Grand Theft Auto franchise, Two Dots, and our NBA 2K franchise,
partially offset by a decrease in net revenue from our Mafia, Red Dead,
Borderlands, and PGA TOUR 2K franchises, and The Outer Worlds. Changes in
foreign currency exchange rates increased net revenue by $6.4 million and
increased gross profit by $4.7 million for the nine months ended December 31,
2021 as compared to the prior year period.
Operating Expenses
                                                                 % of net                                % of net            Increase/             % Increase/
(thousands of dollars)                        2021                revenue               2020              revenue           (decrease)              (decrease)
Selling and marketing                    $   375,159                  14.6  %       $ 338,376                13.4  %       $   36,783                       10.9  %
General and administrative                   362,484                  14.1  %         292,230                11.5  %           70,254                       24.0  %
Research and development                     310,458                  12.1  %         233,752                 9.2  %           76,706                       32.8  %
Depreciation and amortization                 44,642                   1.7  %          40,116                 1.6  %            4,526                       11.3  %
Business reorganization                          546                     -  %            (138)                  -  %              684                     (495.7) %
Total operating expenses (1)             $ 1,093,289                  42.5  %       $ 904,336                35.7  %       $  188,953                   

20.9%


(1) Includes stock-based compensation expense, which was allocated as follows
(in thousands):
                                 2021          2020
Selling and marketing         $ 22,356      $ 13,298
General and administrative      50,341        42,568
Research and development        38,012        22,400


Changes in foreign currency exchange rates increased total operating expenses by
$4.3 million for the nine months ended December 31, 2021, as compared to the
prior year period.
Selling and marketing
Selling and marketing expenses increased by $36.8 million for the nine months
ended December 31, 2021, as compared to the prior year period, due primarily to
(i) higher overall marketing expenses for Two Dots, Top Eleven, Grand Theft Auto
Online, and Grand Theft Auto: The Trilogy - The Definitive Edition, partially
offset by lower overall marketing expenses for Borderlands 3, our Mafia
franchise, Red Dead Online, and our NBA 2K franchise and (ii) higher personnel
expenses for additional headcount. These increases were partially offset by a
decrease in customer service expenses.
General and administrative
General and administrative expenses increased by $70.3 million for the nine
months ended December 31, 2021, as compared to the prior year period, due to
increases in (i) personnel expenses for additional headcount, (ii) the fair
value of the contingent earn-out liability related to our acquisition of Nordeus
(refer to   Note 15 - Acquisitions  ), (iii) IT expenses for cloud-based
services, (iv) transfer tax expense related to our acquisition of Nordeus, and
(iv) professional fees related to acquisitions. These increases were partially
offset by a decrease in charitable contributions in the prior year period
related to our COVID-19 response and relief efforts.
General and administrative expenses for the nine months ended December 31, 2021
and 2020 included occupancy expense (primarily rent, utilities and office
expenses) of $25.6 million and $20.5 million, respectively, related to our
development studios.
Research and development
Research and development expenses increased by $76.7 million for the nine months
ended December 31, 2021, as compared to the prior year period, due primarily to
increases in (i) personnel expenses for higher headcount, including related to
our recent acquisitions, (ii) IT expenses for cloud-based services, and (iii)
production and development expenses for titles that have not yet established
technological feasibility.
Depreciation and Amortization
Depreciation and amortization expenses for the nine months ended December 31,
2021 increased by $4.5 million, as compared to the prior year period, due
primarily to IT infrastructure.
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Business reorganization
During the nine months ended December 31, 2021, as compared to the prior year
period, business reorganization expense increased $0.7 million and was not
material.
Interest and other, net
Interest and other, net was expense of $7.2 million for the nine months ended
December 31, 2021, as compared to income of $12.0 million for the prior year
period. The change was due primarily to (i) foreign currency losses in the
current year period as compared to gains in the prior year period and (ii) lower
interest income on our investments due to lower rates.

Gain on long-term investments, net
Gain on long-term investments, net decreased by $32.6 million for the nine
months ended December 31, 2021 as compared to the prior year period, the
decrease was due primarily to the sale of a portion of one of our investments
and the resulting change in value based on the observable price in the prior
year period, partially offset by changes in value based on the observable price
changes of our long-term investments in the current year period.
Provision for Income Taxes
The provision for income taxes for the nine months ended December 31, 2021 is
based on our projected annual effective tax rate for fiscal year 2021, adjusted
for specific items that are required to be recognized in the period in which
they are incurred. The provision for income taxes was $36.5 million for the nine
months ended December 31, 2021 as compared to a provision for income taxes of
$54.2 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 10.6%
for the nine months ended December 31, 2021 was due primarily to a tax benefit
of $21.1 million due to tax credits and excess tax benefits of $13.9 million
from employee stock-based compensation, offset by tax expense of $5.0 million
related to a nondeductible increase in fair value of the contingent
consideration liability associated with the acquisition of Nordeus and by the
geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the
effective tax rate of 12.8% for the nine months ended December 31, 2020 was due
primarily to a benefit of $17.8 million as a result of tax credits anticipated
to be utilized and excess tax benefits of $13.6 million from employee
stock-based compensation.

The change in the effective tax rate, when compared to the prior year period's
effective tax rate, is due primarily to increased tax benefits from tax credits
in the current period and by the geographic mix of earnings.

The accounting for share-based compensation will increase or decrease our
effective tax rate based on the difference between our share-based compensation
expense and the deductions taken on our tax return, which depends on the stock
price at the time of the employee award vesting. Since we recognize excess tax
benefits on a discrete basis, we anticipate that our effective tax rate will
vary from quarter to quarter depending on our stock price in each period.

We anticipate that additional excess tax benefits or shortfalls from employee
stock compensation, tax credits, and changes in our geographic mix of earnings
could have a significant impact on our effective tax rate in the future. In
addition, we are regularly examined by domestic and foreign taxing authorities.
Examinations may result in tax assessments in excess of amounts claimed and the
payment of additional taxes. We believe our tax positions comply with applicable
tax law, and that we have adequately provided for reasonably foreseeable tax
assessments. It is possible that settlement of audits and/or the expiration of
the statute of limitations could have an impact on our effective tax rate in
future periods.

On March 11, 2021, the American Rescue Plan Act of 2021 (the "ARPA") was
enacted. The ARPA, among other things, includes provisions to expand the IRC
Section 162(m) disallowance for deduction of certain compensation paid by
publicly held corporations. Effective for tax years starting after December 31,
2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover
the next five most highly compensated employees. The ARPA did not have a
material impact on our Condensed Consolidated Financial Statements for the nine
months ended December 31, 2021. The Company continues to evaluate the potential
impact the ARPA may have on its operations and consolidated financial statements
in future periods.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic
Security Act (the "CARES Act"), which provides numerous tax and other stimulus
measures that generally support the U.S. economy. The CARES Act did not have a
material impact on our Condensed Consolidated Financial Statements.
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Net income and earnings per share
For the nine months ended December 31, 2021, net income was $307.1 million, as
compared to $370.1 million in the prior year period. For the nine months ended
December 31, 2021, diluted earnings per share was $2.63 as compared to diluted
earnings per share of $3.20 in the prior year period. Diluted weighted average
shares of 116.8 million were 1.2 million shares higher as compared to the prior
year period, due primarily to normal stock compensation activity, including
vests as well as grants and forfeitures in the prior year being fully
outstanding in the current year period, partially offset by shares repurchased.
See   Note 11 - Earnings Per Share   to our Condensed Consolidated Financial
Statements for additional information regarding earnings per share.
Liquidity and Capital Resources
Our primary cash requirements have been to fund (i) the development,
manufacturing, and marketing of our published products, (ii) working capital,
(iii) acquisitions, and (iv) capital expenditures. We expect to rely on cash and
cash equivalents as well as on short-term investments, funds provided by our
operating activities, and our Credit Agreement to satisfy our working capital
needs.
Short-term Investments
As of December 31, 2021, we had $1,479.0 million of short-term investments,
which are highly liquid in nature and represent an investment of cash that is
available for current operations. From time to time, we may purchase additional
short-term investments depending on future market conditions and liquidity
needs. As of December 31, 2021, based on the composition of our investment
portfolio and relatively lower interest rates as a result of the actions by
central banks around the world, including the interest rate cuts by the U.S.
Federal Reserve, in response to the COVID-19 pandemic and related adverse
economic conditions, we anticipate investment yields may remain low, which would
lower our future interest income. Such impact is not expected to be material to
our liquidity.
Credit Agreement
On February 8, 2019, we entered into an unsecured Credit Agreement (the "Credit
Agreement"), and on June 28, 2021, we amended our unsecured Credit Agreement
solely to increase the commitments under the facility by $50 million (as
amended, the "Credit Agreement") that runs through February 8, 2024. The Credit
Agreement provides for an unsecured five-year revolving credit facility with
commitments of $250 million, including sublimits for (i) the issuance of letters
of credit in an aggregate face amount of up to $25 million and (ii) borrowings
and letters of credit denominated in Pounds Sterling, Euros, and Canadian
Dollars in an aggregate principal amount of up to $25 million. In addition, the
Credit Agreement contains uncommitted incremental capacity permitting the
incurrence of up to an additional $200 million in term loans or revolving credit
facilities.
Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to
0.750% above a certain base rate (3.25% at December 31, 2021) or (b) 1.125% to
1.750% above LIBOR (approximately 0.10% at December 31, 2021), which rates are
determined by reference to our consolidated total net leverage ratio. The LIBOR
benchmark rate is expected to be phased out by the end of June 2023. We do not
expect that the discontinuation of the LIBOR rate will have a material impact on
our liquidity or results of operations.
As of December 31, 2021, there was $247.7 million available to borrow under the
Credit Agreement, and we had $2.3 million of letters of credit outstanding. At
December 31, 2021, and March 31, 2021, we had no outstanding borrowings under
the Credit Agreement.
The Credit Agreement also includes, among other terms and conditions, maximum
leverage ratio, minimum cash reserves and, in certain circumstances, minimum
interest coverage ratio financial covenants, as well as limitations on the
Company's and each of its subsidiaries' ability to: create, incur, assume or be
liable for indebtedness; dispose of assets outside the ordinary course; acquire,
merge or consolidate with or into another person or entity; create, incur or
allow any lien on any of its property; make investments; or pay dividends or
make distributions, in each case subject to certain exceptions. In addition, the
Credit Agreement provides for certain events of default such as nonpayment of
principal and interest when due thereunder, breaches of representations and
warranties, noncompliance with covenants, acts of insolvency, and default on
indebtedness held by third parties (subject to certain limitations and cure
periods).
Financial Condition
We are subject to credit risks, particularly if any of our receivables represent
a limited number of customers or are concentrated in foreign markets. If we are
unable to collect our accounts receivable as they become due, it could adversely
affect our liquidity and working capital position.
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Generally, we have been able to collect our accounts receivable in the ordinary
course of business. We do not hold any collateral to secure payment from
customers. We have trade credit insurance on the majority of our customers to
mitigate accounts receivable risk.
A majority of our trade receivables are derived from sales to major retailers,
including digital storefronts and platform partners, and distributors. Our five
largest customers accounted for 79.2% and 77.4% of net revenue during the nine
months ended December 31, 2021 and 2020, respectively. As of December 31, 2021
and March 31, 2021, five customers accounted for 74.7% and 77.6% of our gross
accounts receivable, respectively. Customers that individually accounted for
more than 10% of our gross accounts receivable balance comprised 59.1% and 69.2%
of such balances at December 31, 2021 and March 31, 2021, respectively. We had
two customers who accounted for 41.9% and 17.2% of our gross accounts receivable
as of December 31, 2021, respectively, and two customers who accounted for 50.4%
and 18.8% of our gross accounts receivable as of March 31, 2021, respectively.
Based upon performing ongoing credit evaluations, maintaining trade credit
insurance on a majority of our customers and our past collection experience, we
believe that the receivable balances from these largest customers do not
represent a significant credit risk, although we actively monitor each
customer's credit worthiness and economic conditions that may affect our
customers' business and access to capital. We are monitoring the current global
economic conditions, including credit markets and other factors as it relates to
our customers in order to manage the risk of uncollectible accounts receivable,
including as a result of the COVID-19 pandemic.
We believe our current cash and cash equivalents, short-term investments and
projected cash flows from operations, along with availability under our Credit
Agreement, will provide us with sufficient liquidity to satisfy our cash
requirements for working capital, capital expenditures, and commitments on both
a short-term and long-term basis. Our liquidity and capital resources were not
materially affected by the COVID-19 pandemic and related volatility and slowdown
in the global financial markets to date. For further discussion regarding the
potential future impacts of the COVID-19 pandemic and related economic
conditions on our business, refer to   Item 1A, Risk Factors of our Annual
Report on Form 10-K   for the fiscal year ended March 31, 2021.
As of December 31, 2021, the amount of cash and cash equivalents held outside of
the U.S. by our foreign subsidiaries was $306.9 million. These balances are
dispersed across various locations around the world. We believe that such
dispersion meets the business and liquidity needs of our foreign affiliates. In
addition, we expect to have the ability to generate sufficient cash domestically
to support ongoing operations for the foreseeable future.
On January 9, 2022, we entered into a definitive merger agreement to acquire
Zynga, a leading developer of mobile games. Under the terms and subject to the
conditions of the merger agreement, Zynga stockholders will receive $3.50 in
cash and a number of shares of our common stock equal to the exchange ratio
(ranging from 0.0350 to 0.0406, as further described below) for each share of
Zynga common stock outstanding at the closing. The transaction is valued at
$9.86 per share of Zynga common stock based on the market closing as of January
7, 2022, implying an enterprise value of $12.7 billion. The transaction includes
a collar mechanism on the equity consideration, so that if our 20-day volume
weighted average price ("VWAP") ending on the third trading day prior to closing
is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to
deliver total consideration of $9.86 per Zynga share. If the VWAP exceeds the
higher end of that range the exchange ratio would be 0.0350 per share and if the
VWAP falls below the lower end of that range, the exchange ratio would be 0.0406
per share.

As part of the transaction, we have received aggregate committed financing of
$2.7 billion from J.P. Morgan and certain other lenders, and we intend to fund
the cash component of the transaction through a combination of cash from our
balance sheet as well as proceeds of new debt issuance.

The transaction, which is expected to close during our first quarter of fiscal
year 2023 ending June 30, 2022, is subject to approval by Take-Two and Zynga
stockholders and the satisfaction of customary closing conditions, including
applicable regulatory approvals.
Our Board of Directors has authorized the repurchase of up to 21.7 million
shares of our common stock, including an increase of 7.4 million shares in
November 2021. Under this program, we may purchase shares from time to time
through a variety of methods, including in the open market or through privately
negotiated transactions, in accordance with applicable securities laws.
Repurchases are subject to the availability of stock, prevailing market
conditions, the trading price of the stock, our financial performance, and other
conditions. The program does not require us to repurchase shares and may be
suspended or discontinued at any time for any reason.
During the three months ended December 31, 2021, we did not repurchase shares of
our common stock in the open market, as part of the program. We have repurchased
a total of 11.7 million shares of our common stock under the program, and as of
December 31, 2021, 10.0 million shares of our common stock remained available
for repurchase under the share repurchase program.
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Our changes in cash flows were as follows:
                                                                               Nine Months Ended
                                                                                 December 31,
(thousands of dollars)                                                     2021                2020
Net cash provided by operating activities                              $   19,161          $  787,661
Net cash used in investing activities                                    (479,765)           (240,899)
Net cash used in financing activities                                    (239,720)            (46,371)

Effects of Exchange Rates on Cash, Cash Equivalents and Restricted Cash and Cash Equivalents

                                   (2,727)             19,006

Net change in cash, cash equivalents and restricted cash and cash equivalents

                                                            $ 

(703.051) $519,397


At December 31, 2021, we had $1,357.2 million of cash and cash equivalents and
restricted cash and cash equivalents, compared to $2,060.2 million at March 31,
2021. The decrease was due to (1) Net cash used in investing activities
primarily related to (i) net purchases of available for sale securities, (ii)
our acquisition of Nordeus (refer to   Note 15 - Acquisitions  ), and (iii)
purchases of fixed assets, including our acquisition of two office buildings in
the UK (refer to   Note 15 - Acquisitions  ) and (2) Net cash used in financing
activities, which was primarily for (i) repurchase of our common stock and (ii)
tax payments related to net share settlements of our restricted stock awards.
This net decrease was partially offset by Net cash provided by operating
activities from sales of our products, partially offset by the timing of
payments.
Contractual Obligations and Commitments
Refer to   Note 13 - Commitments and Contingencies   to our Condensed
Consolidated Financial Statements for disclosures regarding our commitments.
Capital Expenditures
In fiscal year 2022, we anticipate capital expenditures to be $170 million.
During the nine months ended December 31, 2021, capital expenditures were
$133.4 million, which includes our acquisition of two office buildings in the UK
(refer to   Note 15 - Acquisitions  ).
Off-Balance Sheet Arrangements
As of December 31, 2021 and March 31, 2021, we did not have any material
relationships with unconsolidated entities or financial parties, such as
entities often referred to as structured finance or variable interest entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such,
we are not exposed to any financing, liquidity, market, or credit risk that
could arise if we had engaged in such relationships.
International Operations
Net revenue earned outside of the United States is principally generated by our
operations in Europe, Asia, Australia, Canada, and Latin America. For the three
months ended December 31, 2021 and 2020, 40.8% and 38.6%, respectively, of our
net revenue was earned outside of the United States. We are subject to risks
inherent in foreign trade, including increased credit risks, tariffs and duties,
fluctuations in foreign currency exchange rates, shipping delays, and
international political, regulatory and economic developments, all of which can
have a significant effect on our operating results.
Fluctuations in Quarterly Operating Results and Seasonality
We have experienced fluctuations in quarterly and annual operating results as a
result of the timing of the introduction of new titles; variations in sales of
titles developed for particular platforms; market acceptance of our titles;
development and promotional expenses relating to the introduction of new titles;
sequels or enhancements of existing titles; projected and actual changes in
platforms; the timing and success of title introductions by our competitors;
product returns; changes in pricing policies by us and our competitors; the
accuracy of retailers' forecasts of consumer demand; the size and timing of
acquisitions; the timing of orders from major customers; and order cancellations
and delays in product shipment. Sales of our full game products are also
seasonal, with peak demand typically occurring in the fourth calendar quarter
during the holiday season. For certain of our software products with multiple
performance obligations, we defer the recognition of our net revenue over an
estimated service period, which generally ranges from 6 to 15 months. As a
result, the quarter in which we generate the highest net bookings may be
different from the quarter in which we recognize the highest amount of net
revenue. Quarterly comparisons of operating results are not necessarily
indicative of future operating results.
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