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) December 31, 2020 March 31, 2020 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,649,832 $ 1,357,664 Short-term investments 772,683 644,003 Restricted cash and cash equivalents 764,419 546,604 Accounts receivable, net of allowances of $ 350 and $ 443 at December 31, 2020 and March 31, 2020, respectively 581,136 592,555 Inventory 26,733 19,108 Software development costs and licenses 48,784 40,316 Deferred cost of goods sold 19,854 19,598 Prepaid expenses and other 296,518 273,503 Total current assets 4,159,959 3,493,351 Fixed assets, net 135,257 131,888 Right-of-use assets 161,750 154,284 Software development costs and licenses, net of current portion 436,702 401,778 Goodwill 534,535 386,494 Other intangibles, net 117,618 51,260 Deferred tax assets 127,312 116,676 Long-term restricted cash and cash equivalents 98,538 89,124 Other assets 194,428 123,977 Total assets $ 5,966,099 $ 4,948,832 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 100,159 $ 65,684 Accrued expenses and other current liabilities 1,219,614 1,169,884 Deferred revenue 991,476 777,784 Lease liabilities 30,540 25,187 Total current liabilities 2,341,789 2,038,539 Non-current deferred revenue 31,813 28,339 Non-current lease liabilities 156,835 152,059 Non-current software development royalties 108,667 104,417 Other long-term liabilities 171,704 86,234 Total liabilities $ 2,810,808 $ 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 December 31, 2020 and March 31, 2020 — — Common stock, $ .01 par value, 200,000 shares authorized; 137,504 and 135,927 shares issued and 115,083 and 113,506 outstanding at December 31, 2020 and March 31, 2020, respectively 1,375 1,359 Additional paid-in capital 2,327,913 2,134,748 Treasury stock, at cost; 22,421 common shares at December 31, 2020 and March 31, 2020 ( 820,572 ) ( 820,572 ) Retained earnings 1,652,159 1,282,085 Accumulated other comprehensive loss ( 5,584 ) ( 58,376 ) Total stockholders' equity 3,155,291 2,539,244 Total liabilities and stockholders' equity $ 5,966,099 $ 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 December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Net revenue $ 860,889 $ 930,129 $ 2,533,341 $ 2,328,429 Cost of goods sold 346,244 437,093 1,255,438 1,146,810 Gross profit 514,645 493,036 1,277,903 1,181,619 Selling and marketing 139,906 137,068 338,376 378,455 General and administrative 98,624 84,531 292,230 236,023 Research and development 86,428 82,520 233,752 227,680 Depreciation and amortization 14,007 12,330 40,116 35,611 Business reorganization ( 377 ) ( 246 ) ( 138 ) 467 Total operating expenses 338,588 316,203 904,336 878,236 Income from operations 176,057 176,833 373,567 303,383 Interest and other, net 1,098 11,943 12,022 30,422 Gain on long-term investments, net 39,291 — 38,636 — Income before income taxes 216,446 188,776 424,225 333,805 Provision for income taxes 34,198 25,134 54,151 52,068 Net income $ 182,248 $ 163,642 $ 370,074 $ 281,737 Earnings per share: Basic earnings per share $ 1.58 $ 1.44 $ 3.23 $ 2.49 Diluted earnings per share $ 1.57 $ 1.43 $ 3.20 $ 2.47 See accompanying Notes. 3 Table of Contents TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Net income $ 182,248 $ 163,642 $ 370,074 $ 281,737 Other comprehensive income (loss): Foreign currency translation adjustment 30,135 18,172 53,697 ( 3,192 ) Cash flow hedges: Change in unrealized gains — ( 3,728 ) ( 3,817 ) 2,297 Reclassification to earnings ( 600 ) 2,184 ( 1,933 ) ( 1,157 ) Tax effect on effective cash flow hedges — ( 386 ) 845 301 Change in fair value of effective cash flow hedge ( 600 ) ( 1,930 ) ( 4,905 ) 1,441 Change in fair value of available for sale securities ( 295 ) ( 267 ) 4,000 453 Other comprehensive income (loss) 29,240 15,975 52,792 ( 1,298 ) Comprehensive income $ 211,488 $ 179,617 $ 422,866 $ 280,439 See accompanying Notes. 4 TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended December 31, 2020 2019 Operating activities: Net income $ 370,074 $ 281,737 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and impairment of software development costs and licenses 113,392 115,823 Depreciation 40,790 35,246 Amortization and impairment of intellectual property 22,006 15,981 Stock-based compensation 139,835 176,598 Gain on long-term investments ( 40,588 ) — Other, net ( 89 ) 1,809 Changes in assets and liabilities: Accounts receivable 19,544 ( 249,709 ) Inventory ( 6,452 ) 3,688 Software development costs and licenses ( 144,951 ) ( 18,552 ) Prepaid expenses and other assets ( 49,321 ) ( 215,060 ) Deferred revenue 208,182 11,751 Deferred cost of goods sold 463 18,602 Accounts payable, accrued expenses and other liabilities 114,776 262,061 Net cash provided by operating activities 787,661 439,975 Investing activities: Change in bank time deposits 73,000 114,720 Proceeds from available-for-sale securities 363,628 243,170 Purchases of available-for-sale securities ( 563,815 ) ( 311,995 ) Purchases of fixed assets ( 40,207 ) ( 34,790 ) Proceeds from sale of long-term investment 22,472 — Purchases of long-term investments ( 16,452 ) ( 26,142 ) Business acquisitions ( 79,525 ) ( 12,040 ) Net cash used in investing activities ( 240,899 ) ( 27,077 ) Financing activities: Tax payment related to net share settlements on restricted stock awards ( 60,586 ) ( 71,260 ) Issuance of common stock 14,215 10,515 Net cash used in financing activities ( 46,371 ) ( 60,745 ) Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents 19,006 ( 1,705 ) Net change in cash, cash equivalents, and restricted cash and cash equivalents 519,397 350,448 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 $ 2,512,789 $ 1,742,434 See accompanying Notes. 5 TAKE-TWO INTERACTIVE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited) (in thousands) Three Months Ended December 31, 2020 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Amount Shares Amount Balance, September 30, 2020 137,349 $ 1,373 $ 2,285,394 ( 22,421 ) $ ( 820,572 ) $ 1,469,911 $ ( 34,824 ) $ 2,901,282 Net income — — — — — 182,248 — 182,248 Change in cumulative foreign currency translation adjustment — — — — — — 30,135 30,135 Change in gains on cash flow hedge, net — — — — — — ( 600 ) ( 600 ) Net unrealized gain on available-for-sale securities, net of taxes — — — — — — ( 295 ) ( 295 ) Stock-based compensation — — 47,192 — — — — 47,192 Issuance of restricted stock, net of forfeitures and cancellations 141 2 ( 1 ) — — — — 1 Net share settlement of restricted stock awards ( 60 ) ( 1 ) ( 12,383 ) — — — — ( 12,384 ) Employee share purchase plan settlement 74 1 7,711 — — — — 7,712 Balance, December 31, 2020 137,504 $ 1,375 $ 2,327,913 ( 22,421 ) $ ( 820,572 ) $ 1,652,159 $ ( 5,584 ) $ 3,155,291 Three Months Ended December 31, 2019 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Shares Amount Shares Amount Balance, September 30, 2019 135,616 $ 1,356 $ 2,059,720 ( 22,421 ) $ ( 820,572 ) $ 995,721 $ ( 54,462 ) $ 2,181,763 Net income — — — — — 163,642 — 163,642 Change in cumulative foreign currency translation adjustment — — — — — — 18,172 18,172 Change in gains on cash flow hedge, net — — — — — — ( 1,930 ) ( 1,930 ) Net unrealized gain on available-for-sale securities, net of taxes — — — — — — ( 267 ) ( 267 ) Stock-based compensation — — 45,055 — — — — 45,055 Issuance of restricted stock, net of forfeitures and cancellations 171 2 ( 2 ) — — — — — Net share settlement of restricted stock awards ( 80 ) ( 1 ) ( 9,781 ) — — — — ( 9,782 ) Employee share purchase plan settlement 64 1 5,381 — — — — 5,382 Balance, December 31, 2019 135,771 $ 1,358 $ 2,100,373 ( 22,421 ) $ ( 820,572 ) $ 1,159,363 $ ( 38,487 ) $ 2,402,035 6 Nine Months Ended December 31, 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 — — — — — 370,074 — 370,074 Change in cumulative foreign currency translation adjustment — — — — — — 53,697 53,697 Change in gains on cash flow hedge, net — — — — — — ( 4,905 ) ( 4,905 ) Net unrealized gain on available-for-sale securities, net of taxes — — — — — — 4,000 4,000 Stock-based compensation — — 141,904 — — — — 141,904 Issuance of restricted stock, net of forfeitures and cancellations 1,235 13 ( 12 ) — — — — 1 Net share settlement of restricted stock awards ( 401 ) ( 5 ) ( 60,581 ) — — — — ( 60,586 ) Employee share purchase plan settlement 139 2 14,213 — — — — 14,215 Issuance of shares related to Playdots, Inc. acquisition 604 6 97,641 — — — — 97,647 Balance, December 31, 2020 137,504 $ 1,375 $ 2,327,913 ( 22,421 ) $ ( 820,572 ) $ 1,652,159 $ ( 5,584 ) $ 3,155,291 Nine Months Ended December 31, 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 — — — — — 281,737 — 281,737 Change in cumulative foreign currency translation adjustment — — — — — — ( 3,192 ) ( 3,192 ) Change in gains on cash flow hedge, net — — — — — — 1,441 1,441 Net unrealized gain on available-for-sale securities, net of taxes — — — — — — 453 453 Stock-based compensation — — 141,761 — — — — 141,761 Issuance of restricted stock, net of forfeitures and cancellations 1,674 17 ( 17 ) — — — — — Net share settlement of restricted stock awards ( 631 ) ( 7 ) ( 71,253 ) — — — — ( 71,260 ) Employee share purchase plan settlement 126 2 10,513 — — — — 10,515 Balance, December 31, 2019 135,771 $ 1,358 $ 2,100,373 ( 22,421 ) $ ( 820,572 ) $ 1,159,363 $ ( 38,487 ) $ 2,402,035 See accompanying Notes. 7 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, Social Point, and Playdots. 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. 8 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, and we do not expect that the impact of adopting this guidance will be material to our Consolidated Financial Statements. 2. REVENUE FROM CONTRACTS WITH CUSTOMERS Disaggregation of revenue 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. 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). Net revenue by product revenue and service and other was as follows: Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Net revenue recognized: Service and other $ 578,830 $ 481,301 $ 1,662,456 $ 1,327,433 Product 282,059 448,828 870,885 1,000,996 Total net revenue $ 860,889 $ 930,129 $ 2,533,341 $ 2,328,429 9 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. 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. Net revenue by full game and other revenue and recurrent consumer spending was as follows: Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Net revenue recognized: Recurrent consumer spending $ 533,475 $ 340,496 $ 1,508,604 $ 973,822 Full game and other 327,414 589,633 1,024,737 1,354,607 Total net revenue $ 860,889 $ 930,129 $ 2,533,341 $ 2,328,429 Geography We attribute net revenue to geographic regions based on software product destination. Net revenue by geographic region was as follows: Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Net revenue recognized: United States $ 528,324 $ 536,841 $ 1,502,397 $ 1,361,981 International 332,565 393,288 1,030,944 966,448 Total net revenue $ 860,889 $ 930,129 $ 2,533,341 $ 2,328,429 Platform Net revenue by platform was as follows: Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Net revenue recognized: Console $ 656,079 $ 679,799 $ 1,909,033 $ 1,766,431 PC and other 204,810 250,330 624,308 561,998 Total net revenue $ 860,889 $ 930,129 $ 2,533,341 $ 2,328,429 10 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 December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Net revenue recognized: Digital online $ 728,510 $ 700,321 $ 2,166,035 $ 1,743,876 Physical retail and other 132,379 229,808 367,306 584,553 Total net revenue $ 860,889 $ 930,129 $ 2,533,341 $ 2,328,429 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 December 31, 2020 and March 31, 2020 were $ 1,023,289 and $ 806,123 , respectively. For the three months ended December 31, 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 December 31, 2020 and 2019, $ 109,713 and $ 193,468 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. During the nine months ended December 31, 2020 and 2019, $ 722,658 and $ 758,301 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. As of December 31, 2020, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $ 1,134,398 , which includes our deferred revenue balances and amounts to be invoiced and recognized in future periods. We expect to recognize approximately $ 1,011,585 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 December 31, 2020 and March 31, 2020, our contract asset balances were $ 105,460 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 $ 2,655 and $ 3,166 during the three months ended December 31, 2020 and 2019, respectively, and $ 7,925 and $ 6,541 during the nine months ended December 31, 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 $ 6,887 and $ 5,956 during the three months ended December 31, 2020 and 2019, respectively, and $ 20,544 and $ 17,457 during the nine months ended December 31, 2020 and 2019, respectively. 11 Table of Contents In connection with the 2017 Management Agreement, we have granted restricted stock units as follows: Nine Months Ended December 31, 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 December 31, 2020 and March 31, 2020, respectively. During the three and nine months ended December 31, 2020, 297 restricted stock units previously granted to ZelnickMedia vested, and no restricted stock units were forfeited by ZelnickMedia. 4. FAIR VALUE MEASUREMENTS Recurring 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. 12 Table of Contents • 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. • 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. December 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 $ 745,564 $ 745,564 $ — $ — Cash and cash equivalents Bank-time deposits 471,688 471,688 — — Cash and cash equivalents Commercial paper 37,005 — 37,005 — Cash and cash equivalents Corporate bonds 300 — 300 — Cash and cash equivalents Corporate bonds 509,949 — 509,949 — Short-term investments Bank-time deposits 118,000 118,000 — — Short-term investments US Treasuries 45,041 45,041 — — Short-term investments Asset-backed securities 699 — 699 — Short-term investments Commercial paper 98,994 — 98,994 — Short-term investments Money market funds 469,988 469,988 — — Restricted cash and cash equivalents Bank-time deposits 560 560 — — Restricted cash and cash equivalents Money market funds 98,538 98,538 — — Long-term restricted cash and cash equivalents Private equity 6,178 — — 6,178 Other assets Foreign currency forward contracts ( 128 ) — ( 128 ) — Accrued expenses and other current liabilities Total recurring fair value measurements, net $ 2,602,376 $ 1,949,379 $ 646,819 $ 6,178 13 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 equivalents 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 nine months ended December 31, 2020. Nonrecurring fair value measurements We hold equity investments in certain unconsolidated entities without a readily determinable fair value. These strategic investments represent less than a 20% ownership interest in each of the privately-held affiliates, and we do not maintain power over or control of the entities. We have elected the practical expedient in Topic 321, Investments-Equity Securities , to measure these investments at cost less any impairment, adjusted for observable price changes, if any. Based on these considerations, we estimate that the carrying value of the acquired shares represents the fair value of the investment. At December 31, 2020, we held $ 45,000 of such investments in Other assets within our Condensed Consolidated Balance Sheet. During the three and nine months ended December 31, 2020, we recognized a gain on the sale of a portion of one of these investments of $ 19,791 and an unrealized gain based on our sale constituting an observable price change of $ 20,797 related to the same investment. Both gains are reflected in Gain on long-term investments, net within our Condensed Consolidated Statements of Operations. 14 5. SHORT-TERM INVESTMENTS Our Short-term investments consisted of the following: December 31, 2020 Gross Unrealized Cost or Amortized Cost Gains Losses Fair Value Short-term investments Bank time deposits $ 118,000 $ — $ — $ 118,000 Available-for-sale securities: Corporate bonds 508,431 1,617 ( 99 ) 509,949 US Treasuries 44,948 94 ( 1 ) 45,041 Asset-backed securities 697 2 — 699 Commercial paper 98,994 — — 98,994 Total Short-term investments $ 771,070 $ 1,713 $ ( 100 ) $ 772,683 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 December 31, 2020: December 31, 2020 Amortized Cost Fair Value Short-term investments Due in 1 year or less $ 573,013 $ 574,084 Due in 1 - 2 years 197,361 197,900 Due in 2 - 3 years 696 699 Total Short-term investments $ 771,070 $ 772,683 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: December 31, 2020 March 31, 2020 Forward contracts to sell foreign currencies $ 114,105 $ 122,024 Forward contracts to purchase foreign currencies 81,050 52,596 15 Table of Contents For the three months ended December 31, 2020 and 2019, we recorded a loss of $ 5,832 and a loss of $ 556 , respectively, and for the nine months ended December 31, 2020 and 2019 we recorded a loss of $ 9,518 and a loss of $ 1,643 , 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. 7. INVENTORY Inventory balances by category were as follows: December 31, 2020 March 31, 2020 Finished products $ 21,848 $ 17,984 Parts and supplies 4,885 1,124 Inventory $ 26,733 $ 19,108 Estimated product returns included in inventory at December 31, 2020 and March 31, 2020 were $ 367 and $ 506 , respectively. 8. SOFTWARE DEVELOPMENT COSTS AND LICENSES Details of our capitalized software development costs and licenses were as follows: December 31, 2020 March 31, 2020 Current Non-current Current Non-current Software development costs, internally developed $ 35,506 $ 353,982 $ 17,367 $ 305,970 Software development costs, externally developed 8,592 65,445 10,971 92,908 Licenses 4,686 17,275 11,978 2,900 Software development costs and licenses $ 48,784 $ 436,702 $ 40,316 $ 401,778 During the three months ended December 31, 2020 and 2019, we recorded $ 5,532 and $ 0 , respectively, of software development impairment charges (a component of Cost of goods sold). During the nine months ended December 31, 2020 and 2019, we recorded $ 25,227 and $ 0 , respectively, of software development impairment charges (a component of Cost of goods sold). The impairment charge recorded during the three months ended December 31, 2020 related to a decision not to proceed with further development of certain interactive entertainment software. The additional impairment charge recorded during the nine months ended December 31, 2020 related to unamortized capitalized costs for the development of a title, which were anticipated to exceed the net realizable value of the asset at the time they were impaired. 16 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following: December 31, 2020 March 31, 2020 Software development royalties $ 680,428 $ 822,416 Compensation and benefits 170,780 81,791 Licenses 118,664 57,651 Refund liability 72,795 77,829 Marketing and promotions 62,664 40,797 Other 114,283 89,400 Accrued expenses and other current liabilities $ 1,219,614 $ 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 December 31, 2020) or (b) 1.125 % to 1.750 % above LIBOR (approximately 1.44 % at December 31, 2020), which rates are determined by reference to our consolidated total net leverage ratio. We had no outstanding borrowings at December 31, 2020. Information related to availability on our Credit Agreement was as follows: December 31, 2020 March 31, 2020 Available borrowings $ 197,874 $ 198,336 Outstanding letters of credit 2,126 1,664 We recorded interest expense and fees related to the Credit Agreement of $ 141 and $ 82 for the three months ended December 31, 2020 and 2019, respectively, and $ 305 and $ 248 for the nine months ended December 31, 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). 17 11. EARNINGS PER SHARE ("EPS") The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Computation of Basic earnings per share: Net income $ 182,248 $ 163,642 $ 370,074 $ 281,737 Weighted average shares outstanding—basic 115,004 113,251 114,436 112,996 Basic earnings per share $ 1.58 $ 1.44 $ 3.23 $ 2.49 Computation of Diluted earnings per share: Net income $ 182,248 $ 163,642 $ 370,074 $ 281,737 Weighted average shares outstanding—basic 115,004 113,251 114,436 112,996 Add: dilutive effect of common stock equivalents 1,113 1,003 1,137 1,013 Weighted average common shares outstanding—diluted 116,117 114,254 115,573 114,009 Diluted earnings per share $ 1.57 $ 1.43 $ 3.20 $ 2.47 During the nine months ended December 31, 2020, 1,235 restricted stock awards vested, we granted 872 unvested restricted stock awards, and 29 unvested restricted stock awards were forfeited. 12. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table provides the components of accumulated other comprehensive loss: Nine Months Ended December 31, 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 53,697 — ( 2,972 ) 4,000 54,725 Amounts reclassified from accumulated other comprehensive loss — ( 600 ) ( 1,333 ) — ( 1,933 ) Balance at December 31, 2020 $ ( 6,838 ) $ — $ — $ 1,254 $ ( 5,584 ) Nine Months Ended December 31, 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 ( 3,192 ) — 2,598 453 ( 141 ) Amounts reclassified from accumulated other comprehensive loss — — ( 1,157 ) — ( 1,157 ) Balance at December 31, 2019 $ ( 36,282 ) $ 600 $ ( 3,844 ) $ 1,039 $ ( 38,487 ) 18 Table of Contents 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. Included in our Restricted cash as of December 31, 2020, was the cash portion of our offer to acquire Codemasters Group Holdings PLC, a UK-based game publisher and developer. As of January 13, 2021, the offer lapsed, and the cash was no longer restricted. 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 $ 377 and $ 246 for business reorganization during the three months ended December 31, 2020 and 2019, respectively, and a benefit of $ 138 and expense of $ 467 during the nine months ended December 31, 2020 and 2019, respectively, due to updating estimates for employee separation costs. During the nine months ended December 31, 2020, we made payments of $ 3,500 related to these reorganization activities. As of December 31, 2020, $ 1,166 remained accrued in Accrued expenses and other current liabilities and $ 1,550 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 December 31, 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 $ 34,198 for the three months ended December 31, 2020 as compared to $ 25,134 for the prior year period. When compared to the statutory rate of 21%, the effective tax rate of 15.8 % for the three months ended December 31, 2020 was due primarily to a tax benefit of $ 7,116 due to tax credits, excess tax benefits of $ 3,392 from employee stock-based compensation and the geographic mix of earnings. The provision for income taxes for the nine months ended December 31, 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 $ 54,151 for the nine months ended December 31, 2020 as compared to $ 52,068 for the prior year period. When compared to the statutory rate of 21%, the effective tax rate of 12.8 % for the nine months ended December 31, 2020 was due primarily to a tax benefit of $ 17,778 due to tax credits and excess tax benefits of $ 13,580 from employee stock-based compensation and geographic mix of earnings. 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. 16. ACQUISITIONS On September 4, 2020, we completed the acquisition of privately-held Playdots, Inc. ("Playdots"), a New York City based free-to-play mobile game developer, for consideration of $ 97,846 in cash and 604 shares of our common stock. The cash portion was funded from our cash on hand. Of the cash consideration, $ 13,440 was contractually deferred and accrued for within Accrued expenses and other current liabilities within our Condensed Consolidated Balance Sheet at acquisition. During the three months ended December 31, 2020, we paid out $ 3,840 . As of December 31, 2020, $ 9,600 remained accrued within Accrued expenses and other current liabilities within our Condensed Consolidated Balance Sheet at acquisition. 19 Table of Contents We acquired Playdots as part of our ongoing strategy to expand selectively our portfolio of owned intellectual property and to diversify and strengthen further our mobile offerings. The acquisition-date fair value of the consideration totaled $ 195,493 , which consisted of the following: Fair value of purchase consideration Cash $ 97,846 Common stock ( 604 shares) 97,647 Total $ 195,493 We used the acquisition method of accounting and recognized assets at their fair value as of the date of acquisition, with the excess recorded to goodwill. The preliminary fair values of net tangible and intangible assets are management’s estimates based on the information available at the acquisition date and may change over the measurement period, which will end no later than one year from the acquisition date, as additional information is received. The following table summarizes the preliminary acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Playdots: Fair Value Weighted average useful life Cash acquired $ 12,098 N/A Other tangible net assets 8,206 N/A Other liabilities assumed ( 24,680 ) N/A Intangible Assets Developed game technology 69,000 6 User base 6,200 1 Branding and trade names 3,400 8 Game engine technology 2,200 4 Goodwill 119,069 N/A Total $ 195,493 Goodwill, which is not deductible for U.S. income tax purposes, is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition. The amounts of revenue and earnings of Playdots included in our Consolidated Statement of Operations from the acquisition date to the period ending December 31, 2020 are as follows: Three Months Ended December 31, 2020 Nine Months Ended December 31, 2020 Net revenue 7,269 8,503 Net income (loss) ( 12,368 ) ( 18,417 ) The following table summarizes the pro-forma consolidated results of operations (unaudited) for the three and nine months ended December 31, 2020 and 2019, as though the acquisition had occurred on April 1, 2019, the beginning of Fiscal 2020, and Playdots had been included in our consolidated results for the entire periods subsequent to that date. 20 Table of Contents Three Months Ended December 31, Nine Months Ended December 31, 2020 2019 2020 2019 Pro-forma Net revenue $ 860,000 $ 937,690 $ 2,553,352 $ 2,341,580 Pro-forma Net income $ 182,951 $ 153,691 $ 360,201 $ 247,406 The unaudited pro-forma consolidated results above are based on the historical financial statements of the Company and Playdots and not necessarily indicative of the results of operations that would have been achieved if the acquisition was completed at the beginning of Fiscal 2020 and are not indicative of the future operating results of the combined company. The financial information for Playdots prior to the acquisition has been included in the pro-forma results of operations and includes certain adjustments to the historical consolidated financial statements of Playdots to align with our accounting policies. The pro-forma consolidated results of operations also include the business combination accounting effects resulting from the acquisition, including amortization expense related to finite-lived intangible assets acquired and the related tax effects assuming that the business combination occurred on April 1, 2019. Transaction costs of $ 41 and $ 2,553 for the three and nine months ended December 31, 2020, respectively, which have been recorded within General and administrative expense in our Condensed Consolidated Statements of Operations, have been excluded from the above pro-forma consolidated results of operations due to their non-recurring nature. 21 Table of Contents