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 the Federal 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 ended March 31, 2021; and our other
periodic filings with the Securities 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 ended March 31, 2021.
Overview
Our Business
We are a leading developer, publisher, and marketer of interactive entertainment
for consumers around the globe. We develop and publish products principally
through Rockstar Games, 2K, Private Division, and T2 Mobile Games. Our products
are currently designed for console gaming systems, PC, and Mobile including
smartphones and tablets. We deliver our products through physical retail,
digital download, online platforms, and cloud streaming services.
We endeavor to be the most creative, innovative, and efficient company in our
industry. Our core strategy is to capitalize on the popularity of video games by
developing and publishing high-quality interactive entertainment experiences
across a range of genres. We focus on building compelling entertainment
franchises by publishing a select number of titles for which we can create
sequels and incremental revenue opportunities through virtual currency, add-on
content, and in-game purchases. Most of our intellectual property is internally
owned and developed, which we believe best positions us financially and
competitively. We have established a portfolio of proprietary software content
for the major hardware platforms in a wide range of genres, including action,
adventure, family/casual, role-playing, shooter, sports, and strategy, which we
distribute worldwide. We believe that our commitment to creativity and
innovation is a distinguishing strength, enabling us to differentiate our
products in the marketplace by combining advanced technology with compelling
storylines and characters that provide unique gameplay experiences for
consumers. We have created, acquired, or licensed a group of highly recognizable
brands to match the broad consumer demographics that we serve, ranging from
adults to children and game enthusiasts to casual gamers. Another cornerstone of
our strategy is to support the success of our products in the marketplace
through innovative marketing programs and global distribution on platforms and
through channels that are relevant to our target audience.
Our revenue is primarily derived from the sale of internally developed software
titles and software titles developed by third parties. Operating margins are
dependent in part upon our ability to release new, commercially successful
software products and to manage effectively their development and marketing
costs. We have internal development studios located in Australia, Canada, China,
Czech Republic, Hungary, India, Serbia, Spain, South Korea, the United Kingdom,
and the United States.
Software titles published by our Rockstar Games label are primarily internally
developed. We expect Rockstar 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
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believe that Rockstar Games has established a uniquely original, popular
cultural phenomenon with its Grand Theft Auto series, which is the interactive
entertainment industry's most iconic and critically acclaimed brand and has
sold-in over 350 million units. Our most recent installment, Grand Theft Auto V,
which was released in 2013, has sold in over 150 million units worldwide and
includes access to Grand Theft Auto Online. Red Dead Redemption 2, which has
been a critical and commercial success that set numerous entertainment industry
records, has sold-in more than 35 million units worldwide. Rockstar Games is
also well known for developing brands in other genres, including the L.A. Noire,
Bully, and Manhunt franchises. Rockstar Games continues to expand on our
established franchises by developing sequels, offering downloadable episodes,
and additional content. Rockstar Game's titles are published across a number of
platforms, including mobile.
Our 2K label has published a variety of popular entertainment properties across
all key platforms and across a range of genres including shooter, action,
role-playing, strategy, sports and family/casual entertainment. We expect 2K to
continue to develop new, successful franchises in the future. 2K's internally
owned and developed franchises include the critically acclaimed, multi-million
unit selling BioShock, Mafia, Sid Meier's Civilization, and XCOM series. 2K also
publishes successful externally developed brands, such as Borderlands. 2K's
realistic sports simulation titles include our flagship NBA 2K series, which
continues to be the top-ranked NBA basketball video game, the WWE 2K
professional wrestling series, and PGA TOUR 2K. In March 2020, 2K announced a
multi-year partnership with the National Football League encompassing multiple
future video games that will be non-simulation football game experiences. 2K
also publishes mobile titles, such as WWE SuperCard.
Our Private Division label is dedicated to bringing titles from the industry's
leading creative talent to market and is the publisher and owner of Kerbal Space
Program. Kerbal Space Program 2 is planned for release in fiscal year 2023.
Private Division also released The Outer Worlds and Ancestors: The Humankind
Odyssey.
T2 Mobile Games, which includes Socialpoint, Playdots, and Nordeus, which
publish popular free-to-play mobile games that deliver high quality, deeply
engaging entertainment experiences, generates revenue from in-game sales and
in-game advertising. T2 Mobile Games' titles include Dragon City, Monster
Legends, Two Dots, and Top Eleven. In addition, T2 Mobile Games has a number of
exciting games planned for launch in the coming years.
We acquired Nordeus Limited on June 1, 2021, for consideration having an
acquisition date fair value of $306.3 million, consisting of $120.5 million in
cash, the issuance of 0.5 million shares of our common stock, and a contingent
earn-out consideration arrangement that requires us to pay up to an aggregate of
$153.0 million in cash if Nordeus achieves certain performance measures over the
12- and 24-month periods following the closing (See   Note 15 - Acquisitions
of our Condensed Consolidated Financial Statements). Founded in 2010, Nordeus is
a mobile games company based in Belgrade, Serbia, best known for Top Eleven,
with over 240 million registered users.
We are continuing to execute on our growth initiatives in Asia, where our
strategy is to broaden the distribution of our existing products and expand our
online gaming presence, especially in China and South Korea. 2K has secured a
multi-year license from the NBA to develop an online version of the NBA
simulation game in China, Taiwan, South Korea, and Southeast 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 in China with more than 53 million registered users. We have
released two iterations of NBA 2K Online and continue to enhance the title with
new features.
We have expanded our relationship with the NBA through the NBA 2K League. This
groundbreaking competitive gaming league is jointly owned by us and the NBA and
consists of teams operated by actual NBA franchises. The NBA 2K League follows a
professional sports league format: head-to-head competition throughout a regular
season, followed by a bracketed playoff system and a finals match-up that was
held in August of each of the NBA 2K League's first three seasons. The NBA 2K
League's fourth season began in May and is set to conclude in September.
Trends and Factors Affecting our Business
Product Release Schedule.  Our financial results are affected by the timing of
our product releases and the commercial success of those titles. Our Grand Theft
Auto products in particular have historically accounted for a significant
portion of our revenue. Sales of Grand Theft Auto products generated 33.7% of
our net revenue for the three months ended June 30, 2021. The timing of our
Grand Theft Auto product releases may affect our financial performance on a
quarterly and annual basis.
Economic Environment and Retailer Performance.  We continue to monitor economic
conditions, including the impact of the COVID-19 pandemic, that may unfavorably
affect our businesses, such as deteriorating consumer demand, pricing pressure
on our products, credit quality of our receivables, and foreign currency
exchange rates. The COVID-19 pandemic has affected and may continue to affect
our business operations, including our employees, customers, partners, and
communities, and there is substantial uncertainty in the nature and degree of
its continued effects over time. During fiscal year 2021, as in the final
quarter of fiscal year 2020, we noted a positive impact to our results that we
believe was partly due to increased consumer engagement with our products
because of the COVID-19 pandemic related business closures and
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movement restrictions, such as "shelter in place" and "lockdown" orders,
implemented around the world, as well as the online accessibility and social
nature of our products. However, we cannot be certain as to the duration of
these effects, the impact of vaccination efforts or of the lifting of certain
restrictions, and the potential offsetting impacts of deteriorating economic
conditions and decreased consumer spending generally. We expect that engagement
trends will continue to be higher than they were pre-pandemic. However, as the
return to normalcy continues, we expect a moderation of the trends that have
benefited our industry. We have developed and continue to develop plans to help
mitigate the negative impacts of the pandemic on our business, such as our
transition to working from home, based on our concern for the health and safety
of our teams, for the vast majority of our teams, which to date has resulted in
minimal disruption. However, despite largely positive outcomes to date, these
efforts may ultimately not be effective, and a protracted economic downturn may
limit the effectiveness of our mitigation efforts. Any of these considerations
described above could cause or contribute to the risks described under the
heading "  Risk Factors  " included in Part I, Item 1A of our Annual Report on
Form 10-K for the fiscal year ended March 31, 2021, and could materially
adversely affect our business, financial condition, results of operations, or
stock price. Therefore, the effects of the COVID-19 pandemic will not be fully
reflected in our financial results until future periods, and, at this time, we
are not able to predict its ultimate impact on our business.
Additionally, our business is dependent upon a limited number of customers that
account for a significant portion of our revenue. Our five largest customers
accounted for 80.6% and 81.6% of net revenue during the three months ended June
30, 2021 and 2020, respectively. As of June 30, 2021 and March 31, 2021, our
five largest customers comprised 74.2% and 77.6% of our gross accounts
receivable, respectively, with our significant customers (those that
individually comprised more than 10% of our gross accounts receivable balance)
accounting for 65.3% and 69.2% of such balance at June 30, 2021 and March 31,
2021, respectively. We had two customers who accounted for 47.7% and 17.6%,
respectively, of our gross accounts receivable as of June 30, 2021 and two
customers who accounted for 50.4% and 18.8%, respectively, of our gross accounts
receivable as of March 31, 2021. The economic environment has affected our
customers in the past and may do so in the future, including as a result of the
COVID-19 pandemic. Bankruptcies or consolidations of our large retail customers
could adversely affect our business, due to uncollectible accounts receivables
and the concentration of purchasing power among the remaining large retailers.
The COVID-19 pandemic may lead to increased consolidation as larger, better
capitalized competitors will be in a stronger position to withstand prolonged
periods of economic downturn and sustain their business through the financial
volatility. Certain of our large customers sell used copies of our games, which
may negatively affect our business by reducing demand for new copies of our
games. While the online and downloadable content that we now offer for certain
of our titles may serve to reduce used game sales, we expect used game sales to
continue to adversely affect our business.
Hardware Platforms.  We derive most of our revenue from the sale of products
made for video game consoles manufactured by third parties, which comprised
74.1% of our net revenue by product platform for the three months ended June 30,
2021. The success of our business is dependent on consumer acceptance of these
platforms and the continued growth in their installed base. When new hardware
platforms are introduced, such as those released in November 2020 by Sony and
Microsoft, demand for interactive entertainment playable on older platforms
typically declines, which may negatively affect our business during the market
transition to the new consoles. The new Sony and Microsoft consoles provide
"backwards compatibility" (i.e. the ability to play games for the previous
generation of consoles), which could mitigate the risk of such a decline.
However, we cannot be certain how backwards compatibility will affect demand for
our products. Further, the COVID-19 pandemic or other events have affected and
may continue to affect the availability of these new consoles, which may also
affect demand. We manage our product delivery on each current and future
platform in a manner we believe to be most effective to maximize our revenue
opportunities and achieve the desired return on our investments in product
development. Accordingly, our strategy is to focus our development efforts on a
select number of the highest quality titles for these platforms, while also
expanding our offerings for other platforms such as tablets, smartphones, and
online games.
Online Content and Digital Distribution.  The interactive entertainment software
industry is delivering a growing amount of content through digital online
delivery methods. We provide a variety of online delivered products and
offerings. Virtually all of our titles that are available through retailers as
packaged goods products are also available through direct digital download (from
digital storefronts we own and others owned by third parties) as well as a large
selection of our catalog titles. In addition, we aim to drive ongoing engagement
and incremental revenue from recurrent consumer spending on our titles through
virtual currency, add-on content, and in-game purchases. We also publish an
expanding variety of titles for tablets and smartphones, which are delivered to
consumers through digital download. As disclosed in our "Results of Operations,"
below, net revenue from digital online channels comprised 91.1% of our net
revenue for the three months ended June 30, 2021. We expect online delivery of
games and game offerings to continue to grow and to continue to be the primary
part of our business over the long term.
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Content Release Highlights
To date we have announced that, during fiscal year 2022, Rockstar Games will
release Grand Theft Auto V and a standalone version of Grand Theft Auto Online
for the PS5 and Xbox Series X|S, Private Division will release OlliOlli World
and Hades, and 2K will release NBA 2K22, WWE 2K22, and Tiny Tina's Wonderlands.
In addition, throughout the year, we expect our labels to deliver new content
for our franchises. We will also continue to invest in opportunities that we
believe will enhance and scale our business and have the potential to drive
growth over the long-term.
Critical Accounting Policies and Estimates
Our most critical accounting policies, which are those that require significant
judgment, include revenue recognition; price protection and allowances for
returns; capitalization and recognition of software development costs and
licenses; fair value estimates including valuation of goodwill, intangible
assets, and long-lived assets; valuation and recognition of stock-based
compensation; and income taxes. In-depth descriptions of these can be found in
our   Annual Report on Form 10-K   for the fiscal year ended March 31, 2021.
Recently Adopted and Recently Issued Accounting Pronouncements
See Note 1 - Basis of Presentation and Significant Accounting Policies for
further discussion.

Operating Metric

Net Bookings

We monitor Net Bookings as a key operating metric in evaluating the performance
of our business. Net Bookings is defined as the net amount of products and
services sold digitally or sold-in physically during the period and includes
licensing fees, merchandise, in-game advertising, strategy guides, and publisher
incentives. Net Bookings were as follows:
                                  Three Months Ended June 30,
                                                 Increase/       % Increase/
                     2021           2020         (decrease)      (decrease)
Net Bookings      $ 711,430      $ 996,249      $ (284,819)          (28.6) %


For the three months ended June 30, 2021, Net Bookings decreased by $284.8
million as compared to the prior year period due primarily to a decrease in Net
Bookings from Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K
franchise, Red Dead Redemption 2, Borderlands 3, and The Outer Worlds, partially
offset by an increase in Net Bookings from Two Dots, which was part of the
Playdots acquisition in September 2020.
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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 June 30,
(thousands of dollars)                              2021                              2020
Net revenue                          $     813,346              100.0  %    $ 831,310       100.0  %
Cost of goods sold                         329,715               40.5  %      476,689        57.3  %
Gross profit                               483,631               59.5  %      354,621        42.7  %
General and administrative                 104,447               12.8  %      102,173        12.3  %
Selling and marketing                      103,854               12.8  %       84,779        10.2  %
Research and development                    92,294               11.3  %       73,108         8.8  %
Depreciation and amortization               12,465                1.5  %       12,418         1.5  %
Business reorganization                         97                  -  %            -           -  %
Total operating expenses                   313,157               38.5  %      272,478        32.8  %
Income from operations                     170,474               21.0  %       82,143         9.9  %
Interest and other, net                     (1,027)              (0.1) %        8,218         1.0  %
Gain on long-term investments, net           1,997                0.2  %            -           -  %
Income before income taxes                 171,444               21.1  %       90,361        10.9  %
Provision for income taxes                  19,188                2.4  %        1,856         0.2  %
Net income                           $     152,256               18.7  %    $  88,505        10.6  %


                                                         Three Months Ended June 30,
                                                      2021                              2020
Net revenue by geographic region:
United States                          $     493,186               60.6  %    $ 470,490        56.6  %
International                                320,160               39.4  %      360,820        43.4  %
Net revenue by platform:
Console                                $     602,443               74.1  %    $ 611,685        73.6  %
PC and other                                 128,645               15.8  %      165,260        19.9  %
Mobile                                        82,258               10.1  %       54,365         6.5  %
Net revenue by distribution channel:
Digital online                         $     740,806               91.1  %    $ 735,576        88.5  %
Physical retail and other                     72,540                8.9  %       95,734        11.5  %
Net revenue by content:
Recurrent consumer spending            $     572,266               70.4  %    $ 496,853        59.8  %
Full game and other                          241,080               29.6  %      334,457        40.2  %

Three Months Ended June 30, 2021 Compared to June 30, 2020


                                                                                                               Increase/            % Increase/
(thousands of dollars)                 2021                %                2020                %             (decrease)             (decrease)
Net revenue                        $ 813,346             100.0  %       $ 831,310             100.0  %       $  (17,964)                    (2.2) %
Software development costs and
royalties (1)                         87,037              10.7  %         148,047              17.8  %          (61,010)                   (41.2) %
Internal royalties                   145,378              17.9  %         214,063              25.8  %          (68,685)                   (32.1) %
Product costs                         46,896               5.8  %          58,560               7.0  %          (11,664)                   (19.9) %
Licenses                              50,404               6.2  %          56,019               6.7  %           (5,615)                   (10.0) %
Cost of goods sold                   329,715              40.5  %         476,689              57.3  %         (146,974)                   (30.8) %
Gross profit                       $ 483,631              59.5  %       $ 354,621              42.7  %       $  129,010                     36.4  %



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(1)Includes $12,050 and $29,033 of stock-based compensation expense in 2021 and
2020, respectively, in software development costs and royalties.
For the three months ended June 30, 2021, net revenue decreased by $18.0 million
as compared to the prior year period. The decrease was due to a decrease in net
revenue of (i) $47.1 million from Red Dead Redemption 2 and (ii) $26.8 million
from Borderlands 3. These decreases were partially offset by an increase in net
revenue of (i) $54.7 million from our NBA 2K franchise.
Net revenue from console games decreased by $9.2 million and accounted for 74.1%
of our total net revenue for the three months ended June 30, 2021, as compared
to 73.6% for the prior year period. The decrease was due to a decrease in net
revenue from Red Dead Redemption 2, Borderlands 3, and our BioShock franchise,
partially offset by an increase in net revenue from our NBA 2K franchise, Grand
Theft Auto Online, and PGA TOUR 2K21. Net revenue from PC and other decreased by
$36.6 million and accounted for 15.8% of our total net revenue for the three
months ended June 30, 2021, as compared to 19.9% for the prior year period. The
decrease was due to a decrease in net revenue from Borderlands 3, Grand Theft
Auto V, and Red Dead Redemption 2, partially offset by an increase in net
revenue from our NBA 2K franchise. Net revenue from Mobile increased by $27.9
million and accounted for 10.1% of our total net revenue for three months ended
June 30, 2021, as compared to 6.5% for the prior year period. The increase was
due primarily to an increase in net revenue from Two Dots, Grand Theft Auto: San
Andreas, and Dragon City.
Net revenue from digital online channels increased by $5.2 million and accounted
for 91.1% of our total net revenue for the three months ended June 30, 2021, as
compared to 88.5% for the prior year period. The increase was due to an increase
in net revenue from our NBA 2K franchise, Grand Theft Auto Online, and Two Dots,
partially offset by a decrease in net revenue from Red Dead Redemption 2,
Borderlands 3, Civilization VI, and Grand Theft Auto V. Net revenue from
physical retail and other channels decreased by $23.2 million and accounted for
8.9% of our total net revenue for the three months ended June 30, 2021, as
compared to 11.5% for the same period in the prior year period. The decrease in
net revenue from physical retail and other channels was due primarily to a
decrease in net revenue from Red Dead Redemption 2, Borderlands 3, Grand Theft
Auto V, and our BioShock franchise.
Recurrent consumer spending is generated from ongoing consumer engagement and
includes revenue from virtual currency, add-on content, and in-game purchases.
Net revenue from recurrent consumer spending increased by $75.4 million and
accounted for 70.4% of net revenue for the three months ended June 30, 2021, as
compared to 59.8% of net revenue for the prior year period. The increase in net
revenue from recurrent consumer spending is due primarily to an increase in net
revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto
V, and Two Dots, partially offset by a decrease in net revenue from Borderlands
3, Civilization VI, and Red Dead Redemption 2 and Red Dead Online. Net revenue
from full game and other decreased by $93.4 million and accounted for 29.6% of
net revenue for the three months ended June 30, 2021 as compared to 40.2% of net
revenue for the prior year period. The decrease in net revenue from full game
and other was due primarily to a decrease in net revenue from Red Dead
Redemption 2, Grand Theft Auto V, and Borderlands 3.
Gross profit as a percentage of net revenue for the three months ended June 30,
2021 was 59.5% as compared to 42.7% for the prior year period. The increase in
gross profit as a percentage of net revenue was due to lower internal royalties
due to the timing of when royalties are earned, lower capitalized software
amortization due primarily to the timing of releases, and lower development
royalties due primarily to the timing of releases.
Net revenue earned outside of the United States decreased by $40.7 million and
accounted for 39.4% of our total net revenue for the three months ended June 30,
2021, as compared to 43.4% in the prior year period. The decrease in net revenue
outside of the United States was due to a decrease in net revenue from Red Dead
Redemption 2, Grand Theft Auto V, and Borderlands 3, partially offset by an
increase in net revenue from our NBA 2K franchise. Changes in foreign currency
exchange rates decreased net revenue by $1.1 million and increased gross profit
by $0.3 million for the three months ended June 30, 2021 as compared to the
prior year period.
Operating Expenses
                                                             % of net                                % of net            Increase/             % Increase/
(thousands of dollars)                     2021              revenue               2020              revenue             (decrease)             (decrease)
General and administrative             $ 104,447                 12.8  %       $ 102,173                 12.3  %             2,274                      2.2  %
Selling and marketing                    103,854                 12.8  %          84,779                 10.2  %       $    19,075                     22.5  %
Research and development                  92,294                 11.3  %          73,108                  8.8  %            19,186                     26.2  %
Depreciation and amortization             12,465                  1.5  %          12,418                  1.5  %                47                      0.4  %
Business reorganization                       97                    -  %               -                    -  %                97                    100.0  %
Total operating expenses(1)            $ 313,157                 38.5  %       $ 272,478                 32.8  %       $    40,679                     14.9  %

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(1) Includes stock-based compensation expense, which was allocated as follows
(in thousands):
                                 2021          2020
General and administrative    $ 17,197      $ 13,200
Selling and marketing            8,033         4,728
Research and development        11,770         6,450


Changes in foreign currency exchange rates decreased total operating expenses by
$2.0 million for the three months ended June 30, 2021, as compared to the prior
year period.
General and administrative
General and administrative expenses increased by $2.3 million for the three
months ended June 30, 2021, as compared to the prior year period, due primarily
to increases in (i) personnel expenses for additional headcount, (ii)
professional fees related to our acquisition of Nordeus, (iii) rent expense, and
(iv) IT expenses for cloud-based services. The increase was partially offset due
primarily to a decrease in charitable contributions in the prior year period
related to our COVID-19 response and relief efforts.
General and administrative expenses for the three months ended June 30, 2021 and
2020 included occupancy expense (primarily rent, utilities and office expenses)
of $7.8 million and $7.3 million, respectively, related to our development
studios.
Selling and marketing
Selling and marketing expenses increased by $19.1 million for the three months
ended June 30, 2021, as compared to the prior year period, due primarily to (i)
higher overall marketing expense for Two Dots, Top Eleven, Red Dead Online,
Dragon City, and Word Life, partially offset by lower marketing expenses for
Disintegration and Grand Theft Auto Online and (ii) personnel expenses due to
increased headcount.
Research and development
Research and development expenses increased by $19.2 million for the three
months ended June 30, 2021, as compared to the prior year period, due primarily
to increases in personnel expenses due to increased headcount.
Depreciation and Amortization
Depreciation and amortization expenses was relatively consistent year-on-year
for the three months ended June 30, 2021 as compared to the prior year period.
Business reorganization
For the three months ended June 30, 2021, business reorganization expense
increased by $0.1 million as compared to the prior year period and was not
material.
Interest and other, net
Interest and other, net was expense of $1.0 million for the three months ended
June 30, 2021, as compared to income of $8.2 million for the prior year period.
The change was due primarily to (i) foreign currency losses in the current year
period as compared to gains in the prior year period, including a $3.1 million
reclassification from Accumulated other comprehensive loss as a result of
discontinuing our cash flow hedge related to our cross-currency swap, and (ii)
lower interest income due to lower interest rates.
Gain on long-term investments, net
Gain on long-term investments, net for the three months ended June 30, 2021 was
$2.0 million and was due primarily to changes in value based on the observable
price change of our long-term investments.
Provision for Income Taxes
The provision for income taxes for the three months ended June 30, 2021 is based
on our projected annual effective tax rate for fiscal year 2022, adjusted for
specific items that are required to be recognized in the period in which they
are incurred. The provision for income taxes was $19.2 million for the three
months ended June 30, 2021 as compared to $1.9 million for the prior year
period.

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When compared to the statutory rate of 21.0%, the effective tax rate of 11.2%
for the three months ended June 30, 2021 was due primarily to a tax benefit of
$12.1 million from tax credits and excess tax benefits of $9.4 million from
employee stock-based compensation offset by the geographic mix of earnings.
In the prior year period, when compared to our statutory rate of 21%, the
effective tax rate of 2.1% for the three months ended June 30, 2020 was due
primarily to excess tax benefits of $7.9 million from employee stock-based
compensation, tax benefits of $4.9 million from tax credits and the geographic
mix of earnings.
The change in the effective tax rate, when compared to the prior year period's
effective tax rate, is due primarily to increased expense related to the
geographic mix of earnings and decreased excess tax benefits from employee
stock-based compensation in the current period, partially offset by increased
tax credits.
The accounting for share-based compensation will increase or decrease our
effective tax rate based on the difference between our share-based compensation
expense and the deductions taken on our tax return, which depends on the stock
price at the time of the employee award vesting. Since we recognize excess tax
benefits on a discrete basis, we anticipate that our effective tax rate will
vary from quarter to quarter depending on our stock price in each period.
We anticipate that additional excess tax benefits or shortfalls from employee
stock compensation, tax credits, and changes in our geographic mix of earnings
could have a significant impact on our effective tax rate in the future. In
addition, we are regularly examined by domestic and foreign taxing authorities.
Examinations may result in tax assessments in excess of amounts claimed and the
payment of additional taxes. We believe our tax positions comply with applicable
tax law, and that we have adequately provided for reasonably foreseeable tax
assessments. It is possible that settlement of audits and/or the expiration of
the statute of limitations could have an impact on our effective tax rate in
future periods.
On March 11, 2021, The American Rescue Plan Act of 2021 ("ARPA") was signed into
law. ARPA includes several revenue-raising and business provisions. One such
provision that impacts the Company is the expansion of the limitation of
compensation deductions for certain covered employees of publicly held
corporations. Effective April 1, 2027, ARPA expanded the limitation to cover the
next five most highly compensated employees. As June 30, 2021, ARPA did not have
a material impact on our Condensed Consolidated Financial Statements.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic
Security Act (the "CARES Act"), which provides numerous tax and other stimulus
measures that generally support the U.S. economy. The CARES Act did not have a
material impact on our Condensed Consolidated Financial Statements.
Net income and earnings per share
For the three months ended June 30, 2021, net income was $152.3 million, as
compared to $88.5 million in the prior year period. Diluted earnings per share
for the three months ended June 30, 2021 was $1.30, as compared to diluted
earnings per share of $0.77 in the prior year period. Diluted weighted average
shares of 117.1 million were 2.2 million shares higher as compared to the prior
year period, due primarily to normal stock compensation activity, including
vests as well as grants and forfeitures in the prior year being fully
outstanding in the current year period. See   Note 11     -     Earnings

Per


S    hare   to our Condensed Consolidated Financial Statements for additional
information.
Liquidity and Capital Resources
Our primary cash requirements have been to fund (i) the development,
manufacturing, and marketing of our published products, (ii) working capital,
(iii) acquisitions, and (iv) capital expenditures. We expect to rely on cash and
cash equivalents as well as on short-term investments, funds provided by our
operating activities, and our Credit Agreement to satisfy our working capital
needs.
Short-term Investments
As of June 30, 2021, we had $1,135.2 million of short-term investments, which
are highly liquid in nature and represent an investment of cash that is
available for current operations. From time to time, we may purchase additional
short-term investments depending on future market conditions and liquidity
needs. As of June 30, 2021, based on the composition of our investment portfolio
and relatively lower interest rates as a result of the actions by central banks
around the world, including the interest rate cuts by the U.S. Federal Reserve,
in response to the COVID-19 pandemic and related adverse economic conditions, we
anticipate investment yields may remain low, which would lower our future
interest income. Such impact is not expected to be material to our liquidity.
Credit Agreement
On February 8, 2019, we entered into an unsecured Credit Agreement (the "Credit
Agreement"), and on June 28, 2021, we amended our unsecured Credit Agreement
solely to increase the commitments under the facility by $50 million (as
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amended, the "Credit Agreement") that runs through February 8, 2024. The Credit
Agreement provides for an unsecured five-year revolving credit facility with
commitments of $250 million, including sublimits for (i) the issuance of letters
of credit in an aggregate face amount of up to $25 million and (ii) borrowings
and letters of credit denominated in Pounds Sterling, Euros, and Canadian
Dollars in an aggregate principal amount of up to $25 million. In addition, the
Credit Agreement contains uncommitted incremental capacity permitting the
incurrence of up to an additional $200 million in term loans or revolving credit
facilities.
Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to
0.750% above a certain base rate (3.25% at June 30, 2021) or (b) 1.125% to
1.750% above LIBOR (approximately 0.10% at June 30, 2021), which rates are
determined by reference to our consolidated total net leverage ratio.
As of June 30, 2021, there was $247.9 million available to borrow under the
Credit Agreement, and we had $2.1 million of letters of credit outstanding. At
June 30, 2021, we had no outstanding borrowings under the Credit Agreement.
The Credit Agreement also includes, among other terms and conditions, maximum
leverage ratio, minimum cash reserves and, in certain circumstances, minimum
interest coverage ratio financial covenants, as well as limitations on the
Company's and each of its subsidiaries' ability to: create, incur, assume or be
liable for indebtedness; dispose of assets outside the ordinary course; acquire,
merge or consolidate with or into another person or entity; create, incur or
allow any lien on any of its property; make investments; or pay dividends or
make distributions, in each case subject to certain exceptions. In addition, the
Credit Agreement provides for certain events of default such as nonpayment of
principal and interest when due thereunder, breaches of representations and
warranties, noncompliance with covenants, acts of insolvency, and default on
indebtedness held by third parties (subject to certain limitations and cure
periods).
Financial Condition
We are subject to credit risks, particularly if any of our receivables represent
a limited number of customers or are concentrated in foreign markets. If we are
unable to collect our accounts receivable as they become due, it could adversely
affect our liquidity and working capital position.
Generally, we have been able to collect our accounts receivable in the ordinary
course of business. We do not hold any collateral to secure payment from
customers. We have trade credit insurance on the majority of our customers to
mitigate accounts receivable risk.
A majority of our trade receivables are derived from sales to major retailers,
including digital storefronts and platform partners, and distributors. Our five
largest customers accounted for 80.6% and 81.6% of net revenue during the three
months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and
March 31, 2021, five customers accounted for 74.2% and 77.6% of our gross
accounts receivable, respectively. Customers that individually accounted for
more than 10% of our gross accounts receivable balance comprised 65.3% and 69.2%
of such balances at June 30, 2021 and March 31, 2021, respectively. We had two
customers who accounted for 47.7% and 17.6% of our gross accounts receivable as
of June 30, 2021, respectively, and two customers who accounted for 50.4% and
18.8% of our gross accounts receivable as of March 31, 2021, respectively. Based
upon performing ongoing credit evaluations, maintaining trade credit insurance
on a majority of our customers and our past collection experience, we believe
that the receivable balances from these largest customers do not represent a
significant credit risk, although we actively monitor each customer's credit
worthiness and economic conditions that may affect our customers' business and
access to capital. We are monitoring the current global economic conditions,
including credit markets and other factors as it relates to our customers in
order to manage the risk of uncollectible accounts receivable, including as a
result of the COVID-19 pandemic.
We believe our current cash and cash equivalents, short-term investments and
projected cash flows from operations, along with availability under our Credit
Agreement, will provide us with sufficient liquidity to satisfy our cash
requirements for working capital, capital expenditures, and commitments on both
a short-term and long-term basis. Our liquidity and capital resources were not
materially affected by the COVID-19 pandemic and related volatility and slowdown
in the global financial markets to date. For further discussion regarding the
potential future impacts of the COVID-19 pandemic and related economic
conditions on our business, refer to   Item 1A, Risk Factors     of our Annual
Report on Form 10-K   for the fiscal year ended March 31, 2021.
As of June 30, 2021, the amount of cash and cash equivalents held outside of the
U.S. by our foreign subsidiaries was $517.8 million. These balances are
dispersed across various locations around the world. We believe that such
dispersion meets the business and liquidity needs of our foreign affiliates. In
addition, we expect to have the ability to generate sufficient cash domestically
to support ongoing operations for the foreseeable future.
The Tax Cuts and Jobs Act, as enacted 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
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indefinitely earnings of our foreign subsidiaries, and therefore we have not
recorded any tax liabilities associated with the repatriation of foreign
earnings.
Our Board of Directors has authorized the repurchase of up to 14.2 million
shares of our common stock. Under this program, we may purchase shares from time
to time through a variety of methods, including in the open market or through
privately negotiated transactions, in accordance with applicable securities
laws. Repurchases are subject to the availability of stock, prevailing market
conditions, the trading price of the stock, our financial performance, and other
conditions. The program does not require us to repurchase shares and may be
suspended or discontinued at any time for any reason.
During the three months ended June 30, 2021, we did not make any repurchases of
our common stock in the open market. We have repurchased a total of 10.4 million
shares of our common stock under the program, and as of June 30, 2021, 3.8
million shares of our common stock remained available for repurchase under the
share repurchase program.
Our changes in cash flows were as follows:
                                                                              Three Months Ended
                                                                                   June 30,
(thousands of dollars)                                                     2021               2020
Net cash provided by operating activities                              $ 148,242          $  445,423
Net cash used in investing activities                                    (13,857)           (247,465)
Net cash used in financing activities                                    (39,031)            (32,003)

Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents

                                   1,777               1,925

Net change in cash, cash equivalents, and restricted cash and cash equivalents

                                                            $

97,131 $ 167,880




At June 30, 2021, we had $2,157.4 million of cash and cash equivalents and
restricted cash and cash equivalents, compared to $2,060.2 million at March 31,
2021. The increase was due to Net cash provided by operating activities from
sales of our products, partially offset by the timing of payments. This net
increase was partially offset by (1) Net cash used in financing activities,
which was primarily for tax payments related to net share settlements of our
restricted stock awards and (2) Net cash used in investing activities primarily
related to (i) net purchases of available for sale securities, (ii) our
acquisition of Nordeus, and (iii) purchases of fixed assets, including our
acquisition of two office buildings in the UK (refer to   Note 15 -
Acquisitions  ), partially offset by changes in bank time deposits.
Contractual Obligations and Commitments
Refer to   N    ote 13 - Commitments and Contingencies   to our Condensed
Consolidated Financial Statements for disclosures regarding our commitments.
Capital Expenditures
In fiscal year 2022, we anticipate capital expenditures to be $170 million.
During the three months ended June 30, 2021, capital expenditures were
$86.4 million, which includes our acquisition of two office buildings in the UK
(refer to   Note 15 -     Acquisitions  ).
Off-Balance Sheet Arrangements
As of June 30, 2021 and March 31, 2021, we did not have any material
relationships with unconsolidated entities or financial parties, such as
entities often referred to as structured finance or variable interest entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As such,
we are not exposed to any financing, liquidity, market, or credit risk that
could arise if we had engaged in such relationships.
International Operations
Net revenue earned outside of the United States is principally generated by our
operations in Europe, Asia, Australia, Canada, and Latin America. For the three
months ended June 30, 2021 and 2020, 39.4% and 43.4%, respectively, of our net
revenue was earned outside of the 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.
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Fluctuations in Quarterly Operating Results and Seasonality
We have experienced fluctuations in quarterly and annual operating results as a
result of the timing of the introduction of new titles; variations in sales of
titles developed for particular platforms; market acceptance of our titles;
development and promotional expenses relating to the introduction of new titles;
sequels or enhancements of existing titles; projected and actual changes in
platforms; the timing and success of title introductions by our competitors;
product returns; changes in pricing policies by us and our competitors; the
accuracy of retailers' forecasts of consumer demand; the size and timing of
acquisitions; the timing of orders from major customers; and order cancellations
and delays in product shipment. Sales of our full game products are also
seasonal, with peak demand typically occurring in the fourth calendar quarter
during the holiday season. For certain of our software products with multiple
performance obligations, we defer the recognition of our net revenue over an
estimated service period, which generally ranges from 6 to 15 months. As a
result, the quarter in which we generate the highest net bookings may be
different from the quarter in which we recognize the highest amount of net
revenue. Quarterly comparisons of operating results are not necessarily
indicative of future operating results.
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from fluctuations in market rates and
prices. Our market risk exposures primarily include fluctuations in interest
rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to fluctuations in interest rates relates primarily to our
short-term investment portfolio and variable rate debt under the Credit
Agreement.
We seek to manage our interest rate risk by maintaining a short-term investment
portfolio that includes corporate bonds with high credit quality and maturities
less than two years. Since short-term investments mature relatively quickly and
can be reinvested at the then-current market rates, interest income on a
portfolio consisting of short-term securities is more subject to market
fluctuations than a portfolio of longer-term maturities. However, the fair value
of a short-term portfolio is less sensitive to market fluctuations than a
portfolio of longer-term securities. We do not currently use derivative
financial instruments in our short-term investment portfolio. Our investments
are held for purposes other than trading.
As of June 30, 2021, we had $1,135.2 million of short-term investments, which
included $868.3 million of available-for-sale securities. The available-for-sale
securities were recorded at fair market value with unrealized gains or losses
resulting from changes in fair value reported as a separate component of
Accumulated other comprehensive income (loss), net of tax, in Stockholders'
equity. We also had $1,400.9 million of cash and cash equivalents that are
comprised primarily of money market funds and bank-time deposits. We determined
that, based on the composition of our investment portfolio, there was no
material interest rate risk exposure to our Condensed Consolidated Financial
Statements or liquidity as of June 30, 2021.
Historically, fluctuations in interest rates have not had a significant effect
on our operating results. Under our Credit Agreement, loans will bear interest
at our election of (a) 0.250% to 0.750% above a certain base rate (3.25% at
June 30, 2021), or (b) 1.125% to 1.750% above the LIBOR rate (approximately
0.10% at June 30, 2021), with the margin rate subject to the achievement of
certain average liquidity levels. Changes in market rates may affect our future
interest expense if there is an outstanding balance on our line of credit. At
June 30, 2021, there were no outstanding borrowings under our Credit Agreement.
Foreign Currency Exchange Rate Risk
We transact business in foreign currencies and are exposed to risks resulting
from fluctuations in foreign currency exchange rates. Accounts relating to
foreign operations are translated into U.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 ended June 30, 2021 and 2020, our foreign currency
translation adjustment was a gain of $6.1 million and a gain of $4.7 million,
respectively. For the three months ended June 30, 2021 and 2020, we recognized a
foreign currency exchange transaction loss of $2.4 million and a gain of $3.5
million, respectively, included in Interest and other, net in our Condensed
Consolidated Statements of Operations.
Balance Sheet Hedging Activities
We use foreign currency forward contracts to mitigate foreign currency exchange
rate risk associated with non-functional currency denominated cash balances and
intercompany funding loans, non-functional currency denominated accounts
receivable and non-functional currency denominated accounts payable. These
transactions are not designated as hedging instruments and are accounted for as
derivatives whereby the fair value of the contracts is reported as either assets
or liabilities on our Condensed Consolidated Balance Sheets, and gains and
losses resulting from changes in the fair value are reported in Interest and
other, net, in our Condensed Consolidated Statements of Operations. We do not
enter into derivative financial contracts for speculative or trading purposes.
At June 30, 2021, we had $64.5 million of forward contracts outstanding
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to sell foreign currencies in exchange for U.S. dollars and $105.8 million of
forward contracts outstanding to buy foreign currencies in exchange for U.S.
dollars, all of which have maturities of less than one year. At March 31, 2021,
we had $140.5 million of forward contracts outstanding to sell foreign
currencies in exchange for U.S. dollars and $92.1 million of forward contracts
outstanding to buy foreign currencies in exchange for U.S. dollars, all of which
have maturities of less than one year. For the three months ended June 30, 2021
and 2020, we recorded a loss of $1.8 million and a loss of $2.7 million,
respectively. As of June 30, 2021, the fair value of these outstanding forward
contracts was an immaterial loss and was included in Accrued expenses and other
current liabilities, and, as of March 31, 2021, the fair value of outstanding
forward contracts was an immaterial loss and was included in Accrued expenses
and other current liabilities. The fair value of these outstanding forward
contracts is estimated based on the prevailing exchange rates of the various
hedged currencies as of the end of the period.
Our hedging programs are designed to reduce, but do not entirely eliminate, the
effect of currency exchange rate movements. We believe that the counterparties
to these foreign currency forward contracts are creditworthy multinational
commercial banks and that the risk of counterparty nonperformance is not
material. Notwithstanding our efforts to mitigate some foreign currency exchange
rate risks, there can be no assurance that our hedging activities will
adequately protect us against the risks associated with foreign currency
fluctuations, which may be more volatile as a result of the COVID-19 pandemic.
For the three months ended June 30, 2021, 39.4% of our revenue was generated
outside the United States. Using sensitivity analysis, a hypothetical 10%
increase in the value of the U.S. dollar against all currencies would decrease
revenues by 3.9%, while a hypothetical 10% decrease in the value of the U.S.
dollar against all currencies would increase revenues by 3.9%. In our opinion, a
substantial portion of this fluctuation would be offset by cost of goods sold
and operating expenses incurred in local currency.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of
management, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures as defined in
rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act") were effective as of the end of the period covered by
this report to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms and (ii) accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during
the quarter ended June 30, 2021, which were identified in connection with
management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
On June 1, 2021, we acquired Nordeus. Our management plans to exclude Nordeus
from its assessment of and report on internal control over financial reporting
for the fiscal year ending March 31, 2022. We are currently in the process of
incorporating the internal controls and procedures of Nordeus into our internal
control over financial reporting for purposes of our assessment of and report on
internal control over financial reporting for the fiscal year ending March 31,
2023.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. Inherent limitations to any system of disclosure controls and
procedures include, but are not limited to, the possibility of human error and
the circumvention or overriding of such controls by one or more persons. In
addition, we have designed our system of controls based on certain assumptions,
which we believe are reasonable, about the likelihood of future events, and our
system of controls may therefore not achieve its desired objectives under all
possible future events.
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