TAKE-TWO INTERACTIVE SOFTWARE, INC. 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 as the situation with the pandemic continues to evolve; 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 22 -------------------------------------------------------------------------------- Table of Contents 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 355 million units. Our most recent installment, Grand Theft Auto V, which was released in 2013, has sold in over 155 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 all key platforms, including mobile. Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres including shooter, action, role-playing, strategy, sports and family/casual entertainment. We expect 2K to continue to develop new, successful franchises in the future. 2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia,Sid Meier's Civilization, and XCOM series. 2K also publishes successful externally developed brands, such as Borderlands. 2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, the WWE 2K professional wrestling series, 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 includes Socialpoint,Playdots , and Nordeus, which publish popular free-to-play mobile games that deliver high quality, deeply engaging entertainment experiences and generates revenue from in-game sales and in-game advertising. T2 Mobile Games' titles include Dragon City, Monster Legends, Two Dots, and Top Eleven. We acquiredNordeus Limited onJune 1, 2021 , for consideration having an acquisition date fair value of$289.8 million , consisting of$132.9 million in cash, the issuance of 0.5 million shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of$153.0 million in cash if Nordeus achieves certain performance measures over the 12- and 24-month periods following the closing (See Note 15 - Acquisitions of our Condensed Consolidated Financial Statements). Founded in 2010, Nordeus is a mobile games company based inBelgrade ,Serbia , best known for Top Eleven, which has over 240 million registered users. 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 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 54 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 concluded inSeptember 2021 . Trends and Factors Affecting our Business Product Release Schedule. Our financial results are affected by the timing of our product releases and the commercial success of those titles. Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue. Sales of Grand Theft Auto products generated 31.2% of our net revenue for the six months endedSeptember 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 the evolution of the COVID-19 pandemic, including economic conditions that may unfavorably affect our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. During fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of the COVID-19 pandemic related business closures and 23 -------------------------------------------------------------------------------- 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. While we expect that engagement trends will continue to be higher than they were pre-pandemic, we expect a moderation of the trends that have benefited our industry as the return to normalcy continues to unfold. Based on our concern for the health and safety of our teams, we have developed and continue to develop plans to help mitigate the negative impacts of the pandemic on our business, including transitioning the vast majority of our teams to working from home. We are taking a prudent approach relating to our return to office cadence and planning. Some of our offices are open, and we plan for the majority of our offices to reopen in the coming months. Given the evolving dynamics of the COVID-19 pandemic, we continue to adhere to safety standards in the planning and implementation of our return to office. To date, our plans have resulted in minimal disruption. However, despite largely positive outcomes to date, these efforts may ultimately not be effective, and a protracted economic downturn may limit the effectiveness of our mitigation efforts. Any of these considerations described above could cause or contribute to the risks described under the heading " Risk Factors " included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year 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 79.8% and 77.7% of net revenue during the six months endedSeptember 30, 2021 and 2020, respectively. As ofSeptember 30, 2021 andMarch 31, 2021 , our five largest customers comprised 76.9% 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 64.3% and 69.2% of such balance atSeptember 30, 2021 andMarch 31, 2021 , respectively. We had two customers who accounted for 45.4% and 18.9%, respectively, of our gross accounts receivable as ofSeptember 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 69.5% of our net revenue by product platform for the six months endedSeptember 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 90.8% of our net revenue for the six months endedSeptember 30, 2021 . We 24 -------------------------------------------------------------------------------- Table of Contents 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. Content Release Highlights During fiscal year 2022, 2K released NBA 2K22, and Private Division released Hades physically on consoles. 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, and Grand Theft Auto: The Trilogy, Private Division will releaseOlliOlli World , and 2K will release WWE 2K22 andTiny Tina's Wonderlands. In addition, throughout the year, we expect to continue to deliver new content for our franchises. We will also continue to invest in opportunities that we believe will enhance and scale our business and have the potential to drive growth over the long-term. Critical Accounting Policies and Estimates Our most critical accounting policies, which are those that require significant judgment, include revenue recognition; price protection and allowances for returns; capitalization and recognition of software development costs and licenses; fair value estimates including valuation of goodwill, intangible assets, and long-lived assets; valuation and recognition of stock-based compensation; and income taxes. In-depth descriptions of these can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021. Recently Adopted and Recently Issued Accounting Pronouncements See Note 1 - Basis of Presentation and Significant Accounting Policies for further discussion. Operating Metric Net Bookings We monitor Net Bookings as a key operating metric in evaluating the performance of our business. Net Bookings is defined as the net amount of products and services sold digitally or sold-in physically during the period and includes licensing fees, merchandise, in-game advertising, strategy guides, and publisher incentives. Net Bookings were as follows: Three Months Ended September 30, Six
Months Ended
Increase/ % Increase/ Increase/ % Increase/
2021 2020 (decrease) (decrease) 2021 2020 (decrease) (decrease)
Net Bookings $ 984,852 $ 957,534 $ 27,318 2.9 % $ 1,696,282 $ 1,953,784 $ (257,502) (13.2) %
For the three months ended September 30, 2021 , Net Bookings increased by $27.3
million as compared to the prior year period due primarily to an increase in Net
Bookings from Grand Theft Auto Online and Grand Theft Auto V; Top Eleven, which
was part of the Nordeus acquisition in June 2021 ; our NBA 2K franchise; Two
Dots, which was part of the Playdots acquisition in September 2020 ; and
Borderlands 3. These increases were partially offset by a decrease in Net
Bookings from PGA TOUR 2K21, which released in August 2020 ; our Mafia franchise;
The Outer Worlds; and our WWE 2K franchise.
For the six months ended September 30, 2021 , Net Bookings decreased by
$257.5 million as compared to the prior year period due primarily to a decrease
in Net Bookings from Grand Theft Auto V and Grand Theft Auto Online, our NBA 2K
franchise, Red Dead Redemption 2, PGA TOUR 2K21, our Mafia franchise, The Outer
Worlds, our WWE 2K franchise, and Borderlands 3, partially offset by an increase
in Net Bookings from Top Eleven and Two Dots.
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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,
(thousands of dollars) 2021 2020 2021 2020
Net revenue $ 858,198 100.0 % $ 841,142 100.0 % $ 1,671,544 100.0 % $ 1,672,452 100.0 %
Cost of goods sold 456,682 53.2 % 432,505 51.4 % 786,397 47.0 % 909,194 54.4 %
Gross profit 401,516 46.8 % 408,637 48.6 % 885,147 53.0 % 763,258 45.6 %
Selling and marketing 136,019 15.8 % 113,691 13.5 % 239,873 14.4 % 198,470 11.9 %
General and administrative 127,331 14.8 % 91,433 10.9 % 231,778 13.9 % 193,606 11.6 %
Research and development 101,508 11.8 % 74,216 8.8 % 193,802 11.6 % 147,324 8.8 %
Depreciation and amortization 16,181 1.9 % 13,691 1.6 % 28,646 1.7 % 26,109 1.6 %
Business reorganization 326 - % 239 - % 423 - % 239 - %
Total operating expenses 381,365 44.4 % 293,270 34.9 % 694,522 41.5 % 565,748 33.8 %
Income from operations 20,151 2.3 % 115,367 13.7 % 190,625 11.4 % 197,510 11.8 %
Interest and other, net (572) (0.1) % 2,706 0.3 % (1,599) (0.1) % 10,924 0.7 %
Gain (loss) on long-term
investments, net 395 - % (655) (0.1) % 2,392 0.1 % (655) - %
Income before income taxes 19,974 2.3 % 117,418 14.0 % 191,418 11.5 % 207,779 12.4 %
Provision for income taxes 9,677 1.1 % 18,097 2.2 % 28,865 1.7 % 19,953 1.2 %
Net income $ 10,297 1.2 % $ 99,321 11.8 % $ 162,553 9.7 % $ 187,826 11.2 %
Three Months Ended September 30, Six Months Ended September 30,
2021 2020 2021 2020
Net revenue by geographic
region:
United States $ 514,920 60.0 % $ 503,583 59.9 % $ 1,008,106 60.3 % $ 974,073 58.2 %
International 343,278 40.0 % 337,559 40.1 % 663,438 39.7 % 698,379 41.8 %
Net revenue by platform:
Console $ 596,080 69.5 % $ 641,269 76.2 % $ 1,198,523 71.7 % $ 1,252,954 74.9 %
PC and other 147,002 17.1 % 138,686 16.5 % 275,647 16.5 % 303,946 18.2 %
Mobile 115,116 13.4 % 61,187 7.3 % 197,374 11.8 % 115,552 6.9 %
Net revenue by distribution
channel:
Digital online $ 779,097 90.8 % $ 725,684 86.3 % $ 1,519,903 90.9 % $ 1,461,260 87.4 %
Physical retail and other 79,101 9.2 % 115,458 13.7 % 151,641 9.1 % 211,192 12.6 %
Net revenue by content:
Recurrent consumer spending $ 563,649 65.7 % $ 519,897 61.8 % $ 1,135,915 68.0 % $ 1,016,750 60.8 %
Full game and other 294,549 34.3 % 321,245 38.2 % 535,629 32.0 % 655,702 39.2 %
Three Months Ended
Increase/ % Increase/
(thousands of dollars) 2021 % 2020 % (decrease) (decrease)
Net revenue $ 858,198 100.0 % $ 841,142 100.0 % $ 17,056 2.0 %
Internal royalties 159,586 18.6 % 127,804 15.2 % 31,782 24.9 %
Software development costs and
royalties (1) 144,869 16.9 % 142,771 17.0 % 2,098 1.5 %
Licenses 86,130 10.0 % 92,944 11.0 % (6,814) (7.3) %
Product costs 66,097 7.7 % 68,986 8.2 % (2,889) (4.2) %
Cost of goods sold 456,682 53.2 % 432,505 51.4 % 24,177 5.6 %
Gross profit $ 401,516 46.8 % $ 408,637 48.6 % $ (7,121) (1.7) %
(1) Includes
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For the three months ended September 30, 2021 , net revenue increased by $17.1
million as compared to the prior year period. The increase was due to an
increase in net revenue of (i) $37.8 million from Two Dots, (ii) $12.3 million
from Grand Theft Auto Online, (iii) $10.2 million from Top Eleven, (iv) $10.1
million from Red Dead Online, and (v) $8.6 million from our NBA 2K franchise.
These increases were partially offset by a decrease in net revenue of (i) $27.5
million from PGA TOUR 2K21, (ii) $27.3 million from our Mafia franchise, and
(iii) $9.6 million from Red Dead Redemption 2.
Net revenue from console games decreased by $45.2 million and accounted for
69.5% of our total net revenue for the three months ended September 30, 2021 , as
compared to 76.2% for the prior year period. The decrease was due to a decrease
in net revenue from PGA TOUR 2K21, and our Mafia franchise. Net revenue from PC
and other increased by $8.3 million and accounted for 17.1% of our total net
revenue for the three months ended September 30, 2021 , as compared to 16.5% for
the prior year period. The increase was due to an increase in net revenue from
Borderlands 3, partially offset by a decrease in net revenue from our Mafia
franchise, and our NBA 2K franchise. Net revenue from mobile increased by $53.9
million and accounted for 13.4% of our total net revenue for three months ended
September 30, 2021 , as compared to 7.3% for the prior year period. The increase
was due primarily to an increase in net revenue from Two Dots and Top Eleven.
Net revenue from digital online channels increased by $53.4 million and
accounted for 90.8% of our total net revenue for the three months ended
September 30, 2021 , as compared to 86.3% for the prior year period. The increase
was due to an increase in net revenue from Two Dots, Grand Theft Auto Online,
Top Eleven, Red Dead Online, and Borderlands 3, partially offset by a decrease
in net revenue from our Mafia franchise and PGA TOUR 2K21. Net revenue from
physical retail and other channels decreased by $36.4 million and accounted for
9.2% of our total net revenue for the three months ended September 30, 2021 , as
compared to 13.7% for the same period in the prior year period. The decrease in
net revenue from physical retail and other channels was due primarily to a
decrease in net revenue from our Mafia franchise, PGA TOUR 2K21, our WWE 2K
franchise, Borderlands 3, and Red Dead Redemption 2, partially offset by an
increase in net revenue from Hades.
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 $43.8 million and
accounted for 65.7% of net revenue for the three months ended September 30,
2021 , as compared to 61.8% 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 Two Dots, Grand Theft Auto Online, and Top Eleven,
partially offset by a decrease in net revenue from Borderlands 3. Net revenue
from full game and other decreased by $26.7 million and accounted for 34.3% of
net revenue for the three months ended September 30, 2021 as compared to 38.2%
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 PGA TOUR
2K21, our Mafia franchise, and our WWE 2K franchise, partially offset by an
increase in net revenue from Borderlands 3 and our NBA 2K franchise.
Gross profit as a percentage of net revenue for the three months ended September
30, 2021 was 46.8% as compared to 48.6% for the prior year period. The decrease
in gross profit as a percentage of net revenue was due to higher internal
royalties due to the timing of when royalties are earned, partially offset by
lower development royalties due primarily to the timing of releases. The
decrease in gross profit as a percentage of net revenue was also impacted by
impairments recognized against some of our capitalized software balances for
three months ended September 30, 2021. (See Note 8 - Software Development
Costs and Licenses of our Condensed Consolidated Financial Statements).
Net revenue earned outside of the United States increased by $5.7 million and
accounted for 40.0% of our total net revenue for the three months ended
September 30, 2021 , as compared to 40.1% in the prior year period. The increase
in net revenue outside of the United States was due to an increase in net
revenue from Two Dots and Top Eleven, partially offset by a decrease in net
revenue from our Mafia franchise. Changes in foreign currency exchange rates
increased net revenue by $3.5 million and increased gross profit by $1.5 million
for the three months ended September 30, 2021 as compared to the prior year
period.
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Operating Expenses
% of net % of net Increase/ % Increase/
(thousands of dollars) 2021 revenue 2020 revenue (decrease) (decrease)
Selling and marketing $ 136,019 15.8 % $ 113,691 13.5 % $ 22,328 19.6 %
General and administrative 127,331 14.8 % 91,433 10.9 % 35,898 39.3 %
Research and development 101,508 11.8 % 74,216 8.8 % 27,292 36.8 %
Depreciation and amortization 16,181 1.9 % 13,691 1.6 % 2,490 18.2 %
Business reorganization 326 - % 239 - % 87 36.4 %
Total operating expenses(1) $ 381,365 44.4 % $ 293,270 34.9 % $ 88,095 30.0 %
(1) Includes stock-based compensation expense, which was allocated as follows
(in thousands):
2021 2020
Selling and marketing $ 7,134 $ 4,439
General and administrative 16,666 13,830
Research and development 13,010 7,643
Changes in foreign currency exchange rates increased total operating expenses by
$2.7 million for the three months ended September 30, 2021 , as compared to the
prior year period.
Selling and marketing
Selling and marketing expenses increased by $22.3 million for the three months
ended September 30, 2021 , as compared to the prior year period, due primarily to
higher overall marketing expense for Grand Theft Auto Online, Two Dots, Top
Eleven, and our NBA 2K franchise, partially offset by lower overall marketing
expenses for our WWE 2K franchise, our Mafia franchise, and PGA TOUR 2K21.
General and administrative
General and administrative expenses increased by $35.9 million for the three
months ended September 30, 2021 , as compared to the prior year period, due
primarily to increases in (i) the fair value of the contingent earn-out
liability related to our acquisition of Nordeus (refer to Note 15 -
Acquisitions ), (ii) personnel expenses for additional headcount, (iii) IT
expenses for cloud-based services, and (iv) transfer tax expense related to our
acquisition of Nordeus. The increase was partially offset due primarily to a
decrease in professional fees in the prior year period related to our
acquisition of Playdots .
General and administrative expenses for the three months ended September 30,
2021 and 2020 included occupancy expense (primarily rent, utilities and office
expenses) of $8.4 million and $7.1 million , respectively, related to our
development studios.
Research and development
Research and development expenses increased by $27.3 million for the three
months ended September 30, 2021 , as compared to the prior year period, due
primarily to increases in (i) personnel expenses due to increased headcount and
(ii) IT expenses for cloud-based services.
Depreciation and Amortization
Depreciation and amortization expenses increased by $2.5 million for the three
months ended September 30, 2021 as compared to the prior year period, due
primarily to IT infrastructure and leasehold improvements for new office
locations.
Business reorganization
For the three months ended September 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 $0.6 million for the three months ended
September 30, 2021 , as compared to income of $2.7 million for the prior year
period. The change was due primarily to (i) higher interest expense on our
available-for-sale securities and (ii) lower foreign currency gains in the
current year period as compared to the prior year period.
Gain on long-term investments, net
Gain on long-term investments, net for the three months ended September 30, 2021
was $0.4 million and was due primarily to changes in value based on the
observable price changes of our long-term investments.
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Provision for Income Taxes
The provision for income taxes for the three months ended September 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 $9.7 million for the three
months ended September 30, 2021 as compared to $18.1 million for the prior year
period.
When compared to the statutory rate of 21.0%, the effective tax rate of 48.4%
for the three months ended September 30, 2021 was due primarily to a tax expense
of $2.4 million related to a nondeductible increase in fair value of the
contingent consideration liability associated with the acquisition of Nordeus,
tax expense of $5.4 million from a shortfall on employee stock-based
compensation offset by $2.6 million from the geographic mix of earnings.
In the prior year period, when compared to our statutory rate of 21%, the
effective tax rate of 15.4% for the three months ended September 30, 2020 was
due primarily to a tax benefit of $5.7 million from tax credits, excess tax
benefits of $2.3 million from employee stock-based compensation, and offset by
the geographic mix of earnings.
The change in the effective tax rate, when compared to the prior year period's
effective tax rate, is due primarily to decreases in tax benefits from tax
credits and excess tax benefits from employee stock-based compensation the
current period, partially offset by the geographic mix of earnings.
The accounting for share-based compensation will increase or decrease our
effective tax rate based on the difference between our share-based compensation
expense and the deductions taken on our tax return, which depends on the stock
price at the time of the employee award vesting. Since we recognize excess tax
benefits on a discrete basis, we anticipate that our effective tax rate will
vary from quarter to quarter depending on our stock price in each period.
We anticipate that additional excess tax benefits or shortfalls from employee
stock compensation, tax credits, and changes in our geographic mix of earnings
could have a significant impact on our effective tax rate in the future. In
addition, we are regularly examined by domestic and foreign taxing authorities.
Examinations may result in tax assessments in excess of amounts claimed and the
payment of additional taxes. We believe our tax positions comply with applicable
tax law, and that we have adequately provided for reasonably foreseeable tax
assessments. It is possible that settlement of audits and/or the expiration of
the statute of limitations could have an impact on our effective tax rate in
future periods.
On March 11, 2021 , The American Rescue Plan Act of 2021 ("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. Effective April 1, 2027 , ARPA expanded the limitation to cover the
next five most highly compensated employees. As September 30, 2021 , ARPA did not
have a material impact on our Condensed Consolidated Financial Statements.
On March 27, 2020 , the U.S. enacted the Coronavirus Aid, Relief and Economic
Security Act (the "CARES Act"), which provides numerous tax and other stimulus
measures that generally support the U.S. economy. The CARES Act did not have a
material impact on our Condensed Consolidated Financial Statements.
Net income and earnings per share
For the three months ended September 30, 2021 , net income was $10.3 million , as
compared to $99.3 million in the prior year period. Diluted earnings per share
for the three months ended September 30, 2021 was $0.09 , as compared to diluted
earnings per share of $0.86 in the prior year period. Diluted weighted average
shares of 116.8 million were 1.4 million shares higher as compared to the prior
year period, due primarily to normal stock compensation activity, including
vests as well as grants and forfeitures in the prior year being fully
outstanding in the current year period, partially offset by shares repurchased.
See Note 11 - Earnings Per Share to our Condensed Consolidated Financial
Statements for additional information.
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Six Months Ended September 30, 2021 Compared to September 30, 2020
Increase/ % Increase/
(thousands of dollars) 2021 % 2020 % (decrease) (decrease)
Net revenue $ 1,671,544 100.0 % $ 1,672,452 100.0 % $ (908) (0.1) %
Internal royalties 304,964 18.2 % 341,867 20.4 % (36,903) (10.8) %
Software development costs and
royalties (1) 231,906 13.9 % 290,818 17.4 % (58,912) (20.3) %
Licenses 136,534 8.2 % 148,963 8.9 % (12,429) (8.3) %
Product costs 112,993 6.8 % 127,546 7.6 % (14,553) (11.4) %
Cost of goods sold 786,397 47.0 % 909,194 54.4 % (122,797) (13.5) %
Gross profit $ 885,147 53.0 % $ 763,258 45.6 % $ 121,889 16.0 %
(1) Includes $22,386 and $48,429 of stock-based compensation expense in 2021 and
2020, respectively, in software development costs and royalties.
For the six months ended September 30, 2021 , net revenue decreased by $0.9
million as compared to the prior year period. The decrease was due to a decrease
in net revenue of (i) $56.7 million from Red Dead Redemption 2, (ii) $23.0
million from Borderlands 3, (iii) $15.4 million from PGA TOUR 2K21, and (iv)
$11.3 million from Civilization VI. These decreases were partially offset by an
increase in net revenue of (i) $63.3 million from our NBA 2K franchise, (ii)
$54.4 million from Two Dots, (iii) $31.9 million from Grand Theft Auto Online,
(iv) $13.7 million from Red Dead Online, and (v) $12.2 million from Top Eleven.
Net revenue from console games decreased by $54.4 million and accounted for
71.7% of our total net revenue for the six months ended September 30, 2021 , as
compared to 74.9% for the prior year period. The decrease was due to a decrease
in net revenue from our Red Dead Redemption 2, Borderlands 3, our Mafia
franchise, PGA TOUR 2K21, and our WWE 2K franchise, partially offset by an
increase in net revenue from our NBA 2K franchise, and Grand Theft Auto Online.
Net revenue from PC and other decreased by $28.3 million and accounted for 16.5%
of our total net revenue for the six months ended September 30, 2021 , as
compared to 18.2% for the prior year period. The decrease was due to a decrease
in net revenue from Red Dead Redemption 2, Grand Theft Auto V, and Civilization
VI, partially offset by an increase in net revenue from our NBA 2K franchise.
Net revenue from mobile increased by $81.8 million and accounted for 11.8% of
our total net revenue for six months ended September 30, 2021 , as compared to
6.9% for the prior year period. The increase was due primarily to an increase in
net revenue from Two Dots and Top Eleven.
Net revenue from digital online channels increased by $58.6 million and
accounted for 90.9% of our total net revenue for the six months ended September
30, 2021 , as compared to 87.4% for the prior year period. The increase was due
to an increase in net revenue from our NBA 2K franchise, Two Dots, Grand Theft
Auto Online, Red Dead Online, and Top Eleven, partially offset by a decrease in
net revenue from Red Dead Redemption 2, our Mafia franchise, Borderlands 3,
Civilization VI, PGA TOUR 2K21, and our XCOM franchise. Net revenue from
physical retail and other channels decreased by $59.6 million and accounted for
9.1% of our total net revenue for the six months ended September 30, 2021 , as
compared to 12.6% for the prior year period. The decrease was due to a decrease
in net revenue from Red Dead Redemption 2, our Mafia franchise, Borderlands 3,
PGA TOUR 2K21, Grand Theft Auto V, and our WWE 2K 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 $119.2 million and
accounted for 68.0% of net revenue for the six months ended September 30, 2021 ,
as compared to 60.8% of net revenue for the prior year period. The increase was
due to an increase in net revenue from Two Dots, our NBA 2K franchise, Grand
Theft Auto Online, and Top Eleven, partially offset by a decrease in net revenue
from Borderlands 3. Net revenue from full game and other decreased by $120.1
million and accounted for 32.0% of net revenue for the six months ended
September 30, 2021 as compared to 39.2% of net revenue for the prior year
period. The decrease was due to a decrease in net revenue from Red Dead
Redemption 2, our Mafia franchise, Grand Theft Auto V, and PGA TOUR 2K21.
Gross profit as a percentage of net revenue for the six months ended September
30, 2021 was 53.0% as compared to 45.6% for the prior year period. The increase
in gross profit as a percentage of net revenue was due to lower development
royalties due primarily to the timing of releases and lower internal royalties
due primarily to the timing of when royalties are earned. Offsetting the
increase in gross profit as a percentage of net revenue were impairments
recognized against some of our capitalized software balances for six months
ended September 30, 2021. (See Note 8 - Software Development Costs and
Licenses of our Condensed Consolidated Financial Statements).
Net revenue earned outside of the United States decreased by $34.9 million , and
accounted for 39.7% of our total net revenue for the six months ended September
30, 2021 , as compared to 41.8% in the prior year period. The decrease in net
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revenue outside of the United States was due to a decrease in net revenue from
Red Dead Redemption 2, our Mafia franchise, Grand Theft Auto V, and Borderlands
3, partially offset by an increase in net revenue from Two Dots, Top Eleven, and
our NBA 2K franchise. Changes in foreign currency exchange rates increased net
revenue by $2.3 million and increased gross profit by $1.7 million for the six
months ended September 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)
Selling and marketing $ 239,873 14.4 % $ 198,470 11.9 % $ 41,403 20.9 %
General and administrative 231,778 13.9 % 193,606 11.6 % 38,172 19.7 %
Research and development 193,802 11.6 % 147,324 8.8 % 46,478 31.5 %
Depreciation and amortization 28,646 1.7 % 26,109 1.6 % 2,537 9.7 %
Business reorganization 423 - % 239 - % 184 77.0 %
Total operating expenses (1) $ 694,522 41.5 % $ 565,748 33.8 % $ 128,774 22.8 %
(1) Includes stock-based compensation expense, which was allocated as follows
(in thousands):
2021 2020
Selling and marketing $ 15,167 $ 9,167
General and administrative 33,863 27,030
Research and development 24,780 14,093
Changes in foreign currency exchange rates increased total operating expenses by
$0.7 million for the six months ended September 30, 2021 , as compared to the
prior year period.
Selling and marketing
Selling and marketing expenses increased by $41.4 million for the six months
ended September 30, 2021 , as compared to the prior year period, due primarily to
higher overall marketing expenses for Two Dots, Grand Theft Auto Online, Top
Eleven, and our NBA 2K franchise.
General and administrative
General and administrative expenses increased by $38.2 million for the six
months ended September 30, 2021 , as compared to the prior year period, due to
increases in (i) the fair value of the contingent earn-out liability related to
our acquisition of Nordeus (refer to Note 15 - Acquisitions ), (ii) personnel
expenses for additional headcount (iii) IT expenses for cloud-based services
(iv) professional fees related to our acquisition of Nordeus, and (v) rent
expense. The increase was partially offset by a decrease in charitable
contributions as compared to the prior year period primarily due to our COVID-19
response and relief efforts in the prior year period.
General and administrative expenses for the six months ended September 30, 2021
and 2020 included occupancy expense (primarily rent, utilities and office
expenses) of $15.9 million and $13.7 million , respectively, related to our
development studios.
Research and development
Research and development expenses increased by $46.5 million for the six months
ended September 30, 2021 , as compared to the prior year period, due primarily to
increases in personnel expenses for higher headcount.
Depreciation and Amortization
Depreciation and amortization expenses for the six months ended September 30,
2021 increased by $2.5 million , as compared to the prior year period, due
primarily to IT infrastructure.
Business reorganization
During the six months ended September 30, 2021 , as compared to the prior year
period, business reorganization expense increased $0.2 million and was not
material.
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Interest and other, net
Interest and other, net was expense of $1.6 million for the six months ended
September 30, 2021 , as compared to income of $10.9 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, (ii) higher
interest expense on our available-for-sale investments, and (iii) lower interest
income on our investments due to lower rates.
Gain on long-term investments, net
Gain on long-term investments, net for the six months ended September 30, 2021
was $2.4 million and was due primarily to changes in value based on the
observable price change of our long-term investment.
Provision for Income Taxes
The provision for income taxes for the six months ended September 30, 2021 is
based on our projected annual effective tax rate for fiscal year 2021, adjusted
for specific items that are required to be recognized in the period in which
they are incurred. The provision for income taxes was $28.9 million for the six
months ended September 30, 2021 as compared to a provision for income taxes of
$20.0 million for the prior year period.
When compared to the statutory rate of 21.0%, the effective tax rate of 15.1%
for the six months ended September 30, 2021 was due primarily to a tax benefit
of $11.4 million as a result of tax credits anticipated to be utilized and
excess tax benefits of $4.0 million from employee stock-based compensation
offset by a tax expense of $2.4 million related to a nondeductible increase in
fair value of the contingent consideration liability associated with the
acquisition of Nordeus and by the geographic mix of earnings.
In the prior year period, when compared to our blended statutory rate of 21%,
the effective tax rate of 9.6% for the six months ended September 30, 2020 was
due primarily to a benefit of $10.7 million as a result of tax credits
anticipated to be utilized and excess tax benefits of $10.2 million from
employee stock-based compensation.
The change in the effective tax rate, when compared to the prior year period's
effective tax rate, is due primarily to decreased tax benefits from employee
stock-based compensation in the current period, partially offset by the
geographic mix of earnings.
The accounting for share-based compensation will increase or decrease our
effective tax rate based on the difference between our share-based compensation
expense and the deductions taken on our tax return, which depends on the stock
price at the time of the employee award vesting. Since we recognize excess tax
benefits on a discrete basis, we anticipate that our effective tax rate will
vary from quarter to quarter depending on our stock price in each period.
We anticipate that additional excess tax benefits or shortfalls from employee
stock compensation, tax credits, and changes in our geographic mix of earnings
could have a significant impact on our effective tax rate in the future. In
addition, we are regularly examined by domestic and foreign taxing authorities.
Examinations may result in tax assessments in excess of amounts claimed and the
payment of additional taxes. We believe our tax positions comply with applicable
tax law, and that we have adequately provided for reasonably foreseeable tax
assessments. It is possible that settlement of audits and/or the expiration of
the statute of limitations could have an impact on our effective tax rate in
future periods.
On March 11, 2021 , The American Rescue Plan Act of 2021 ("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. Effective April 1, 2027 , ARPA expanded the limitation to cover the
next five most highly compensated employees. As September 30, 2021 , ARPA did not
have a material impact on our Condensed Consolidated Financial Statements.
On March 27, 2020 , the U.S. enacted the Coronavirus Aid, Relief and Economic
Security Act (the "CARES Act"), which provides numerous tax and other stimulus
measures that generally support the U.S. economy. The CARES Act did not have a
material impact on our Condensed Consolidated Financial Statements.
Net income and earnings per share
For the six months ended September 30, 2021 , net income was $162.6 million , as
compared to $187.8 million in the prior year period. For the six months ended
September 30, 2021 , diluted earnings per share was $1.39 as compared to diluted
earnings per share of $1.63 in the prior year period. Diluted weighted average
shares of 116.9 million were 1.6 million shares higher as compared to the prior
year period, due primarily to normal stock compensation activity, including
vests as well as grants and forfeitures in the prior year being fully
outstanding in the current year period, partially offset by shares repurchased.
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See Note 11 - Earnings Per Share to our Condensed Consolidated Financial
Statements for additional information regarding earnings per share.
Liquidity and Capital Resources
Our primary cash requirements have been to fund (i) the development,
manufacturing, and marketing of our published products, (ii) working capital,
(iii) acquisitions, and (iv) capital expenditures. We expect to rely on cash and
cash equivalents as well as on short-term investments, funds provided by our
operating activities, and our Credit Agreement to satisfy our working capital
needs.
Short-term Investments
As of September 30, 2021 , we had $1,440.6 million of short-term investments,
which are highly liquid in nature and represent an investment of cash that is
available for current operations. From time to time, we may purchase additional
short-term investments depending on future market conditions and liquidity
needs. As of September 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 the U.S.
Federal Reserve , in response to the COVID-19 pandemic and related adverse
economic conditions, we anticipate investment yields may remain low, which would
lower our future interest income. Such impact is not expected to be material to
our liquidity.
Credit Agreement
On February 8, 2019 , we entered into an unsecured Credit Agreement (the "Credit
Agreement"), and on June 28, 2021 , we amended our unsecured Credit Agreement
solely to increase the commitments under the facility by $50 million (as
amended, the "Credit Agreement") that runs through February 8, 2024 . The Credit
Agreement provides for an unsecured five-year revolving credit facility with
commitments of $250 million , including sublimits for (i) the issuance of letters
of credit in an aggregate face amount of up to $25 million and (ii) borrowings
and letters of credit denominated in Pounds Sterling, Euros, and Canadian
Dollars in an aggregate principal amount of up to $25 million . In addition, the
Credit Agreement contains uncommitted incremental capacity permitting the
incurrence of up to an additional $200 million in term loans or revolving credit
facilities.
Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to
0.750% above a certain base rate (3.25% at September 30, 2021 ) or (b) 1.125% to
1.750% above LIBOR (approximately 0.09% at September 30, 2021 ), which rates are
determined by reference to our consolidated total net leverage ratio. The LIBOR
benchmark rate is expected to be phased out by the end of June 2023 . We do not
expect that the discontinuation of the LIBOR rate will have a material impact on
our liquidity or results of operations.
As of September 30, 2021 , there was $247.8 million available to borrow under the
Credit Agreement, and we had $2.2 million of letters of credit outstanding. At
September 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 79.8% and 77.7% of net revenue during the six
months ended September 30, 2021 and 2020, respectively. As of September 30, 2021
and March 31, 2021 , five customers accounted for 76.9% and 77.6% of our gross
accounts receivable, respectively. Customers that individually accounted for
more than 10% of
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our gross accounts receivable balance comprised 64.3% and 69.2% of such balances
at September 30, 2021 and March 31, 2021 , respectively. We had two customers who
accounted for 45.4% and 18.9% of our gross accounts receivable as of
September 30, 2021 , respectively, and two customers who accounted for 50.4% and
18.8% of our gross accounts receivable as of March 31, 2021 , respectively. Based
upon performing ongoing credit evaluations, maintaining trade credit insurance
on a majority of our customers and our past collection experience, we believe
that the receivable balances from these largest customers do not represent a
significant credit risk, although we actively monitor each customer's credit
worthiness and economic conditions that may affect our customers' business and
access to capital. We are monitoring the current global economic conditions,
including credit markets and other factors as it relates to our customers in
order to manage the risk of uncollectible accounts receivable, including as a
result of the COVID-19 pandemic.
We believe our current cash and cash equivalents, short-term investments and
projected cash flows from operations, along with availability under our Credit
Agreement, will provide us with sufficient liquidity to satisfy our cash
requirements for working capital, capital expenditures, and commitments on both
a short-term and long-term basis. Our liquidity and capital resources were not
materially affected by the COVID-19 pandemic and related volatility and slowdown
in the global financial markets to date. For further discussion regarding the
potential future impacts of the COVID-19 pandemic and related economic
conditions on our business, refer to Item 1A, Risk Factors of our Annual
Report on Form 10-K for the fiscal year ended March 31, 2021.
As of September 30, 2021 , the amount of cash and cash equivalents held outside
of the U.S. by our foreign subsidiaries was $306.9 million . These balances are
dispersed across various locations around the world. We believe that such
dispersion meets the business and liquidity needs of our foreign affiliates. In
addition, we expect to have the ability to generate sufficient cash domestically
to support ongoing operations for the foreseeable future.
The Tax Cuts and Jobs Act, as enacted in December 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 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 ended September 30, 2021 , we repurchased 1.3 million
shares of our common stock in the open market for $200.0 million , including
commissions, as part of the program. We have repurchased a total of 11.7 million
shares of our common stock under the program, and as of September 30, 2021 , 2.6
million shares of our common stock remained available for repurchase under the
share repurchase program.
Our changes in cash flows were as follows:
Six Months Ended
September 30,
(thousands of dollars) 2021 2020
Net cash provided by operating activities $ 283,679 $ 626,745
Net cash used in investing activities (384,093) (502,624)
Net cash used in financing activities (244,386) (41,699)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents
(741) 8,966
Net change in cash, cash equivalents, and restricted cash and cash equivalents
$
(345,541)
AtSeptember 30, 2021 , we had$1,714.7 million of cash and cash equivalents and restricted cash and cash equivalents, compared to$2,060.2 million atMarch 31, 2021 . The decrease was due to (1) Net cash used in investing activities primarily related to (i) net purchases of available for sale securities, (ii) our acquisition of Nordeus (refer to Note 15 - Acquisitions ), and (iii) purchases of fixed assets, including our acquisition of two office buildings in the UK (refer to Note 15 - Acquisitions ) and (2) Net cash used in financing activities, which was primarily for (i) repurchase of our common stock and (ii) tax payments related to net share settlements of our restricted stock awards. This net increase was partially offset by Net cash provided by operating activities from sales of our products, partially offset by the timing of payments. 34 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments Refer to Note 13 - Commitments and Contingencies to our Condensed Consolidated Financial Statements for disclosures regarding our commitments. Capital Expenditures In fiscal year 2022, we anticipate capital expenditures to be$170 million . During the six months endedSeptember 30, 2021 , capital expenditures were$111.2 million , which includes our acquisition of two office buildings in theUK (refer to Note 15 - Acquisitions ). Off-Balance Sheet Arrangements As ofSeptember 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 endedSeptember 30, 2021 and 2020, 40.0% and 40.1%, 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. 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 ofSeptember 30, 2021 , we had$1,440.6 million of short-term investments, which included$862.9 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$856.9 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 ofSeptember 30, 2021 . 35 -------------------------------------------------------------------------------- Table of Contents 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% atSeptember 30, 2021 ), or (b) 1.125% to 1.750% above the LIBOR rate (approximately 0.09% atSeptember 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. AtSeptember 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 endedSeptember 30, 2021 and 2020, our foreign currency translation adjustment was a loss of$16.7 million and a gain of$18.9 million , respectively. For the three months endedSeptember 30, 2021 and 2020, we recognized a foreign currency exchange transaction gain of$0.4 million and a gain of$1.5 million , respectively, included in Interest and other, net in our Condensed Consolidated Statements of Operations. For the six months endedSeptember 30, 2021 and 2020, our foreign currency translation adjustment was a loss of$10.6 million and a gain of$23.6 million , respectively. For the six months endedSeptember 30, 2021 and 2020, we recognized a foreign currency exchange transaction loss of$1.9 million and a gain of$5.0 million , respectively, included in Interest and other, net in our Condensed Consolidated Statement 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. AtSeptember 30, 2021 , we had$153.1 million of forward contracts outstanding to sell foreign currencies in exchange forU.S. dollars and$93.5 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 endedSeptember 30, 2021 and 2020, we recorded a gain of$0.6 million and a loss of$1.0 million , respectively. For the six months endedSeptember 30, 2021 and 2020, we recorded a loss of$1.2 million and a loss of$3.7 million , respectively. As ofSeptember 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 endedSeptember 30, 2021 , 40.0% 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 4.0%, while a hypothetical 10% decrease in the value of theU.S. dollar against all currencies would increase revenues by 4.0%. 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 36 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 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. 37
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