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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-02-07 · 171 added, 247 removed, 209 unchanged (67% of the section changed)

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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 the Company's future business and financial performance.

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 those contained herein, in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2019, in the section entitled "Risk Factors," and the Company's other periodic filings with the Securities and Exchange Commission.

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, 2020;

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.

The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

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.

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We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe.

We develop and publish products through our labels Rockstar Games, 2K, and Private Division, as well as Social Point, a leading developer of mobile games.

We develop and publish products principally through Rockstar Games, 2K, Private Division, and Social Point.

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.

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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, Spain, the United Kingdom, and the United States.

We have internal development studios located in Australia, Canada, China, Czech Republic, Hungary, India, 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 by leveraging our existing titles as well as by developing new brands.

We 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 310 million units.

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 325 million units.

The latest installment, Grand Theft Auto V , has sold in over 130 million units worldwide and includes access to Grand Theft Auto Online .

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Noire , Bully, and Manhunt franchises.

Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, content, and virtual currency, and releasing titles for smartphones and tablets.

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.

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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 externally developed brands, such as Borderlands .

The latest installment, Borderlands 3 , launched on September 13, 2019.

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 the Golf Club .

Our Private Division label is dedicated to bringing titles from top independent developers to market and is the publisher of Kerbal Space Program .

During fiscal year 2020, Private Division released The Outer Worlds and Ancestors:

The Humankind Odyssey , based on new IP from renowned industry creative talent.

Private Division has announced that Kerbal Space Program 2 and Disintegration are planned for release in fiscal year 2021.

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 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.

Private Division has announced that Kerbal Space Program 2 is planned for release in fiscal year 2022.

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 .

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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 over 48 million registered users.

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 nearly 50 million registered users.

We have released two iterations of NBA 2K Online and continue to enhance the title with new features.

In February 2017, we expanded our relationship with the NBA through the creation of the NBA 2K League.

Launched in May 2018, this groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises, who will be joined by a team from Shanghai for the 2020 season.

We have expanded our relationship with the NBA through the creation of the NBA 2K League.

Launched in May 2018, 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:

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Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue.

Sales of Grand Theft Auto products generated 21.5% of our net revenue for the nine months ended December 31, 2019.

In October 2018, we released Red Dead Redemption 2 .

Sales of Red Dead Redemption products generated 14.8% of our net revenue for the nine months ended December 31, 2019.

The timing of our Grand Theft Auto or Red Dead Redemption product releases may affect our financial performance on a quarterly and annual basis.

Sales of Grand Theft Auto products generated 31.6% of our net revenue for the three months ended June 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 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.

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 70.0% and 68.3% of net revenue during the nine months ended December 31, 2019 and 2018, respectively.

As of December 31, 2019 and March 31, 2019, our five largest customers comprised 63.6% and 66.6% 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 48.9% and 55.8% of such balance at December 31, 2019 and March 31, 2019, respectively.

We had two customers who accounted for 34.4% and 14.4%, respectively, of our gross accounts receivable as of December 31, 2019 and two customers who accounted for 40.1% and 15.7%, respectively, of our gross accounts receivable as of March 31, 2019.

The economic environment has affected our customers in the past and may do so in the future.

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 quarter 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, being 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, based on our concern for the health and safety of our teams, to working from home 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 ended March 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 81.6% and 71.5% of net revenue during the three months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020 and March 31, 2020, our five largest customers comprised 76.0% 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 at June 30, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 47.2% and 19.8%, respectively, of our gross accounts receivable as of June 30, 2020 and two customers who accounted for 29.4% and 19.4%, respectively, of our gross accounts receivable as of March 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 seriously hurt 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.

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Hardware Platforms.

We derive most of our revenue from the sale of software 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 75.9% of our net revenue by product platform for the nine months ended December 31, 2019.

The success of our business is dependent upon the consumer acceptance of these platforms and continued growth in their installed base.

When new hardware platforms are introduced, demand for software used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles.

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 emerging platforms such as tablets, smartphones and online games.

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 73.6% of our net revenue by product platform for the three months ended June 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 in calendar 2020 by Sony and Microsoft, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles.

The 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 timing of release and 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.

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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 websites we own and others owned by third parties) as well as a larger selection of our catalog titles.

In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending, which is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases.

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.

Our "Results of Operations" discloses that net revenue from digital online channels comprised 74.9% of our net revenue by distribution channel for the nine months ended December 31, 2019.

We expect online delivery of games and game offerings to continue to grow and to become an increasing part of our business over the long-term.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 87.4% of our net revenue for the three months ended June 30, 2020.

We expect online delivery of games and game offerings to continue to grow and to become the primary part of our business over the long-term.

Product Releases

We released the following key titles during the nine months ended December 31, 2019:

We released the following key titles during the three months ended June 30, 2020:

Title Publishing

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Development Platform(s) Date Released

Game of the Year Edition 2K External PS4, Xbox One, PC April 3, 2019

NBA 2K Mobile 2K Internal Android April 17, 2019

The Humankind Odyssey Private Division External PC (digital only) August 27, 2019

NBA 2K20 2K Internal PS4, Xbox One, Switch, PC, iOS, Android September 6, 2019

Borderlands 3 2K Internal / External PS4, Xbox One, PC September 13, 2019

WWE 2K20 2K Internal PS4, Xbox One, PC October 22, 2019

The Outer Worlds Private Division External PS4, Xbox One, PC October 25, 2019

Red Dead Redemption 2 Rockstar Games Internal PC November 5, 2019

Red Dead Redemption 2 Rockstar Games Internal Google Stadia November 19, 2019

NBA 2K20 2K Internal Google Stadia November 19, 2019

Sid Meier's Civilization VI 2K Internal PS4, Xbox One November 22, 2019

The Humankind Odyssey Private Division External PS4, Xbox One December 6, 2019

Borderlands 3 2K Internal / External Google Stadia December 17, 2019

Chimera Squad 2K Internal PC April 24, 2020

The Collection 2K Internal/External Switch May 29, 2020

Borderlands Legendary Collection 2K Internal/External Switch May 29, 2020

XCOM 2 Collection 2K External Switch May 29, 2020

The Outer Worlds Private Division External Switch June 5, 2020

Disintegration Private Division External PS4, Xbox One, PC June 16, 2020

Product Pipeline

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Development Platform(s) Expected Release Date

Disintegration Private Division External TBA Fiscal 2021

Kerbal Space Program 2 Private Division External PC (digital only) Fiscal 2021

PGA Tour 2K21 2K External PS4, Xbox One, Switch, PC, Stadia August 21, 2020

NBA 2K21 2K Internal PS4, Xbox One, Switch, PC, Stadia September 4, 2020

WWE 2K Battlegrounds 2K External PS4, Xbox One, Switch, PC, Stadia September 18, 2020

NBA 2K21 2K Internal PS5, Xbox Series X Holiday 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 Fall 2021

Critical Accounting Policies and Estimates

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In-depth descriptions of these can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

During the nine months ended December 31, 2019, there were no significant changes to the above critical accounting policies and estimates, with the exception of our adoption of Topic 842, Leases .

Refer to Note 1 - Basis of Presentation and Significant Accounting Policies in the Notes to our Condensed Consolidated Financial Statements for disclosures regarding our updated lease accounting policies.

During the three months ended June 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.

Recently Adopted and Recently Issued Accounting Pronouncements

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Net Bookings were as follows:

Three Months Ended December 31, Nine Months Ended December 31,

Three Months Ended June 30,

2020 2019 Increase/

(decrease) % Increase/

(decrease) 2019 2018 Increase/

(decrease) % Increase/

Net Bookings $ 996,249 $ 422,240 $ 574,009 135.9 %

For the three months ended December 31, 2019, Net Bookings decreased by $680.4 million as compared to the prior year period due primarily to Red Dead Redemption 2, which released on PS4 and Xbox One in October 2018, partially offset by an increase in Net Bookings from The Outer Worlds, Borderlands 3, Grand Theft Auto Online, Grand Theft Auto V, and Red Dead Online.

For the nine months ended December 31, 2019, Net Bookings decreased by $179.4 million as compared to the prior year period due primarily to Red Dead Redemption 2, partially offset by an increase in Net Bookings from Borderlands 3 , The Outer Worlds, our NBA 2K franchise, Grand Theft Auto Online , and Red Dead Online.

For the three months ended June 30, 2020, Net Bookings increased by $574.0 million as compared to the prior year period due primarily to Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, Borderlands 3, which released in September 2019, and Red Dead Redemption 2.

Results of Operations

The following tables set forth, for the periods indicated, our Condensed Consolidated Statements of Operations, net revenue by geographic region, net revenue by platform, net revenue by distribution channel, and net revenue by content type:

Three Months Ended December 31, Nine Months Ended December 31,

Three Months Ended June 30,

(thousands of dollars) 2020 2019

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Gross profit 354,621 42.7 % 298,990 55.3 %

Selling and marketing 137,068 14.7 % 161,322 12.9 % 378,455 16.3 % 313,793 14.7 %

General and administrative 102,173 12.3 % 74,833 13.8 %

Selling and marketing 84,779 10.2 % 91,821 17.0 %

Research and development 73,108 8.8 % 68,963 12.8 %

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Income before income taxes 90,361 10.9 % 62,155 11.5 %

Provision for (benefit from) income taxes 25,134 2.7 % (120,098) (9.6) % 52,068 2.2 % (108,750) (5.1) %

Provision for income taxes 1,856 0.2 % 15,875 2.9 %

Net income $ 88,505 10.6 % $ 46,280 8.6 %

Three Months Ended December 31, Nine Months Ended December 31,

2019 2018 2019 2018

Three Months Ended June 30,

Net revenue by geographic region:

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Net revenue by content:

Full game and other $ 589,633 63.4 % $ 952,182 76.3 % $ 1,354,607 58.2 % $ 1,351,202 63.5 %

Recurrent consumer spending $ 479,405 57.7 % $ 314,858 58.3 %

Three Months Ended December 31, 2019 Compared to December 31, 2018

Full game and other 351,905 42.3 % 225,601 41.7 %

Three Months Ended June 30, 2020 Compared to June 30, 2019

(thousands of dollars) 2020 % 2019 % Increase/

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Software development costs and royalties (1)

148,047 17.8 % 108,441 20.1 % 39,606 36.5 %

Internal royalties 214,063 25.8 % 62,889 11.6 % 151,174 240.4 %

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(1) Includes $29,033 and $30,798 of stock-based compensation expense in 2020 and 2019, respectively, in software development costs and royalties.

For the three months ended December 31, 2019, net revenue decreased by $318.6 million as compared to the prior year period.

The decrease was due to (i) a decrease in net revenue of $577.2 million from Red Dead Redemption 2, which released in October 2018, partially offset by an increase in net revenue of (ii) $153.9 million from The Outer Worlds which released in October 2019, (iii) $65.8 million from Borderlands 3, which released in September 2019, and (iv) $45.7 million from our NBA 2K franchise.

Net revenue from console games decreased by $464.7 million and accounted for 73.1% of our total net revenue for the three months ended December 31, 2019, as compared to 91.6% for the prior year period.

The decrease was due to a decrease in net revenue from Red Dead Redemption 2, partially offset by an increase in net revenue from The Outer Worlds, Borderlands 3, and our NBA 2K franchise .

Net revenue from PC and other increased by $146.1 million and accounted for 26.9% of our total net revenue for the three months ended December 31, 2019, as compared to 8.4% for the prior year period.

The increase was due to net revenue from Red Dead Redemption 2, which released on PC in November 2019, The Outer Worlds, and Borderlands 3 .

Net revenue from digital online channels increased by $105.6 million and accounted for 75.3% of our total net revenue for the three months ended December 31, 2019, as compared to 47.6% for the prior year period.

The increase was due to an increase in net revenue from The Outer Worlds, Borderlands 3 , and our NBA 2K franchise, partially offset by a decrease in net revenue from Red Dead Redemption 2.

Net revenue from physical retail and other channels decreased by $424.2 million and accounted for 24.7% of our total net revenue for the three months ended December 31, 2019, as compared to 52.4% for the same period in the prior year period.

The decrease in net revenue from physical retail and other channels was due to a decrease in net revenue from Red Dead Redemption 2, partially offset by an increase in net revenue from The Outer Worlds.

For the three months ended June 30, 2020, net revenue increased by $290.9 million as compared to the prior year period.

The increase was due to an increase in net revenue of (i) $108.7 million from Grand Theft Auto Online and Grand Theft Auto V, (ii) $63.4 million from our NBA 2K franchise, (iii) $28.5 million from Borderlands 3, which released in September 2019, (iv) $18.0 million from Civilization VI , and (v) $15.8 million from Red Dead Redemption Online .

Net revenue from console games increased by $176.9 million and accounted for 73.6% of our total net revenue for the three months ended June 30, 2020, as compared to 80.5% 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, Borderlands 3, which released in September 2019, and Red Dead Online, partially offset by a decrease in net revenue from Red Dead Redemption 2.

Net revenue from PC and other increased by $114.0 million and accounted for 26.4% of our total net revenue for the three months ended June 30, 2020, as compared to 19.5% for the prior year period.

The increase was due to net revenue from Borderlands 3 , Red Dead Redemption 2, which released on PC in November 2019, Grand Theft Auto V, and Civilization VI .

Net revenue from digital online channels increased by $298.4 million and accounted for 87.4% of our total net revenue for the three months ended June 30, 2020, as compared to 79.2% 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, Borderlands 3, Red Dead Redemption 2 , and Civilization V.

Net revenue from physical retail and other channels decreased by $7.6 million and accounted for 12.6% of our total net revenue for the three months ended June 30, 2020, as compared to 20.8% for the same period in the prior year period.

The decrease in net revenue from physical retail and other channels was due to a decrease in net revenue from Red Dead Redemption 2 and Grand Theft Auto Online, partially offset by an increase in net revenue from Borderlands 3 , our NBA 2K franchise, our BioShock franchise, Grand Theft Auto V , The Outer Worlds , which released in October 2019, Dragon City , and our WWE 2K franchise .

Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases.

Net revenue from recurrent consumer spending increased by $43.9 million and accounted for 36.6% of net revenue for the three months ended December 31, 2019, as compared to 23.7% 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.

Net revenue from full game and other decreased by $362.5 million and accounted for 63.4% of net revenue for the three months ended December 31, 2019 as compared to 76.3% 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 Red Dead Redemption 2, partially offset by an increase in net revenue from The Outer Worlds and Borderlands 3 .

Gross profit as a percentage of net revenue for the three months ended December 31, 2019 was 53.0% as compared to 28.0% for the prior year period.

The increase in gross profit as a percentage of net revenue was due to lower royalties and amortization of capitalized software costs as a percentage of net revenue due primarily to the timing of releases.

Net revenue earned outside of the United States decreased by $203.9 million and accounted for 42.3% of our total net revenue for the three months ended December 31, 2019, as compared to 47.8% 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, partially offset by an increase in net revenue from The Outer Worlds and Borderlands 3 .

Changes in foreign currency exchange rates decreased net revenue by $1.9 million and decreased gross profit by $0.1 million for the three months ended December 31, 2019 as compared to the prior year period.

Net revenue from recurrent consumer spending increased by $164.5 million and accounted for 57.7% of net revenue for the three months ended June 30, 2020, as compared to 58.3% 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, Borderlands 3 , and Red Dead Online .

Net revenue from full game and other increased by $126.3 million and accounted for 42.3% of net revenue for the three months ended June 30, 2020 as compared to 41.7% of net revenue for the prior year period.

The increase in net revenue from full game and other was due to an increase in net revenue from Grand Theft Auto V, Borderlands 3, our NBA 2K franchise, The Outer Worlds, and our Mafia franchise.

Gross profit as a percentage of net revenue for the three months ended June 30, 2020 was 42.7% as compared to 55.3% for the prior year period.

The decrease in gross profit as a percentage of net revenue was due to higher royalties as a percentage of net revenue due primarily to the timing of when royalties are earned, partially offset by lower amortization of capitalized software costs as a percentage of net revenue due primarily to the timing of releases.

Net revenue earned outside of the United States increased by $150.8 million and accounted for 43.4% of our total net revenue for the three months ended June 30, 2020, as compared to 38.9% in the prior year period.

The increase in net revenue outside of the United States was due to an increase in net revenue from Grand Theft Auto V and Grand Theft Auto Online, Borderlands 3, our NBA 2K franchise, and Red Dead Redemption 2 and Red Dead Online.

Changes in foreign currency exchange rates decreased net revenue by $1.1 million and decreased gross profit by $0.3 million for the three months ended June 30, 2020 as compared to the prior year period.

Operating Expenses

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(decrease) % Increase/

Selling and marketing $ 137,068 14.7 % $ 161,322 12.9 % $ (24,254) (15.0) %

General and administrative $ 102,173 12.3 % $ 74,833 13.8 % $ 27,340 36.5 %

Selling and marketing 84,779 10.2 % 91,821 17.0 % (7,042) (7.7) %

Research and development 73,108 8.8 % 68,963 12.8 % 4,145 6.0 %

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$ 272,478 32.8 % $ 247,260 45.8 % $ 25,218 10.2 %

_______________________________________________________________________________

(1) Includes stock-based compensation expense, which was allocated as follows (in thousands):

Selling and marketing $ 4,113 $ 6,673

General and administrative $ 13,200 $ 13,790

Research and development 11,327 7,123

Changes in foreign currency exchange rates decreased total operating expenses by $0.9 million for the three months ended December 31, 2019, as compared to the prior year period.

Selling and marketing 4,728 6,476

Selling and marketing expenses decreased by $24.3 million for the three months ended December 31, 2019, as compared to the prior year period, due primarily to lower advertising expenses for Red Dead Redemption 2, which released in October 2018, partially offset by higher advertising expenses for The Outer Worlds, Grand Theft Auto Online, Borderlands 3, and Red Dead Online .

The decrease was partially offset by higher personnel expenses due to increased headcount.

General and administrative

General and administrative expenses increased by $13.9 million for the three months ended December 31, 2019, as compared to the prior year period, due to increases in (i) personnel expenses for additional headcount, (ii) increased professional fees due to an insurance recovery in the prior year period, and (iii) IT-related expenses for cloud-based services.

General and administrative expenses for the three months ended December 31, 2019 and 2018 included occupancy expense (primarily rent, utilities and office expenses) of $6.6 million and $5.5 million, respectively, related to our development studios.

Research and development 6,450 6,591

Research and development expenses increased by $20.2 million for the three months ended December 31, 2019, as compared to the prior year period, due primarily to increases in (i) production and development expenses for titles for which technological feasibility has not been established and (ii) personnel expenses for additional headcount.

Depreciation and Amortization

Depreciation and amortization expenses increased by $2.2 million for the three months ended December 31, 2019 as compared to the prior year period, due primarily to IT infrastructure.

Business reorganization

During the three months ended December 31, 2019, business reorganization expense increased $5.7 million due to a benefit in the prior year related to updating estimates for our 2016 Plan, partially offset by updating estimates for our 2018 Plan with no corresponding expense in the prior year period.

Interest and other, net

Interest and other, net was income of $11.9 million for the three months ended December 31, 2019, as compared to $8.1 million for the prior year period.

The change was due primarily to higher interest income due to the nature of our investments, higher invested balances, and higher interest rates on those investments.

Provision for Income Taxes

The provision for income taxes for the three months ended December 31, 2019 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 $25.1 million for the three months ended December 31, 2019 as compared to a benefit for income taxes of $120.1 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 13.3% for the three months ended December 31, 2019 was due primarily to tax benefits of $9.1 million as a result of tax credits anticipated to be utilized and $2.6 million due to a geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of (200.7)% for the three months ended December 31, 2018 was due primarily to a tax benefit of $108.7 million resulting from changes in our valuation allowance on certain U.S.

deferred tax assets that are more-likely-than-not to be realized, a tax benefit of $15.4 million due to the geographic mix of earnings, a tax benefit of $12.0 million for excess tax benefits from employee stock compensation, and a tax benefit of $6.5 million as a result of tax credits anticipated to be utilized.

To a lesser extent, our rate was also affected by the Tax Cuts and Jobs Act (herein referred to as the "Tax Act").

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to decreased benefits from changes in our valuation allowance, our geographic mix in earnings, and excess benefits from stock compensation.

We anticipate that additional excess tax benefits or shortfalls from employee stock compensation, tax credits, and changes in our geographic mix of earnings could have a significant impact on our effective tax rate in the future.

In addition, we are regularly examined by domestic and foreign taxing authorities.

Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes.

We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments.

It is possible that settlement of audits and/or the expiration of the statute of limitations could have an impact on our effective tax rate in future periods.

The 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.

On June 21, 2018, the U.S.

Supreme Court issued its decision in South Dakota v.

Wayfair, which overturned previous case law that precluded states from requiring retailers to collect and remit sales tax on sales made to in-state customers unless the retailer had physical presence in the state.

Although this case is limited to sales tax collection obligations, we continue to monitor the potential impact of this decision on our state income tax footprint.

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 tax reform abolished preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level.

The TRAF allows the cantons to establish transition rules, the implementation of which may be subject to a ruling from the canton.

Any deferred tax assets arising from tax basis step-up would be recorded once the cantonal process is complete.

As of December 31, 2019, the TRAF did not have a material effect on the Company.

Net income and earnings per share

For the three months ended December 31, 2019, net income was $163.6 million, as compared to $179.9 million in the prior year period.

Diluted earnings per share for the three months ended December 31, 2019, was $1.43, as compared to diluted earnings per share of $1.57 in the prior year period.

Diluted weighted average shares of 114.3 million were 0.5 million shares lower as compared to the prior year period, due primarily to share repurchases in the last three quarters of fiscal year 2019.

See Note 11 to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.

Nine Months Ended December 31, 2019 Compared to December 31, 2018

(thousands of dollars) 2019 % 2018 % Increase/

(decrease) % Increase/

Net revenue $ 2,328,429 100.0 % $ 2,129,387 100.0 % $ 199,042 9.3 %

Software development costs and royalties(1) 451,422 19.4 % 337,603 15.9 % 113,819 33.7 %

Internal royalties 339,312 14.6 % 536,662 25.2 % (197,350) (36.8) %

Product costs 225,162 9.7 % 277,234 13.0 % (52,072) (18.8) %

Licenses 130,914 5.6 % 113,231 5.3 % 17,683 15.6 %

Cost of goods sold 1,146,810 49.3 % 1,264,730 59.4 % (117,920) (9.3) %

Gross profit $ 1,181,619 50.7 % $ 864,657 40.6 % $ 316,962 36.7 %

(1) Includes $91,678 and $107,740 of stock-based compensation expense in 2019 and 2018, respectively, in software development costs and royalties.

For the nine months ended December 31, 2019, net revenue increased by $199.0 million as compared to the prior year period.

The increase was due primarily to (i) $321.3 million in net revenue from Borderlands 3, which released in September 2019 , (ii) $153.9 million from The Outer Worlds, which released in October 2019, and (iii) an increase of $132.0 million from our NBA 2K franchise.

These increases were offset by a decrease of $419.8 million in net revenue from Red Dead Redemption 2 , which released in October 2018.

Net revenue from console games decreased by $45.0 million and accounted for 75.9% of our total net revenue for the nine months ended December 31, 2019, as compared to 85.1% for the prior year period.

The decrease was due to a decrease in net revenue from Red Dead Redemption 2, our WWE 2K franchise, and Grand Theft Auto Online , partially offset by an increase in net revenue from Borderlands 3, our NBA 2K franchise, The Outer Worlds, and Red Dead Online .

Net revenue from PC and other increased by $244.0 million and accounted for 24.1% of our total net revenue for the nine months ended December 31, 2019, as compared to 14.9% for the prior year period.

The increase was due an increase in net revenue from Borderlands 3, Red Dead Redemption 2, which released on PC in November 2019, and The Outer Worlds .

Net revenue from digital online channels increased by $475.7 million and accounted for 74.9% of our total net revenue for the nine months ended December 31, 2019, as compared to 59.6% for the prior year period.

The increase was due to an increase in net revenue from Borderlands 3 , our NBA 2K franchise, and The Outer Worlds, partially offset by a decrease in net revenue from Red Dead Redemption 2 .

Net revenue from physical retail and other channels decreased by $276.7 million and accounted for 25.1% of our total net revenue for the nine months ended December 31, 2019, as compared to 40.4% for the same period in the prior year period.

The decrease was due to a decrease in net revenue from Red Dead Redemption 2, partially offset by an increase in net revenue from Borderlands 3 .

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 $195.6 million and accounted for 41.8% of net revenue for the nine months ended December 31, 2019, as compared to 36.5% of net revenue for the prior year period.

The increase was due to an increase in net revenue from our NBA 2K franchise, Borderlands 3 , and Red Dead Online, partially offset by a decrease in net revenue from Grand Theft Auto Online.

Net revenue from full game and other increased by $3.4 million and accounted for 58.2% of net revenue for the nine months ended December 31, 2019 as compared to 63.5% of net revenue for the prior year period.

The increase was due to net revenue from Borderlands 3, The Outer Worlds, The Ancestors, and Civilization VI, which released on PS4 and Xbox One in November 2019, partially offset by a decrease in net revenue from Red Dead Redemption 2, our WWE 2K franchise, our NBA 2K franchise, and Grand Theft Auto V.

Gross profit as a percentage of net revenue for the nine months ended December 31, 2019 was 50.7% as compared to 40.6% for the prior year period.

The increase in gross profit as a percentage of net revenue was due to lower royalties as a percentage of net revenue due primarily to the timing of releases.

Net revenue earned outside of the United States decreased by $10.7 million, and accounted for 41.5% of our total net revenue for the nine months ended December 31, 2019, as compared to 45.9% 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 our WWE 2K franchise, partially offset by an increase in net revenue from Borderlands 3, The Outer Worlds, Civilization VI, The Ancestors, and Red Dead Redemption Online .

Changes in foreign currency exchange rates decreased net revenue by $9.7 million and decreased gross profit by $2.8 million for the nine months ended December 31, 2019 as compared to the prior year period.

Operating Expenses

(thousands of dollars) 2019 % of net revenue 2018 % of net revenue Increase/

(decrease) % Increase/

Selling and marketing $ 378,455 16.3 % $ 313,793 14.7 % $ 64,662 20.6 %

General and administrative 236,023 10.1 % 205,693 9.7 % 30,330 14.7 %

Research and development 227,680 9.8 % 173,582 8.2 % 54,098 31.2 %

Depreciation and amortization 35,611 1.5 % 29,151 1.4 % 6,460 22.2 %

Business reorganization 467 — % (6,172) (0.3) % 6,639 (107.6) %

Total operating expenses (1) $ 878,236 37.7 % $ 716,047 33.6 % $ 162,189 22.7 %

(1) Includes stock-based compensation expense, which was allocated as follows (in thousands):

Changes in foreign currency exchange rates decreased total operating expenses by $2.0 million for the three months ended June 30, 2020, as compared to the prior year period.

General and administrative

Selling and marketing 14,333 16,321

Research and development 28,533 16,314

Changes in foreign currency exchange rates decreased total operating expenses by $7.9 million for the nine months ended December 31, 2019, as compared to the prior year period.

General and administrative expenses increased by $27.3 million for the three months ended June 30, 2020, as compared to the prior year period, due to increases in charitable contributions made in connection with our COVID-19 pandemic response and relief efforts, personnel expenses for additional headcount and higher incentive compensation, and bad debt expense.

General and administrative expenses for the three months ended June 30, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $7.3 million and $6.1 million, respectively, related to our development studios.

Selling and marketing

Selling and marketing expenses increased by $64.7 million for the nine months ended December 31, 2019, as compared to the prior year period, due primarily to higher advertising expenses for Borderlands 3, Red Dead Online, Grand Theft Auto Online, and The Outer Worlds, partially offset by lower advertising expenses for Red Dead Redemption 2.

The increase was also due to higher personnel expenses due to increased headcount.

General and administrative

General and administrative expenses increased by $30.3 million for the nine months ended December 31, 2019, as compared to the prior year period, due to increases in personnel expenses for additional headcount and IT related expenses for cloud-based service and IT infrastructure.

General and administrative expenses for the nine months ended December 31, 2019 and 2018 included occupancy expense (primarily rent, utilities and office expenses) of $18.9 million and $16.5 million, respectively, related to our development studios.

Selling and marketing expenses decreased by $7.0 million for the three months ended June 30, 2020, as compared to the prior year period, due primarily to lower marketing expenses for Borderlands 3 and Red Dead Online, partially offset by higher marketing expenses for 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.

Research and development

Research and development expenses increased by $54.1 million for the nine months ended December 31, 2019, as compared to the prior year period, due primarily to increases in (i) production and development expenses for titles for which technological feasibility has not been established and (ii) personnel expenses due to increased headcount.

Research and development expenses increased by $4.1 million for the three months ended June 30, 2020, as compared to the prior year period, due primarily to increases in personnel expenses for additional headcount and IT expenses for cloud-based services.

These increases were partially offset by 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 lower travel expenses due to restrictions as a result of the COVID-19 pandemic.

Depreciation and Amortization

Depreciation and amortization expenses for the nine months ended December 31, 2019 increased by $6.5 million, as compared to the prior year period, due primarily to IT infrastructure.

Depreciation and amortization expenses increased by $1.2 million for the three months ended June 30, 2020 as compared to the prior year period, due primarily to IT infrastructure and leasehold improvements for new office locations.

Business reorganization

During the nine months ended December 31, 2019, business reorganization expense increased $6.6 million due to a benefit in the prior year related to updating estimates for our 2016 Plan and updating estimates for our 2018 Plan with no corresponding expense in the prior year period.

During the three months ended June 30, 2020, business reorganization expense decreased $0.4 million due to expense in the prior year related to updating estimates for our 2018 Plan with no corresponding expense in the current year.

Interest and other, net

Interest and other, net was income of $30.4 million for the nine months ended December 31, 2019, as compared to income of $19.6 million for the prior year period.

The change was due primarily to higher interest income due to the nature of our investments, higher invested balances, and higher interest rates on those investments, partially offset by foreign currency losses.

Interest and other, net was income of $8.2 million for the three months ended June 30, 2020, as compared to $10.4 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 nine months ended December 31, 2019 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 $52.1 million for the nine months ended December 31, 2019 as compared to a benefit from income taxes of $108.8 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 15.6% for the nine months ended December 31, 2019 was due primarily to a benefit of $15.1 million as a result of tax credits anticipated to be utilized, a tax benefit of $11.6 million from changes in unrecognized tax benefits due to audit settlements, and a benefit of $5.8 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.

In the prior year period, when compared to our blended statutory rate of 21%, the effective tax rate of (64.6)% for the nine months ended December 31, 2018 was due primarily to a tax benefit of $108.7 million as a result of changes in our valuation allowance on certain U.S.

deferred tax assets that are more-likely-than-not to be realized, a tax benefit of $18.9 million for excess tax benefits from employee stock compensation, a tax benefit of $15.3 million as a result of tax credits anticipated to be utilized, and a net tax benefit of $4.7 million due to the geographic mix of earnings.

To a lesser extent, our rate was also affected by the Tax Act.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased tax expense relating to the Altera case, discussed below, decreased benefits from changes in our valuation allowance relating to temporary items and tax carryforwards anticipated to be utilized, and excess tax benefits from employee stock-based compensation partially offset by increased discrete tax benefits recorded from changes in unrecognized tax benefits due primarily to audit settlements.

We anticipate that additional excess tax benefits 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.

The provision for income taxes for the three months ended June 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 $1.9 million for the three months ended June 30, 2020 as compared to $15.9 million for the prior year period.

When compared to the statutory rate of 21.0%, 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 geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 25.5% for the three months ended June 30, 2019 was due primarily to a tax expense of $19.8 million from the reversal of deferred tax benefits relating to the Altera case, discussed below, partially offset by a tax benefit of $11.6 million from changes in unrecognized tax benefits due to audit settlements.

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 in the current period, offset by decreased tax expense related to the Altera case, discussed below, and decreased tax benefits related to the changes in unrecognized tax benefits due to audit settlements.

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.

In addition, we are regularly examined by domestic and foreign taxing authorities.

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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.

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.

On July 27, 2015, the U.S.

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In February 2016, the U.S.

Internal Revenue Service appealed the decision to the U.S.

Court of Appeals for the Ninth Circuit.

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.

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 nine months ended December 31, 2019, 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 $19,826.

The taxpayer requested a rehearing before the full Ninth Circuit which was denied on November 12, 2019.

The case remains

potentially open for judicial review by the U.S.

Supreme Court.

As a result, the final outcome of the case is uncertain.

We will continue to monitor ongoing developments of this matter and potential impacts to our financial statements.

During the three months ended June 30, 2019, we removed the deferred tax asset and a deferred tax liability associated with this matter from our financial statements, resulting in a cumulative net discrete income tax expense of $19.8 million.

The taxpayer in the Altera case 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 June 21, 2018, the U.S.

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The tax reform abolished preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level.

The TRAF allows the cantons to establish transition rules, the implementation of which may be subject to a ruling from the canton.

Any deferred tax assets arising from tax basis step-up would be recorded once the cantonal process is complete.

As of December 31, 2019, the TRAF did not have a material effect on the Company.

The TRAF abolished preferential tax regimes at the cantonal level.

The cantons established transition rules which provided the Company 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.

Although we are currently reviewing the potential implications of the CARES Act, we do not expect that it will have a material impact to our Consolidated Financial Statements.

Net income and earnings per share

For the nine months ended December 31, 2019, net income was $281.7 million, as compared to net income of $277.0 million in the prior year period.

For the nine months ended December 31, 2019, diluted earnings per share was $2.47 as compared to diluted earnings per share of $2.41 in the prior year period.

Diluted weighted average shares of 114 million were 0.9 million shares lower as compared to the prior year period, due primarily to share repurchases in the last three quarters of fiscal year 2019.

For the three months ended June 30, 2020, net income was $88.5 million, as compared to $46.3 million in the prior year period.

Diluted earnings per share for the three months ended June 30, 2020 was $0.77, as compared to diluted earnings per share of $0.41 in the prior year period.

Diluted weighted average shares of 115.0 million were 1.2 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 to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.

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Short-term Investments

As of December 31, 2019, we had $699.3 million of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations.

As of June 30, 2020, we had $880.8 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 June 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”).

The Credit Agreement runs through February 8, 2024.

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 (5.50% at December 31, 2019) or (b) 1.125% to 1.750% above LIBOR (approximately 1.66% at December 31, 2019), which rates are determined by reference to our consolidated total net leverage ratio.

As of December 31, 2019, there was $198.3 million available to borrow under the Credit Agreement and we had $1.7 million of letters of credit outstanding.

At December 31, 2019, we had no outstanding borrowings under the Credit Agreement.

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, 2020) or (b) 1.125% to 1.750% above LIBOR (approximately 1.63% at June 30, 2020), which rates are determined by reference to our consolidated total net leverage ratio.

As of June 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 June 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:

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acquire, merge or consolidate with or into another person or entity;

create, incur or allow any lien on any of its property;

create, incur or allow any lien on any of

its property;

make investments;

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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 and distributors.

Our five largest customers accounted for 70.0% and 68.3% of net revenue during the nine months ended December 31, 2019 and 2018, respectively.

As of December 31, 2019 and March 31, 2019, five customers accounted for 63.6% and 66.6% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 48.9% and 55.8% of such balances at December 31, 2019 and March 31, 2019, respectively.

We had two customers who accounted for 34.4% and 14.4% of our gross accounts receivable as of December 31, 2019, respectively, and two customers who accounted for 40.1% and 15.7% of our gross accounts receivable as of March 31, 2019, respectively.

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 81.6% and 71.5% of net revenue during the three months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020 and March 31, 2020, five customers accounted for 76.0% 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% and 48.8% of such balances at June 30, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 47.2% and 19.8% of our gross accounts receivable as of June 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.

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.

As of December 31, 2019, the amount of cash and cash equivalents held outside of the U.S.

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 quarter of fiscal year 2021.

As of June 30, 2020, the amount of cash and cash equivalents held outside of the U.S.

by our foreign subsidiaries was $594.4 million.

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We believe that such dispersion meets the business and liquidity needs of our foreign affiliates.

In addition, we expect for the foreseeable future to have the ability to generate sufficient cash domestically to support ongoing operations.

Our Board of Directors has authorized the repurchase of up to 14,218 shares of our common stock.

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 may be suspended or discontinued at any time for any reason.

During the nine months ended December 31, 2019, we did not make any repurchases of our common stock in the open market.

We have repurchased a total of 10,400 shares of our common stock under the program, and as of December 31, 2019, 3,818 shares of our common stock remained available for repurchase under the share repurchase program.

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, 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 June 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:

Nine Months Ended

Three Months Ended

(thousands of dollars) 2020 2019

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Net cash used in financing activities (32,003) (52,118)

Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash (1,705) (15,124)

Net change in cash, cash equivalents, and restricted cash $ 350,448 $ 49,124

At December 31, 2019, we had $1,742.4 million of cash and cash equivalents and restricted cash, compared to $1,392.0 million at March 31, 2019.

Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents 1,925 (3,201)

Net change in cash, cash equivalents, and restricted cash and cash equivalents $ 167,880 $ 220,009

At June 30, 2020, we had $2,161.3 million of cash and cash equivalents and restricted cash and cash equivalents, compared to $1,993.4 million at March 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 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 the purchases of fixed assets and purchases of long-term investments.

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 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

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Legal and Other Proceedings:

We are, or may become, subject to demands and claims (including intellectual property 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 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.

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Off-Balance Sheet Arrangements

As of December 31, 2019 and March 31, 2019, 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 of June 30, 2020 and March 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.

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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 December 31, 2019 and 2018, 42.3% and 47.8%, respectively, and for the nine months ended December 31, 2019 and 2018, 41.5% and 45.9%, respectively, of our net revenue was earned outside of the United States.

For the three months ended June 30, 2020 and 2019, 43.4% and 38.9%, 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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and order cancellations and delays in product shipment.

Sales of our products are also seasonal, with peak shipments typically occurring in the fourth calendar quarter as a result of increased demand for products during the holiday season.

For certain of our software products, we allocate a portion of the amount to be recognized as revenue over an estimated service period, which generally ranges from 9 to 15 months.

As a result, the quarter in which we generate the highest net sales volume may be different from the quarter in which we recognize the highest amount of net revenues.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis