TAKE-TWO INTERACTIVE SOFTWARE, INC. CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained herein, which are not historical facts including statements relating to our acquisition of Zynga Inc. (the "Zynga Acquisition"), are considered forward-looking statements under federal securities laws and may be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects," "seeks," "should," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Such forward-looking statements are based on the current beliefs of our management as well as assumptions made by and information currently available to them, which are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and uncertainties including the uncertainty of the impact of the COVID-19 pandemic and measures taken in response thereto; the effect that measures taken to mitigate the COVID-19 pandemic have on our operations, including our ability to timely deliver our titles and other products, and on the operations of our counterparties, including retailers, including digital storefronts and platform partners, and distributors; the effects of the COVID-19 pandemic on consumer demand and the discretionary spending patterns of our customers as the situation with the pandemic continues to evolve; the impact of changes in interest rates by theFederal Reserve and other central banks, including on our short-term investment portfolio; the impact of inflation; volatility in foreign currency exchange rates; risks that the Zynga Acquisition disrupts our plans and operations; the ability company to retain key personnel subsequent to the Zynga Acquisition; the ability to realize the benefits of the Zynga Acquisition, including Net Bookings opportunities and cost synergies; the ability to successfully integrate Zynga's business with Take-Two's business or to integrate the businesses within the anticipated timeframe; the outcome of any legal proceedings that may be instituted against Take-Two, Zynga or others related to the acquisition; the amount of the costs, fees, expenses and charges related to the acquisition; other risks included herein; as well as, but not limited to, the risks and uncertainties discussed under the heading " Risk Factors " included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 ; and our other periodic filings with theSecurities and Exchange Commission . All forward-looking statements are qualified by these cautionary statements and speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion should be read in conjunction with the MD&A and our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 . All figures are in millions, except per share amounts or as otherwise noted.
Overview
Zynga Acquisition and Related Debt Transactions
We acquired Zynga onMay 23, 2022 , for consideration having an acquisition date fair value of$9,521.8 , consisting of$3,992.4 in cash, the issuance of 46.3 shares of our common stock, valued at$5,377.7 , and$151.7 of replacement equity awards attributable to the pre-acquisition service period. Refer to Note 14 - Acquisitions of our Condensed Consolidated Financial Statements. Zynga is a leading developer of mobile games with a mission to connect the world through games.
Also, in connection with the Zynga Acquisition, we entered into several debt transactions (refer to Note 9 - Debt ).
OnApril 14, 2022 , we completed our offering and sale of$2,700.0 aggregate principal amount of our senior notes, consisting of$1,000.0 principal amount of our 3.300% Senior Notes due 2024 (the "2024 Notes"),$600.0 principal amount of our 3.550% Senior Notes due 2025 (the "2025 Notes"),$600.0 principal amount of our 3.700% Senior Notes due 2027 (the "2027 Notes"), and$500.0 principal amount of our 4.000% Senior Notes due 2032 (the "2032 Notes" and, together with the 2024 Notes, the 2025 Notes and the 2027 Notes, the "Senior Notes"). The Senior Notes were issued under an indenture between the Company and The Bank of New York Mellon, as trustee (the "Trustee"). The 2024 Notes mature onMarch 28, 2024 , and bear interest at an annual rate of 3.300%. The 2025 Notes mature onApril 14, 2025 , and bear interest at an annual rate of 3.550%. The 2027 Notes mature onApril 14, 2027 , and bear interest at an annual rate of 3.700%. The 2032 Notes mature onApril 14, 2032 , and bear interest at an annual rate of 4.000%. We will pay interest on the 2024 Notes semiannually onMarch 28 andSeptember 28 of each year, commencingSeptember 28, 2022 . During the nine months endedDecember 31, 2022 , we made interest payments of$15.0 . We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually onApril 14 andOctober 14 of each year, commencingOctober 14, 2022 . During the three and nine months endedDecember 31, 2022 , we made interest payments of$31.8 . The proceeds were used to finance a portion of our acquisition of Zynga. 34 --------------------------------------------------------------------------------
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OnMay 23, 2022 , we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement"), which replaced in its entirety the Company's prior Credit Agreement and provides for an unsecured five-year revolving credit facility with commitments of$500.0 , including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to$100.0 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to$100.0 . In addition, the 2022 Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional amount not to exceed the greater of$250.0 and 35.0% of the Company's Consolidated Adjusted EBITDA (as defined in the 2022 Credit Agreement). Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (7.50% atDecember 31, 2022 ) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 4.36% atDecember 31, 2022 , which rates are determined by the Company's credit rating. OnJune 22, 2022 , we drew down approximately$200.0 at 3.28% from our facility under the 2022 Credit Agreement. InDecember 2022 , we fully repaid the$200.0 drawdown, and, atDecember 31, 2022 , there were no borrowings against the 2022 Credit Agreement. OnJune 22, 2022 , we entered into an unsecured 364-Day Term Loan Credit Agreement ("Term Loan"). The Term Loan provides for an unsecured 364-day term loan credit facility in the aggregate principal amount of$350.0 and matures onJune 21, 2023 , and will bear interest at our election at a margin of (a) 0.000% to 0.375% above an alternate base rate (defined on the basis of prime rate) or (b) 0.750% to 1.375% above SOFR, which margins are determined by reference to our credit rating. We fully drew down on the Term Loan onJune 22, 2022 at 3.6%. The proceeds from our draw-downs of the 2022 Credit Agreement and Term Loan were used to finance a portion of the settlement of the Convertible Notes acquired from Zynga. In total, we paid$321.6 for the tendered or converted 2024 Convertible Notes, including interest, and$845.1 for the tendered 2026 Convertible Notes in cash, and we issued 3.7 shares of our common stock upon the conversion of the 2024 Convertible Notes. After settlement of all Convertible Notes tendered or surrendered for conversion,$21.4 aggregate principal amount of the 2024 Convertible Notes remained outstanding and$29.4 aggregate principal amount of the 2026 Convertible Notes remained outstanding atDecember 31, 2022 .
Cybersecurity Incident
InSeptember 2022 , we experienced a network intrusion in which an unauthorized third party illegally accessed and downloaded confidential information from our systems, including early development footage of the next installment in the Grand Theft Auto franchise. We immediately took steps to isolate and contain the incident.Rockstar Games did not experience and does not anticipate any disruption to its current services nor any long-term effect on its development timelines as a result of this incident. Subsequently, also inSeptember 2022 , we became aware that an unauthorized third party illegally accessed credentials for a vendor platform that 2K Games uses to provide help desk support to its customers. The unauthorized party sent a communication to certain players containing a malicious link. 2K Games immediately notified all affected users and took steps to restrict further unauthorized activity until service was restored. In connection with this activity (the "Cybersecurity Incident"), we have incurred certain immaterial incremental one-time costs related to consultants, experts and data recovery efforts and expect to incur additional costs related to cybersecurity protections in the future. We are in the process of implementing a variety of measures to enhance further our cybersecurity protections.
Our Business
We are a leading developer, publisher, and marketer of interactive entertainment
for consumers around the globe. We develop and publish products principally
through
Our strategy is to be the most creative, innovative, and efficient company in
our industry. Our ambition is to capitalize on the popularity of video games by
creating the highest-quality, most engaging interactive entertainment franchises
in the business and delivering them across an array of platforms to captivate
our global audience. We focus on building compelling entertainment franchises by
publishing a select number of titles for which we can create sequels and
incremental revenue opportunities through virtual currency, add-on content,
in-game purchases, and in-game advertising. Most of our intellectual property is
internally owned and developed, which we believe best positions us financially
and competitively. We have established a portfolio of proprietary software
content for the major hardware platforms in a wide range of genres, including
action, adventure, family/casual, role-playing, shooter, sports, and strategy,
which we distribute worldwide. We believe that our commitment to creativity and
innovation is a distinguishing strength, enabling us to differentiate our
products in the marketplace by combining advanced technology with compelling
storylines and characters that provide unique gameplay experiences for
consumers. We have created, acquired, or licensed a group of highly recognizable
brands to match the broad consumer demographics that we serve, ranging from
adults to children and game enthusiasts to casual gamers. Another
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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 derived primarily from the sale of internally developed software titles and software titles developed by third parties. Operating margins are dependent in part upon our ability to release new, commercially successful software products and to manage effectively their development and marketing costs. We have internal development studios located inAustralia ,Canada ,China ,Czech Republic ,Finland ,Germany ,Hungary ,India ,Serbia ,South Korea ,Spain ,Turkey , theUnited Kingdom (U.K. ), andthe United States (U.S. ). Software titles published by ourRockstar Games label are primarily internally-developed. We expectRockstar Games , our wholly-owned publisher of the Grand Theft Auto,Max Payne ,Midnight Club , Red Dead Redemption, and other popular franchises, to continue to be a leader in the action/adventure product category and to create groundbreaking entertainment. We believe thatRockstar Games has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 390 million units. Our most recent installment, Grand Theft Auto V, which was released in 2013, has sold-in more than 175 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 50 million units worldwide.Rockstar Games is also well known for developing brands in other genres, including the L.A. Noire, Bully, and Manhunt franchises.Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, and additional content. Rockstar Game's titles are published across all key platforms, including mobile. InFebruary 2022 ,Rockstar Games announced that active development of the next entry in the Grand Theft Auto series is well underway. Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres, including shooter, action, role-playing, strategy, sports and family/casual entertainment. We expect 2K to continue to develop new, successful franchises in the future. 2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia,Sid Meier's Civilization, and XCOM series. 2K also publishes successful externally developed brands, such as Borderlands andTiny Tina's Wonderlands. 2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, the WWE 2K professional wrestling series, andPGA TOUR 2K. InMarch 2020 , 2K announced a multi-year partnership with theNational Football League encompassing multiple future video games that will be non-simulation football game experiences. 2K also publishes mobile titles, such as WWE SuperCard. Our Private Division label is dedicated to bringing titles from the industry's leading creative talent to market and is the publisher and owner of Kerbal Space Program andOlliOlli World . Kerbal Space Program 2 is planned for early access release in fiscal year 2023. Private Division also previously released The Outer Worlds and Ancestors: The Humankind Odyssey. Our Zynga label, which includes our former T2 Mobile Games label (which included Socialpoint,Playdots , and Nordeus) publishes popular free-to-play mobile games that deliver high quality, deeply engaging entertainment experiences and generates revenue from in-game sales and in-game advertising. Zynga's diverse portfolio of popular game franchises has been downloaded more than 6 billion times, includingCSR Racing , Dragon City, Empires & Puzzles, FarmVille, Golf Rival,Harry Potter : Puzzles & Spells, Merge Dragons, Merge Magic, Monster Legends, Parking Jam 3D, Toon Blast, Top Eleven, Toy Blast, Two Dots, Words With Friends, Zynga Poker, and a high volume of hyper-casual titles, including Hair Challenge and High Heels, published by Rollic. Zynga is also an industry-leading next-generation platform with the ability to acquire new users, cross-promote games, apply live services content updates, and optimize programmatic advertising and yields at scale through Chartboost, its leading mobile advertising and monetization platform. We acquired Popcore onNovember 16, 2022 for consideration having an acquisition date fair value of$199.2 , consisting of$116.9 in cash, the issuance of 0.6 shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of$105.0 in cash if Popcore achieves certain performance measures over each of the three calendar years following the closing (See Note 14 - Acquisitions to our Condensed Consolidated Financial Statements). Founded in 2018, Popcore is a mobile games company based inBerlin best known for Parking Jam 3D and Pull the Pin. We are continuing our strategy inAsia to broaden the distribution of our existing products and expand our online gaming presence, especially inChina andSouth Korea . 2K has a multi-year license from the NBA to offer an online version of the NBA simulation game inChina ,Taiwan ,South Korea , andSoutheast Asia . NBA 2K Online, our free-to-play NBA simulation game that is based on the console edition of NBA 2K, which was co-developed by 2K and Tencent, is the top online PC sports game inChina with more than 55 million registered users. We have released two iterations of NBA 2K Online and continue to enhance the title with new features. Additionally, we see a long-term opportunity to expand our mobile efforts across various emerging markets, particularly throughoutAsia . 36 --------------------------------------------------------------------------------
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We have expanded our relationship with the NBA through the NBA 2K League. This groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises and several international partners. The NBA 2K League follows a professional sports league format: head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up. The NBA 2K League is currently gearing up for its sixth season.
Trends and Factors Affecting our Business
Product Release Schedule. Our financial results are affected by the timing of our product releases and the commercial success of those titles. Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue. Sales of Grand Theft Auto products generated 15% of our net revenue for the nine months endedDecember 31, 2022 . 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 various macroeconomic and geopolitical factors that may affect our business in several areas, including consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. For example, 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. We transitioned the vast majority of our teams to working from home throughout fiscal years 2021 and 2022 in response to the health and safety threats relating to COVID-19. Since that time, the majority of our global offices have reopened. We continue to follow protocols from local governments and health officials to safety standards. 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 79.7% and 79.2% of net revenue during the nine months endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , andMarch 31, 2022 , five customers comprised 57.6% and 72.8% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 34.7% and 63.8% of such balance atDecember 31, 2022 , andMarch 31, 2022 , respectively. We had two customers who accounted for 21.4% and 13.3% of our gross accounts receivable as ofDecember 31, 2022 , and two customers who accounted for 43.5% and 20.3% of our gross accounts receivable as ofMarch 31, 2022 . We did not have any additional customers that exceeded 10% of our gross accounts receivable as ofDecember 31, 2022 , andMarch 31, 2022 . The economic environment has affected our customers in the past, and may do so in the future, including as a result of the COVID-19 pandemic. Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers. There has been increased consolidation in our industry, as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through financial volatility. Hardware Platforms. We derive a substantial portion of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 44.1% of our net revenue by product platform for the nine months endedDecember 31, 2022 . The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released inNovember 2020 by Sony and Microsoft, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The latest Sony and Microsoft consoles provide "backwards compatibility" (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products. Further, events beyond our control may impact the availability of these new consoles, which may also affect demand. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Accordingly, our strategy for these platforms is to focus our development efforts on a select number of the highest quality titles. Online Content and Digital Distribution. The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from digital storefronts we own and others owned by third parties) as well as a large selection of our catalog titles. In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, in-game purchases, and in-game advertising. As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 94.6% of our net revenue for the nine months endedDecember 31, 2022 . We expect online delivery of games and game offerings to continue to continue to be the primary part of our business over the long term. 37 -------------------------------------------------------------------------------- Table of Contents We also publish an expanding variety of titles for Mobile, which are delivered to consumers through digital download, and are primarily distributed, marketed, and promoted through third parties, primarilyApple's App Store and theGoogle Play Store . Virtual items for our Mobile games are purchased through the payment processing systems of these platform providers. We generate a significant portion of our net revenue through the Apple and Google platforms and expect to continue to do so for the foreseeable future as we launch more games for Mobile. Apple and Google generally have the discretion to set the amounts of their platform fees and change their platforms' terms of service and other policies with respect to us or other developers at their sole discretion, and those changes may be unfavorable to us. These platform fees are recorded as cost of revenue as incurred. Further, as a result of the platform fees associated with online game sales, our Mobile Net revenue generally generates a lower gross margin percentage than our Console or PC revenue. Accordingly, the overall product mix between Mobile and other game sales may impact our gross margins. We are also starting to expand our direct-to-consumer efforts more meaningfully across our mobile portfolio to enhance profitability. Player acquisition costs. Principally for our Mobile titles, we use advertising and other forms of player acquisition and retention to grow and retain our player audience. These expenditures, which are recorded within Sales and marketing in our Consolidated Statements of Operations, generally relate to the promotion of new game launches and ongoing performance-based programs to drive new player acquisition and lapsed player reactivation. Over time, these acquisition and retention-related programs may become either less effective or costlier, negatively impacting our operating results.
Content Release Highlights
During fiscal year 2023, Private Division released Rollerdrome, and 2K released
The Quarry, NBA 2K23,
To date we have announced that, during the remainder of fiscal year 2023, 2K will release WWE 2K23, and Private Division will release Kerbal Space Program 2 early access on PC. In addition, throughout the year, we expect to continue to deliver new content for our franchises. We will also continue to invest in opportunities that we believe will enhance and scale our business and have the potential to drive growth over the long term.
Critical Accounting Policies and Estimates
Our most critical accounting policies, which are those that require significant judgment, include revenue recognition; price protection and allowances for returns; capitalization and recognition of software development costs and licenses; fair value estimates including valuation of goodwill, intangible assets, and long-lived assets; valuation and recognition of stock-based compensation; income taxes; and contingent earnout consideration. We are reiterating our significant accounting policy on revenue recognition, which is included in Note 1 - Basis of Presentation , including certain revenue policies applied upon close of the Zynga Acquisition. In-depth descriptions of our other critical accounting policies and estimates can be found in our
Annual Report on Form 10-K for the fiscal year ended
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 December 31, Nine Months Ended December 31,
Increase/ % Increase/ Increase/ % Increase/
2022 2021 (decrease) (decrease) 2022 2021 (decrease) (decrease)Net Bookings$ 1,382.8 $ 866.1 $ 516.7 59.7 %$ 3,890.1 $ 2,562.4 $ 1,327.7 51.8 % For the three months endedDecember 31, 2022 , Net Bookings increased by$516.7 as compared to the prior year period. The increase was primarily due to Net Bookings from Zynga, which we acquired in May 2022 (refer to Note 14 - Acquisitions ), including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well as an increase in Net Bookings from ourPGA TOUR 2K franchise, includingPGA TOUR 2K23, 38 --------------------------------------------------------------------------------
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which released in
For the nine months endedDecember 31, 2022 , Net Bookings increased by$1,327.7 as compared to the prior year period. The increase was primarily due to Net Bookings from Zynga, which we acquired inMay 2022 (refer to Note 14 - Acquisitions ), including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Words With Friends, and Merge Dragons!, as well as an increase in Net Bookings from (i)Tiny Tina's Wonderlands, which released inMarch 2022 ; (ii) The Quarry, which released inJune 2022 ; and (iii) our WWE 2K franchise, including ourMarch 2022 release of WWE 2K22. These increases were partially offset by a decrease in Net Bookings from our Grand Theft Auto, Borderlands, and Red Dead Redemption franchises.
Results of Operations
The following tables set forth, for the periods indicated, our Condensed
Consolidated Statements of Operations, net revenue by geographic region, net
revenue by platform, net revenue by distribution channel, and net revenue by
content type:
Three Months Ended December 31, Nine Months Ended December 31,
(millions of dollars) 2022 2021 2022 2021
Net revenue $ 1,407.8 100.0 % $ 903.3 100.0 % $ 3,903.7 100.0 % $ 2,574.8 100.0 %
Cost of revenue 691.9 49.1 % 350.4 38.8 % 1,841.6 47.2 % 1,136.8 44.2 %
Gross profit 715.9 50.9 % 552.9 61.2 % 2,062.1 52.8 % 1,438.0 55.8 %
Selling and marketing 446.7 31.7 % 135.3 15.0 % 1,163.1 29.8 % 375.2 14.6 %
Research and development 238.2 17.4 % 116.7 12.9 % 655.2 16.8 % 310.5 12.1 %
General and administrative 168.9 12.0 % 130.8 14.5 % 620.6 15.9 % 363.0 14.1 %
Depreciation and amortization 35.0 2.5 % 16.0 1.8 % 86.0 2.2 % 44.6 1.7 %
Total operating expenses 888.8 63.1 % 398.8 44.1 % 2,524.9 64.7 % 1,093.3 42.5 %
(Loss) income from operations (172.9) (12.3) % 154.1 17.1 % (462.8) (11.9) % 344.7 13.4 %
Interest and other, net (28.3) (2.0) % (5.6) (0.6) % (108.1) (2.8) % (7.2) (0.3) %
Gain (loss) on fair value
adjustments, net 1.1 0.1 % 3.7 0.4 % (36.6) (0.9) % 6.1 0.2 %
(Loss) income before income taxes (200.1) (14.2) % 152.2 16.8 % (607.5) (15.6) % 343.6 13.3 %
(Benefit from) provision for
income taxes (46.7) (3.3) % 7.6 0.8 % (93.1) (2.4) % 36.5 1.4 %
Net (loss) income $ (153.4) (10.9) % $ 144.6 16.0 % $ (514.4) (13.2) % $ 307.1 11.9 %
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
Net revenue by geographic
region:
United States $ 886.8 63.0 % $ 534.9 59.2 % $ 2,412.6 61.8 % $ 1,543.0 59.9 %
International 521.0 37.0 % 368.4 40.8 % 1,491.1 38.2 % 1,031.8 40.1 %
Net revenue by platform:
Mobile $ 721.2 51.2 % $ 103.8 11.5 % $ 1,820.9 46.6 % $ 301.2 11.7 %
Console 561.4 39.9 % 665.5 73.7 % 1,720.5 44.1 % 1,864.0 72.4 %
PC and other 125.2 8.9 % 134.0 14.8 % 362.3 9.3 % 409.6 15.9 %
Net revenue by distribution
channel:
Digital online $ 1,336.7 94.9 % $ 795.7 88.1 % $ 3,693.7 94.6 % $ 2,315.6 89.9 %
Physical retail and other 71.1 5.1 % 107.6 11.9 % 210.0 5.4 % 259.2 10.1 %
Net revenue by content:
Recurrent consumer spending $ 1,115.4 79.2 % $ 547.8 60.6 % $ 3,042.8 77.9 % $ 1,683.7 65.4 %
Full game and other 292.4 20.8 % 355.5 39.4 % 860.9 22.1 % 891.1 34.6 %
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Three Months Ended
Increase/ % Increase/
(millions of dollars) 2022 % 2021 % (decrease) (decrease)
Total net revenue $ 1,407.8 100.0 % $ 903.3 100.0 % $ 504.5 55.9 %
Software development costs and
royalties (1) 294.1 20.9 % 43.1 4.8 % 251.0 582.4 %
Product costs 204.6 14.5 % 73.0 8.1 % 131.6 180.3 %
Internal royalties 116.7 8.3 % 172.8 19.1 % (56.1) (32.5) %
Licenses 76.5 5.4 % 61.5 6.8 % 15.0 24.4 %
Cost of revenue 691.9 49.1 % 350.4 38.8 % 341.5 97.5 %
Gross profit $ 715.9 50.9 % $ 552.9 61.2 % $ 163.0 29.5 %
(1) Includes
For the three months endedDecember 31, 2022 , net revenue increased by$504.5 as compared to the prior year period. The increase was primarily due to net revenue of$631.2 from Zynga, which we acquired inMay 2022 (refer to Note 14- Acquisitions ), including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well as an increase in net revenue of$19.9 from ourPGA TOUR 2K franchise, includingPGA TOUR 2K23, which released inOctober 2022 and$20.5 from Marvel's Midnight Suns, which released inDecember 2022 . These increases were partially offset by a decrease in net revenue of (i)$117.1 from our Grand Theft Auto franchise and (ii)$25.8 from our NBA 2K franchise. Net revenue from console games decreased by$104.1 and accounted for 39.9% of our total net revenue for the three months endedDecember 31, 2022 , as compared to 73.7% for the prior year period. The decrease in net revenue from console games was due to a decrease in net revenue from our Grand Theft Auto and NBA 2K franchises. These decreases in net revenue from console games were partially offset by an increase in net revenue from ourPGA TOUR 2K franchise and Marvel's Midnight Suns. Net revenue from PC and other decreased by$8.8 and accounted for 8.9% of our total net revenue for the three months endedDecember 31, 2022 , as compared to 14.8% for the prior year period. The decrease was primarily due to a decrease in net revenue from our Borderlands and Grand Theft Auto franchises. These decreases in net revenue from PC and other were partially offset by an increase in net revenue from Zynga. Net revenue from mobile increased by$617.4 and accounted for 51.2% of our total net revenue for three months endedDecember 31, 2022 , as compared to 11.5% for the prior year period. The increase was primarily due to net revenue of$620.8 from Zynga, including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well as an increase in net revenue from Top Eleven. Net revenue from digital online channels increased by$541.0 and accounted for 94.9% of our total net revenue for the three months endedDecember 31, 2022 , as compared to 88.1% for the prior year period. The increase was primarily due to net revenue of$631.1 from Zynga, including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!. This increase was partially offset by a decrease in net revenue from our Grand Theft Auto franchise. Net revenue from physical retail and other channels decreased by$36.5 and accounted for 5.1% of our total net revenue for the three months endedDecember 31, 2022 , as compared to 11.9% 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 Grand Theft Auto franchise. Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, in-game purchases, and in-game advertising. Net revenue from recurrent consumer spending increased by$567.6 and accounted for 79.2% of net revenue for the three months endedDecember 31, 2022 , as compared to 60.6% of net revenue for the prior year period. The increase in net revenue from recurrent consumer spending was primarily due to net revenue of$621.3 from Zynga, including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!. These increases were partially offset by a decrease in net revenue from our Grand Theft Auto franchise. Net revenue from full game and other decreased by$63.1 and accounted for 20.8% of net revenue for the three months endedDecember 31, 2022 as compared to 39.4% of net revenue for the prior year period. The decrease in net revenue from full game and other was due primarily to a decrease in net revenue from our Grand Theft Auto franchise. This decrease was partially offset by an increase in net revenue from Marvel's Midnight Suns and ourPGA TOUR 2K franchise. Gross profit as a percentage of net revenue for the three months endedDecember 31, 2022 was 50.9% as compared to 61.2% for the prior year period. The decrease in gross profit as a percentage of net revenue was due to (i) higher amortization related to intangible assets related to our Zynga acquisition, (ii) higher product costs for fees paid to platform partners due to an increase in Mobile revenues as a result of the Zynga acquisition, and (iii) higher capitalized software amortization due to the timing of releases, partially offset by lower internal royalties due to the timing of when royalties are earned. 40 --------------------------------------------------------------------------------
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Net revenue earned outside ofthe United States increased by$152.6 and accounted for 37.0% of our total net revenue for the three months endedDecember 31, 2022 , as compared to 40.8% in the prior year period. The increase in net revenue outside ofthe United States was primarily due to net revenue of$220.4 from Zynga, including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Zynga Poker, and Merge Dragons! This increase was partially offset by a decrease in net revenue from our Grand Theft Auto franchise. Changes in foreign currency exchange rates decreased net revenue by$8.2 and decreased gross profit by$6.4 for the three months endedDecember 31, 2022 as compared to the prior year period. Operating Expenses % of net % of net Increase/ % Increase/ (millions of dollars) 2022 revenue 2021 revenue (decrease) (decrease) Selling and marketing$ 446.7 31.7 %$ 135.3 15.0 %$ 311.4 230.2 % Research and development 238.2 16.9 % 116.7 12.9 % 121.5 104.1 % General and administrative 168.9 12.0 % 130.8 14.5 % 38.1 29.1 % Depreciation and amortization 35.0 2.5 % 16.0 1.8 % 19.0 118.8 % Total operating expenses(1)$ 888.8 63.1 %$ 398.8 44.1 %$ 490.0 122.9 %
(1) Includes stock-based compensation expense, which was allocated as follows:
2022 2021
Research and development $ 29.4 $ 13.2
General and administrative 25.9 16.5
Selling and marketing 23.0 7.2
Changes in foreign currency exchange rates decreased total operating expenses by
$21.3 for the three months ended December 31, 2022 , as compared to the prior
year period.
Selling and marketing
Selling and marketing expenses increased by $311.4 for the three months ended
December 31, 2022 , as compared to the prior year period, due primarily to (i)
marketing expense for titles from our Zynga acquisition, including Rollic's
hyper-casual portfolio, Toon Blast, Merge Dragons!, Empires & Puzzles, and Toy
Blast, (ii) higher amortization related to intangible assets related to our
Zynga acquisition, and (iii) higher personnel expenses for additional headcount,
including related to our acquisition of Zynga.
Research and development
Research and development expenses increased by$121.5 for the three months endedDecember 31, 2022 , as compared to the prior year period, due primarily to increases in (i) personnel expenses due to increased headcount, including related to our acquisition of Zynga and (ii) production and development expenses related to Zynga. General and administrative General and administrative expenses increased by$38.1 for the three months endedDecember 31, 2022 , as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, including our acquisition of Zynga, (ii) rent expense, including Zynga locations, (ii) professional fees related to our acquisition and integration of Zynga, and (iv) IT expenses for cloud based services.
General and administrative expenses for the three months ended
Depreciation and Amortization
Depreciation and amortization expenses increased by$19.0 for the three months endedDecember 31, 2022 as compared to the prior year period, due primarily to acquired intangible assets and depreciation expense related to Zynga.
Interest and other, net
Interest and other, net was expense of$28.3 for the three months endedDecember 31, 2022 , as compared to$5.6 for the prior year period. The increase in expense was due primarily to interest expense related to our Senior Notes, Term Loan, and 2022 Credit Agreement, in connection with our acquisition of Zynga (refer to
Note 9 - Debt and Note 14 - Acquisitions ), partially offset by interest income on our available-for-sale securities.
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Gain (loss) on fair value adjustments, net
Gain (loss) on fair value adjustments, net was a gain of$1.1 for the three months endedDecember 31, 2022 as compared to$3.7 for the prior year period. The change was due primarily to changes in fair value based on the observable price changes of our long-term investments.
Benefit from Income Taxes
The benefit from income taxes for the three months endedDecember 31, 2022 is based on our projected annual effective tax rate for fiscal year 2023, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was$46.7 for the three months endedDecember 31, 2022 as compared to the provision for income taxes of$7.6 for the prior year period. When compared to the statutory rate of 21.0%, the effective tax rate of 23.3% for the three months endedDecember 31, 2022 was due primarily to tax benefits of$2.4 related to geographic mix of earnings, tax benefits of$1.0 from tax credits, and tax expense of$0.5 from employee stock-based compensation. In the prior year period, when compared to the statutory rate of 21.0%, the effective tax rate of 5.0% for the three months endedDecember 31, 2021 was due primarily to excess tax benefits of$9.9 on employee stock-based compensation, tax benefits of$9.7 from tax credits, and a tax benefit of$7.2 related to 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 decreased tax benefits from tax credits, and from employee stock-based compensation in the current period, and by the geographic mix of earnings.
The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting.
We anticipate that additional excess tax benefits or shortfalls from employee
stock compensation, tax credits, and changes in our geographic mix of earnings
could have a significant impact on our effective tax rate in the future. In
addition, we are regularly examined by domestic and foreign taxing authorities.
Examinations may result in tax assessments in excess of amounts claimed and the
payment of additional taxes. We believe our tax positions comply with applicable
tax law, and that we have adequately provided for reasonably foreseeable tax
assessments. It is possible that settlement of audits or the expiration of the
statute of limitations could have an impact on our effective tax rate in future
periods.
The Tax Cuts and Jobs Act of 2017 ("TCJA") requires taxpayers to capitalize and
amortize research and development costs pursuant to Internal Revenue Code
("IRC") Section 174. The requirement was effective for the Company beginning
April 1, 2022 . The actual impact of Section 174 capitalization and amortization
on the income tax payable and deferred tax asset will depend on multiple
factors, including the amount of research and development expenses we will incur
and whether we conduct our research and development activities inside or outside
the United States . If legislation is not passed to defer, repeal, or otherwise
modify the capitalization and amortization requirement we expect our cash taxes
payable and deferred tax assets to increase in the future.
The American Rescue Plan Act of 2021 (the "ARPA"), among other things, includes
provisions to expand the IRC Section 162(m) disallowance for deduction of
certain compensation paid by publicly held corporations. Effective for tax years
starting after December 31, 2026 (April 1, 2027 for the Company), the ARPA
expands the limitation to cover the next five most highly compensated employees.
The ARPA did not have a material impact on our Consolidated Financial Statements
for the three months ended December 31, 2022 . We continue to evaluate the
potential impact the ARPA may have on our operations and Consolidated Financial
Statements in future periods.
The Inflation Reduction Act of 2022 (the "Inflation Reduction Act") includes a
new corporate alternative minimum tax (CAMT) of 15% on the adjusted financial
statement income (AFSI) of corporations with an average AFSI exceeding $1.0
billion over a consecutive three-year period. The CAMT is effective for taxable
year ending March 31, 2024 . It is possible that the CAMT could result in an
additional tax liability over the regular federal corporate tax liability in a
particular year based on differences between book and taxable income. We will
continue to evaluate the potential impact of the Inflation Reduction Act may
have on our operations and Consolidated Financial Statements in future periods.
Net (loss) income and (loss) earnings per share
For the three months endedDecember 31, 2022 , net loss was$153.4 , as compared to income of$144.6 in the prior year period. Diluted loss per share for the three months endedDecember 31, 2022 was$0.91 , as compared to diluted earnings per share of$1.24 in the prior year period. Basic weighted average shares of 168.0 were 51.3 shares higher as compared to the 42 --------------------------------------------------------------------------------
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prior year period diluted weighted average shares, due primarily to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes. See Note 10 - (Loss) Earnings Per Share to our Condensed Consolidated Financial Statements for additional information.
Nine Months Ended
Increase/ % Increase/
(millions of dollars) 2022 % 2021 % (decrease) (decrease)
Total net revenue $ 3,903.7 100.0 % $ 2,574.8 100.0 % $ 1,328.9 51.6 %
Software development costs and
royalties (1) 749.1 19.2 % 275.0 10.7 % 474.1 172.4 %
Product costs 526.0 13.5 % 186.0 7.2 % 340.0 182.8 %
Internal royalties 334.4 8.6 % 477.8 18.6 % (143.4) (30.0) %
Licenses 232.1 5.9 % 198.0 7.7 % 34.1 17.2 %
Cost of revenue 1,841.6 47.2 % 1,136.8 44.2 % 704.8 62.0 %
Gross profit $ 2,062.1 52.8 % $ 1,438.0 55.8 % $ 624.1 43.4 %
(1) Includes
For the nine months endedDecember 31, 2022 , net revenue increased by$1,328.9 as compared to the prior year period. The increase was primarily due to net revenue of$1,547.2 from Zynga, which we acquired inMay 2022 (refer to Note 14- Acquisitions ), including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well an increase in net revenue of$74.3 fromTiny Tina's Wonderlands, which released inMarch 2022 . These increases were partially offset by a decrease in net revenue of (i)$244.2 from our Grand Theft Auto franchise and (ii)$76.8 from our Borderlands franchise. Net revenue from console games decreased by$143.5 and accounted for 44.1% of our total net revenue for the nine months endedDecember 31, 2022 , as compared to 72.4% for the prior year period. The decrease was due to a decrease in net revenue from our Grand Theft Auto, Red Dead Redemption, and Borderlands franchises, partially offset by an increase in net revenue from our WWE 2K franchise,Tiny Tina's Wonderlands, and The Quarry. Net revenue from PC and other decreased by$47.3 and accounted for 9.3% of our total net revenue for the nine months endedDecember 31, 2022 , as compared to 15.9% for the prior year period. The decrease was due to a decrease in net revenue from our Borderlands, Grand Theft Auto, and Red Dead Redemption franchises, partially offset by an increase in net revenue fromTiny Tina's Wonderlands and Zynga. Net revenue from mobile increased by$1,519.7 and accounted for 46.6% of our total net revenue for nine months endedDecember 31, 2022 , as compared to 11.7% for the prior year period. The increase was primarily due to net revenue of$1,524.0 from ourMay 2022 acquisition of Zynga, including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well as an increase in net revenue from Top Eleven. Net revenue from digital online channels increased by$1,378.1 and accounted for 94.6% of our total net revenue for the nine months endedDecember 31, 2022 , as compared to 89.9% for the prior year period. The increase was primarily due to net revenue of$1,546.6 from ourMay 2022 acquisition of Zynga, including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well as an increase in net revenue fromTiny Tina's Wonderlands. These increases in net revenue from digital online channels were partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises. Net revenue from physical retail and other channels decreased by$49.2 and accounted for 5.4% of our total net revenue for the nine months endedDecember 31, 2022 , as compared to 10.1% for the prior year period. The decrease was due to a decrease in net revenue from our Grand Theft Auto and NBA 2K franchises, partially offset by an increase in net revenue from The Quarry. Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, in-game purchases, and in-game advertising. Net revenue from recurrent consumer spending increased by$1,359.1 and accounted for 77.9% of net revenue for the nine months endedDecember 31, 2022 , as compared to 65.4% of net revenue for the prior year period. The increase was primarily due to net revenue of$902.4 from Zynga, including top contributors Empires & Puzzles, Toon Blast, Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well as an increase in net revenue from Top Eleven. The increase in net revenue from recurrent consumer spending was partially offset by a decrease in net revenue from our Grand Theft Auto franchise. Net revenue from full game and other decreased by$30.2 and accounted for 22.1% of net revenue for the nine months endedDecember 31, 2022 as compared to 34.6% of net revenue for the prior year period. The decrease was due to an decrease in net revenue from our Grand Theft Auto, Borderlands, and Red Dead Redemption franchises, partially offset by an increase in net revenue from The Quarry,Tiny Tina's Wonderlands, our WWE 2K franchise, Zynga, and Marvel's Midnight Suns. 43 --------------------------------------------------------------------------------
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Gross profit as a percentage of net revenue for the nine months endedDecember 31, 2022 was 52.8% as compared to 55.8% for the prior year period. The decrease in gross profit as a percentage of net revenue was due to (i) higher amortization related to intangible assets related to our Zynga acquisition and (ii) higher product costs for fees paid to platform partners due to an increase in Mobile revenues as a result of the Zynga acquisition, partially offset by (i) lower internal royalties due to the timing of when royalties are earned and (ii) lower capitalized software amortization due to impairments recognized in the prior year period. Net revenue earned outside ofthe United States increased by$459.3 and accounted for 38.2% of our total net revenue for the nine months endedDecember 31, 2022 , as compared to 40.1% in the prior year period. The increase in net revenue outside ofthe United States was primarily due to net revenue of$346.5 from ourMay 2022 acquisition of Zynga, including top contributors Empires & Puzzles, Rollic's hyper-casual portfolio, Toon Blast, Zynga Poker, and Merge Dragons!, partially offset by a decrease in net revenue from our Grand Theft Auto franchise. Changes in foreign currency exchange rates decreased net revenue by$29.0 and decreased gross profit by$15.2 for the nine months endedDecember 31, 2022 as compared to the prior year period. Operating Expenses % of net % of net Increase/ % Increase/ (millions of dollars) 2022 revenue 2021 revenue (decrease) (decrease) Selling and marketing$ 1,163.1 29.8 %$ 375.2 14.6 %$ 787.9 210.0 % Research and development 655.2 16.8 % 310.5 12.1 % 344.7 111.0 % General and administrative 620.6 15.9 % 363.0 14.1 % 257.6 71.0 % Depreciation and amortization 86.0 2.2 % 44.6 1.7 % 41.4 92.8 % Total operating expenses (1)$ 2,524.9 64.7 %$ 1,093.3 42.5 %$ 1,431.6 130.9 % (1) Includes stock-based compensation expense, which was allocated as follows (in millions): 2022 2021 General and administrative 90.6$ 50.3 Research and development 88.7 38.0 Selling and marketing 76.2 22.4 Changes in foreign currency exchange rates decreased total operating expenses by$57.1 for the nine months endedDecember 31, 2022 , as compared to the prior year period. Selling and marketing Selling and marketing expenses increased by$787.9 for the nine months endedDecember 31, 2022 , as compared to the prior year period, due primarily to (i) marketing expense for titles from our Zynga acquisition, including Rollic's hyper-casual portfolio, Toon Blast, Merge Dragons!, Empires & Puzzles, and Toy Blast, (ii) higher amortization related to intangible assets related to our Zynga acquisition, and (iii) higher personnel expenses for additional headcount, including related to our acquisition of Zynga.
Research and development
Research and development expenses increased by$344.7 for the nine months endedDecember 31, 2022 , as compared to the prior year period, due primarily to increases in (i) personnel expenses due to increased headcount, including related to our acquisition of Zynga and (ii) production and development expenses related to Zynga. General and administrative General and administrative expenses increased by$257.6 for the nine months endedDecember 31, 2022 , as compared to the prior year period, due to increases in (i) professional fees related to our acquisition and integration of Zynga and (ii) personnel expenses for additional headcount, including our acquisition of Zynga.
General and administrative expenses for the nine months ended
Depreciation and Amortization
Depreciation and amortization expenses for the nine months endedDecember 31, 2022 increased by$41.4 , as compared to the prior year period, due primarily to acquired intangible assets and depreciation expense related to Zynga. 44 --------------------------------------------------------------------------------
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Interest and other, net
Interest and other, net was expense of$108.1 for the nine months endedDecember 31, 2022 , as compared to$7.2 for the prior year period. The increase in expense was due primarily to interest expense related to our Senior Notes, Term Loan, 2022 Credit Agreement, andBridge Loan commitment, including the amortization of related deferred costs, in connection with our acquisition of Zynga (refer to
Note 9 - Debt and Note 14 - Acquisitions ) and foreign currency losses.
Gain (loss) on fair value adjustments, net
Gain (loss) on fair value adjustments, net was a loss of$36.6 for the nine months endedDecember 31, 2022 as compared to a gain of$6.1 for the prior year period. The change was due primarily to a loss relating to our Convertible Notes, partially offset by a gain related to our Capped Calls, both as result of our Zynga Acquisition (refer to Note 9 - Debt and Note 14 - Acquisitions ).
Benefit from Income Taxes
The benefit from income taxes for the nine months endedDecember 31, 2022 is based on our projected annual effective tax rate for fiscal year 2023, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit for income taxes was$93.1 for the nine months endedDecember 31, 2022 as compared to a provision for income taxes of$36.5 for the prior year period. When compared to the statutory rate of 21.0%, the effective tax rate of 15.3% for the nine months endedDecember 31, 2022 was due primarily to tax expense of$20.3 related to geographic mix of earnings, tax expense of$6.5 from employee stock-based compensation, nondeductible expense of$10.0 related to the settlement of convertible debt, offset by benefits of$31.9 from tax credits. In the prior year period, when compared to the statutory rate of 21.0%, the effective tax rate of 10.6% for the nine months endedDecember 31, 2021 was due primarily to a tax benefit of$21.1 due to tax credits and excess tax benefits of$13.9 from employee stock-based compensation, offset by tax expense of$5.0 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. The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased tax benefits from tax credits in the current period, increased expense from employee stock-based compensation, nondeductible expense related to the settlement of convertible debt and by the geographic mix of earnings. The accounting for share-based compensation will increase or decrease our effective tax rate based on the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting. Since we recognize excess tax benefits on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period. We anticipate that additional excess tax benefits or shortfalls from employee stock compensation, tax credits, and changes in our geographic mix of earnings could have a significant impact on our effective tax rate in the future. In addition, we are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits and/or the expiration of the statute of limitations could have an impact on our effective tax rate in future periods. The Tax Cuts and Jobs Act of 2017 ("TCJA") requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code ("IRC") Section 174. The requirement was effective for the Company beginningApril 1, 2022 . For the nine months endedDecember 31, 2022 , we recorded an estimated increase to income tax payable and deferred tax assets of approximately$70.0 due to Section 174 capitalization. The actual impact of Section 174 capitalization and amortization on the income tax payable and deferred tax asset will depend on multiple factors, including the amount of research and development expenses we will incur and whether we conduct our research and development activities inside or outsidethe United States . If legislation is not passed to defer, repeal, or otherwise modify the capitalization and amortization requirement we expect our cash taxes payable and deferred tax assets to increase in the future. The American Rescue Plan Act of 2021 (the "ARPA"), among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations. Effective for tax years starting afterDecember 31, 2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover the next five most highly compensated employees. The ARPA did not have a material impact on our Consolidated Financial Statements for the 45 -------------------------------------------------------------------------------- Table of Contents nine months endedDecember 31, 2022 . We continue to evaluate the potential impact the ARPA may have on our operations and Consolidated Financial Statements in future periods. The Inflation Reduction Act of 2022 (the "Inflation Reduction Act") includes a new corporate alternative minimum tax (CAMT) of 15% on the adjusted financial statement income (AFSI) of corporations with an average AFSI exceeding$1.0 billion over a consecutive three-year period. The CAMT is effective for taxable year endingMarch 31, 2024 . It is possible that the CAMT could result in an additional tax liability over the regular federal corporate tax liability in a particular year based on differences between book and taxable income. We will continue to evaluate the potential impact of the Inflation Reduction Act may have on our operations and Consolidated Financial Statements in future periods.
Net (loss) income and (loss) earnings per share
For the nine months endedDecember 31, 2022 , net loss was$514.4 , as compared to income of$307.1 in the prior year period. For the nine months endedDecember 31, 2022 , diluted loss per share was$3.27 as compared to diluted earnings per share of$2.63 in the prior year period. Basic weighted average shares of 157.2 were 40.4 shares higher as compared to the prior year period, due to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes. See Note 10 - (Loss) Earnings Per Share to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.
Liquidity and Capital Resources
Our primary cash requirements are to fund (i) the development, manufacturing, and marketing of our published products, (ii) working capital, (iii) capital expenditures, (iv) debt and interest payments, (v) acquisitions, and (vi) tax payments. We expect to rely on cash and cash equivalents as well as on short-term investments, funds provided by our operating activities, and our 2022 Credit Agreement to satisfy our working capital needs. Refer to Note 9 - Debt for additional discussion of our outstanding debt obligations.
Short-term Investments
As ofDecember 31, 2022 , we had$268.6 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 ofDecember 31, 2022 , based on the composition of our investment portfolio and actions taken in recent months by central banks around the world, including theU.S. Federal Reserve , in response to rising inflation and related adverse economic conditions, we anticipate our investment yields may increase, which could increase our future interest income. Such impact is not expected to be material to our liquidity. Senior Notes OnApril 14, 2022 , we completed our offering and sale of$2,700.0 aggregate principal amount of our senior notes, consisting of$1,000.0 principal amount of our 3.300% Senior Notes due 2024 (the "2024 Notes"),$600.0 principal amount of our 3.550% Senior Notes due 2025 (the "2025 Notes"),$600.0 principal amount of our 3.700% Senior Notes due 2027 (the "2027 Notes"), and$500.0 principal amount of our 4.000% Senior Notes due 2032 (the "2032 Notes" and, together with the 2024 Notes, the 2025 Notes and the 2027 Notes, the "Senior Notes"). The Senior Notes were issued under an indenture between the Company and The Bank of New York Mellon, as trustee. The Senior Notes are the Company's senior unsecured obligations and rank equally with all of our other existing and future unsubordinated obligations. The 2024 Notes mature onMarch 28, 2024 and bear interest at an annual rate of 3.300%. The 2025 Notes mature onApril 14, 2025 and bear interest at an annual rate of 3.550%. The 2027 Notes mature onApril 14, 2027 and bear interest at an annual rate of 3.700%. The 2032 Notes mature onApril 14, 2032 and bear interest at an annual rate of 4.000%. We will pay interest on the 2024 Notes semi-annually onMarch 28 andSeptember 28 of each year, commencingSeptember 28, 2022 . During the nine months endedDecember 31, 2022 , we made interest payments of$15.0 . We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually onApril 14 andOctober 14 of each year, commencingOctober 14, 2022 . During the three and nine months endedDecember 31, 2022 , we made interest payments of$31.8 . The proceeds were used to finance a portion of our acquisition of Zynga.
Credit Agreement
OnMay 23, 2022 , we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement"), which replaced in its entirety the Company's prior Credit Agreement, dated as ofFebruary 8, 2019 , which was paid off in full and terminated. The 2022 Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of$500.0 , including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to$100.0 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to$100.0 . In addition, the 2022 Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an 46 --------------------------------------------------------------------------------
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additional amount not to exceed the greater of
Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (7.50% atDecember 31, 2022 ) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 4.36% atDecember 31, 2022 , which rates are determined by the Company's credit rating. OnJune 22, 2022 , we drew down$200.0 at approximately 3.28% from our facility under the 2022 Credit Agreement. The proceeds were used to finance a portion of the repurchase of the Convertible Notes. InDecember 2022 , we fully repaid the$200.0 drawdown. As ofDecember 31, 2022 , there were no borrowings under the 2022 Credit Agreement, and we had approximately$499.5 available for additional borrowings. Term Loan OnJune 22, 2022 , we entered into an unsecured 364-Day Term Loan Credit Agreement ("Term Loan"). The Term Loan provides for an unsecured 364-day term loan credit facility in the aggregate principal amount of$350.0 and matures onJune 21, 2023 , and will bear interest at our election at a margin of (a) 0.000% to 0.375% above an alternate base rate (defined on the basis of prime rate) or (b) 0.750% to 1.375% above SOFR, which margins are determined by reference to our credit rating. We fully drew down on the Term Loan onJune 22, 2022 at approximately 3.60%. The proceeds were used to finance a portion of the repurchase of the Convertible Notes (refer to Note 9 - Debt ).
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 79.7% and 79.2% of net revenue during the nine months endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 andMarch 31, 2022 , five customers accounted for 57.6% and 72.8% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 34.7% and 63.8% of such balances atDecember 31, 2022 andMarch 31, 2022 , respectively. We had two customers who accounted for 21.4% and 13.3% of our gross accounts receivable as ofDecember 31, 2022 , respectively, and two customers who accounted for 43.5% and 20.3% of our gross accounts receivable as ofMarch 31, 2022 , 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 2022 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 endedMarch 31, 2022 . As ofDecember 31, 2022 , the amount of cash and cash equivalents held outside of theU.S. by our foreign subsidiaries was$738.9 . 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. Our Board of Directors has authorized the repurchase of up to 21.7 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, 47 --------------------------------------------------------------------------------
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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 endedDecember 31, 2022 , we did not repurchase shares of our common stock in the open market, as part of the program. We have repurchased a total of 11.7 shares of our common stock under the program, and as ofDecember 31, 2022 , 10.0 shares of our common stock remained available for repurchase under the share repurchase program.
Our changes in cash flows were as follows:
Nine Months Ended
December 31,
(millions of dollars) 2022 2021
Net cash provided by operating activities $ 35.8 $ 19.2
Net cash used in investing activities (2,814.8) (479.8)
Net cash provided by (used in) financing activities 1,904.6 (239.7)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents
(18.6) (2.7)
Net change in cash, cash equivalents, and restricted cash and cash equivalents
$
(893.0)
AtDecember 31, 2022 , we had$1,302.3 of cash and cash equivalents and restricted cash and cash equivalents, compared to$2,195.3 atMarch 31, 2022 . The decrease was due to Net cash used in investing activities primarily related to our Zynga Acquisition (refer to Note 14 - Acquisitions ). This net decrease was partially offset by Net cash provided by financing activities (refer to Note 9 - Debt ), primarily related to proceeds from the issuance of Senior Notes and draw-downs on our Term Loan, which were partially offset by payments for Convertible Notes that were part of our Zynga Acquisition. To a lesser extent, the net decrease was also partially offset by Net cash provided by operating activities from sales of our products, partially offset by the timing of payments, including for transaction-related costs related to our Zynga Acquisition. Commitments
Refer to Note 12 - Commitments and Contingencies for disclosures regarding our commitments.
Capital Expenditures
In fiscal year 2023, we anticipate capital expenditures to be approximately
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 endedDecember 31, 2022 and 2021, 37.0% and 40.8%, 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 six to fifteen months. As a result, the quarter in which we generate the highest net bookings may be different from the quarter in which we recognize the highest amount of net revenue. Quarterly comparisons of operating results are not necessarily indicative of future operating results.
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