TAKE TWO INTERACTIVE SOFTWARE INC 10-Q

Item 1. Financial Statements TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) June 30, 2020 March 31, 2020 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,404,124 $ 1,357,664 Short-term investments 880,825 644,003 Restricted cash and cash equivalents 467,622 546,604 Accounts receivable, net of allowances of $ 2,201 and $ 443 at June 30, 2020 and March 31, 2020, respectively 685,169 592,555 Inventory 19,486 19,108 Software development costs and licenses 31,714 40,316 Deferred cost of goods sold 14,281 19,598 Prepaid expenses and other 183,712 273,503 Total current assets 3,686,933 3,493,351 Fixed assets, net 128,904 131,888 Right-of-use assets 158,018 154,284 Software development costs and licenses, net of current portion 409,962 401,778 Goodwill 389,825 386,494 Other intangibles, net 46,746 51,260 Deferred tax assets 120,892 116,676 Long-term restricted cash and cash equivalents 289,526 89,124 Other assets 138,435 123,977 Total assets $ 5,369,241 $ 4,948,832 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 56,410 $ 65,684 Accrued expenses and other current liabilities 1,136,628 1,169,884 Deferred revenue 928,100 777,784 Lease liabilities 27,602 25,187 Total current liabilities 2,148,740 2,038,539 Non-current deferred revenue 32,851 28,339 Non-current lease liabilities 153,506 152,059 Non-current software development royalties 300,970 104,417 Other long-term liabilities 82,146 86,234 Total liabilities $ 2,718,213 $ 2,409,588 Commitments and contingencies (See Note 13) Stockholders' equity: Preferred stock, $ .01 par value, 5,000 shares authorized; no shares issued and outstanding at June 30, 2020 and March 31, 2020 — — Common stock, $ .01 par value, 200,000 shares authorized; 136,689 and 135,927 shares issued and 114,268 and 113,506 outstanding at June 30, 2020 and March 31, 2020, respectively 1,367 1,359 Additional paid-in capital 2,151,774 2,134,748 Treasury stock, at cost; 22,421 common shares at June 30, 2020 and March 31, 2020 ( 820,572 ) ( 820,572 ) Retained earnings 1,370,590 1,282,085 Accumulated other comprehensive loss ( 52,131 ) ( 58,376 ) Total stockholders' equity 2,651,028 2,539,244 Total liabilities and stockholders' equity $ 5,369,241 $ 4,948,832 See accompanying Notes. 2 Table of Contents TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended June 30, 2020 2019 Net revenue $ 831,310 $ 540,459 Cost of goods sold 476,689 241,469 Gross profit 354,621 298,990 General and administrative 102,173 74,833 Selling and marketing 84,779 91,821 Research and development 73,108 68,963 Depreciation and amortization 12,418 11,257 Business reorganization — 386 Total operating expenses 272,478 247,260 Income from operations 82,143 51,730 Interest and other, net 8,218 10,425 Income before income taxes 90,361 62,155 Provision for income taxes 1,856 15,875 Net income $ 88,505 $ 46,280 Earnings per share: Basic earnings per share $ 0.78 $ 0.41 Diluted earnings per share $ 0.77 $ 0.41 See accompanying Notes. 3 Table of Contents TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended June 30, 2020 2019 Net income $ 88,505 $ 46,280 Other comprehensive income (loss): Foreign currency translation adjustment 4,701 ( 8,797 ) Cash flow hedges: Change in unrealized gains ( 3,817 ) 202 Reclassification to earnings ( 1,333 ) 1,083 Tax effect on effective cash flow hedges 845 ( 9 ) Change in fair value of effective cash flow hedge ( 4,305 ) 1,276 Change in fair value of available for sale securities 5,849 722 Other comprehensive income (loss) 6,245 ( 6,799 ) Comprehensive income $ 94,750 $ 39,481 See accompanying Notes. 4 TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended June 30, 2020 2019 Operating activities: Net income $ 88,505 $ 46,280 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and impairment of software development costs and licenses 57,441 30,498 Depreciation 12,298 11,134 Amortization and impairment of intellectual property 4,986 5,560 Stock-based compensation 53,411 57,432 Other, net ( 2,924 ) 1,321 Changes in assets and liabilities: Accounts receivable ( 91,846 ) 44,041 Inventory ( 131 ) 4,029 Software development costs and licenses ( 60,219 ) ( 56,968 ) Prepaid expenses and other assets 80,759 ( 131,121 ) Deferred revenue 153,525 ( 15,871 ) Deferred cost of goods sold 5,398 15,619 Accounts payable, accrued expenses and other liabilities 144,220 96,581 Net cash provided by operating activities 445,423 108,535 Investing activities: Change in bank time deposits ( 161,026 ) 133,303 Proceeds from available-for-sale securities 117,738 82,424 Purchases of available-for-sale securities ( 188,372 ) ( 28,248 ) Purchases of fixed assets ( 8,905 ) ( 9,971 ) Purchases of long-term investments ( 6,900 ) ( 2,000 ) Business acquisitions — ( 8,715 ) Net cash (used in) provided by investing activities ( 247,465 ) 166,793 Financing activities: Tax payment related to net share settlements on restricted stock awards ( 38,506 ) ( 52,118 ) Issuance of common stock 6,503 — Net cash used in financing activities ( 32,003 ) ( 52,118 ) 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 Cash, cash equivalents, and restricted cash and cash equivalents, beginning of year 1,993,392 1,391,986 Cash, cash equivalents, and restricted cash and cash equivalents, end of period $ 2,161,272 $ 1,611,995 See accompanying Notes. 5 TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited) (in thousands) Three Months Ended June 30, 2020 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Amount Shares Amount Balance, March 31, 2020 135,927 $ 1,359 $ 2,134,748 ( 22,421 ) $ ( 820,572 ) $ 1,282,085 $ ( 58,376 ) $ 2,539,244 Net income — — — — — 88,505 — 88,505 Change in cumulative foreign currency translation adjustment — — — — — — 4,701 4,701 Change in unrealized gains on cash flow hedge, net — — — — — — ( 4,305 ) ( 4,305 ) Net unrealized gain on available-for-sale securities, net of taxes — — — — — — 5,849 5,849 Stock-based compensation — — 49,037 — — — — 49,037 Issuance of restricted stock, net of forfeitures and cancellations 979 10 ( 10 ) — — — — — Net share settlement of restricted stock awards ( 282 ) ( 3 ) ( 38,503 ) — — — — ( 38,506 ) Employee share purchase plan settlement 65 1 6,502 — — — — 6,503 Balance, June 30, 2020 136,689 $ 1,367 $ 2,151,774 ( 22,421 ) $ ( 820,572 ) $ 1,370,590 $ ( 52,131 ) $ 2,651,028 Three Months Ended June 30, 2019 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Amount Shares Amount Balance, March 31, 2019 134,602 $ 1,346 $ 2,019,369 ( 22,421 ) $ ( 820,572 ) $ 877,626 $ ( 37,189 ) $ 2,040,580 Net income — — — — — 46,280 — 46,280 Change in cumulative foreign currency translation adjustment — — — — — — ( 8,797 ) ( 8,797 ) Change in unrealized gains on cash flow hedge, net — — — — — — 1,276 1,276 Net unrealized gain on available-for-sale securities, net of taxes — — — — — — 722 722 Stock-based compensation — — 53,251 — — — — 53,251 Repurchased common stock — — — — — — — — Issuance of restricted stock, net of forfeitures and cancellations 1,339 13 ( 13 ) — — — — — Net share settlement of restricted stock awards ( 476 ) ( 5 ) ( 52,113 ) — — — — ( 52,118 ) Employee share purchase plan settlement 62 1 5,132 — — — — 5,133 Balance, June 30, 2019 135,527 $ 1,355 $ 2,025,626 ( 22,421 ) $ ( 820,572 ) $ 923,906 $ ( 43,988 ) $ 2,086,327 See accompanying Notes. 6 Table of Contents TAKE-TWO INTERACTIVE SOFTWARE, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) (in thousands, except per share amounts) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Take-Two Interactive Software, Inc. (the "Company," "we," "us," or similar pronouns) was incorporated in the state of Delaware in 1993. 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 Social Point. Our products are designed for console systems and personal computers, including smart phones and tablets, and are delivered through physical retail, digital download, online platforms, and cloud streaming services. Basis of Presentation The accompanying Condensed Consolidated Financial Statements are unaudited and include the accounts of the Company and its wholly-owned subsidiaries and, in our opinion, reflect all normal and recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows. Interim results may not be indicative of the results that may be expected for the full fiscal year. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of these Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. As permitted under U.S. GAAP, interim accounting for certain expenses, including income taxes, are based on full year assumptions when appropriate. Actual results could differ materially from those estimates, including as a result of the COVID-19 pandemic, which may affect economic conditions in a number of different ways and result in uncertainty and risk. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with 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, 2020. Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation. Recently Adopted Accounting Pronouncements Accounting for Fair Value Measurement In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement , which modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. We adopted this update effective April 1, 2020. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements. Accounting for Credit Losses In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses , which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that will require the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. For most financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which will generally result in the earlier recognition of credit losses on financial instruments. We adopted this update effective April 1, 2020 under a modified retrospective basis. No adjustment to retained earnings was recorded as a result of the adoption of this standard, which did not have a material impact on our Condensed Consolidated Financial Statements. 7 Recently Issued Accounting Pronouncements Accounting for Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional guidance to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. The guidance includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This guidance is effective immediately and is only available through December 31, 2022. We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements. Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2020 (April 1, 2021 for the Company), with early adoption permitted. We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements. 2. REVENUE FROM CONTRACTS WITH CUSTOMERS Disaggregation of revenue Product revenue Product revenue is primarily comprised of the portion of revenue from software products that is recognized when the customer takes control of the product (i.e., upon delivery of the software product). Service and other revenue Service and other revenue is primarily comprised of revenue from game related services, virtual currency transactions, and in-game purchases which are recognized over an estimated service period. Net revenue by product revenue and service and other was as follows: Three Months Ended June 30, 2020 2019 Net revenue recognized: Service and other 532,050 424,385 Product 299,260 116,074 Total net revenue $ 831,310 $ 540,459 8 Full game and other revenue Full game and other revenue primarily includes the initial sale of full game software products, which may include offline and/or significant game related services. Recurrent consumer spending revenue Recurrent consumer spending revenue is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases. Net revenue by full game and other revenue and recurrent consumer spending was as follows: Three Months Ended June 30, 2020 2019 Net revenue recognized: Recurrent consumer spending 479,405 314,858 Full game and other 351,905 225,601 Total net revenue $ 831,310 $ 540,459 Geography We attribute net revenue to geographic regions based on software product destination. Net revenue by geographic region was as follows: Three Months Ended June 30, 2020 2019 Net revenue recognized: United States $ 470,490 $ 330,479 International 360,820 209,980 Total net revenue $ 831,310 $ 540,459 Platform Net revenue by platform was as follows: Three Months Ended June 30, 2020 2019 Net revenue recognized: Console $ 611,685 $ 434,814 PC and other 219,625 105,645 Total net revenue $ 831,310 $ 540,459 9 Distribution channel Our products are delivered through digital online services (digital download, online platforms, and cloud streaming) and physical retail and other. Net revenue by distribution channel was as follows: Three Months Ended June 30, 2020 2019 Net revenue recognized: Digital online $ 726,226 $ 427,781 Physical retail and other 105,084 112,678 Total net revenue $ 831,310 $ 540,459 Deferred Revenue We record deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations. Deferred revenue, including current and non-current balances as of June 30, 2020 and March 31, 2020 were $ 960,951 and $ 806,123 , respectively. For the three months ended June 30, 2020, the additions to our deferred revenue balance were due primarily to cash payments received or due in advance of satisfying our performance obligations, while the reductions to our deferred revenue balance were due primarily to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business. During the three months ended June 30, 2020 and 2019, $ 371,213 and $ 330,421 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. As of June 30, 2020, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $ 1,070,511 , which includes our deferred revenue balances and amounts to be invoiced and recognized in future periods. We expect to recognize approximately $ 980,660 of this balance as revenue over the next 12 months, and the remainder thereafter. This balance does not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee. As of June 30, 2020 and March 31, 2020, our contract asset balances were $ 92,733 and $ 81,625 , respectively, which are recorded within Prepaid expenses and other in our Condensed Consolidated Balance Sheets. 3. MANAGEMENT AGREEMENT In November 2017, we entered into a new management agreement (the "2017 Management Agreement"), with ZelnickMedia Corporation ("ZelnickMedia") that replaces our previous agreement with ZelnickMedia and pursuant to which ZelnickMedia provides financial and management consulting services through March 31, 2024. The 2017 Management Agreement became effective January 1, 2018. As part of the 2017 Management Agreement, Strauss Zelnick, the President of ZelnickMedia, continues to serve as Executive Chairman and Chief Executive Officer of the Company, and Karl Slatoff, a partner of ZelnickMedia, continues to serve as President of the Company. The 2017 Management Agreement provides for an annual management fee of $ 3,100 over the term of the agreement and a maximum annual bonus opportunity of $ 7,440 over the term of the agreement, based on the Company achieving certain performance thresholds. In consideration for ZelnickMedia's services, we recorded consulting expense (a component of General and administrative expenses) of $ 2,665 and $ 1,670 during the three months ended June 30, 2020 and 2019, respectively. We recorded stock-based compensation expense for restricted stock units granted to ZelnickMedia, which is included in General and administrative expenses, of $ 6,740 and $ 5,545 during the three months ended June 30, 2020 and 2019, respectively. 10 Table of Contents In connection with the 2017 Management Agreement, we have granted restricted stock units as follows: Three Months Ended June 30, 2020 2019 Time-based 79 92 Market-based(1) 145 168 Performance-based(1) IP 24 28 Recurrent Consumer Spending ("RCS") 24 28 Total—Performance-based 48 56 Total Restricted Stock Units 272 316 _______________________________________________________________________________ (1) Represents the maximum number of shares eligible to vest. Time-based restricted stock units granted in fiscal year 2021 will vest on April 13, 2022, and those granted in fiscal year 2020 will vest on April 13, 2021, in each case provided that the 2017 Management Agreement has not been terminated prior to such vesting date. Market-based restricted stock units granted in fiscal year 2021 are eligible to vest on April 13, 2022, and those granted in fiscal year 2020 are eligible to vest on April 13, 2021, in each case provided that the 2017 Management Agreement has not been terminated prior to such vesting date. Market-based restricted stock units are eligible to vest based on the Company's Total Shareholder Return (as defined in the relevant grant agreement) relative to the Total Shareholder Return (as defined in the relevant grant agreement) of the companies that constitute the NASDAQ Composite Index as of the grant date measured over a two-year period. To earn the target number of market-based restricted stock units (which represents 50 % of the number of the market-based restricted stock units set forth in the table above), the Company must perform at the 50th percentile, with the maximum number of market-based restricted stock units earned if the Company performs at the 75th percentile. Performance-based restricted stock units granted in fiscal year 2021 are eligible to vest on April 13, 2022, and those granted in fiscal year 2020 are eligible to vest on April 13, 2021, in each case provided that the 2017 Management Agreement has not been terminated prior to such vesting date. The performance-based restricted stock units, of which 50 % are tied to "IP" and 50 % to "RCS" (as defined in the relevant grant agreement), are eligible to vest based on the Company's achievement of certain performance metrics (as defined in the relevant grant agreement) of either individual product releases of "IP" or "RCS" measured over a two-year period. The target number of performance-based restricted stock units that may be earned pursuant to these grants is equal to 50 % of the grant amounts set forth in the above table (the numbers in the table represent the maximum number of performance-based restricted stock units that may be earned). At the end of each reporting period, we assess the probability of each performance metric and upon determination that certain thresholds are probable, we record expense for the unvested portion of the shares of performance-based restricted stock units. The unvested portion of time-based, market-based and performance-based restricted stock units held by ZelnickMedia were 588 and 613 as of June 30, 2020 and March 31, 2020, respectively. During the three months ended June 30, 2020, 297 restricted stock units previously granted to ZelnickMedia vested, and no restricted stock units were forfeited by ZelnickMedia. 4. FAIR VALUE MEASUREMENTS The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, prepaid expenses and other, accounts payable, and accrued expenses and other current liabilities, approximate fair value because of their short maturities. We follow a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of "observable inputs" and minimize the use of "unobservable inputs." The three levels of inputs used to measure fair value are as follows: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data. 11 Table of Contents • Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. The table below segregates all assets and liabilities that are measured at fair value on a recurring basis (which is measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. June 30, 2020 Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Balance Sheet Classification Money market funds $ 498,644 $ 498,644 $ — $ — Cash and cash equivalents Bank-time deposits 213,000 213,000 — — Cash and cash equivalents Commercial paper 94,105 — 94,105 — Cash and cash equivalents Corporate bonds 37,261 — 37,261 — Cash and cash equivalents Corporate bonds 401,198 — 401,198 — Short-term investments Bank-time deposits 352,026 352,026 — — Short-term investments US Treasuries 28,684 28,684 — — Short-term investments Asset-backed securities 1,007 — 1,007 — Short-term investments Commercial paper 97,910 — 97,910 — Short-term investments Money market funds 467,298 467,298 — — Restricted cash and cash equivalents Bank-time deposits 324 324 — — Restricted cash and cash equivalents Money market funds 289,526 289,526 — — Long-term restricted cash and cash equivalents Private equity 5,364 — — 5,364 Other assets Foreign currency forward contracts ( 242 ) — ( 242 ) — Accrued expenses and other current liabilities Total recurring fair value measurements, net $ 2,486,105 $ 1,849,502 $ 631,239 $ 5,364 12 Table of Contents March 31, 2020 Quoted prices in active markets for identical assets (level 1) Significant other observable inputs (level 2) Significant unobservable inputs (level 3) Balance Sheet Classification Money market funds $ 497,861 $ 497,861 $ — $ — Cash and cash equivalents Bank-time deposits 313,757 313,757 — — Cash and cash equivalents Commercial paper 97,544 — 97,544 — Cash and cash equivalents Corporate bonds 9,888 — 9,888 — Cash and cash equivalents Money market funds 546,604 546,604 — — Restricted cash and cash equialents Corporate bonds 334,631 — 334,631 — Short-term investments Bank-time deposits 191,000 191,000 — — Short-term investments US Treasuries 30,819 30,819 — — Short-term investments Commercial paper 87,553 — 87,553 — Short-term investments Cross-currency swap 11,275 — 11,275 — Prepaid expenses and other Money market funds 89,124 89,124 — — Long-term restricted cash and cash equivalents Private equity 2,759 — — 2,759 Other assets Foreign currency forward contracts ( 11 ) — ( 11 ) — Accrued and other current liabilities Total recurring fair value measurements, net $ 2,212,804 $ 1,669,165 $ 540,880 $ 2,759 We did not have any transfers between Level 1 and Level 2 fair value measurements, nor did we have any transfers into or out of Level 3 during the three months ended June 30, 2020 5. SHORT-TERM INVESTMENTS Our Short-term investments consisted of the following: June 30, 2020 Gross Unrealized Cost or Amortized Cost Gains Losses Fair Value Short-term investments Bank time deposits $ 352,026 $ — $ — $ 352,026 Available-for-sale securities: Corporate bonds 398,792 2,672 ( 266 ) 401,198 US Treasuries 28,444 240 — 28,684 Asset-backed securities 1,000 7 — 1,007 Commercial paper 97,910 — — 97,910 Total Short-term investments $ 878,172 $ 2,919 $ ( 266 ) $ 880,825 13 March 31, 2020 Gross Unrealized Cost or Amortized Cost Gains Losses Fair Value Short-term investments Bank time deposits $ 191,000 $ — $ — $ 191,000 Available-for-sale securities: Corporate bonds 337,752 307 ( 3,428 ) 334,631 US Treasuries 30,481 338 — 30,819 Commercial paper 87,553 — — 87,553 Total short-term investments $ 646,786 $ 645 $ ( 3,428 ) $ 644,003 The following table summarizes the contracted maturities of our short-term investments at June 30, 2020: June 30, 2020 Amortized Cost Fair Value Short-term investments Due in 1 year or less $ 747,633 $ 748,872 Due in 1 - 2 years 129,539 130,946 Due in 2 - 3 years 1,000 1,007 Total short-term investments $ 878,172 $ 880,825 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Our risk management strategy includes the use of derivative financial instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. We do not enter into derivative financial contracts for speculative or trading purposes. We recognize derivative instruments as either assets or liabilities on our Consolidated Balance Sheets, and we measure those instruments at fair value. We classify cash flows from derivative transactions as cash flows from operating activities in our Consolidated Statements of Cash Flows. Foreign currency forward contracts The following table shows the gross notional amounts of foreign currency forward contracts: June 30, 2020 March 31, 2020 Forward contracts to sell foreign currencies $ 126,114 $ 122,024 Forward contracts to purchase foreign currencies 81,751 52,596 For the three months ended June 30, 2020 and 2019, we recorded a loss of $ 2,657 and a loss of $ 3,298 , respectively, related to foreign currency forward contracts in Interest and other, net in our Condensed Consolidated Statements of Operations. Our foreign currency exchange forward contracts are not designated as hedging instruments under hedge accounting and are used to reduce the impact of foreign currency on certain balance sheet exposures and certain revenue and expense. These instruments are generally short-term in nature, with typical maturities of less than one year, and are subject to fluctuations in foreign exchange rates. Cross-currency swap In August 2017, we entered into a cross-currency swap agreement related to an intercompany loan that has been designated and accounted for as a cash flow hedge of foreign currency exchange risk. During the three months ended June 30, 2020, we settled the intercompany loan and cross-currency swap, thereby discontinuing the cash flow hedge. As a result, we reclassified $ 3,109 from Accumulated other comprehensive income (loss) to earnings as an increase to Interest and other, net on our Condensed Consolidated Statement of Operations. We also received $ 7,420 in cash to settle our corresponding derivative asset. 14 7. INVENTORY Inventory balances by category were as follows: June 30, 2020 March 31, 2020 Finished products $ 18,039 $ 17,984 Parts and supplies 1,447 1,124 Inventory $ 19,486 $ 19,108 Estimated product returns included in inventory at June 30, 2020 and March 31, 2020 were $ 541 and $ 506 , respectively. 8. SOFTWARE DEVELOPMENT COSTS AND LICENSES Details of our capitalized software development costs and licenses were as follows: June 30, 2020 March 31, 2020 Current Non-current Current Non-current Software development costs, internally developed $ 10,491 $ 321,524 $ 17,367 $ 305,970 Software development costs, externally developed 13,674 84,188 10,971 92,908 Licenses 7,549 4,250 11,978 2,900 Software development costs and licenses $ 31,714 $ 409,962 $ 40,316 $ 401,778 During the three months ended June 30, 2020 and June 30, 2019, we recorded $ 19,695 and $ 0 , respectively, of software development impairment charges (a component of Cost of goods sold). The impairment charge recorded during the three months ended June 30, 2020 related to unamortized capitalized costs for the development of a title, which are anticipated to exceed the net realizable value of the asset. 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following: June 30, 2020 March 31, 2020 Software development royalties 793,744 $ 822,416 Licenses 82,916 57,651 Compensation and benefits 71,218 81,791 Refund liability 54,820 77,829 Marketing and promotions 32,684 40,797 Other 101,246 89,400 Accrued expenses and other current liabilities $ 1,136,628 $ 1,169,884 10. DEBT Credit Agreement On February 8, 2019, we entered into an unsecured Credit Agreement (the “Credit Agreement”) that runs through February 8, 2024. The Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $ 200,000 , including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $ 25,000 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $ 25,000 . In addition, the Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $ 250,000 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, 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. We had no outstanding borrowings at June 30, 2020. 15 Table of Contents Information related to availability on our Credit Agreement was as follows: June 30, 2020 March 31, 2020 Available borrowings $ 198,336 $ 198,336 Outstanding letters of credit 1,664 1,664 We recorded interest expense and fees related to the Credit Agreement of $ 82 and $ 82 for the three months ended June 30, 2020 and 2019, respectively. 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 us and each of our 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). 11. EARNINGS PER SHARE ("EPS") The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended June 30, 2020 2019 Computation of Basic earnings per share: Net income $ 88,505 $ 46,280 Weighted average shares outstanding—basic 113,862 112,621 Basic earnings per share $ 0.78 $ 0.41 Computation of Diluted earnings per share: Net income $ 88,505 $ 46,280 Weighted average shares outstanding—basic 113,862 112,621 Add: dilutive effect of common stock equivalents 1,094 1,107 Weighted average common shares outstanding—diluted 114,956 113,728 Diluted earnings per share $ 0.77 $ 0.41 During the three months ended June 30, 2020, 979 restricted stock awards vested, we granted 645 unvested restricted stock awards, and 3 unvested restricted stock awards were forfeited. 12. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table provides the components of accumulated other comprehensive loss: Three Months Ended June 30, 2020 Foreign currency translation adjustments Unrealized gain (loss) on forward contracts Unrealized gain (loss) on cross-currency swap Unrealized gain (loss) on available-for- sales securities Total Balance at March 31, 2020 $ ( 60,535 ) $ 600 $ 4,305 $ ( 2,746 ) $ ( 58,376 ) Other comprehensive income (loss) before reclassifications 4,701 — ( 2,972 ) 5,849 7,578 Amounts reclassified from accumulated other comprehensive loss — — ( 1,333 ) — ( 1,333 ) Balance at June 30, 2020 $ ( 55,834 ) $ 600 $ — $ 3,103 $ ( 52,131 ) 16 Table of Contents Three Months Ended June 30, 2019 Foreign currency translation adjustments Unrealized gain (loss) on derivative instruments Unrealized gain (loss) on cross-currency swap Unrealized gain (loss) on available-for- sales securities Total Balance at March 31, 2019 $ ( 33,090 ) $ 600 $ ( 5,285 ) $ 586 $ ( 37,189 ) Other comprehensive income (loss) before reclassifications ( 8,797 ) — 193 722 ( 7,882 ) Amounts reclassified from accumulated other comprehensive loss — — 1,083 — 1,083 Balance at June 30, 2019 $ ( 41,887 ) $ 600 $ ( 4,009 ) $ 1,308 $ ( 43,988 ) 13. COMMITMENTS AND CONTINGENCIES We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years. Other than agreements entered into in the ordinary course of business and in addition to the agreements requiring known cash commitments as reported in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, we did not have any significant changes to our commitments since March 31, 2020. Legal and Other Proceedings We are, or may become, subject to demands and claims (including intellectual property and employment related claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial condition or results of operations. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material. 14. BUSINESS REORGANIZATION In the first quarter of fiscal year 2018, we announced and initiated actions to implement a strategic reorganization at one of our labels (the "2018 Plan"). In connection with this initiative, we recorded a benefit of $ 0 and expense of $ 386 for business reorganization during the three months ended June 30, 2020 and 2019, respectively, due to updating estimates for employee separation costs and made payments of $ 3,500 related to these reorganization activities. As of June 30, 2020, $ 1,600 remained accrued in Accrued expenses and other current liabilities and $ 1,254 in Other non-current liabilities. Although we may record additional expense or benefit in future periods to true-up estimates, we do not expect to incur additional reorganization costs in connection with the 2018 Plan. 15. INCOME TAXES 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 $ 1,856 for the three months ended June 30, 2020 as compared to $ 15,875 for the prior year period. When compared to the 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 $ 7,867 from employee stock-based compensation, tax benefits of $ 4,931 due to tax credits, and geographic mix of earnings. 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 and use tax collection 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. We are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations may have an impact on our effective tax rate in future periods. 17 Table of Contents