CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS The statements contained herein, which are not historical facts, 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; the impact of reductions in interest rates by theFederal Reserve and other central banks, including on our short-term investment portfolio; the impact of potential inflation; volatility in foreign currency exchange rates; 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, 2021 ; 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, 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 throughRockstar 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. 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 ,Hungary ,India ,Serbia ,Spain ,South Korea , theUnited Kingdom , andthe United States . 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 20 -------------------------------------------------------------------------------- Table of Contents 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 350 million units. Our most recent installment, Grand Theft Auto V, which was released in 2013, has sold in over 150 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 35 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 a number of 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, 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. 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, which includes Socialpoint,Playdots , and Nordeus, which publish popular free-to-play mobile games that deliver high quality, deeply engaging entertainment experiences, generates revenue from in-game sales and in-game advertising. T2 Mobile Games' titles include Dragon City, Monster Legends, Two Dots, and Top Eleven. In addition, T2 Mobile Games has a number of exciting games planned for launch in the coming years. We acquiredNordeus Limited onJune 1, 2021 , for consideration having an acquisition date fair value of$306.3 million , consisting of$120.5 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 inBelgrade ,Serbia , best known for Top Eleven, with over 240 million registered users. We are continuing to execute on our growth initiatives inAsia , where our strategy is to broaden the distribution of our existing products and expand our online gaming presence, especially inChina andSouth Korea . 2K has secured a multi-year license from the NBA to develop 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 53 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 that was held in August of each of the NBA 2K League's first three seasons. The NBA 2K League's fourth season began in May and is set to conclude in September. 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 33.7% of our net revenue for the three months endedJune 30, 2021 . The timing of our Grand Theft Auto product releases may affect our financial performance on a quarterly and annual basis. Economic Environment and Retailer Performance. We continue to monitor economic conditions, including the impact of the COVID-19 pandemic, 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 21 -------------------------------------------------------------------------------- Table of Contents 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. We expect that engagement trends will continue to be higher than they were pre-pandemic. However, as the return to normalcy continues, we expect a moderation of the trends that have benefited our industry. We have developed and continue to develop plans to help mitigate the negative impacts of the pandemic on our business, such as our transition to working from home, based on our concern for the health and safety of our teams, for the vast majority of our teams, which to date has 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, 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 80.6% and 81.6% of net revenue during the three months endedJune 30, 2021 and 2020, respectively. As ofJune 30, 2021 andMarch 31, 2021 , our five largest customers comprised 74.2% 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 65.3% and 69.2% of such balance atJune 30, 2021 andMarch 31, 2021 , respectively. We had two customers who accounted for 47.7% and 17.6%, respectively, of our gross accounts receivable as ofJune 30, 2021 and two customers who accounted for 50.4% and 18.8%, respectively, of our gross accounts receivable as ofMarch 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 74.1% of our net revenue by product platform for the three months endedJune 30, 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 inNovember 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. 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 91.1% of our net revenue for the three months endedJune 30, 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. 22 -------------------------------------------------------------------------------- Table of Contents Content Release Highlights To date we have announced that, during 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, Private Division will releaseOlliOlli World and Hades, and 2K will release NBA 2K22, WWE 2K22, andTiny Tina's Wonderlands. In addition, throughout the year, we expect our labels 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: Three Months Ended June 30, Increase/ % Increase/ 2021 2020 (decrease) (decrease) Net Bookings$ 711,430 $ 996,249 $ (284,819) (28.6) % For the three months endedJune 30, 2021 , Net Bookings decreased by$284.8 million as compared to the prior year period due primarily to a decrease in Net Bookings from Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, Red Dead Redemption 2, Borderlands 3, and The Outer Worlds, partially offset by an increase in Net Bookings from Two Dots, which was part of thePlaydots acquisition inSeptember 2020 . 23 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth, for the periods indicated, our Condensed Consolidated Statements of Operations, net revenue by geographic region, net revenue by platform, net revenue by distribution channel, and net revenue by content type: Three Months Ended June 30, (thousands of dollars) 2021 2020 Net revenue$ 813,346 100.0 %$ 831,310 100.0 % Cost of goods sold 329,715 40.5 % 476,689 57.3 % Gross profit 483,631 59.5 % 354,621 42.7 % General and administrative 104,447 12.8 % 102,173 12.3 % Selling and marketing 103,854 12.8 % 84,779 10.2 % Research and development 92,294 11.3 % 73,108 8.8 % Depreciation and amortization 12,465 1.5 % 12,418 1.5 % Business reorganization 97 - % - - % Total operating expenses 313,157 38.5 % 272,478 32.8 % Income from operations 170,474 21.0 % 82,143 9.9 % Interest and other, net (1,027) (0.1) % 8,218 1.0 % Gain on long-term investments, net 1,997 0.2 % - - % Income before income taxes 171,444 21.1 % 90,361 10.9 % Provision for income taxes 19,188 2.4 % 1,856 0.2 % Net income$ 152,256 18.7 %$ 88,505 10.6 % Three Months Ended June 30, 2021 2020 Net revenue by geographic region: United States$ 493,186 60.6 %$ 470,490 56.6 % International 320,160 39.4 % 360,820 43.4 % Net revenue by platform: Console$ 602,443 74.1 %$ 611,685 73.6 % PC and other 128,645 15.8 % 165,260 19.9 % Mobile 82,258 10.1 % 54,365 6.5 % Net revenue by distribution channel: Digital online$ 740,806 91.1 %$ 735,576 88.5 % Physical retail and other 72,540 8.9 % 95,734 11.5 % Net revenue by content: Recurrent consumer spending$ 572,266 70.4 %$ 496,853 59.8 % Full game and other 241,080 29.6 % 334,457 40.2 %
Three Months Ended
Increase/ % Increase/ (thousands of dollars) 2021 % 2020 % (decrease) (decrease) Net revenue$ 813,346 100.0 %$ 831,310 100.0 %$ (17,964) (2.2) % Software development costs and royalties (1) 87,037 10.7 % 148,047 17.8 % (61,010) (41.2) % Internal royalties 145,378 17.9 % 214,063 25.8 % (68,685) (32.1) % Product costs 46,896 5.8 % 58,560 7.0 % (11,664) (19.9) % Licenses 50,404 6.2 % 56,019 6.7 % (5,615) (10.0) % Cost of goods sold 329,715 40.5 % 476,689 57.3 % (146,974) (30.8) % Gross profit$ 483,631 59.5 %$ 354,621 42.7 %$ 129,010 36.4 %
_______________________________________________________________________________ 24 -------------------------------------------------------------------------------- Table of Contents (1)Includes$12,050 and$29,033 of stock-based compensation expense in 2021 and 2020, respectively, in software development costs and royalties. For the three months endedJune 30, 2021 , net revenue decreased by$18.0 million as compared to the prior year period. The decrease was due to a decrease in net revenue of (i)$47.1 million from Red Dead Redemption 2 and (ii)$26.8 million from Borderlands 3. These decreases were partially offset by an increase in net revenue of (i)$54.7 million from our NBA 2K franchise. Net revenue from console games decreased by$9.2 million and accounted for 74.1% of our total net revenue for the three months endedJune 30, 2021 , as compared to 73.6% for the prior year period. The decrease was due to a decrease in net revenue from Red Dead Redemption 2, Borderlands 3, and our BioShock franchise, partially offset by an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, andPGA TOUR 2K21. Net revenue from PC and other decreased by$36.6 million and accounted for 15.8% of our total net revenue for the three months endedJune 30, 2021 , as compared to 19.9% for the prior year period. The decrease was due to a decrease in net revenue from Borderlands 3, Grand Theft Auto V, and Red Dead Redemption 2, partially offset by an increase in net revenue from our NBA 2K franchise. Net revenue from Mobile increased by$27.9 million and accounted for 10.1% of our total net revenue for three months endedJune 30, 2021 , as compared to 6.5% for the prior year period. The increase was due primarily to an increase in net revenue from Two Dots, Grand Theft Auto: San Andreas, and Dragon City. Net revenue from digital online channels increased by$5.2 million and accounted for 91.1% of our total net revenue for the three months endedJune 30, 2021 , as compared to 88.5% for the prior year period. The increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, and Two Dots, partially offset by a decrease in net revenue from Red Dead Redemption 2, Borderlands 3, Civilization VI, and Grand TheftAuto V. Net revenue from physical retail and other channels decreased by$23.2 million and accounted for 8.9% of our total net revenue for the three months endedJune 30, 2021 , as compared to 11.5% 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 Red Dead Redemption 2, Borderlands 3, Grand Theft Auto V, and our BioShock 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$75.4 million and accounted for 70.4% of net revenue for the three months endedJune 30, 2021 , as compared to 59.8% of net revenue for the prior year period. The increase in net revenue from recurrent consumer spending is due primarily to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, and Two Dots, partially offset by a decrease in net revenue from Borderlands 3, Civilization VI, and Red Dead Redemption 2 and Red Dead Online. Net revenue from full game and other decreased by$93.4 million and accounted for 29.6% of net revenue for the three months endedJune 30, 2021 as compared to 40.2% 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 Red Dead Redemption 2, Grand Theft Auto V, and Borderlands 3. Gross profit as a percentage of net revenue for the three months endedJune 30, 2021 was 59.5% as compared to 42.7% for the prior year period. The increase in gross profit as a percentage of net revenue was due to lower internal royalties due to the timing of when royalties are earned, lower capitalized software amortization due primarily to the timing of releases, and lower development royalties due primarily to the timing of releases. Net revenue earned outside ofthe United States decreased by$40.7 million and accounted for 39.4% of our total net revenue for the three months endedJune 30, 2021 , as compared to 43.4% in the prior year period. The decrease in net revenue outside ofthe United States was due to a decrease in net revenue from Red Dead Redemption 2, Grand Theft Auto V, and Borderlands 3, partially offset by an increase in net revenue from our NBA 2K franchise. Changes in foreign currency exchange rates decreased net revenue by$1.1 million and increased gross profit by$0.3 million for the three months endedJune 30, 2021 as compared to the prior year period. Operating Expenses % of net % of net Increase/ % Increase/ (thousands of dollars) 2021 revenue 2020 revenue (decrease) (decrease) General and administrative$ 104,447 12.8 %$ 102,173 12.3 % 2,274 2.2 % Selling and marketing 103,854 12.8 % 84,779 10.2 %$ 19,075 22.5 % Research and development 92,294 11.3 % 73,108 8.8 % 19,186 26.2 % Depreciation and amortization 12,465 1.5 % 12,418 1.5 % 47 0.4 % Business reorganization 97 - % - - % 97 100.0 % Total operating expenses(1)$ 313,157 38.5 %$ 272,478 32.8 %$ 40,679 14.9 %
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25 -------------------------------------------------------------------------------- Table of Contents (1) Includes stock-based compensation expense, which was allocated as follows (in thousands): 2021 2020 General and administrative$ 17,197 $ 13,200 Selling and marketing 8,033 4,728 Research and development 11,770 6,450 Changes in foreign currency exchange rates decreased total operating expenses by$2.0 million for the three months endedJune 30, 2021 , as compared to the prior year period. General and administrative General and administrative expenses increased by$2.3 million for the three months endedJune 30, 2021 , as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, (ii) professional fees related to our acquisition of Nordeus, (iii) rent expense, and (iv) IT expenses for cloud-based services. The increase was partially offset due primarily to 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 three months endedJune 30, 2021 and 2020 included occupancy expense (primarily rent, utilities and office expenses) of$7.8 million and$7.3 million , respectively, related to our development studios. Selling and marketing Selling and marketing expenses increased by$19.1 million for the three months endedJune 30, 2021 , as compared to the prior year period, due primarily to (i) higher overall marketing expense for Two Dots, Top Eleven, Red Dead Online, Dragon City, and Word Life, partially offset by lower marketing expenses for Disintegration and Grand Theft Auto Online and (ii) personnel expenses due to increased headcount. Research and development Research and development expenses increased by$19.2 million for the three months endedJune 30, 2021 , as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount. Depreciation and Amortization Depreciation and amortization expenses was relatively consistent year-on-year for the three months endedJune 30, 2021 as compared to the prior year period. Business reorganization For the three months endedJune 30, 2021 , business reorganization expense increased by$0.1 million as compared to the prior year period and was not material. Interest and other, net Interest and other, net was expense of$1.0 million for the three months endedJune 30, 2021 , as compared to income of$8.2 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, including a$3.1 million reclassification from Accumulated other comprehensive loss as a result of discontinuing our cash flow hedge related to our cross-currency swap, and (ii) lower interest income due to lower interest rates. Gain on long-term investments, net Gain on long-term investments, net for the three months endedJune 30, 2021 was$2.0 million and was due primarily to changes in value based on the observable price change of our long-term investments. Provision for Income Taxes The provision for income taxes for the three months endedJune 30, 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$19.2 million for the three months endedJune 30, 2021 as compared to$1.9 million for the prior year period. 26 -------------------------------------------------------------------------------- Table of Contents When compared to the statutory rate of 21.0%, the effective tax rate of 11.2% for the three months endedJune 30, 2021 was due primarily to a tax benefit of$12.1 million from tax credits and excess tax benefits of$9.4 million from employee stock-based compensation offset by the geographic mix of earnings. In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 2.1% for the three months endedJune 30, 2020 was due primarily to excess tax benefits of$7.9 million from employee stock-based compensation, tax benefits of$4.9 million from tax credits and 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 expense related to the geographic mix of earnings and decreased excess tax benefits from employee stock-based compensation in the current period, partially offset by increased tax credits. 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. OnMarch 11, 2021 , The American Rescue Plan Act of 2021 ("ARPA") was signed into law. ARPA includes several revenue-raising and business provisions. One such provision that impacts the Company is the expansion of the limitation of compensation deductions for certain covered employees of publicly held corporations. EffectiveApril 1, 2027 , ARPA expanded the limitation to cover the next five most highly compensated employees. AsJune 30, 2021 , ARPA did not have a material impact on our Condensed Consolidated Financial Statements. OnMarch 27, 2020 , theU.S. enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which provides numerous tax and other stimulus measures that generally support theU.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 endedJune 30, 2021 , net income was$152.3 million , as compared to$88.5 million in the prior year period. Diluted earnings per share for the three months endedJune 30, 2021 was$1.30 , as compared to diluted earnings per share of$0.77 in the prior year period. Diluted weighted average shares of 117.1 million were 2.2 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. See Note 11 - Earnings
Per
S hare to our Condensed Consolidated Financial Statements for additional information. 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 ofJune 30, 2021 , we had$1,135.2 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 ofJune 30, 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 theU.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 OnFebruary 8, 2019 , we entered into an unsecured Credit Agreement (the "Credit Agreement"), and onJune 28, 2021 , we amended our unsecured Credit Agreement solely to increase the commitments under the facility by$50 million (as 27 -------------------------------------------------------------------------------- Table of Contents amended, the "Credit Agreement") that runs throughFebruary 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% atJune 30, 2021 ) or (b) 1.125% to 1.750% above LIBOR (approximately 0.10% atJune 30, 2021 ), which rates are determined by reference to our consolidated total net leverage ratio. As ofJune 30, 2021 , there was$247.9 million available to borrow under the Credit Agreement, and we had$2.1 million of letters of credit outstanding. AtJune 30, 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. 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 80.6% and 81.6% of net revenue during the three months endedJune 30, 2021 and 2020, respectively. As ofJune 30, 2021 andMarch 31, 2021 , five customers accounted for 74.2% and 77.6% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 65.3% and 69.2% of such balances atJune 30, 2021 andMarch 31, 2021 , respectively. We had two customers who accounted for 47.7% and 17.6% of our gross accounts receivable as ofJune 30, 2021 , respectively, and two customers who accounted for 50.4% and 18.8% of our gross accounts receivable as ofMarch 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 ofJune 30, 2021 , the amount of cash and cash equivalents held outside of theU.S. by our foreign subsidiaries was$517.8 million . These balances are dispersed across various locations around the world. We believe that such dispersion meets the business and liquidity needs of our foreign affiliates. In addition, we expect to have the ability to generate sufficient cash domestically to support ongoing operations for the foreseeable future. The Tax Cuts and Jobs Act, as enacted inDecember 2017 , includes a number of provisions, which generally establish a territorial-style system for taxing foreign income of domestic multinational corporations. Our current intention is to reinvest 28 -------------------------------------------------------------------------------- Table of Contents indefinitely earnings of our foreign subsidiaries, and therefore we have not recorded any tax liabilities associated with the repatriation of foreign earnings. Our Board of Directors has authorized the repurchase of up to 14.2 million shares of our common stock. Under this program, we may purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance, and other conditions. The program does not require us to repurchase shares and may be suspended or discontinued at any time for any reason. During the three months endedJune 30, 2021 , we did not make any repurchases of our common stock in the open market. We have repurchased a total of 10.4 million shares of our common stock under the program, and as ofJune 30, 2021 , 3.8 million shares of our common stock remained available for repurchase under the share repurchase program. Our changes in cash flows were as follows: Three Months Ended June 30, (thousands of dollars) 2021 2020 Net cash provided by operating activities$ 148,242 $ 445,423 Net cash used in investing activities (13,857) (247,465) Net cash used in financing activities (39,031) (32,003)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents
1,777 1,925
Net change in cash, cash equivalents, and restricted cash and cash equivalents
$
97,131
AtJune 30, 2021 , we had$2,157.4 million of cash and cash equivalents and restricted cash and cash equivalents, compared to$2,060.2 million atMarch 31, 2021 . The increase was due to Net cash provided by operating activities from sales of our products, partially offset by the timing of payments. This net increase was partially offset by (1) Net cash used in financing activities, which was primarily for tax payments related to net share settlements of our restricted stock awards and (2) Net cash used in investing activities primarily related to (i) net purchases of available for sale securities, (ii) our acquisition of Nordeus, and (iii) purchases of fixed assets, including our acquisition of two office buildings in the UK (refer to Note 15 - Acquisitions ), partially offset by changes in bank time deposits. Contractual Obligations and Commitments Refer to N ote 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 three months endedJune 30, 2021 , capital expenditures were$86.4 million , which includes our acquisition of two office buildings in theUK (refer to Note 15 - Acquisitions ). Off-Balance Sheet Arrangements As ofJune 30, 2021 andMarch 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 ofthe United States is principally generated by our operations inEurope ,Asia ,Australia ,Canada , andLatin America . For the three months endedJune 30, 2021 and 2020, 39.4% and 43.4%, respectively, of our net revenue was earned outside ofthe 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. 29 -------------------------------------------------------------------------------- Table of Contents 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in interest rates and foreign currency exchange rates. Interest Rate Risk Our exposure to fluctuations in interest rates relates primarily to our short-term investment portfolio and variable rate debt under the Credit Agreement. We seek to manage our interest rate risk by maintaining a short-term investment portfolio that includes corporate bonds with high credit quality and maturities less than two years. Since short-term investments mature relatively quickly and can be reinvested at the then-current market rates, interest income on a portfolio consisting of short-term securities is more subject to market fluctuations than a portfolio of longer-term maturities. However, the fair value of a short-term portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. We do not currently use derivative financial instruments in our short-term investment portfolio. Our investments are held for purposes other than trading. As ofJune 30, 2021 , we had$1,135.2 million of short-term investments, which included$868.3 million of available-for-sale securities. The available-for-sale securities were recorded at fair market value with unrealized gains or losses resulting from changes in fair value reported as a separate component of Accumulated other comprehensive income (loss), net of tax, in Stockholders' equity. We also had$1,400.9 million of cash and cash equivalents that are comprised primarily of money market funds and bank-time deposits. We determined that, based on the composition of our investment portfolio, there was no material interest rate risk exposure to our Condensed Consolidated Financial Statements or liquidity as ofJune 30, 2021 . Historically, fluctuations in interest rates have not had a significant effect on our operating results. Under our Credit Agreement, loans will bear interest at our election of (a) 0.250% to 0.750% above a certain base rate (3.25% atJune 30, 2021 ), or (b) 1.125% to 1.750% above the LIBOR rate (approximately 0.10% atJune 30, 2021 ), with the margin rate subject to the achievement of certain average liquidity levels. Changes in market rates may affect our future interest expense if there is an outstanding balance on our line of credit. AtJune 30, 2021 , there were no outstanding borrowings under our Credit Agreement. Foreign Currency Exchange Rate Risk We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated intoU.S. dollars using prevailing exchange rates at the relevant period end. Translation adjustments are included as a separate component of Stockholders' equity on our Condensed Consolidated Balance Sheets. For the three months endedJune 30, 2021 and 2020, our foreign currency translation adjustment was a gain of$6.1 million and a gain of$4.7 million , respectively. For the three months endedJune 30, 2021 and 2020, we recognized a foreign currency exchange transaction loss of$2.4 million and a gain of$3.5 million , respectively, included in Interest and other, net in our Condensed Consolidated Statements of Operations. Balance Sheet Hedging Activities We use foreign currency forward contracts to mitigate foreign currency exchange rate risk associated with non-functional currency denominated cash balances and intercompany funding loans, non-functional currency denominated accounts receivable and non-functional currency denominated accounts payable. These transactions are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts is reported as either assets or liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in Interest and other, net, in our Condensed Consolidated Statements of Operations. We do not enter into derivative financial contracts for speculative or trading purposes. AtJune 30, 2021 , we had$64.5 million of forward contracts outstanding 30 -------------------------------------------------------------------------------- Table of Contents to sell foreign currencies in exchange forU.S. dollars and$105.8 million of forward contracts outstanding to buy foreign currencies in exchange forU.S. dollars, all of which have maturities of less than one year. AtMarch 31, 2021 , we had$140.5 million of forward contracts outstanding to sell foreign currencies in exchange forU.S. dollars and$92.1 million of forward contracts outstanding to buy foreign currencies in exchange forU.S. dollars, all of which have maturities of less than one year. For the three months endedJune 30, 2021 and 2020, we recorded a loss of$1.8 million and a loss of$2.7 million , respectively. As ofJune 30, 2021 , the fair value of these outstanding forward contracts was an immaterial loss and was included in Accrued expenses and other current liabilities, and, as ofMarch 31, 2021 , the fair value of outstanding forward contracts was an immaterial loss and was included in Accrued expenses and other current liabilities. The fair value of these outstanding forward contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period. Our hedging programs are designed to reduce, but do not entirely eliminate, the effect of currency exchange rate movements. We believe that the counterparties to these foreign currency forward contracts are creditworthy multinational commercial banks and that the risk of counterparty nonperformance is not material. Notwithstanding our efforts to mitigate some foreign currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations, which may be more volatile as a result of the COVID-19 pandemic. For the three months endedJune 30, 2021 , 39.4% of our revenue was generated outsidethe United States . Using sensitivity analysis, a hypothetical 10% increase in the value of theU.S. dollar against all currencies would decrease revenues by 3.9%, while a hypothetical 10% decrease in the value of theU.S. dollar against all currencies would increase revenues by 3.9%. In our opinion, a substantial portion of this fluctuation would be offset by cost of goods sold and operating expenses incurred in local currency. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Based on an evaluation under the supervision and with the participation of management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter endedJune 30, 2021 , which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. OnJune 1, 2021 , we acquired Nordeus. Our management plans to exclude Nordeus from its assessment of and report on internal control over financial reporting for the fiscal year endingMarch 31, 2022 . We are currently in the process of incorporating the internal controls and procedures of Nordeus into our internal control over financial reporting for purposes of our assessment of and report on internal control over financial reporting for the fiscal year endingMarch 31, 2023 . Limitations on Effectiveness of Controls and Procedures In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events. 31
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