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; 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, 2020 ; 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, 2020 . 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,Social Point , andPlaydots . Our products are currently designed for console gaming systems, such as Sony's PlayStation®4 ("PS4"), Microsoft's Xbox One® ("Xbox One"), or Nintendo's Switch™ ("Switch"), and personal computers ("PC"), including smartphones and tablets. In addition, we are currently developing games for the next-generation console systems, Sony's PlayStation 5 ("PS5") and Microsoft's Xbox Series X ("Xbox Series X"), that are expected to launch inNovember 2020 . 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, racing, 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 ,Spain ,South Korea , theUnited Kingdom , andthe United States . 21 -------------------------------------------------------------------------------- Table of Contents 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 330 million units. The latest installment, Grand Theft Auto V, has sold in over 135 million units worldwide and includes access to Grand Theft Auto Online. OnOctober 26, 2018 ,Rockstar Games launched Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records. To date, Red Dead Redemption 2 has sold-in more than 30 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, content, and virtual currency. 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 and will launch starting in fiscal year 2022. Our Private Division label is dedicated to bringing titles from top independent developers to market and is the publisher and owner of Kerbal Space Program. Private Division released The Outer Worlds and Ancestors: The Humankind Odyssey, during fiscal year 2020, and Disintegration during fiscal year 2021, based on new IP from renowned industry creative talent. Kerbal Space Program 2 is planned for release in fiscal year 2023.Social Point develops and publishes popular free-to-play mobile games that deliver high-quality, deeply engaging entertainment experiences, including its two most successful games, Dragon City and Monster Legends. In addition,Social Point has a robust development pipeline with a number of exciting games planned for launch in the coming years. OnSeptember 4, 2020 , we acquired privately heldPlaydots, Inc. ("Playdots") for consideration having an acquisition date fair value of$195.5 million , consisting of$97.8 million in cash and the issuance of 0.6 million shares of our common stock (See Note 16 of our Condensed Consolidated Financial Statements.). Founded in 2013 and based inNew York City ,Playdots builds mobile games with unique and thoughtful designs. They are best known for Two Dots, which has been downloaded over 80 million times since its launch six years ago and continues to deeply engage audiences throughout the world. We are continuing to execute on our growth initiatives inAsia , where our strategy is to broaden the distribution of our existing products and expand our online gaming presence, especially inChina andSouth Korea . 2K has secured a multi-year license from the NBA to develop an online version of the NBA simulation game inChina ,Taiwan ,South Korea , andSoutheast Asia . NBA 2K Online, our free-to-play NBA simulation game that is based on the console edition of NBA 2K, which was co-developed by 2K and Tencent, is the top online PC sports game inChina with more than 50 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 is set to take place in calendar year 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 29.6% of our net revenue for the six months endedSeptember 30, 2020 . The timing of our Grand Theft Auto product releases may affect our financial performance on a quarterly and annual basis. Economic Environment and Retailer Performance. We continue to monitor economic conditions, including the impact of the COVID-19 pandemic, that may unfavorably affect our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. In the first two 22 -------------------------------------------------------------------------------- Table of Contents quarters of fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of the COVID-19 pandemic related business closures and movement restrictions, such as "shelter in place" and "lockdown" orders, implemented around the world, as well as the online accessibility and social nature of our products. However, we cannot be certain as to the duration of these effects and the potential offsetting impacts of deteriorating economic conditions and decreased consumer spending generally. We have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, such as our transition to working from home, based on our concern for the health and safety of our teams, for the vast majority of our teams, which to date has resulted in minimal disruption. However, these efforts may 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, 2020 , 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 77.7% and 74.8% of net revenue during the six months endedSeptember 30, 2020 and 2019, respectively. As ofSeptember 30, 2020 andMarch 31, 2020 , our five largest customers comprised 75.1% and 58.1% 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 67.0% and 48.8% of such balance atSeptember 30, 2020 andMarch 31, 2020 , respectively. We had two customers who accounted for 47.3% and 19.7%, respectively, of our gross accounts receivable as ofSeptember 30, 2020 and two customers who accounted for 29.4% and 19.4%, respectively, of our gross accounts receivable as ofMarch 31, 2020 . 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, such as Sony's PS4, Microsoft's Xbox One, and Nintendo's Switch, which comprised 74.9% of our net revenue by product platform for the six months endedSeptember 30, 2020 . The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in their installed base. When new hardware platforms are introduced, such as those slated for release 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 are expected to 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 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 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 86.0% of our net revenue for the six months endedSeptember 30, 2020 . We expect online delivery of games and game offerings to continue to grow and to continue to be the primary part of our business over the long-term. 23 -------------------------------------------------------------------------------- Table of Contents Product Releases We released the following key titles during the six months endedSeptember 30, 2020 : Publishing Internal or External Title Label Development Platform(s) Date Released PGA TOUR 2K21 2K External PS4, Xbox One, Switch, PC, August 21, 2020 Stadia NBA 2K21 2K Internal PS4, Xbox One, Switch, PC, September 4, 2020 Stadia WWE 2K Battlegrounds 2K External PS4, Xbox One, Switch, PC, September 18,
2020
Stadia
Mafia I: Definitive Edition 2K External PS4, Xbox One, PC September 25, 2020
Product Pipeline
We have announced the following future key titles to date (this list does not
represent all titles currently in development):
Publishing Internal or External
Title Label Development Platform(s) Expected Release Date
Borderlands 3 2K External Xbox Series X (digital November 10, 2020
only)
NBA 2K21 2K Internal Xbox Series X November 10, 2020
Borderlands 3 2K External PS5 (digital only) November 12, 2020
NBA 2K21 2K Internal PS5 November 12, 2020
Grand Theft Auto V Rockstar Games Internal PS5, Xbox Series X Fiscal 2022
Kerbal Space Program 2 Private Division Internal PS4, Xbox One, PC Fiscal 2023
24-------------------------------------------------------------------------------- Table of Contents 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 endedMarch 31, 2020 . During the six months endedSeptember 30, 2020 there were no significant changes to the above critical accounting policies and estimates, with the exception of our adoption of Topic 326, Financial Instruments - Credit Losses. Refer to Note 1 - Basis of Presentation and Significant Accounting Policies for further discussion. 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 EndedSeptember 30 , Six
Months Ended
Increase/ % Increase/ Increase/ % Increase/
2020 2019 (decrease) (decrease) 2020 2019 (decrease) (decrease)
Net Bookings $ 957,534 $ 950,516 $ 7,018 0.7 % $ 1,953,784 $ 1,372,756 $ 581,028 42.3 %
For the three months ended September 30, 2020 , Net Bookings increased by $7.0
million as compared to the prior year period due primarily to increases from our
NBA 2K franchise, PGA TOUR 2K21, which released in August 2020 , our Mafia
franchise, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, which
released in October 2019 , our WWE 2K franchise, Dragon City, Civilization VI,
Two Dots, a title from Playdots , which we acquired in September 2020 (refer to
Note 16 to our Condensed Consolidated Financial Statements), and Monster
Legends, partially offset by decreases from Borderlands 3, which released in
September 2019 , Grand Theft Auto V, and Grand Theft Auto Online.
For the six months ended September 30, 2020 Net Bookings increased by
$581.0 million as compared to the prior year period due primarily to increases
from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, Red
Dead Redemption 2 and Red Dead Online, PGA TOUR 2K21, which released in August
2020 , our Mafia franchise, The Outer Worlds, our WWE 2K franchise, Civilization
VI, Dragon City, and Monster Legends, partially offset by a decrease in Net
Bookings from Borderlands 3, which released in September 2019 .
25
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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) 2020 2019 2020 2019
Net revenue $ 841,142 100.0 % $ 857,841 100.0 % $ 1,672,452 100.0 % $ 1,398,300 100.0 %
Cost of goods sold 432,505 51.4 % 468,248 54.6 % 909,194 54.4 % 709,717 50.8 %
Gross profit 408,637 48.6 % 389,593 45.4 % 763,258 45.6 % 688,583 49.2 %
Selling and marketing 113,691 13.5 % 149,566 17.4 % 198,470 11.9 % 241,387 17.3 %
General and administrative 91,433 10.9 % 76,659 8.9 % 193,606 11.6 % 151,492 10.8 %
Research and development 74,216 8.8 % 76,197 8.9 % 147,324 8.8 % 145,160 10.4 %
Depreciation and amortization 13,691 1.6 % 12,024 1.4 % 26,109 1.6 % 23,281 1.7 %
Business reorganization 239 - % 327 - % 239 - % 713 0.1 %
Total operating expenses 293,270 34.9 % 314,773 36.7 % 565,748 33.8 % 562,033 40.2 %
Income from operations 115,367 13.7 % 74,820 8.7 % 197,510 11.8 % 126,550 9.1 %
Interest and other, net 2,706 0.3 % 8,054 0.9 % 10,924 0.7 % 18,479 1.3 %Loss on long-term investments 655 0.1 % - - % 655 - % - - % Income before income taxes 117,418 14.0 % 82,874 9.7 % 207,779 12.4 % 145,029 10.4 % Provision for income taxes 18,097 2.2 % 11,059 1.3 % 19,953 1.2 % 26,934 1.9 % Net income$ 99,321 11.8 %$ 71,815 8.4 %$ 187,826 11.2 %$ 118,095 8.4 % Three Months Ended September 30, Six Months Ended September 30, 2020 2019 2020 2019 Net revenue by geographic region: United States$ 503,583 59.9 %$ 494,661 57.7 %$ 974,073 58.2 %$ 825,140 59.0 % International 337,559 40.1 % 363,180 42.3 % 698,379 41.8 % 573,160 41.0 % Net revenue by platform: Console$ 641,269 76.2 %$ 651,818 76.0 %$ 1,252,954 74.9 %$ 1,086,632 77.7 % PC and other 199,873 23.8 % 206,023 24.0 % 419,498 25.1 % 311,668 22.3 % Net revenue by distribution channel: Digital online$ 711,299 84.6 %$ 615,774 71.8 %$ 1,437,525 86.0 %$ 1,043,555 74.6 % Physical retail and other 129,843 15.4 % 242,067 28.2 % 234,927 14.0 % 354,745 25.4 % Net revenue by content: Recurrent consumer spending$ 495,724 58.9 %$ 318,468 37.1 %$ 975,129 41.7 %$ 764,974 54.7 % Full game and other 345,418 41.1 % 539,373 62.9 % 697,323 58.3 % 633,326 45.3 %
Three Months Ended
Increase/ % Increase/
(thousands of dollars) 2020 % 2019 % (decrease) (decrease)
Net revenue $ 841,142 100.0 % $ 857,841 100.0 % $ (16,699) (1.9) %
Software development costs and
royalties (1) 142,771 17.0 % 211,996 24.7 % (69,225) (32.7) %
Internal royalties 127,804 15.2 % 109,991 12.8 % 17,813 16.2 %
Product costs 68,986 8.2 % 86,568 10.1 % (17,582) (20.3) %
Licenses 92,944 11.0 % 59,693 7.0 % 33,251 55.7 %
Cost of goods sold 432,505 51.4 % 468,248 54.6 % (35,743) (7.6) %
Gross profit $ 408,637 48.6 % $ 389,593 45.4 % $ 19,044 4.9 %
_______________________________________________________________________________
(1)Includes
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For the three months ended September 30, 2020 , net revenue decreased by $16.7
million as compared to the prior year period. The decrease was due to a decrease
in net revenue of (i) $211.5 million from Borderlands 3, which released in
September 2019 , (ii) $32.8 million from Red Dead Redemption 2, and (iii) $13.0
million from Ancestors: The Humankind Odyssey. These decreases were offset by an
increase in net revenue of (i) $65.5 million from our NBA 2K franchise, (ii)
$65.5 million from Grand Theft Auto Online and Grand Theft Auto V, (iii) $35.6
million from PGA TOUR 2K21, which released in August 2020 , (iv) $33.6 million
from our Mafia franchise, (v) $12.9 million from our WWE 2K franchise, (vi) $9.4
million from Civilization VI, (vii) $6.0 million from Dragon City, and (viii)
$5.8 million from Red Dead Online.
Net revenue from console games decreased by $10.5 million and accounted for
76.2% of our total net revenue for the three months ended September 30, 2020 , as
compared to 76.0% for the prior year period. The decrease was due to a decrease
in net revenue from Borderlands 3, and Red Dead Redemption 2, partially offset
by an increase in net revenue from Grand Theft Auto V and Grand Theft Auto
Online, our NBA 2K franchise, PGA TOUR 2K21, our Mafia franchise, and our WWE 2K
franchise. Net revenue from PC and other decreased by $6.2 million and accounted
for 23.8% of our total net revenue for the three months ended September 30,
2020 , as compared to 24.0% for the prior year period. The decrease was due to a
decrease in net revenue from Borderlands 3, Ancestors: The Humankind Odyssey,
partially offset by an increase in net revenue from Red Dead Redemption 2, which
released on PC in November 2019 , our NBA 2K franchise, Grand Theft Auto V and
Grand Theft Auto Online, our Mafia franchise, Civilization VI, Dragon City, PGA
TOUR 2K21, our WWE franchise, Monster Legends, and Word Life.
Net revenue from digital online channels increased by $95.5 million and
accounted for 84.6% of our total net revenue for the three months ended
September 30, 2020 , as compared to 71.8% for the prior year period. The increase
was due to an increase in net revenue from our NBA 2K franchise, Grand Theft
Auto Online and Grand Theft Auto V, PGA TOUR 2K21, our Mafia franchise, Red Dead
Redemption 2 and Red Dead Online, and Civilization VI, partially offset by a
decrease in net revenue from Borderlands 3 and Ancestors: The Humankind Odyssey.
Net revenue from physical retail and other channels decreased by $112.2
million and accounted for 15.4% of our total net revenue for the three months
ended September 30, 2020 , as compared to 28.2% for the same period in the prior
year period. The decrease in net revenue from physical retail and other channels
was due primarily to a decrease in net revenue from Borderlands 3 and Red Dead
Redemption 2, partially offset by an increase in net revenue from our Mafia
franchise and PGA TOUR 2K21.
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 $177.3 million and
accounted for 58.9% of net revenue for the three months ended September 30,
2020 , as compared to 37.1% of net revenue for the prior year period. The
increase in net revenue from recurrent consumer spending is due primarily to an
increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online,
Dragon City, Monster Legends, and Word Life. Net revenue from full game and
other decreased by $194.0 million and accounted for 41.1% of net revenue for the
three months ended September 30, 2020 as compared to 62.9% of net revenue for
the prior year period. The decrease in net revenue from full game and other was
due to a decrease in net revenue from Borderlands 3, and Red Dead Redemption 2,
partially offset by an increase in net revenue from PGA TOUR 2K21 and our Mafia
franchise.
Gross profit as a percentage of net revenue for the three months ended September
30, 2020 was 48.6% as compared to 45.4% for the prior year period. The increase
in gross profit as a percentage of net revenue was due to lower development
royalties as a percentage of net revenue due primarily to the timing of
releases, partially offset by higher license royalties due to the timing of when
royalties are earned.
Net revenue earned outside of the United States decreased by $25.6 million and
accounted for 40.1% of our total net revenue for the three months ended
September 30, 2020 , as compared to 42.3% in the prior year period. The decrease
in net revenue outside of the United States was due to a decrease in net revenue
from Borderlands 3, Red Dead Redemption 2, and Ancestors: The Humankind Odyssey,
partially offset by an increase in net revenue from Grand Theft Auto Online and
Grand Theft Auto V, our Mafia franchise, our NBA 2K franchise, and PGA TOUR
2K21. 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, 2020 as compared to the prior year period.
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Operating Expenses
% of net % of net Increase/ % Increase/
(thousands of dollars) 2020 revenue 2019 revenue (decrease) (decrease)
Selling and marketing $ 113,691 13.5 % $ 149,566 17.4 % $ (35,875) (24.0) %
General and administrative 91,433 10.9 % 76,659 8.9 % 14,774 19.3 %
Research and development 74,216 8.8 % 76,197 8.9 % (1,981) (2.6) %
Depreciation and amortization 13,691 1.6 % 12,024 1.4 % 1,667 13.9 %
Business reorganization 239 - % 327 - % (88) (26.9) %
Total operating expenses(1) $ 293,270 34.9 % $ 314,773 36.7 % $ (21,503) (6.8) %
_______________________________________________________________________________
(1) Includes stock-based compensation expense, which was allocated as follows
(in thousands):
2020 2019
General and administrative $ 13,830 $ 13,576
Selling and marketing 4,439 3,744
Research and development 7,643 10,615
Changes in foreign currency exchange rates increased total operating expenses by
$2.7 million for the three months ended September 30, 2020 , as compared to the
prior year period.
Selling and marketing
Selling and marketing expenses decreased by $35.9 million for the three months
ended September 30, 2020 , as compared to the prior year period, due primarily to
lower marketing expenses for Borderlands 3 and Grand Theft Auto Online, and
lower trade show and travel expenses due to restrictions as a result of the
COVID-19 pandemic. The decrease was partially offset by higher personnel
expenses due to increased headcount and higher incentive compensation.
General and administrative
General and administrative expenses increased by $14.8 million for the three
months ended September 30, 2020 , as compared to the prior year period, due to
increases in (i) personnel expenses for additional headcount and higher
incentive compensation, (ii) professional fees related to our acquisition of
Playdots , and (iii) rent expense.
General and administrative expenses for the three months ended September 30,
2020 and 2019 included occupancy expense (primarily rent, utilities and office
expenses) of $7.1 million and $6.1 million , respectively, related to our
development studios.
Research and development
Research and development expenses decreased by $2.0 million for the three months
ended September 30, 2020 , as compared to the prior year period, due primarily to
(i) lower production and development expenses primarily due to additional
capitalization of costs for development on titles having established
technological feasibility compared to prior year and (ii) lower travel expenses
due to restrictions as a result of the COVID-19 pandemic. These decreases were
partially offset by (i) increases in IT expenses for cloud-based services, (ii)
increases in personnel expenses for higher incentive compensation, and (iii)
increases in professional fees.
Depreciation and Amortization
Depreciation and amortization expenses increased by $1.7 million for the three
months ended September 30, 2020 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, 2020 , business reorganization expense
decreased by $0.1 million as compared to the prior year period and was not
material.
Interest and other, net
Interest and other, net was income of $2.7 million for the three months ended
September 30, 2020 , as compared to $8.1 million for the prior year period. The
change was due primarily to lower interest income due to lower interest rates,
partially offset by foreign currency gains.
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Provision for Income Taxes
The provision for income taxes for the three months ended September 30, 2020 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 $18.1 million for the
three months ended September 30, 2020 as compared to $11.1 million for the prior
year period.
When compared to the statutory rate of 21.0%, 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.
In the prior year period, when compared to our statutory rate of 21%, the
effective tax rate of 13.3% for the three months ended September 30, 2019 was
due primarily to a tax benefit of $3.2 million as a result of tax credits
anticipated to be utilized and $1.4 million due to a 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 excess tax benefits from
employee stock-based compensation and tax credits in the current period, offset
by increased expense related to 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 May 19, 2019 , a public referendum held in Switzerland approved the Federal
Act on Tax Reform and AVH (Old-Age and Survivors Insurance ) Financing ("TRAF"),
which was effective for us on January 1, 2020 . The TRAF abolished preferential
tax regimes at the cantonal level. The cantons established transition rules
which provided us a step-up in tax basis for which a deferred tax asset of $45.3
million and valuation allowance of $33.4 million were established. It is
possible that realization of deferred tax assets relating to the Swiss cantonal
basis step-up may change due to changes in forecasted future earnings in
Switzerland .
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. We do not expect that it will have a material impact to our
Consolidated Financial Statements.
Net income and earnings per share
For the three months ended September 30, 2020 , net income was $99.3 million , as
compared to $71.8 million in the prior year period. Diluted earnings per share
for the three months ended September 30, 2020 was $0.86 , as compared to diluted
earnings per share of $0.63 in the prior year period. Diluted weighted average
shares of 115.4 million were 1.3 million shares higher as compared to the prior
year period, due primarily to normal stock compensation activity, including
vests as well as grants and forfeitures in the prior year being fully
outstanding in the current year period. See Note 11 to our Condensed
Consolidated Financial Statements for additional information regarding earnings
per share.
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Six Months Ended September 30, 2020 Compared to September 30, 2019
Increase/ % Increase/
(thousands of dollars) 2020 % 2019 % (decrease) (decrease)
Net revenue $ 1,672,452 100.0 % $ 1,398,300 100.0 % $ 274,152 19.6 %
Software development costs and
royalties (1) 290,818 17.4 % 320,437 22.9 % (29,619) (9.2) %
Internal royalties 341,867 20.4 % 172,880 12.4 % 168,987 97.7 %
Product costs 127,546 7.6 % 134,203 9.6 % (6,657) (5.0) %
Licenses 148,963 8.9 % 82,197 5.9 % 66,766 81.2 %
Cost of goods sold 909,194 54.4 % 709,717 50.8 % 199,477 28.1 %
Gross profit $ 763,258 45.6 % $ 688,583 49.2 % $ 74,675 10.8 %
(1)Includes $48,429 and $58,630 of stock-based compensation expense in 2020 and
2019, respectively, in software development costs and royalties.
For the six months ended September 30, 2020 , net revenue increased by $274.2
million as compared to the prior year period. The increase was due primarily to
an increase in net revenue of (i) $174.2 million from Grand Theft Auto Online
and Grand Theft Auto V, (ii) $128.9 million from our NBA 2K franchise, (iii)
$41.1 million from our Mafia franchise, (iv) $35.6 million from PGA TOUR 2K21,
which released in August 2020 , (vi) $27.4 million from Civilization VI, (vi)
$21.6 million from Red Dead Online, and (vii) $21.6 million from our WWE 2K
franchise. These increases were offset by a decrease in net revenue of (i)
$154.2 million from Borderlands 3, which released in September 2019 , and (ii)
$28.0 million from Red Dead Redemption 2.
Net revenue from console games increased by $166.3 million and accounted for
74.9% of our total net revenue for the six months ended September 30, 2020 , as
compared to 77.7% for the prior year period. The increase was due to an increase
in net revenue from Grand Theft Auto V and Grand Theft Auto Online, our NBA 2K
franchise, our Mafia franchise, PGA TOUR 2K21, our WWE 2K franchise, and Red
Dead Online, partially offset by a decrease in net revenue from Borderlands 3,
and Red Dead Redemption 2. Net revenue from PC and other increased by $107.8
million and accounted for 25.1% of our total net revenue for the six months
ended September 30, 2020 , as compared to 22.3% for the prior year period. The
increase was due an increase in net revenue from Red Dead Redemption 2, which
released on PC in November 2019 , Grand Theft Auto V and Grand Theft Auto Online,
our NBA 2K franchise, Civilization VI, Dragon City, and our Mafia franchise,
partially offset by a decrease in net revenue from Borderlands 3 and Ancestors:
The Humankind Odyssey.
Net revenue from digital online channels increased by $394.0 million and
accounted for 86.0% of our total net revenue for the six months ended September
30, 2020 , as compared to 74.6% for the prior year period. The increase was due
to an increase in net revenue from Grand Theft Auto Online and Grand Theft Auto
V, our NBA 2K franchise, Red Dead Redemption 2 and Red Dead Online, our Mafia
franchise, Civilization VI, and PGA TOUR 2K21 partially offset by a decrease in
net revenue from Borderlands 3. Net revenue from physical retail and other
channels decreased by $119.8 million and accounted for 14.0% of our total net
revenue for the six months ended September 30, 2020 , as compared to 25.4% for
the same period in the prior year period. The decrease was due to a decrease in
net revenue from Borderlands 3, Red Dead Redemption 2, and our NBA 2K franchise,
partially offset by an increase in net revenue from our Mafia franchise and PGA
TOUR 2K21.
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 $341.8 million and
accounted for 58.3% of net revenue for the six months ended September 30, 2020 ,
as compared to 45.3% of net revenue for the prior year period. The increase was
due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto
Online, Red Dead Online, Borderlands 3, and Civilization VI. Net revenue from
full game and other decreased by $67.7 million and accounted for 41.7% of net
revenue for the six months ended September 30, 2020 as compared to 54.7% of net
revenue for the prior year period. The decrease was due to a decrease in net
revenue from Borderlands 3, Red Dead Redemption 2, partially offset by an
increase in net revenue from Grand Theft Auto V, our Mafia franchise, PGA TOUR
2K21, and our WWE 2K franchise.
Gross profit as a percentage of net revenue for the six months ended September
30, 2020 was 45.6% as compared to 49.2% for the prior year period. The decrease
in gross profit as a percentage of net revenue was due to higher internal
royalties and license royalties due primarily to the timing of when royalties
are earned, partially offset by lower development royalties, capitalized
software amortization, and product costs based on the timing of releases.
Net revenue earned outside of the United States increased by $125.2 million , and
accounted for 41.8% of our total net revenue for the six months ended September
30, 2020 , as compared to 41.0% in the prior year period. The increase in net
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revenue outside of the United States was due to an increase in net revenue from
Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, our Mafia
franchise, Civilization VI, PGA TOUR 2K21, and Red Dead Online, partially offset
by a decrease in net revenue from Borderlands 3. 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, 2020 as compared to the
prior year period.
Operating Expenses
% of net % of net Increase/ % Increase/
(thousands of dollars) 2020 revenue 2019 revenue (decrease) (decrease)
Selling and marketing $ 198,470 11.9 % $ 241,387 17.3 % $ (42,917) (17.8) %
General and administrative 193,606 11.6 % 151,492 10.8 % 42,114 27.8 %
Research and development 147,324 8.8 % 145,160 10.4 % 2,164 1.5 %
Depreciation and amortization 26,109 1.6 % 23,281 1.7 % 2,828 12.1 %
Business reorganization 239 - % 713 0.1 % (474) (66.5) %
Total operating expenses (1) $ 565,748 33.8 % $ 562,033 40.2 % $ 3,715 0.7 %
(1)Includes stock-based compensation expense, which was allocated as follows (in
thousands):
2020 2019
General and administrative $ 27,030 $ 27,143
Selling and marketing 9,167 10,220
Research and development 14,093 17,206
Changes in foreign currency exchange rates increased total operating expenses by
$0.7 million for the six months ended September 30, 2020 , as compared to the
prior year period.
Selling and marketing
Selling and marketing expenses decreased by $42.9 million for the six months
ended September 30, 2020 , as compared to the prior year period, due primarily to
lower marketing expenses for Borderlands 3, Red Dead Online, Grand Theft Auto
Online, and Red Dead Redemption 2, partially offset by higher marketing expenses
for Dragon City and Word Life. This decrease was partially offset by higher
personnel expenses due to increased headcount and higher incentive compensation
General and administrative
General and administrative expenses increased by $42.1 million for the six
months ended September 30, 2020 , as compared to the prior year period, due to
increases in (i) charitable contributions made in connection with our COVID-19
pandemic response and relief efforts, (ii) personnel expenses for additional
headcount and higher incentive compensation, (iii) rent expense, (iv)
professional fees related to our acquisition of Playdots , and (v) IT related
expenses for cloud-based service and IT infrastructure.
General and administrative expenses for the six months ended September 30, 2020
and 2019 included occupancy expense (primarily rent, utilities and office
expenses) of $13.7 million and $12.4 million , respectively, related to our
development studios.
Research and development
Research and development expenses increased by $2.2 million for the six months
ended September 30, 2020 , as compared to the prior year period, due primarily to
(i) increases in IT expenses for cloud-based services, (ii) increases in
personnel expenses for higher incentive compensation, (iii) increases in
professional fees, and (iv) higher online support costs. These increases were
partially offset by (i) lower production and development expenses primarily due
to additional capitalization of costs for development on titles having
established technological feasibility compared to prior year and (ii) lower
travel expenses due to restrictions as a result of the COVID-19 pandemic.
Depreciation and Amortization
Depreciation and amortization expenses for the six months ended September 30,
2020 increased by $2.8 million , as compared to the prior year period, due
primarily to IT infrastructure.
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Business reorganization
During the six months ended September 30, 2020 , as compared to the prior year
period, business reorganization expense decreased $0.5 million and was not
material.
Interest and other, net
Interest and other, net was income of $10.9 million for the six months ended
September 30, 2020 , as compared to $18.5 million for the prior year period. The
change was due primarily to lower interest income due to lower interest rates,
partially offset by foreign currency gains, including a $3.1 million
reclassification from Accumulated other comprehensive loss as a result of
discontinuing our cash flow hedge related to our cross-currency swap.
Provision for Income Taxes
The provision for income taxes for the six months ended September 30, 2020 is
based on our projected annual effective tax rate for fiscal year 2020, adjusted
for specific items that are required to be recognized in the period in which
they are incurred. The provision for income taxes was $20.0 million for the six
months ended September 30, 2020 as compared to a provision for income taxes of
$26.9 million for the prior year period.
When compared to the statutory rate of 21.0%, 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.
In the prior year period, when compared to our blended statutory rate of 21%,
the effective tax rate of 18.6% for the six months ended September 30, 2019 was
due primarily to a tax benefit of $11.7 million from changes in unrecognized tax
benefits due to audit settlements, a benefit of $6.0 million as a result of tax
credits anticipated to be utilized, and a benefit of $3.2 million from our
geographic mix of earnings. To a lesser extent, the rate was also affected by
excess tax benefits from employee stock-based compensation. These benefits were
partially offset by a tax expense of $19.8 million from the reversal of net
deferred tax benefits relating to the Altera case, discussed below.
The change in the effective tax rate, when compared to the prior year period's
effective tax rate, is due primarily to increased benefits related to excess tax
benefits from employee stock-based compensation and to tax credits offset by
decreased tax expense relating to the Altera case, discussed below, and
decreased tax benefits related to the changes in unrecognized tax benefits due
to audit settlements.
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 July 27, 2015 , the U.S. Tax Court issued an opinion in Altera Corp. v.
Commissioner, which concluded that related parties in an intercompany
cost-sharing arrangement are not required to share costs related to stock-based
compensation. In February 2016 , the U.S. Internal Revenue Service appealed the
decision to the U.S. Court of Appeals for the Ninth Circuit . On June 7, 2019 ,
the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court. As a result
of this decision, we are no longer reflecting a net tax benefit within our
financial statements related to the removal of stock-based compensation from our
intercompany cost-sharing arrangement. During the six months ended September 30,
2020 , we removed the deferred tax asset and a deferred tax liability associated
with this matter, resulting in a cumulative net discrete income tax expense of
$19.8 million . The taxpayer requested a rehearing before the full Ninth Circuit
which was denied on November 12, 2019 . In February 2020 , the taxpayer appealed
to the U.S. Supreme Court , which denied certiorari on June 22, 2020 .
On May 19, 2019 , a public referendum held in Switzerland approved the Federal
Act on Tax Reform and AVH (Old-Age and Survivors Insurance ) Financing ("TRAF"),
which was effective for us on January 1, 2020 . The TRAF abolished preferential
tax regimes at the cantonal level. The cantons established transition rules
which provided us a step-up in tax basis for which a deferred tax asset of $45.3
million and valuation allowance of $33.4 million were established. It is
possible that
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realization of deferred tax assets relating to the Swiss cantonal basis step-up
may change due to changes in forecasted future earnings in Switzerland .
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. We do not expect that it will have a material impact to our
Consolidated Financial Statements.
Net income and earnings per share
For the six months ended September 30, 2020 , net income was $187.8 million , as
compared to $118.1 million in the prior year period. For the six months ended
September 30, 2020 , diluted earnings per share was $1.63 as compared to diluted
earnings per share of $1.04 in the prior year period. Diluted weighted average
shares of 115.2 million were 1.3 million shares higher as compared to the prior
year period, due primarily to normal stock compensation activity, including
vests as well as grants and forfeitures in the prior year being fully
outstanding in the current year period. See Note 11 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, 2020 , we had $1,040.8 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, 2020 , based on the composition of our investment
portfolio and relatively lower interest rates as a result of the recent 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") that runs through February 8, 2024 . The Credit Agreement provides
for an unsecured five-year revolving credit facility with commitments of $200
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 $250 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, 2020 ) or (b) 1.125% to
1.750% above LIBOR (approximately 1.48% at September 30, 2020 ), which rates are
determined by reference to our consolidated total net leverage ratio.
As of September 30, 2020 , there was $198.3 million available to borrow under the
Credit Agreement, and we had $1.7 million of letters of credit outstanding. At
September 30, 2020 , we had no outstanding borrowings under the Credit Agreement.
The Credit Agreement also includes, among other terms and conditions, maximum
leverage ratio, minimum cash reserves and, in certain circumstances, minimum
interest coverage ratio financial covenants, as well as limitations on the
Company's and each of its subsidiaries' ability to: create, incur, assume or be
liable for indebtedness; dispose of assets outside the ordinary course; acquire,
merge or consolidate with or into another person or entity; create, incur or
allow any lien on any of its property; make investments; or pay dividends or
make distributions, in each case subject to certain exceptions. In addition, the
Credit Agreement provides for certain events of default such as nonpayment of
principal and interest when due thereunder, breaches of representations and
warranties, noncompliance with covenants, acts of insolvency, and default on
indebtedness held by third parties (subject to certain limitations and cure
periods).
Financial Condition
We are subject to credit risks, particularly if any of our receivables represent
a limited number of customers or are concentrated in foreign markets. If we are
unable to collect our accounts receivable as they become due, it could adversely
affect our liquidity and working capital position.
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Generally, we have been able to collect our accounts receivable in the ordinary
course of business. We do not hold any collateral to secure payment from
customers. We have trade credit insurance on the majority of our customers to
mitigate accounts receivable risk.
A majority of our trade receivables are derived from sales to major retailers,
including digital storefronts and platform partners, and distributors. Our five
largest customers accounted for 77.7% and 74.8% of net revenue during the six
months ended September 30, 2020 and 2019, respectively. As of September 30, 2020
and March 31, 2020 , five customers accounted for 75.1% and 58.1% of our gross
accounts receivable, respectively. Customers that individually accounted for
more than 10% of our gross accounts receivable balance comprised 67.0% and 48.8%
of such balances at September 30, 2020 and March 31, 2020 , respectively. We had
two customers who accounted for 47.3% and 19.7% of our gross accounts receivable
as of September 30, 2020 , respectively, and two customers who accounted for
29.4% and 19.4% of our gross accounts receivable as of March 31, 2020 ,
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 during the first two quarters of fiscal year
2021.
As of September 30, 2020 , the amount of cash and cash equivalents held outside
of the U.S. by our foreign subsidiaries was $544.1 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 six months ended September 30, 2020 , we did not make any repurchases
of our common stock in the open market. We have repurchased a total of 10.4
million shares of our common stock under the program, and as of September 30,
2020 , 3.8 million shares of our common stock remained available for repurchase
under the share repurchase program.
Our changes in cash flows were as follows:
Six Months Ended
September 30,
(thousands of dollars) 2020 2019
Net cash provided by operating activities $ 626,745 $ 144,158
Net cash used in investing activities (502,624) (36,200)
Net cash used in financing activities (41,699) (61,478)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents
8,966 (8,063)
Net change in cash, cash equivalents, and restricted cash and cash equivalents
$
91,388
AtSeptember 30, 2020 , we had$2,084.8 million of cash and cash equivalents and restricted cash and cash equivalents, compared to$1,993.4 million atMarch 31, 2020 . The increase was due to Net cash provided by operating activities from sales of our products, partially offset by the timing of payments. This net increase was partially offset by (1) Net cash used in investing activities primarily related to changes in bank time deposits and net purchases of available for sale securities as well 34 -------------------------------------------------------------------------------- Table of Contents as our purchase ofPlaydots and (2) Net cash used in financing activities, which was primarily for tax payments related to net share settlements of our restricted stock awards. Contractual Obligations and Commitments We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years. Other than agreements entered into in the ordinary course of business and in addition to the agreements requiring known cash commitments as reported in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 , we did not have any significant changes to our commitments sinceMarch 31, 2020 . Legal and Other Proceedings: We are, or may become, subject to demands and claims (including intellectual property and employment related claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial statements. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material. Off-Balance Sheet Arrangements As ofSeptember 30, 2020 andMarch 31, 2020 , 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, 2020 and 2019, 40.1% and 42.3%, 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. 35 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2020 , we had$1,040.8 million of short-term investments, which included$631.5 million of available-for-sale securities. The available-for-sale securities were recorded at fair market value with unrealized gains or losses resulting from changes in fair value reported as a separate component of Accumulated other comprehensive income (loss), net of tax, in Stockholders' equity. We also had$1,345.1 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, 2020 . 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, 2020 ), or (b) 1.125% to 1.750% above the LIBOR rate (approximately 1.48% atSeptember 30, 2020 ), 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, 2020 , 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, 2020 and 2019, our foreign currency translation adjustment was a gain of$18.9 million and a loss of$12.6 million , respectively. For the six months endedSeptember 30, 2020 and 2019, our foreign currency translation adjustment was a gain of$23.6 million and a loss of$21.4 million , respectively. For the three months endedSeptember 30, 2020 and 2019, we recognized a foreign currency exchange transaction gain of$1.5 million and a loss of$1.7 million , respectively, and for the six months endedSeptember 30, 2020 and 2019, we recognized a foreign currency exchange transaction gain of$5.0 million and a loss of$2.7 million , respectively, included in Interest and other, net in our Condensed Consolidated Statements of Operations. Balance Sheet Hedging Activities We use foreign currency forward contracts to mitigate foreign currency exchange rate risk associated with non-functional currency denominated cash balances and intercompany funding loans, non-functional currency denominated accounts receivable and non-functional currency denominated accounts payable. These transactions are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts is reported as either assets or liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in Interest and other, net, in our Condensed Consolidated Statements of Operations. We do not enter into derivative financial contracts for speculative or trading purposes. AtSeptember 30, 2020 , we had$193.7 million of forward contracts outstanding to sell foreign currencies in exchange forU.S. dollars and$71.8 million of forward contracts outstanding to buy foreign currencies in exchange forU.S. dollars, all of which have maturities of less than one year. AtMarch 31, 2020 , we had$122.0 million of forward contracts outstanding to sell foreign currencies in exchange forU.S. dollars and$52.6 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, 2020 and 2019, we recorded a loss of$1.0 million and a gain of$2.2 million , respectively. For the six months endedSeptember 30, 2020 and 2019, we recorded a loss of$3.7 million and a loss of$1.1 million . As ofSeptember 30, 2020 , the fair value of these outstanding forward contracts was an immaterial gain and was included in Accrued expenses and other current liabilities, and, as ofMarch 31, 2020 , 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, 2020 , 40.1% 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. 36 --------------------------------------------------------------------------------
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