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Item 7. Management’s Discussion and Analysis

2021-05-19 compared with 2020-05-22 · 100 added, 211 removed, 208 unchanged (60% of the section changed)

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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 principally through Rockstar Games, 2K, Private Division, and Social Point.

Our products are currently designed for console gaming systems, such as Sony's PS4, Microsoft's Xbox One, and Nintendo's Switch, and PC, including smartphones and tablets.

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

Our products are currently designed for console gaming systems and PC, including smartphones and tablets.

We deliver our products through physical retail, digital download, online platforms and cloud streaming services.

We endeavor to be the most creative, innovative and efficient company in our industry.

Our core strategy is to capitalize on the popularity of video games by developing and publishing high-quality interactive entertainment experiences across a range of genres.

We focus on building compelling entertainment franchises by publishing a select number of titles for which we can create sequels and incremental revenue opportunities through virtual currency, add-on content, and in-game purchases.

Most of our intellectual property is internally owned and developed, which we believe best positions us financially and competitively.

We have established a portfolio of proprietary software content for the major hardware platforms in a wide range of genres, including action, adventure, family/casual, racing, role-playing, shooter, sports and strategy, which we distribute worldwide.

We believe that our commitment to creativity and innovation is a distinguishing strength, enabling us to differentiate our products in the marketplace by combining advanced technology with compelling storylines and characters that provide unique gameplay experiences for consumers.

We have created, acquired or licensed a group of highly recognizable brands to match the broad consumer demographics that we serve, ranging from adults to children and game enthusiasts to casual gamers.

Another cornerstone of our strategy is to support the success of our products in the marketplace through innovative marketing programs and global distribution on platforms and through channels that are relevant to our target audience.

Our revenue is primarily derived from the sale of internally developed software titles and software titles developed by third parties.

Operating margins are dependent in part upon our ability to release new, commercially successful software products and to manage effectively their development and marketing costs.

We have internal development studios located 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.

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 320 million units.

The latest installment, Grand Theft Auto V , has sold-in over 125 million units worldwide and includes access to Grand Theft Auto Online .

On October 26, 2018, Rockstar Games launched Red Dead Redemption 2 , which has been a critical and commercial success that set numerous entertainment industry records.

To date, Red Dead Redemption 2 has sold-in more than 30 million units worldwide.

Rockstar Games is also well known for developing brands in other genres, including the L.A.

Noire , Bully and Manhunt franchises.

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

Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres including shooter, action, role-playing, strategy, sports and family/casual entertainment.

We expect 2K to continue to develop new, successful franchises in the future.

2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling BioShock , Mafia , Sid Meier's Civilization, and XCOM series.

2K also publishes successful externally developed franchises, 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 .

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

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

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

In addition, Social Point has a robust development pipeline with a number of exciting games planned for launch in the coming years.

We are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden the distribution of our existing products and expand our online gaming presence, especially in China and South Korea.

2K has secured a multi-year license from the NBA to develop an online version of the NBA simulation game in China, Taiwan, South Korea, and Southeast Asia.

NBA 2K Online , our free-to-play NBA simulation game, which was co-developed by 2K and Tencent, is the top online PC sports game in China with over 49 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.

The NBA 2K League follows a professional sports league format:

head-to-head competition throughout a regular season followed by a bracketed playoff system and a finals match-up that was held in August in each of the NBA 2K League's first two seasons.

Trends and Factors Affecting our Business

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Economic Environment and Retailer Performance.

We continue to monitor economic conditions, including the impact of the COVID-19 pandemic, that may unfavorably affect our businesses, such as deteriorating consumer demand, delays in development, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates.

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 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 COVID-19 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.

During fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of the COVID-19 related business closures and movement restrictions, such as "shelter in place" and "lockdown" orders, implemented around the world, as well as the online accessibility and social nature of our products.

However, we cannot be certain as to the duration of these effects, the impact of vaccination efforts or of the lifting of certain restrictions on them, and the potential offsetting impacts of deteriorating economic conditions and decreased consumer spending generally.

We expect that engagement trends will continue to be notably higher than they were pre-pandemic;

however, as the return to normalcy continues, we expect a moderation of the trends that benefited our industry over the past year.

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 over the last year, which to date has resulted in minimal disruption.

However, despite largely positive outcomes to date, these efforts may ultimately not be effective, and a protracted economic downturn may limit the effectiveness of our mitigation efforts.

Any of these considerations described above could cause or contribute to the risks described, above, in Item 1A of this Form 10-K and could materially adversely affect our business, financial condition, results of operations, or stock price.

Therefore, the effects of COVID-19 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.

Therefore, the effects of COVID-19 may 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.

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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.

The COVID-19 pandemic has led, and may continue to 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 products made for video game consoles manufactured by third parties, such as Sony's PS4 and Microsoft's Xbox One, which comprised 74.7% of our net revenue by product platform for the fiscal year ended March 31, 2020.

We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 74.6% of our net revenue by product platform for the fiscal year ended

March 31, 2021.

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

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.

When new hardware platforms are introduced, such as those released in November 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 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, COVID-19 or other events, may impact the timing of release and availability of these new consoles, which may also affect demand.

Further, COVID-19 or other events, may impact the availability of these new consoles, which may also affect demand.

We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development.

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As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 86.6% of our net revenue for the fiscal year ended March 31, 2021.

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 in fiscal year 2020:

Title Publishing Label Internal or

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, Nintendo 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

Borderlands 3 (for Steam and other retailers) 2K Internal/External PC March 13, 2020

Product Pipeline

We have announced the following key titles to date (this list does not represent all titles currently in development):

Title Publishing Label Internal or

Development Platform(s) Expected Release Date

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

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

NBA 2K21 2K Internal TBA Fall 2020

Kerbal Space Program 2 Private Division Internal PS4, Xbox One, PC Fall 2021

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

Content Release Highlights

During fiscal year 2021, we released new content for a number of our biggest franchises, including, but not limited to Grand Theft Auto Online, Red Dead Online, Borderlands, and Sid Meier’s Civilization .

Our 2K label also released NBA 2K21 and PGA TOUR 2K21 .

To date we have announced that, during fiscal year 2022, Rockstar Games will release Grand Theft Auto V for the PS5 and Xbox Series X|S, Private Division will release OlliOlli World digitally, and 2K will release NBA 2K22 and WWE 2K22 .

In addition, throughout the year, we expect our labels to deliver new content for our franchises.

We will also continue to invest in opportunities that we believe will enhance and scale our business and have the potential to drive growth over the long-term.

Fiscal 2021 Financial Summary

Our Net revenue for fiscal year ended March 31, 2021 was led by titles from a variety of our top franchises, primarily NBA 2K;

Grand Theft Auto V and Grand Theft Auto Online;

Red Dead Redemption 2 and Red Dead Online , which released on PC in November 2019;

Borderlands 3 , which released in September 2019;

and The Outer Worlds , which released in October 2019 .

Grand Theft Auto Online and Grand Theft Auto V;

Red Dead Redemption 2 and Red Dead Online ;

Borderlands 3 , and our WWE 2K franchise .

Our Net revenue increased to $3,372.8 million, an increase of $283.8 million or 9.2% compared to the fiscal year ended March 31, 2020.

For the fiscal year ended March 31, 2020, our Net income was $404.5 million, as compared to Net income of $333.8 million in the prior year.

For the fiscal year ended March 31, 2021, our Net income was $588.9 million, as compared to Net income of $404.5 million in the prior year, and includes the reversal of share-based compensation expense of $69.8 million due to forfeitures and a gain of $40.6 million due to primarily the sale of one of our investments.

Diluted earnings per share for the fiscal year ended March 31, 2021 was $5.09, as compared to Diluted income per share of $3.54 for the fiscal year ended March 31, 2020.

Our operating income for the fiscal year ended March 31, 2020 increased compared to the operating income for fiscal year ended March 31, 2019, due primarily to higher Gross profit, which was due primarily to higher revenue from the titles described above and lower internal royalties as a percentage of net revenue, partially offset by higher Operating expenses primarily due to higher Selling and marketing expense.

Our operating income for the fiscal year ended March 31, 2021 increased compared to the operating income for fiscal year ended March 31, 2020, due primarily to higher Gross profit, which was due primarily to higher revenue from the titles described above, lower capitalized software amortization as a percentage of net revenue, and lower internal royalties as a percentage of net revenue, partially offset by higher Operating expenses primarily due to higher headcount.

At March 31, 2021, we had $2,060.2 million of Cash and cash equivalents and Restricted cash and cash equivalents, compared to $1,993.4 million at March 31, 2020.

The increase in Cash and cash equivalents and Restricted cash and cash equivalents from March 31, 2020 was due primarily to Net cash provided by operating activities from sales primarily from the previously mentioned titles , partially offset by investments in software development and licenses as well as royalty payments.

and to a lesser extent Net cash from investing activities.

These net increases were offset by Net cash used in financing activities, which was primarily related to tax payments related to net share settlements of our restricted stock.

This net increase was partially offset by (i) Net cash used in investing activities primarily related to changes in bank time deposits and net purchases of available for sale securities, our acquisition of Playdots, and purchases of fixed assets and (ii) Net cash used in financing activities, which was primarily related to tax payments related to net share settlements of our restricted stock.

Critical Accounting Policies and Estimates

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Net Bookings $ 3,552,598 $ 2,990,358 $ 562,240 18.8 %

For the fiscal year ended March 31, 2020, Net Bookings increased by $61.6 million as compared to the prior year period due primarily to Borderlands 3, which released in September 2019, Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, The Outer Worlds which released in October 2019, Red Dead Online , Civilization VI , and Ancestors:

The Humankind Odyssey , which released in August 2019, partially offset by a decrease in Net Bookings from Red Dead Redemption 2, which released on PS4 and Xbox One in October 2018 and PC in November 2019.

For the fiscal year ended March 31, 2021, Net Bookings increased by $562.2 million as compared to the prior year due primarily to increases in Net Bookings from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, our Mafia franchise, PGA TOUR 2K21, which released in August 2020, Two Dots, which was part of our Playdots acquisition completed in September 2020 , and Dragon City, partially offset by a decrease in Net Bookings from Borderlands 3 , which released in September 2019, and The Outer Worlds, which released in October 2019 .

Results of Operations

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Interest and other, net 8,796 0.3 % 38,505 1.2 % 26,113 1.0 %

Loss on long-term investments 5,333 0.2 % — — % — — %

Gain (loss) on long-term investments, net 39,636 1.2 % (5,333) (0.2) % — — %

Income before income taxes 677,816 20.1 % 458,439 14.8 % 232,785 8.7 %

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Net revenue by content:

Full game and other $ 1,703,971 55.2 % $ 1,597,478 59.9 % $ 1,046,176 58.4 %

Recurrent consumer spending $ 2,074,687 61.5 % 1,384,999 44.8 % 1,070,916 40.1 %

Full game and other 1,298,085 38.5 % $ 1,703,971 55.2 % $ 1,597,478 59.9 %

Fiscal Years ended March 31, 2021 and 2020

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Net revenue $ 3,372,772 100.0 % $ 3,088,970 100.0 % $ 283,802 9.2 %

Software development costs and royalties(1) 611,198 19.8 % 449,198 16.8 % 162,000 36.1 %

Internal royalties 637,652 18.9 % 483,697 15.7 % 153,955 31.8 %

Product costs 277,147 9.0 % 322,148 12.1 % (45,001) (14.0) %

Software development costs and royalties(1) 396,797 11.8 % 611,198 19.8 % (214,401) (35.1) %

Licenses 260,721 7.7 % 170,408 5.5 % 90,313 53.0 %

Product costs 239,915 7.1 % 277,147 9.0 % (37,232) (13.4) %

Cost of goods sold 1,535,085 45.5 % 1,542,450 49.9 % (7,365) (0.5) %

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For the fiscal year ended March 31, 2021, net revenue increased by $283.8 million, as compared to the prior year.

The increase was due primarily to (i) $371.8 million in net revenue from Borderlands 3 , which released in September 2019, (ii) an increase of $185.5 million in net revenue from our NBA 2K franchise , (iii) $159.8 million in net revenue from The Outer Worlds , which released in October 2019, and (iv) an increase of $46.6 million in net revenue from Red Dead Online.

These increases were partially offset by a decrease of $402.9 million in net revenue from Red Dead Redemption 2.

The increase was due primarily to an increase in net revenue of (i) $378.6 million from our NBA 2K franchise , (ii) $267.4 million from Grand Theft Auto Online and Grand Theft Auto V, (iii) $75.5 million from our Mafia franchise, (iv) $65.0 million from PGA TOUR 2K21, which released in August 2020, (vi) $24.1 million from Dragon City, and (vii) $20.5 million from Two Dots, which was part of our Playdots.

acquisition completed in September 2020 .

These increases were offset by a decrease in net revenue of (i) $226.4 million from Borderlands 3, which released in September 2019, (ii) $217.8 million from Red Dead Redemption 2, which released on PC in November 2019, and (iii) $124.7 million from The Outer Worlds, which released in October 2019.

Net revenue from console games increased by $208.4 million and accounted for 74.6% of our total net revenue in the fiscal year ended March 31, 2021, as compared to 74.7% in the prior year.

The increase was due to an increase in net revenue from Borderlands 3 , our NBA 2K franchise, The Outer Worlds, and Red Dead Online .

These increases were partially offset by a decrease in net revenue from Red Dead Redemption 2 .

The increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, PGA TOUR 2K21, and our Mafia franchise, partially offset by a decrease in net revenue from Red Dead Redemption 2, Borderlands 3, and The Outer Worlds .

Net revenue from PC and other increased by $75.4 million and accounted for 25.4% of our total net revenue in the fiscal year ended March 31, 2021, as compared to 25.3% in the prior year.

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

The increase was due to an increase in net revenue from Grand Theft Auto V and Grand Theft Auto Online, our NBA 2K franchise, Dragon City, Two Dots , and our Mafia franchise, partially offset by a decrease in net revenue from Borderlands 3 and The Outer Worlds.

Net revenue from digital online channels increased by $540.7 million and accounted for 86.6% of our total net revenue for the fiscal year ended March 31, 2021, as compared to 77.0% in the prior year.

The increase was due to an increase in net revenue from Borderlands 3, our NBA 2K franchise, and The Outer Worlds.

The increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, our Mafia franchise, and PGA TOUR 2K21 , partially offset by a decrease in net revenue from Borderlands 3, The Outer Worlds, and Red Dead Redemption 2.

Net revenue from physical retail and other channels decreased by $256.9 million and accounted for 13.4% of our total net revenue for the fiscal year ended March 31, 2021, as compared to 23.0% for the prior year.

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.

Net revenue from full game and other increased by $106.5 million and accounted for 55.2% of net revenue for the fiscal year ended March 31, 2020, as compared to 59.9% for the prior year.

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

The decrease was due to a decrease in net revenue from Red Dead Redemption 2, Borderlands 3, and The Outer Worlds, partially offset by an increase in net revenue from our Mafia franchise and PGA TOUR 2K21 .

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

Net revenue from recurrent consumer spending increased by $689.7 million and accounted for 61.5% of net revenue for the fiscal year ended March 31, 2021, as compared to 44.8% for the prior year.

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.

The increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V ,

Civilization VI, Dragon City and Two Dots .

Net revenue from full game and other decreased by $405.9 million and accounted for 38.5% of net revenue for the fiscal year ended March 31, 2021, as compared to 55.2% for the prior year.

The decrease was due to a decrease in net revenue from Borderlands 3, Red Dead Redemption 2, and The Outer Worlds, partially offset by an increase in net revenue from our Mafia franchise, and PGA TOUR 2K21 .

Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2021 was 54.5%, as compared to 50.1% in the prior year.

The percentage increase was due primarily to lower internal royalties as a percentage of net revenue due to the timing of when royalties are earned and our release slate.

The percentage increase was due primarily to lower capitalized software amortization as a percentage of net revenue based on the timing of releases and a reversal of stock-based compensation expense as a result of forfeited awards (see N ote 17 - Stock -B ased Compensation ), partially offset by higher internal royalties as a percentage of net revenue due to the timing of when royalties are earned, and product mix.

Net revenue earned outside of the United States increased by $43.6 million and accounted for 40.2% of our total net revenue in the fiscal year ended March 31, 2021, as compared to 42.5% in the prior year.

The increase was due to an increase in net revenue from Borderlands 3, The Outer Worlds, our NBA 2K franchise, Red Dead Online, Civilization VI , Ancestors:

The Humankind Odyssey, and Grand Theft Auto V, partially offset by a decrease in net revenue from Red Dead Redemption 2 and Grand Theft Auto Online.

Changes in foreign currency exchange rates decreased net revenue and gross profit by $11.5 million and $4.0 million, respectively, in the fiscal year ended March 31, 2020 as compared to the prior year.

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

Changes in foreign currency exchange rates increased net revenue and gross profit by $11.2 million and $7.5 million, respectively, in the fiscal year ended March 31, 2021 as compared to the prior year.

Operating Expenses

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Research and development $ 26,587 $ 31,563

Foreign currency exchange rates decreased total operating expenses by $6.7 million in the fiscal year ended March 31, 2020 as compared to the prior year.

Foreign currency exchange rates increased total operating expenses by $9.7 million in the fiscal year ended March 31, 2021 as compared to the prior year.

Selling and marketing

Selling and marketing expenses increased by $67.0 million in the fiscal year ended March 31, 2020 as compared to the prior year, due primarily to $44.5 million in higher advertising and marketing expenses.

Advertising and marketing expenses were higher in the current year due primarily to Borderlands 3 , Grand Theft Auto Online, Red Dead 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, primarily due to increased headcount.

Selling and marketing expenses decreased by $13.4 million in the fiscal year ended March 31, 2021 as compared to the prior year, due primarily to $49.1 million in lower overall marketing expenses due primarily to less spend on Borderlands 3 and Red Dead Redemption 2 , partially offset by marketing expenses for Two Dots with no comparable costs in the prior year period.

The net decrease was partially offset by an increase in personnel expenses, primarily due to increased headcount.

General and administrative

General and administrative expenses increased by $37.0 million for the fiscal year ended March 31, 2020, as compared to the prior year, due primarily to increases in (i) personnel expenses due to additional headcount, (ii) IT related expenses for cloud-based services, (iii) indirect tax expenses, and (iv) rent expenses.

General and administrative expenses increased by $72.4 million for the fiscal year ended March 31, 2021, as compared to the prior year, due primarily to increases in (i) personnel expenses for additional headcount and higher incentive compensation, (ii) charitable contributions made in connection with our COVID-19 pandemic response and relief efforts, (iii) professional fees related to consulting, including for our acquisition of Playdots and our offer to acquire Codemasters Group Holdings PLC, and (iv) IT expenses, primarily for cloud-based services.

General and administrative expenses for the fiscal years ended March 31, 2021 and 2020 include occupancy expense (primarily rent, utilities and office expenses) of $27.5 million and $25.9 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $66.2 million for the fiscal year ended March 31, 2020, as compared to the prior year, due primarily to (i) an increase in production and development expenses for titles for which technological feasibility has not been established or for ongoing development for titles that have already been released and (ii) increased personnel expense due to increased headcount.

Research and development expenses increased by $20.9 million for the fiscal year ended March 31, 2021, as compared to the prior year, due primarily to increased personnel expense due to increased headcount.

Depreciation and amortization

Depreciation and amortization expenses increased by $7.9 million for the fiscal year ended March 31, 2020, as compared to the prior year, due primarily to an increase in IT infrastructure costs.

Depreciation and amortization expenses increased by $7.5 million for the fiscal year ended March 31, 2021, as compared to the prior year, due primarily to an increase in IT infrastructure and leasehold improvements for new office locations.

Business Reorganization

During the fiscal year ended March 31, 2020, business reorganization expense increased by $5.0 million due to a benefit in the prior year related to updating estimates for and completing our 2016 Plan and updating estimates for our 2018 Plan.

During the fiscal year ended March 31, 2021, business reorganization expense decreased by $0.4 million as compared to the prior year period and was not material.

Interest and other, net

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Interest expense (6,207) (0.2) % (2,637) (0.1) % (3,570) 135.4 %

Foreign currency exchange loss (3,589) (0.1) % (505) — % (3,084) 610.7 %

Foreign currency exchange gain (loss) 727 — % (3,589) (0.1) % 4,316 (120.3) %

Other (4,425) (0.1) % (2,610) (0.1) % (1,815) 69.5 %

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Interest and other, net was income of $8.8 million for the fiscal year ended March 31, 2021, as compared to income of $38.5 million for the fiscal year ended March 31, 2020.

The increase was due primarily to a $9.3 million increase in interest income due to the nature of our investments, higher invested balances, and higher interest rates on those investments.

Provision from income taxes

Our income tax expense was $54.0 million for the fiscal year ended March 31, 2020 as compared to a benefit of $101.1 million for the fiscal year ended March 31, 2019.

When compared to the statutory rate of 21.0%, the effective tax rate of 11.8% for the fiscal year ended March 31, 2020 was due primarily to a $37.9 million tax benefit from tax credits anticipated to be utilized, $12.7 million from our geographic mix of earnings, $11.9 million due to net deferred tax asset arising from a step up in tax basis related to the Federal Act on Tax Reform and AVH (Old-Age and Survivors Insurance) Financing ("TRAF") enacted in Switzerland during the fiscal year, discussed below, $9.2 million in changes in unrecognized tax benefits primarily due to audit settlements, and $8.4 million in excess tax benefits from employee stock compensation.

These benefits were partially offset by tax expense of $19.8 million from the reversal of net deferred tax benefits relating to the Altera case, discussed below.

When compared to the statutory rate of 21%, the effective tax rate of (43.4)% for the fiscal year ended March 31, 2019 was primarily due to a $107.1 million tax benefit from changes in valuation allowance, a benefit of $35.0 million for tax credits, $13.3 million from excess tax benefits from employee stock compensation, and $9.0 million from our geographic mix of earnings, partially offset by tax expense from other immaterial items, which include the impact of the Tax Act.

The effective tax rate in the current year was higher compared to the prior year primarily due to decreased tax benefits from (i) changes in valuation allowance and (ii) geographic mix of earnings.

The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends upon the stock price at the time of employee award vesting.

Since we recognize excess tax benefits and shortfalls 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.

The decrease was due primarily to a $28.6 million decrease in interest income due to lower interest rates.

Gain/(loss) on long-term investments, net

Gain/(loss) on long-term investments, net for the fiscal year ended March 31, 2021 was a gain of $39.6 million compared to a loss of $5.3 million in the prior year period and was due primarily to the sale of one of our investments (see Note 4 - Fair Value Measurements ).

Provision for income taxes

Our income tax expense was $88.9 million for the fiscal year ended March 31, 2021 as compared to $54.0 million for the fiscal year ended March 31, 2020.

When compared to the statutory rate of 21%, the effective tax rate of 13.1% for the fiscal year ended March 31, 2021 was due primarily to a $29.1 million tax benefit from tax credits anticipated to be utilized, a $21.4 million tax benefit from our geographic mix of earnings and $13.7 million in excess tax benefits from employee stock compensation.

When compared to the statutory rate of 21%, the effective tax rate of 11.8% for the fiscal year ended March 31, 2020 was primarily due to a $37.9 million tax benefit from tax credits anticipated to be utilized, $12.7 million from our geographic mix of earnings, $11.9 million due to a net deferred tax asset arising from a step up in tax basis related to the Federal Act on Tax Reform and AVH (Old-Age and Survivors Insurance) Financing ("TRAF") enacted in Switzerland during the fiscal year, discussed below, $9.2 million in changes in unrecognized tax benefits primarily due to audit settlements, and $8.4 million in excess tax benefits from employee stock compensation.

These benefits were partially offset by tax expense of $19.8 million from the reversal of net deferred tax benefits relating to the Altera case.

The effective tax rate in the current year was higher compared to the prior year primarily due to decreased tax benefits related to the one time creation of the net deferred tax asset related to TRAF offset by decreased expense associated with the reversal of net deferred tax benefits relating to the Altera case.

The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting.

Since we recognize excess tax benefits on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period.

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

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

On July 27, 2015, the U.S.

Tax Court issued an opinion in Altera Corp.

Commissioner, which concluded that related parties in an intercompany cost-sharing arrangement are not required to share costs related to stock-based compensation.

In February 2016, the U.S.

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

Court of Appeals for the Ninth Circuit.

On June 7, 2019, the Ninth Circuit reversed the 2015 decision of the U.S.

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 three 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 $19.8 million.

In February 2020, the taxpayer petitioned the U.S.

Supreme Court to review the Ninth Circuit's decision and is awaiting the Supreme Court's decision as to whether it will hear the case.

We will continue to monitor the case.

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 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 March 11, 2021, The American Rescue Plan Act of 2021 (“ARPA”) was signed into law.

ARPA includes several revenue-raising and business provisions.

One such provision that impacts the Company is the expansion of the limitation of compensation deductions for certain covered employees of publicly held corporations.

Effective April 1, 2027, ARPA expanded the limitation to cover the next five most highly compensated employees.

As of March 31, 2021, ARPA did not have a material impact on our Consolidated Financial Statements.

On March 27, 2020, the U.S.

enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which provides numerous tax and other stimulus measures that generally support the U.S.

The CARES Act did not have a material impact on our Consolidated Financial Statements.

On May 19, 2019, a public referendum held in Switzerland approved the 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 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.

For the three months ended March 31, 2020, we recorded a deferred tax asset of $45.3 million offset by a valuation allowance of $33.4 million rising from the Swiss cantonal tax basis step-up.

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.

For the fiscal year ended March 31, 2020, we recorded a deferred tax asset of $45.3 million offset by a valuation allowance of $33.4 million arising from the Swiss cantonal tax basis step-up.

As of March 31, 2021, we had gross unrecognized tax benefits, including interest and penalties, of $167.6 million, of which $62.6 million would affect our effective tax rate if realized.

For the fiscal year ended March 31, 2020, gross unrecognized tax benefits decreased by $4.7 million.

For the fiscal year ended March 31, 2021, gross unrecognized tax benefits increased by $33.3 million.

We are no longer subject to audit for U.S.

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Diluted earnings per share for the fiscal year ended March 31, 2021 was $5.09, as compared to $3.54 for the fiscal year ended March 31, 2020.

Diluted weighted average shares outstanding of 114.1 million were 1.1 million lower compared to the prior fiscal year due primarily to share repurchases in the last three quarters of fiscal year 2019.

Diluted weighted average shares outstanding of 115.7 million were 1.6 million higher 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.

Liquidity and Capital Resources

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From time to time, we may purchase additional short-term investments depending on future market conditions and liquidity needs.

As of March 31, 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.

As of March 31, 2021, based on the composition of our investment portfolio and actions by central banks around the world to cut interest rates, including the U.S.

Federal Reserve, in response to the COVID-19 pandemic and related adverse economic conditions, we anticipate investment yields to 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 replaced our existing Credit Agreement, which was terminated on the same day.

The Credit Agreement 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.

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 margin of (a) 0.125% to 0.750% above a certain base rate (3.25% at March 31, 2021), or (b) 1.125% to 1.750% above LIBOR (approximately 1.10% at March 31, 2021), which margins are determined by reference to our consolidated total net leverage ratio.

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We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2021 and 2020.

Based upon performing ongoing credit evaluations, maintaining trade credit insurance on a majority of our customers and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk, although we actively monitor each customer's credit worthiness and economic conditions that may affect our customers' business and access to capital.

We are monitoring the current global economic conditions, including credit markets and other factors as it relates to our customers in order to manage the risk of uncollectible accounts receivable, including as a result of COVID-19.

We believe our current cash, short-term investments and projected cash flow from operations, along with availability under our Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis.

Our liquidity and capital resources were not materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets during the fourth quarter of fiscal year 2020.

For further discussion regarding the potential future impacts of the COVID-19 pandemic and related economic conditions on our business, refer to "Part II, Item 1A, Risk Factors."

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 creditworthiness and economic conditions that may affect our customers' business and access to capital.

We believe our current cash and cash equivalents, short-term investments and projected cash flow from operations, along with availability under our Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis.

Our liquidity and capital resources were not materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets to date.

For further discussion regarding the potential future impacts of the COVID-19 pandemic and related economic conditions on our business, refer to Item 1A, Risk Factors .

As of March 31, 2021, the amount of cash and cash equivalents held outside of the U.S.

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

The Tax 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.

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 the earnings of our foreign subsidiaries, and, therefore, we have not recorded any material 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.

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The program does not require us to repurchase shares and may be suspended or discontinued at any time for any reason.

During the fiscal years ended March 31, 2020, 2019, and 2018, we repurchased zero, 3.7 million, and 1.5 million shares of our common stock, respectively, in the open market for $0.0 million, $362.4 million, and $154.8 million, respectively, including commissions as

part of the program.

During the fiscal years ended March 31, 2021, 2020, and 2019, we repurchased zero, zero, and 3.7 million shares of our common stock, respectively, in the open market for $0.0 million, $0.0 million, and $362.4 million, respectively, including

commissions as part of the program.

As of March 31, 2021, we had repurchased a total of 10.4 million shares of our common stock under the program, and 3.8 million shares of our common stock remained available for repurchase under the share repurchase program.

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Net cash provided by operating activities $ 912,318 $ 685,678 $ 843,515

Net cash provided by (used in) investing activities 4,049 (223,576) (271,827)

Net cash (used in) provided by investing activities (806,724) 4,049 (223,576)

Net cash used in financing activities (57,338) (77,453) (463,685)

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At March 31, 2021, we had $2,060.2 million of Cash, cash equivalents, and Restricted cash and cash equivalents, compared to $1,993.4 million at March 31, 2020.

The increase in Cash, cash equivalents, and Restricted cash and cash equivalents from March 31, 2019 was due primarily to Net cash provided by operating activities from sales , partially offset by investments in software development and licenses as well as royalty payments, and to a lesser extent Net cash from investing activities.

These net increases were offset by Net cash used in financing activities, which was primarily related to tax payments related to net share settlements of our restricted stock.

Contractual Obligations and Commitments

We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years.

Generally, these include:

• Software Development and Licensing:

We make payments to third-party software developers that include contractual payments to developers under several software development agreements that expire at various times through March 2025.

Our aggregate outstanding software development commitments assume satisfactory performance by third-party software developers.

We also have licensing commitments that primarily consist of obligations to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of our products.

We have certain minimum marketing support commitments where we commit to spend specified amounts related to marketing our products.

Marketing commitments expire at various times through September 2025.

• Operating Leases:

Our offices are occupied under non-cancelable operating leases expiring at various times through December 2032.

We also lease certain furniture, equipment and automobiles under non-cancelable leases expiring through June 2023.

Some of the leases have fixed rent increases and also include inducements to enter into the lease.

The effect of such amounts are deferred and recognized on a straight-line basis over the related lease term.

• Purchase obligations :

These obligations are primarily related to agreements to purchase services that are enforceable and legally binding on us that specifies all significant terms, including fixed, minimum or variable pricing provisions;

and the approximate timing of the transactions, expiring at various times through March 2024.

A summary of annual minimum contractual obligations and commitments as of March 31, 2020 is as follows (in thousands of dollars):

Fiscal Year Ending March 31, Software

and Licensing Marketing Operating

Leases Purchase

Obligations Total

2021 $ 151,123 $ 11,891 $ 34,119 $ 38,477 $ 235,610

2022 144,975 38,881 36,352 23,910 244,118

2023 150,775 40,914 34,056 12,503 238,248

2024 122,285 89,260 26,919 1,239 239,703

2025 69,188 35,528 21,549 947 127,212

Thereafter 52,880 24,788 83,801 — 161,469

Total $ 691,226 $ 241,262 $ 236,796 $ 77,076 $ 1,246,360

• Income Taxes:

At March 31, 2020, we had recorded a liability for gross unrecognized tax benefits, including interest and penalties, of $30.7 million, for which we are unable to make a reasonable and reliable estimate of the period in which these liabilities will be settled with the respective tax authorities;

therefore, these liabilities have not been included in the contractual obligations table.

• Legal and Other Proceedings:

We are, or may become, subject to demands and claims (including intellectual property and employment related claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial statements.

We have appropriately accrued amounts related to certain of these claims and legal and other proceedings.

While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.

The increase in Cash, cash equivalents, and Restricted cash and cash equivalents from March 31, 2020 was due primarily to Net cash provided by operating activities from sales primarily from the previously mentioned titles , partially offset by investments in software development and licenses as well as royalty payments.

Refer to Note 15 - Commit ments and Contingencies to our Consolidated Financial Statements for disclosures regarding our commitments.

Capital Expenditures

In fiscal year 2022, we anticipate capital expenditures to be $100 million.

Off-Balance Sheet Arrangements

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Sales of our 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.

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 six to fifteen 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.

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What changed 10-K

Item 7. Management’s Discussion and Analysis