TAKE-TWO INTERACTIVE SOFTWARE, INC. CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained herein, which are not historical facts including statements relating to our acquisition of Zynga Inc. (the "Zynga 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 changes in interest rates by theFederal Reserve and other central banks, including on our short-term investment portfolio; the impact of inflation; volatility in foreign currency exchange rates; risks that the Zynga Acquisition disrupts our plans and operations; the ability company to retain key personnel subsequent to the Zynga Acquisition; the ability to realize the benefits of the Zynga 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 acquisition; the amount of the costs, fees, expenses and charges related to the 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 endedMarch 31, 2022 ; and our other periodic filings with theSecurities 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 endedMarch 31, 2022 . All figures are in millions, except per share amounts or as otherwise noted.
Overview
Zynga Acquisition and Related Debt Transactions
We acquired Zynga onMay 23, 2022 , for consideration having an acquisition date fair value of$9,513.7 , consisting of$3,992.4 in cash, the issuance of 46.3 shares of our common stock, and$143.6 of replacement equity awards attributable to the pre-acquisition service period. Refer to Note 14 - Acquisitions of our Condensed Consolidated Financial Statements. Zynga is a leading developer of mobile games with a mission to connect the world through games.
Also, in connection with the Zynga Acquisition, we entered into several debt transactions (refer to Note 9 - Debt ).
OnApril 14, 2022 , we completed our offering and sale of$2,700.0 aggregate principal amount of our senior notes, consisting of$1,000.0 principal amount of our 3.300% Senior Notes due 2024 (the "2024 Notes"),$600.0 principal amount of our 3.550% Senior Notes due 2025 (the "2025 Notes"),$600.0 principal amount of our 3.700% Senior Notes due 2027 (the "2027 Notes"), and$500.0 principal amount of our 4.000% Senior Notes due 2032 (the "2032 Notes" and, together with the 2024 Notes, the 2025 Notes and the 2027 Notes, the "Senior Notes").The Senior Notes were issued under an indenture between the Company and The Bank of New York Mellon, as trustee (the "Trustee"). The 2024 Notes mature onMarch 28, 2024 , and bear interest at an annual rate of 3.300%. The 2025 Notes mature onApril 14, 2025 , and bear interest at an annual rate of 3.550%. The 2027 Notes mature onApril 14, 2027 , and bear interest at an annual rate of 3.700%. The 2032 Notes mature onApril 14, 2032 , and bear interest at an annual rate of 4.000%. We will pay interest on the 2024 Notes semiannually onMarch 28 andSeptember 28 of each year, commencingSeptember 28, 2022 . During the three months endedSeptember 30, 2022 , we made interest payments of$15.0 . We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually onApril 14 andOctober 14 of each year, commencingOctober 14, 2022 . The proceeds were used to finance our acquisition of Zynga. 33 --------------------------------------------------------------------------------
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OnMay 23, 2022 , we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement"), which replaced in its entirety the Company's prior Credit Agreement and provides for an unsecured five-year revolving credit facility with commitments of$500.0 , including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to$100.0 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to$100.0 . In addition, the 2022 Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional amount not to exceed the greater of$250.0 and 35.0% of the Company's Consolidated Adjusted EBITDA (as defined in the 2022 Credit Agreement). Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (6.25% atSeptember 30, 2022 ) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 3.04% atSeptember 30, 2022 , which rates are determined by the Company's credit rating. OnJune 22, 2022 , we drew down approximately$200.0 at 3.28% from our facility under the 2022 Credit Agreement. OnJune 22, 2022 , we entered into an unsecured 364-Day Term Loan Credit Agreement ("Term Loan"). The Term Loan provides for an unsecured 364-day term loan credit facility in the aggregate principal amount of$350.0 and matures onJune 21, 2023 , and will bear interest at our election at a margin of (a) 0.000% to 0.375% above an alternate base rate (defined on the basis of prime rate) or (b) 0.750% to 1.375% above SOFR, which margins are determined by reference to our credit rating. We fully drew down on the Term Loan onJune 22, 2022 at 3.6%. The proceeds from our draw-downs of the 2022 Credit Agreement and Term Loan were used to finance a portion of the settlement of the Convertible Notes acquired from Zynga. In total, we paid$321.6 for the tendered or converted 2024 Convertible Notes, including interest, and$845.1 for the tendered 2026 Convertible Notes in cash, and we issued 3.7 shares of our common stock upon the conversion of the 2024 Convertible Notes. After settlement of all Convertible Notes tendered or surrendered for conversion,$21.4 aggregate principal amount of the 2024 Convertible Notes remained outstanding and$29.4 aggregate principal amount of the 2026 Convertible Notes remained outstanding atSeptember 30, 2022 .
Cybersecurity Incident
InSeptember 2022 , we experienced a network intrusion in which an unauthorized third party illegally accessed and downloaded confidential information from our systems, including early development footage for the next Grand Theft Auto. We immediately took steps to isolate and contain the incident.Rockstar Games did not experience and does not anticipate any disruption to its current services nor any long-term effect on its development timelines as a result of this incident. Subsequently, also inSeptember 2022 , we became aware that an unauthorized third party illegally accessed credentials for a vendor platform that 2K Games uses to provide help desk support to its customers. The unauthorized party sent a communication to certain players containing a malicious link. 2K Games immediately notified all affected users and took steps to restrict further unauthorized activity until service was restored. In connection with this activity (the "Cybersecurity Incident"), we have incurred certain immaterial incremental one-time costs related to consultants, experts and data recovery efforts and expect to incur additional costs related to cybersecurity protections in the future. We are in the process of implementing a variety of measures to further enhance our cybersecurity protections.
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
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
creating the highest-quality, most engaging interactive entertainment franchises
in the business and delivering them across an array of platforms to captivate
our global audience. 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,
in-game purchases, and in-game advertising. 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 inAustralia ,Canada ,China ,Czech Republic ,Finland ,Germany ,Hungary ,India ,Serbia ,South Korea ,Spain ,Turkey , theUnited Kingdom (U.K. ), andthe United States (U.S. ). Software titles published by ourRockstar Games label are primarily internally developed. We expectRockstar 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 thatRockstar 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 385 million units. Our most recent installment, Grand Theft Auto V, which was released in 2013, has sold-in more than 170 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 45 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. InFebruary 2022 ,Rockstar Games announced that active development of the next entry in the Grand Theft Auto series is well underway. 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 andTiny Tina's Wonderlands. 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, andPGA TOUR 2K. InMarch 2020 , 2K announced a multi-year partnership with theNational 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 andOlliOlli World . Kerbal Space Program 2 is planned for early access release in fiscal year 2023. Private Division also previously released The Outer Worlds and Ancestors: The Humankind Odyssey. Our Zynga label, which includes our former T2 Mobile Games label (which included Socialpoint,Playdots , and Nordeus), publishes 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. Zynga's diverse portfolio of popular game franchises has been downloaded more than 6 billion times on mobile, includingCSR Racing , Dragon City, Empires & Puzzles, FarmVille, Golf Rival,Harry Potter : Puzzles & Spells, Merge Dragons, Merge Magic, Monster Legends, Toon Blast, Top Eleven, Toy Blast, Two Dots, Words With Friends, Zynga Poker, and a high volume of hyper-casual titles, including Hair Challenge and High Heels, published by Rollic. Zynga is also an industry-leading next-generation platform with the ability to acquire new users, cross-promote games, apply live services content updates, and optimize programmatic advertising and yields at scale through Chartboost, its leading mobile advertising and monetization platform. We are continuing our strategy inAsia to broaden the distribution of our existing products and expand our online gaming presence, especially inChina andSouth Korea . 2K has a multi-year license from the NBA to offer an online version of the NBA simulation game inChina ,Taiwan ,South Korea , andSoutheast 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 inChina 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. Additionally, we see a long-term opportunity to expand our mobile efforts across various emerging markets, particularly throughoutAsia . 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 and several international partners. 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 is currently gearing up for its sixth season.
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 15.8% of
our net revenue for the six months ended
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Economic Environment and Retailer Performance. We continue to monitor economic conditions, including the impact of various macroeconomic and geopolitical factors, including inflation and the COVID-19 pandemic, that may affect our business, by affecting areas such as 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 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. As expected, during fiscal year 2022 and the first two quarters of fiscal year 2023, we experienced a moderation in engagement from the all-time highs experienced in fiscal year 2021, but overall engagement continued to be notably higher than it was pre-pandemic. Based on our concern for the health and safety of our teams, we transitioned the vast majority of our teams to working from home throughout fiscal years 2021 and 2022; however, the majority of our offices either have reopened or are scheduled 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 endedMarch 31, 2022 , 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 79.9% and 79.8% of net revenue during the six months endedSeptember 30, 2022 and 2021, respectively. As ofSeptember 30, 2022 , andMarch 31, 2022 , five customers comprised 68.9% and 72.8% 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 51.0% and 63.8% of such balance atSeptember 30, 2022 , andMarch 31, 2022 , respectively. We had two customers who accounted for 32.4% and 18.6% of our gross accounts receivable as ofSeptember 30, 2022 , and two customers who accounted for 43.5% and 20.3% of our gross accounts receivable as ofMarch 31, 2022 . We did not have any additional customers that exceeded 10% of our gross accounts receivable as ofSeptember 30, 2022 , andMarch 31, 2022 . 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 seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers. There has been increased consolidation in our industry, as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through financial volatility. Hardware Platforms. We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 46.4% of our net revenue by product platform for the six months endedSeptember 30, 2022 . The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released inNovember 2020 by Sony and Microsoft, demand for interactive entertainment used 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, events beyond our control may impact 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 for these platforms is to focus our development efforts on a select number of the highest quality titles. 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. 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, in-game purchases, and in-game advertising. As disclosed in our "Results of 36 --------------------------------------------------------------------------------
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Operations," below, net revenue from digital online channels comprised 94.4% of our net revenue for the six months endedSeptember 30, 2022 . We expect online delivery of games and game offerings to continue to continue to be the primary part of our business over the long term. We also publish an expanding variety of titles for Mobile, which are delivered to consumers through digital download, and are primarily distributed, marketed, and promoted through third parties, primarilyApple's App Store and theGoogle Play Store . Virtual items for our Mobile games are purchased through the payment processing systems of these platform providers. We generate a significant portion of our net revenue through the Apple and Google platforms and expect to continue to do so for the foreseeable future as we launch more games for Mobile. Apple and Google generally have the discretion to set the amounts of their platform fees and change their platforms' terms of service and other policies with respect to us or other developers at their sole discretion, and those changes may be unfavorable to us. These platform fees are recorded as cost of revenue as incurred. Further, as a result of the platform fees associated with online game sales, our Mobile Net revenue generally generates lower gross margin percentage than our Console or PC revenue. Accordingly, the overall product mix between Mobile and other game sales may impact our gross margins. Player acquisition costs. Principally for our Mobile titles, we use advertising and other forms of player acquisition and retention to grow and retain our player audience. These expenditures, which are recorded within Sales and marketing in our Consolidated Statements of Operations, generally relate to the promotion of new game launches and ongoing performance-based programs to drive new player acquisition and lapsed player reactivation. Over time, these acquisition and retention-related programs may become either less effective or costlier, negatively impacting our operating results.
Content Release Highlights
During fiscal year 2023, Private Division released Rollerdrome, and 2K released
The Quarry, NBA 2K23,
To date we have announced that, during the remainder of fiscal year 2023, 2K will release Marvel's Midnight Suns and WWE 2K23, and Private Division will release Kerbal Space Program 2 early access on PC.
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. We are reiterating our significant accounting policy on revenue recognition, which is included in Note 1 - Basis of Presentation , including certain revenue policies applied upon close of the Zynga Acquisition. In-depth descriptions of our other critical accounting policies and estimates can be found in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 .
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:
Three Months Ended September 30 , Six Months
Ended
Increase/ % Increase/ Increase/ % Increase/
2022 2021 (decrease) (decrease) 2022 2021 (decrease) (decrease)Net Bookings$ 1,504.8 $ 984.9 $ 519.9 52.8 %$ 2,507.3 $ 1,696.3 $ 811.0 47.8 % 37
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For the three months endedSeptember 30, 2022 , Net Bookings increased by$519.9 as compared to the prior year period. The increase was primarily due to Net Bookings from Zynga, which we acquired in May 2022 (refer to Note 14 - Acquisitions ), including top contributors Rollic's hyper-casual portfolio, Empires & Puzzles, Toon Blast, Words With Friends, and Merge Dragons!, as well as an increase in Net Bookings fromTiny Tina's Wonderlands, which released inMarch 2022 . These increases were partially offset by a decrease in Net Bookings from our Grand Theft Auto, Borderlands, and Red Dead Redemption franchises. For the six months endedSeptember 30, 2022 , Net Bookings increased by$811.0 as compared to the prior year period. The increase was primarily due to Net Bookings from Zynga, which we acquired in May 2022 (refer to Note 14 - Acquisitions ), including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Words With Friends, and Merge Dragons!, as well as an increase in Net Bookings from (i)Tiny Tina's Wonderlands; (ii) The Quarry, which released inJune 2022 ; (iii) our WWE 2K franchise, including ourMarch 2022 release of WWE 2K22; and (iv) Top Eleven, which was part of ourJune 2021 Nordeus acquisition. These increases were partially offset by a decrease in Net Bookings from our Grand Theft Auto, Borderlands, and Red Dead Redemption franchises. Results of Operations The following tables set forth, for the periods indicated, our Condensed Consolidated Statements of Operations, net revenue by geographic region, net revenue by platform, net revenue by distribution channel, and net revenue by content type: Three Months Ended September 30, Six Months Ended September 30, (millions of dollars) 2022 2021 2022 2021 Net revenue$ 1,393.5 100.0 %$ 858.2 100.0 %$ 2,495.9 100.0 %$ 1,671.5 100.0 % Cost of revenue 713.9 51.2 % 456.7 53.2 % 1,149.7 46.1 % 786.4 47.0 % Gross profit 679.6 48.8 % 401.5 46.8 % 1,346.2 53.9 % 885.1 53.0 % Selling and marketing 444.4 31.9 % 136.0 15.8 % 716.4 28.7 % 239.9 14.4 % General and administrative 214.6 15.4 % 127.8 14.9 % 451.7 18.1 % 232.2 13.9 % Research and development 243.2 17.5 % 101.5 11.8 % 417.0 16.7 % 193.8 11.6 % Depreciation and amortization 29.9 2.1 % 16.1 1.9 % 51.0 2.0 % 28.6 1.7 % Total operating expenses 932.1 66.9 % 381.4 44.4 % 1,636.1 65.6 % 694.5 41.5 % (Loss) income from operations (252.5) (18.1) % 20.1 2.3 % (289.9) (11.6) % 190.6 11.4 % Interest and other, net (50.5) (3.6) % (0.6) (0.1) % (79.8) (3.2) % (1.6) (0.1) % Gain (loss) on fair value adjustments, net 1.9 0.1 % 0.4 - % (37.7) (1.5) % 2.4 0.1 % (Loss) income before income taxes (301.1) (21.6) % 19.9 2.3 % (407.4) (16.3) % 191.4 11.5 % (Benefit from) provision for income taxes (44.1) (3.2) % 9.7 1.1 % (46.4) (1.9) % 28.9 1.7 % Net (loss) income$ (257.0) (18.4) %$ 10.2 1.2 %$ (361.0) (14.5) %$ 162.5 9.7 % Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021 Net revenue by geographic region: United States$ 842.9 60.5 %$ 514.9 60.0 %$ 1,525.8 61.1 %$ 1,008.1 60.3 % International 550.6 39.5 % 343.3 40.0 % 970.1 38.9 % 663.4 39.7 % Net revenue by platform: Console$ 551.9 39.6 %$ 596.1 69.5 %$ 1,159.1 46.4 %$ 1,198.5 71.7 % Mobile 730.1 52.4 % 115.1 13.4 % 1,099.7 44.1 % 197.4 11.8 % PC and other 111.5 8.0 % 147.0 17.1 % 237.1 9.5 % 275.6 16.5 % Net revenue by distribution channel: Digital online$ 1,319.2 94.7 %$ 779.1 90.8 %$ 2,357.0 94.4 %$ 1,519.9 90.9 % Physical retail and other 74.3 5.3 % 79.1 9.2 % 138.9 5.6 % 151.6 9.1 % Net revenue by content: Recurrent consumer spending$ 1,101.8 79.1 %$ 563.6 65.7 %$ 1,927.4 77.2 %$ 1,135.9 68.0 % Full game and other 291.7 20.9 % 294.6 34.3 % 568.5 22.8 % 535.6 32.0 % 38
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Three Months Ended
Increase/ % Increase/
(millions of dollars) 2022 % 2021 % (decrease) (decrease)
Total net revenue $ 1,393.5 100.0 % $ 858.2 100.0 % $ 535.3 62.4 %
Software development costs and
royalties (1) 289.9 20.8 % 144.9 16.9 % 145.0 100.1 %
Product costs 204.5 14.7 % 66.1 7.7 % 138.4 209.4 %
Internal royalties 124.3 8.9 % 159.6 18.6 % (35.3) (22.1) %
Licenses 95.2 6.8 % 86.1 10.0 % 9.1 10.6 %
Cost of revenue 713.9 51.2 % 456.7 53.2 % 257.2 56.3 %
Gross profit $ 679.6 48.8 % $ 401.5 46.8 % $ 278.1 69.3 %
(1) Includes
For the three months endedSeptember 30, 2022 , net revenue increased by$535.3 as compared to the prior year period. The increase was primarily due to net revenue of$639.3 from Zynga, which we acquired inMay 2022 (refer to Note 14- Acquisitions ), including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Words With Friends, and Merge Dragons!, as well as an increase in net revenue of$20.0 fromTiny Tina's Wonderlands, which released inMarch 2022 . These increases were partially offset by a decrease in net revenue of (i)$54.5 from our Grand Theft Auto franchise and (ii)$42.0 from our Borderlands franchise. Net revenue from console games decreased by$44.2 and accounted for 39.6% of our total net revenue for the three months endedSeptember 30, 2022 , as compared to 69.5% for the prior year period. The decrease in net revenue from console games was due to a decrease in net revenue from our Grand Theft Auto, Red Dead Redemption, and Borderlands franchises and Hades, which released inAugust 2021 . These decreases in net revenue from console games were partially offset by an increase in net revenue from our WWE 2K franchise,Tiny Tina's Wonderlands, and The Quarry. Net revenue from PC and other decreased by$35.5 and accounted for 8.0% of our total net revenue for the three months endedSeptember 30, 2022 , as compared to 17.1% for the prior year period. The decrease was primarily due to a decrease in net revenue fromTiny Tina's Wonderlands. Net revenue from mobile increased by$615.0 and accounted for 52.4% of our total net revenue for three months endedSeptember 30, 2022 , as compared to 13.4% for the prior year period. The increase was primarily due to net revenue of$630.3 from ourMay 2022 acquisition of Zynga, including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Words With Friends,and Merge Dragons!, as well as an increase in net revenue from Top Eleven. Net revenue from digital online channels increased by$540.1 and accounted for 94.7% of our total net revenue for the three months endedSeptember 30, 2022 , as compared to 90.8% for the prior year period. The increase was primarily due to net revenue of$638.8 from ourMay 2022 acquisition of Zynga, including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Words With Friends, and Merge Dragons!. This increase was partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises. Net revenue from physical retail and other channels decreased by$4.8 and accounted for 5.3% of our total net revenue for the three months endedSeptember 30, 2022 , as compared to 9.2% 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 Hades. Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, in-game purchases, and in-game advertising. Net revenue from recurrent consumer spending increased by$538.2 and accounted for 79.1% of net revenue for the three months endedSeptember 30, 2022 , as compared to 65.7% of net revenue for the prior year period. The increase in net revenue from recurrent consumer spending was primarily due to net revenue of$628.9 from ourMay 2022 acquisition of Zynga, including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Words With Friends, and Merge Dragons!. These increases were partially offset by a decrease in net revenue from our Grand Theft Auto franchise. Net revenue from full game and other decreased by$2.9 and accounted for 20.9% of net revenue for the three months endedSeptember 30, 2022 as compared to 34.3% of net revenue for the prior year period. The decrease in net revenue from full game and other was due primarily to a decrease in net revenue from our Borderlands franchise. This decrease was partially offset by an increase in net revenue fromTiny Tina's Wonderlands, our NBA 2K franchise and The Quarry. Gross profit as a percentage of net revenue for the three months endedSeptember 30, 2022 was 48.8% as compared to 46.8% for the prior year period. The increase in gross profit as a percentage of net revenue was due to (i) lower internal royalties due to the timing of when royalties are earned and (ii) lower capitalized software amortization due to impairments recognized in the prior year period, partially offset by (i) higher amortization related to intangible assets related to our Zynga acquisition and (ii) higher product costs for fees paid to platform partners due to an increase in Mobile revenues as a result of the Zynga acquisition. 39 --------------------------------------------------------------------------------
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Net revenue earned outside ofthe United States increased by$207.3 and accounted for 39.5% of our total net revenue for the three months endedSeptember 30, 2022 , as compared to 40.0% in the prior year period. The increase in net revenue outside ofthe United States was primarily due to net revenue of$255.5 from ourMay 2022 acquisition of Zynga, including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Zynga Poker, and Merge Dragons!. Thin increase was partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises. Changes in foreign currency exchange rates decreased net revenue by$8.3 and decreased gross profit by$4.4 for the three months endedSeptember 30, 2022 as compared to the prior year period. Operating Expenses % of net % of net Increase/ % Increase/ (millions of dollars) 2022 revenue 2021 revenue (decrease) (decrease) Selling and marketing$ 444.4 31.9 %$ 136.0 15.8 %$ 308.4 226.8 % General and administrative 214.6 15.4 % 127.8 14.9 % 86.8 67.9 % Research and development 243.2 17.5 % 101.5 11.8 % 141.7 139.6 % Depreciation and amortization 29.9 2.1 % 16.1 1.9 % 13.8 85.7 % Total operating expenses(1)$ 932.1 66.9 %$ 381.4 44.4 %$ 550.7 144.4 % (1) Includes stock-based compensation expense, which was allocated as follows: 2022 2021 Selling and marketing$ 17.5 $ 7.1 General and administrative 44.2 16.7 Research and development 38.2 13.0 Changes in foreign currency exchange rates decreased total operating expenses by$19.8 for the three months endedSeptember 30, 2022 , as compared to the prior year period. Selling and marketing Selling and marketing expenses increased by$308.4 for the three months endedSeptember 30, 2022 , as compared to the prior year period, due primarily to (i) marketing expense for titles from our Zynga acquisition, including Rollic's hyper-casual portfolio, Toon Blast, Merge Dragons!, Empires & Puzzles, and Toy Blast, (ii) higher amortization related to intangible assets related to our Zynga acquisition, and (iii) higher personnel expenses for additional headcount, including related to our acquisition of Zynga.
General and administrative
General and administrative expenses increased by$86.8 for the three months endedSeptember 30, 2022 , as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, including our acquisition of Zynga and (ii) professional fees related to our acquisition and integration of Zynga. General and administrative expenses for the three months endedSeptember 30, 2022 and 2021 included occupancy expense (primarily rent, utilities and office expenses) of$16.6 and$8.4 , respectively, related to our development studios.
Research and development
Research and development expenses increased by$141.7 for the three months endedSeptember 30, 2022 , as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount, including related to our acquisition of Zynga.
Depreciation and Amortization
Depreciation and amortization expenses increased by$13.8 for the three months endedSeptember 30, 2022 as compared to the prior year period, due primarily to acquired intangible assets and depreciation expense related to Zynga.
Interest and other, net
Interest and other, net was expense of$50.5 for the three months endedSeptember 30, 2022 , as compared to$0.6 for the prior year period. The increase was due primarily to interest expense related to our Senior Notes, Term Loan, 2022 Credit Agreement, andBridge Loan commitment, including the amortization of related deferred costs, in connection with our acquisition of Zynga (refer to Note 9 - Debt and Note 14 - Acquisitions ) and foreign currency losses. 40
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Gain (loss) on fair value adjustments, net
Gain (loss) on fair value adjustments, net was a gain of$1.9 for the three months endedSeptember 30, 2022 as compared to$0.4 for the prior year period. The change was due primarily to changes in fair value based on the observable price changes of our long-term investments.
Benefit from Income Taxes
The benefit from income taxes for the three months endedSeptember 30, 2022 is based on our projected annual effective tax rate for fiscal year 2023, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was$44.1 for the three months endedSeptember 30, 2022 as compared to the provision for income taxes of$9.7 for the prior year period. When compared to the statutory rate of 21.0%, the effective tax rate of 14.6% for the three months endedSeptember 30, 2022 was due primarily to tax benefits of$8.5 from tax credits, tax benefits of$3.4 from employee stock-based compensation, and tax expense of$12.8 related to geographic mix of earnings. In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 48.4% for the three months endedSeptember 30, 2021 was due primarily to a tax expense of$2.4 related to a nondeductible increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus, tax expense of$5.4 from a shortfall on employee stock-based compensation offset by$2.6 from 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 increased tax benefits from tax credits, increased tax benefits from employee stock-based compensation 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 upon 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.
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 or the expiration of the
statute of limitations could have an impact on our effective tax rate in future
periods.
The Tax Cuts and Jobs Act of 2017 ("TCJA") requires taxpayers to capitalize and
amortize research and development costs pursuant to Internal Revenue Code
("IRC") Section 174. Although Congress is considering legislation that would
defer the capitalization and amortization requirement to later years, we have no
assurance that the requirement will be repealed or otherwise modified. The
requirement was effective for the Company beginning April 1, 2022 . The actual
impact of Section 174 capitalization and amortization on the income tax payable
and deferred tax asset will depend on multiple factors, including the amount of
research and development expenses we will incur and whether we conduct our
research and development activities inside or outside the United States . If
legislation is not passed to defer, repeal, or otherwise modify the
capitalization and amortization requirement we expect our cash taxes payable and
deferred tax assets to increase in the future.
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 Consolidated Financial Statements for the three months
ended September 30, 2022 . We continue to evaluate the potential impact the ARPA
may have on our operations and Consolidated Financial Statements in future
periods.
In August 2022 , President Biden signed into law the Inflation Reduction Act of
2022 (the "Inflation Reduction Act"), which includes a 15% book-income
alternative minimum tax on corporations with average applicable financial
statement income over $1 billion for any 3-year period ending with 2022 or later
and a 1% excise tax on the fair market value of stock that is repurchased by
publicly traded U.S. corporations or their specified affiliates. The alternative
minimum tax and the excise tax are effective in taxable years beginning after
December 31, 2022 . We will continue to evaluate the potential impact of the
Inflation Reduction Act may have on our operations and Consolidated Financial
Statements in future periods.
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Net (loss) income and (loss) earnings per share
For the three months endedSeptember 30, 2022 , net loss was$257.0 , as compared to income of$10.2 in the prior year period. Diluted loss per share for the three months endedSeptember 30, 2022 was$1.54 , as compared to diluted earnings per share of$0.09 in the prior year period. Basic weighted average shares of 166.9 were 50.1 shares higher as compared to the prior year period diluted weighted average shares, due to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes. See Note 10 - (Loss) Earnings Per Share to our Condensed Consolidated Financial Statements for additional information.
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