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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-02-09 · 125 added, 254 removed, 234 unchanged (62% 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, Social Point, and Playdots.

Our products are currently designed for console gaming systems, such as Sony's PlayStation®4 ("PS4") and PlayStation 5 ("PS5"), Microsoft's Xbox One® ("Xbox One") and Xbox Series X ("Xbox Series X"), and Nintendo's Switch™ ("Switch"), and personal computers ("PC"), including smartphones and tablets.

We develop and publish products principally through Rockstar Games, 2K, Private Division, and T2 Mobile Games.

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

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

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

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

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

We have internal development studios located in Australia, Canada, China, Czech Republic, Hungary, India, Spain, South Korea, the United Kingdom, and the United States.

We have internal development studios located in Australia, Canada, China, Czech Republic, Hungary, India, Serbia, Spain, South Korea, the United Kingdom, and the United States.

Software titles published by our Rockstar Games label are primarily internally developed.

We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto , Max Payne , Midnight Club , Red Dead Redemption , and other popular

franchises, to continue to be a leader in the action/adventure product category and to create groundbreaking entertainment.

We 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 335 million units.

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.

believe that Rockstar Games has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 350 million units.

Our most recent installment, Grand Theft Auto V , which was released in 2013, has sold in over 150 million units worldwide and includes access to Grand Theft Auto Online .

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 35 million units worldwide.

Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records, has sold-in more than 35 million units worldwide.

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

Noire , Bully, and Manhunt franchises.

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

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

Rockstar Game's titles are published across a number of platforms, including mobile.

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

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2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, the WWE 2K professional wrestling series, and PGA TOUR 2K .

In March 2020, 2K announced a multi-year partnership with the National Football League encompassing multiple future video games that will be non-simulation football game experiences and will launch starting in fiscal year 2022.

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

Private Division released The Outer Worlds and Ancestors:

The Humankind Odyssey , during fiscal year 2020, and Disintegration during fiscal year 2021, based on new IP from renowned industry creative talent.

In March 2020, 2K announced a multi-year partnership with the National Football League encompassing multiple future video games that will be non-simulation football game experiences.

2K also publishes mobile titles, such as WWE SuperCard .

Our Private Division label is dedicated to bringing titles from the industry's leading creative talent to market and is the publisher and owner of Kerbal Space Program .

Kerbal Space Program 2 is planned for release in fiscal year 2023.

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.

On September 4, 2020, we acquired privately held Playdots, Inc.

("Playdots") for consideration having an acquisition date fair value of $195.5 million, consisting of $97.8 million in cash and the issuance of 0.6 million shares of our common stock.

(See Note 16 of our Condensed Consolidated Financial Statements.) Founded in 2013 and based in New York City, Playdots builds mobile games with unique and thoughtful designs.

They are best known for Two Dots , which has been downloaded over 80 million times since its launch six years ago and continues to deeply engage audiences throughout the world.

Private Division also released The Outer Worlds and Ancestors:

The Humankind Odyssey .

T2 Mobile Games, which includes Socialpoint, Playdots, and Nordeus, which publish popular free-to-play mobile games that deliver high quality, deeply engaging entertainment experiences, generates revenue from in-game sales and in-game advertising.

T2 Mobile Games' titles include Dragon City , Monster Legends , Two Dots , and Top Eleven .

In addition, T2 Mobile Games has a number of exciting games planned for launch in the coming years.

We acquired Nordeus Limited on June 1, 2021, for consideration having an acquisition date fair value of $306.3 million, consisting of $120.5 million in cash, the issuance of 0.5 million shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of $153.0 million in cash if Nordeus achieves certain performance measures over the 12- and 24-month periods following the closing (See Note 15 - Acquisitions of our Condensed Consolidated Financial Statements).

Founded in 2010, Nordeus is a mobile games company based in Belgrade, Serbia, best known for Top Eleven, with over 240 million registered users.

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

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

The NBA 2K League's fourth season is set to take place in calendar year 2021.

The NBA 2K League's fourth season began in May and is set to conclude in September.

Trends and Factors Affecting our Business

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

Sales of Grand Theft Auto products generated 28.9% of our net revenue for the nine months ended December 31, 2020.

Sales of Grand Theft Auto products generated 33.7% of our net revenue for the three months ended June 30, 2021.

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

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The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.

During fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to

increased consumer engagement with our products because of the COVID-19 pandemic related business closures and 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 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 to working from home, based on our concern for the health and safety of our teams, for the vast majority of our teams, which to date has resulted in minimal disruption.

However, 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 pandemic 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, and the potential offsetting impacts of deteriorating economic conditions and decreased consumer spending generally.

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

However, as the return to normalcy continues, we expect a moderation of the trends that have benefited our industry.

We have developed and continue to develop plans to help mitigate the negative impacts of the pandemic on our business, such as our transition to working from home, based on our concern for the health and safety of our teams, for the vast majority of our teams, which to date has resulted in minimal disruption.

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

Any of these considerations described above could cause or contribute to the risks described under the heading " Risk Factors " included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, and could materially adversely affect our business, financial condition, results of operations, or stock price.

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Additionally, our business is dependent upon a limited number of customers that account for a significant portion of our revenue.

Our five largest customers accounted for 77.4% and 70.0% of net revenue during the nine months ended December 31, 2020 and 2019, respectively.

As of December 31, 2020 and March 31, 2020, our five largest customers comprised 71.8% and 58.1% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 59.1% and 48.8% of such balance at December 31, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 39.5% and 19.6%, respectively, of our gross accounts receivable as of December 31, 2020 and two customers who accounted for 29.4% and 19.4%, respectively, of our gross accounts receivable as of March 31, 2020.

Our five largest customers accounted for 80.6% and 81.6% of net revenue during the three months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021 and March 31, 2021, our five largest customers comprised 74.2% and 77.6% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 65.3% and 69.2% of such balance at June 30, 2021 and March 31, 2021, respectively.

We had two customers who accounted for 47.7% and 17.6%, respectively, of our gross accounts receivable as of June 30, 2021 and two customers who accounted for 50.4% and 18.8%, respectively, of our gross accounts receivable as of March 31, 2021.

The economic environment has affected our customers in the past and may do so in the future, including as a result of the COVID-19 pandemic.

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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 PS5, Microsoft's Xbox One and Xbox Series X, and Nintendo's Switch, which comprised 75.4% of our net revenue by product platform for the nine months ended December 31, 2020.

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

We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 74.1% of our net revenue by product platform for the three months ended June 30, 2021.

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

When new hardware platforms are introduced, such as those released in November 2020 by Sony and Microsoft, demand for interactive entertainment playable on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles.

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However, we cannot be certain how backwards compatibility will affect demand for our products.

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

Further, the COVID-19 pandemic or other events have affected and may continue to affect the availability of these new consoles, which may also affect demand.

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

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We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 85.5% of our net revenue for the nine months ended December 31, 2020.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 91.1% of our net revenue for the three months ended June 30, 2021.

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

Product Releases

We released the following key titles during the nine months ended December 31, 2020:

Title Publishing

Label Internal or External

Development Platform(s) Date Released

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

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

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

Definitive Edition 2K External PS4, Xbox One, PC September 25, 2020

Borderlands 3 2K External Xbox Series X (digital only) November 10, 2020

NBA 2K21 2K Internal Xbox Series X November 10, 2020

Borderlands 3 2K External PS5 (digital only) November 12, 2020

NBA 2K21 2K Internal PS5 November 12, 2020

Red Dead Online - Standalone Rockstar Games Internal PS4, Xbox One, PC, Steam, Epic Store December 1, 2020

Product Pipeline

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

Title Publishing

Label Internal or External

Development Platform(s) Expected Release Date

Grand Theft Auto V Rockstar Games Internal PS5, Xbox Series X Fiscal 2022

Kerbal Space Program 2 Private Division Internal PS4, Xbox One, PC Fiscal 2023

Content Release Highlights

To date we have announced that, during fiscal year 2022, Rockstar Games will release Grand Theft Auto V and a standalone version of Grand Theft Auto Online for the PS5 and Xbox Series X|S, Private Division will release OlliOlli World and Hades , and 2K will release NBA 2K22, WWE 2K22, and Tiny Tina's Wonderlands .

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

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

Critical Accounting Policies and Estimates

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In-depth descriptions of these can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.

During the nine months ended December 31, 2020 there were no significant changes to the above critical accounting policies and estimates, with the exception of our adoption of Topic 326, Financial Instruments - Credit Losses.

Refer to Note 1 - Basis of Presentation and Significant Accounting Policies for further discussion.

Recently Adopted and Recently Issued Accounting Pronouncements

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Net Bookings were as follows:

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

Three Months Ended June 30,

2021 2020 Increase/

(decrease) % Increase/

(decrease) 2020 2019 Increase/

(decrease) % Increase/

Net Bookings $ 711,430 $ 996,249 $ (284,819) (28.6) %

For the three months ended December 31, 2020, Net Bookings decreased by $73.9 million as compared to the prior year period due primarily to a decrease in Net Bookings from The Outer Worlds, which released in October 2019, Red Dead Redemption 2, which released on PC in November 2019 , our WWE 2K franchise, which benefited from the release of WWE 2K20 in the prior year period, and Borderlands 3, which released in September 2019 , partially offset by an increase in Net Bookings from our NBA 2K franchise, Grand Theft Auto Online, and our Mafia franchise.

For the nine months ended December 31, 2020, Net Bookings increased by $507.1 million as compared to the prior year period due primarily to increases 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, Dragon City, and Two Dots, which was part of our Playdots Inc.

acquisition completed in September 2020 , partially offset by a decrease in Net Bookings from Borderlands 3 , and The Outer Worlds, which released in October 2019 .

For the three months ended June 30, 2021, Net Bookings decreased by $284.8 million as compared to the prior year period due primarily to a decrease in Net Bookings from Grand Theft Auto Online and Grand Theft Auto V , our NBA 2K franchise, Red Dead Redemption 2 , Borderlands 3 , and The Outer Worlds , partially offset by an increase in Net Bookings from Two Dots , which was part of the Playdots acquisition in September 2020.

Results of Operations

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

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

Three Months Ended June 30,

(thousands of dollars) 2021 2020

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Gross profit 483,631 59.5 % 354,621 42.7 %

Selling and marketing 139,906 16.3 % 137,068 14.7 % 338,376 13.4 % 378,455 16.3 %

General and administrative 104,447 12.8 % 102,173 12.3 %

Selling and marketing 103,854 12.8 % 84,779 10.2 %

Research and development 92,294 11.3 % 73,108 8.8 %

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Net income $ 152,256 18.7 % $ 88,505 10.6 %

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

2020 2019 2020 2019

Three Months Ended June 30,

Net revenue by geographic region:

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PC and other 128,645 15.8 % 165,260 19.9 %

Mobile 82,258 10.1 % 54,365 6.5 %

Net revenue by distribution channel:

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Full game and other 241,080 29.6 % 334,457 40.2 %

Three Months Ended December 31, 2020 Compared to December 31, 2019

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

(thousands of dollars) 2021 % 2020 % Increase/

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(1) Includes $12,050 and $29,033 of stock-based compensation expense in 2021 and 2020, respectively, in software development costs and royalties.

For the three months ended December 31, 2020, net revenue decreased by $69.2 million as compared to the prior year period.

The decrease was due to a decrease in net revenue of (i) $138.0 million from The Outer Worlds, which released in October 2019, (ii) $106.3 million from Red Dead Redemption 2 , which released on PC in November 2019, (iii) $39.4 million from Borderlands 3, which released in September 2019, and (iv) $27.7 million from our WWE 2K franchise, which benefited from the release of WWE 2K20 in the prior year period.

These decreases were partially offset by an increase in net revenue of (i) $130.0 million from our NBA 2K franchise, (ii) $58.1 million from Grand Theft Auto Online , (iii) $27.6 million from our Mafia franchise, and (iv) $16.8 million from PGA TOUR 2K21, which released in August 2020.

Net revenue from console games decreased by $23.7 million and accounted for 76.2% of our total net revenue for the three months ended December 31, 2020, as compared to 73.1% for the prior year period.

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

Net revenue from PC and other decreased by $45.5 million and accounted for 23.8% of our total net revenue for the three months ended December 31, 2020, as compared to 26.9% for the prior year period.

The decrease was due to a decrease in net revenue from Red Dead Redemption 2, which released on PC in November 2019 , The Outer Worlds, and Borderlands 3, partially offset by an increase in net revenue from Grand Theft Auto V and Grand Theft Auto Online, Dragon City, our Mafia franchise, Two Dots, and our NBA 2K franchise.

Net revenue from digital online channels increased by $28.2 million and accounted for 84.6% of our total net revenue for the three months ended December 31, 2020, as compared to 75.3% for the prior year period.

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

Net revenue from physical retail and other channels decreased by $97.4 million and accounted for 15.4% of our total net revenue for the three months ended December 31, 2020, as compared to 24.7% for the same period in the prior year period.

The decrease in net revenue from physical retail and other channels was due primarily to a decrease in net revenue from Red Dead Redemption 2, The Outer Worlds, and our WWE 2K franchise.

For the three months ended June 30, 2021, net revenue decreased by $18.0 million as compared to the prior year period.

The decrease was due to a decrease in net revenue of (i) $47.1 million from Red Dead Redemption 2 and (ii) $26.8 million from Borderlands 3.

These decreases were partially offset by an increase in net revenue of (i) $54.7 million from our NBA 2K franchise .

Net revenue from console games decreased by $9.2 million and accounted for 74.1% of our total net revenue for the three months ended June 30, 2021, as compared to 73.6% for the prior year period.

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

Net revenue from PC and other decreased by $36.6 million and accounted for 15.8% of our total net revenue for the three months ended June 30, 2021, as compared to 19.9% for the prior year period.

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

Net revenue from Mobile increased by $27.9 million and accounted for 10.1% of our total net revenue for three months ended June 30, 2021, as compared to 6.5% for the prior year period.

The increase was due primarily to an increase in net revenue from Two Dots , Grand Theft Auto:

San Andreas , and Dragon City .

Net revenue from digital online channels increased by $5.2 million and accounted for 91.1% of our total net revenue for the three months ended June 30, 2021, as compared to 88.5% for the prior year period.

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

Net revenue from physical retail and other channels decreased by $23.2 million and accounted for 8.9% of our total net revenue for the three months ended June 30, 2021, as compared to 11.5% for the same period in the prior year period.

The decrease in net revenue from physical retail and other channels was due primarily to a decrease in net revenue from Red Dead Redemption 2, Borderlands 3 , Grand Theft Auto V , and our BioShock franchise.

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

Net revenue from recurrent consumer spending increased by $193.0 million and accounted for 62.0% of net revenue for the three months ended December 31, 2020, as compared to 36.6% of net revenue for the prior year period.

The increase in net revenue from recurrent consumer spending is due primarily to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, Dragon City, and Two Dots, partially offset by a decrease in net revenue from Red Dead Redemption 2 .

Net revenue from full game and other decreased by $262.2 million and accounted for 38.0% of net revenue for the three months ended December 31, 2020 as compared to 63.4% of net revenue for the prior year period.

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

Gross profit as a percentage of net revenue for the three months ended December 31, 2020 was 59.8% as compared to 53.0% for the prior year period.

The increase in gross profit as a percentage of net revenue was due to lower capitalized software amortization due primarily to the timing of releases, lower internal royalties due to the timing of when royalties are earned, and product costs based on the timing of releases.

Net revenue earned outside of the United States decreased by $60.7 million and accounted for 38.6% of our total net revenue for the three months ended December 31, 2020, as compared to 42.3% in the prior year period.

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

Changes in foreign currency exchange rates increased net revenue by $4.1 million and increased gross profit by $3.0 million for the three months ended December 31, 2020 as compared to the prior year period.

Net revenue from recurrent consumer spending increased by $75.4 million and accounted for 70.4% of net revenue for the three months ended June 30, 2021, as compared to 59.8% of net revenue for the prior year period.

The increase in net revenue from recurrent consumer spending is due primarily to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V, and Two Dots, partially offset by a decrease in net revenue from Borderlands 3 , Civilization VI , and Red Dead Redemption 2 and Red Dead Online .

Net revenue from full game and other decreased by $93.4 million and accounted for 29.6% of net revenue for the three months ended June 30, 2021 as compared to 40.2% of net revenue for the prior year period.

The decrease in net revenue from full game and other was due primarily to a decrease in net revenue from Red Dead Redemption 2, Grand Theft Auto V , and Borderlands 3 .

Gross profit as a percentage of net revenue for the three months ended June 30, 2021 was 59.5% as compared to 42.7% for the prior year period.

The increase in gross profit as a percentage of net revenue was due to lower internal royalties due to the timing of when royalties are earned, lower capitalized software amortization due primarily to the timing of releases, and lower development royalties due primarily to the timing of releases.

Net revenue earned outside of the United States decreased by $40.7 million and accounted for 39.4% of our total net revenue for the three months ended June 30, 2021, as compared to 43.4% in the prior year period.

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

Changes in foreign currency exchange rates decreased net revenue by $1.1 million and increased gross profit by $0.3 million for the three months ended June 30, 2021 as compared to the prior year period.

Operating Expenses

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(decrease) % Increase/

Selling and marketing $ 139,906 16.3 % $ 137,068 14.7 % $ 2,838 2.1 %

General and administrative $ 104,447 12.8 % $ 102,173 12.3 % 2,274 2.2 %

Selling and marketing 103,854 12.8 % 84,779 10.2 % $ 19,075 22.5 %

Research and development 92,294 11.3 % 73,108 8.8 % 19,186 26.2 %

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

Selling and marketing $ 4,131 $ 4,113

General and administrative $ 17,197 $ 13,200

Research and development 8,347 11,327

Changes in foreign currency exchange rates increased total operating expenses by $3.6 million for the three months ended December 31, 2020, as compared to the prior year period.

Selling and marketing 8,033 4,728

Selling and marketing expenses increased by $2.8 million for the three months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses due to increased headcount and higher incentive compensation, (ii) IT expenses for cloud-based services, and (iii) customer service expenses.

The increase was partially offset by lower overall marketing expense due to lower marketing expenses for Red Dead Redemption 2, The Outer Worlds, our WWE 2K franchise, Borderlands 3, and Civilization VI, partially offset by higher marketing expenses for Grand Theft Auto Online, our NBA 2K franchise, Two Dots, Word Life, Dragon City, Red Dead Online, and our Mafia franchise.

General and administrative

General and administrative expenses increased by $14.1 million for the three months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount and higher incentive compensation, (ii) professional fees related to consulting, including for our offer to acquire Codemasters Group Holdings PLC, a UK-based game publisher and developer, and (iii) IT expenses for cloud-based services.

General and administrative expenses for the three months ended December 31, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $6.8 million and $6.6 million, respectively, related to our development studios.

Research and development 11,770 6,450

Research and development expenses increased by $3.9 million for the three months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses for higher incentive compensation and (ii) IT expenses for cloud-based services.

These increases were partially offset by (i) lower production and development expenses primarily due to additional capitalization of costs for development on titles having established technological feasibility compared to the prior year, and (iii) lower travel expenses due to restrictions as a result of the COVID-19 pandemic.

Depreciation and Amortization

Depreciation and amortization expenses increased by $1.7 million for the three months ended December 31, 2020 as compared to the prior year period, due primarily to IT infrastructure and leasehold improvements for new office locations.

Business reorganization

For the three months ended December 31, 2020, business reorganization expense decreased by $0.1 million as compared to the prior year period and was not material.

Interest and other, net

Interest and other, net was income of $1.1 million for the three months ended December 31, 2020, as compared to $11.9 million for the prior year period.

The change was due primarily to lower interest income due to lower interest rates.

Gain on long-term investments, net

Gain on long-term investments, net for the three months ended December 31, 2020 was $39.3 million and was due primarily to the sale of a portion of one of our investments and the resulting change in value based on the observable price change of the remaining portion of that investment.

Provision for 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 $34.2 million for the three months ended December 31, 2020 as compared to $25.1 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 15.8% for the three months ended December 31, 2020 was due primarily to a tax benefit of $7.1 million from tax credits and excess tax benefits of $3.4 million from employee stock-based compensation offset by the geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 13.3% for the three months ended December 31, 2019 was due primarily to a tax benefit of $9.1 million as a result of tax credits anticipated to be utilized and $2.6 million due to a geographic mix of earnings.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased expense related to the geographic mix of earnings and decreased tax credits, partially offset by increased excess tax benefits from employee stock-based compensation in the current period.

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

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

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

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

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

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

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

On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AVH (Old-Age and Survivors Insurance) Financing ("TRAF"), which was effective for us on January 1, 2020.

The TRAF abolished preferential tax regimes at the cantonal level.

The cantons established transition rules which provided us a step-up in tax basis for which a deferred tax asset of $45.3 million and valuation allowance of $33.4 million were established.

It is possible that

realization of deferred tax assets relating to the Swiss cantonal basis step-up may change due to changes in forecasted future earnings in Switzerland.

On March 27, 2020, the U.S.

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

An additional economic stimulus package, the Consolidated Appropriations Act, 2021, was approved on December 27, 2020.

We do not expect that these measures will have a material impact to our Consolidated Financial Statements.

Net income and earnings per share

For the three months ended December 31, 2020, net income was $182.2 million, as compared to $163.6 million in the prior year period.

Diluted earnings per share for the three months ended December 31, 2020 was $1.57, as compared to diluted earnings per share of $1.43 in the prior year period.

Diluted weighted average shares of 116.1 million were 1.9 million shares higher as compared to the prior year period, due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year period.

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

Nine Months Ended December 31, 2020 Compared to December 31, 2019

(thousands of dollars) 2020 % 2019 % Increase/

(decrease) % Increase/

Net revenue $ 2,533,341 100.0 % $ 2,328,429 100.0 % $ 204,912 8.8 %

Software development costs and royalties (1) 374,332 14.8 % 451,422 19.4 % (77,090) (17.1) %

Internal royalties 479,524 18.9 % 339,312 14.6 % 140,212 41.3 %

Product costs 194,702 7.7 % 225,162 9.7 % (30,460) (13.5) %

Licenses 206,880 8.2 % 130,914 5.6 % 75,966 58.0 %

Cost of goods sold 1,255,438 49.6 % 1,146,810 49.3 % 108,628 9.5 %

Gross profit $ 1,277,903 50.4 % $ 1,181,619 50.7 % $ 96,284 8.1 %

(1) Includes $61,529 and $91,678 of stock-based compensation expense in 2020 and 2019, respectively, in software development costs and royalties.

For the nine months ended December 31, 2020, net revenue increased by $204.9 million as compared to the prior year period.

The increase was due primarily to an increase in net revenue of (i) $258.9 million from our NBA 2K franchise , (ii) $227.0 million from Grand Theft Auto Online and Grand Theft Auto V, (iii) $68.6 million from our Mafia franchise, (iv) $52.4 million from PGA TOUR 2K21, which released in August 2020 , and (vi) $24.7 million from Red Dead Online.

These increases were offset by a decrease in net revenue of (i) $193.6 million from Borderlands 3, which released in September 2019, (ii) $134.3 million from Red Dead Redemption 2, which released on PC in November 2019, and (iii) $126.3 million from The Outer Worlds, which released in October 2019.

Net revenue from console games increased by $142.6 million and accounted for 75.4% of our total net revenue for the nine months ended December 31, 2020, as compared to 75.9% for the prior year period.

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

Net revenue from PC and other increased by $62.3 million and accounted for 24.6% of our total net revenue for the nine months ended December 31, 2020, as compared to 24.1% for the prior year period.

The increase was due to an increase in net revenue from Grand Theft Auto V and Grand Theft Auto Online, our NBA 2K franchise, Civilization VI, Dragon City, our Mafia franchise, and Red Dead Online and Red Dead Redemption 2, which released on PC in November 2019, partially offset by a decrease in net revenue from Borderlands 3 and The Outer Worlds .

Net revenue from digital online channels increased by $422.2 million and accounted for 85.5% of our total net revenue for the nine months ended December 31, 2020, as compared to 74.9% for the prior year period.

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

Net revenue from physical retail and other channels decreased by $217.2 million and accounted for 14.5% of our total net revenue for the nine months ended December 31, 2020, as compared to 25.1% for the prior year period.

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.

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 $534.8 million and accounted for 59.5% of net revenue for the nine months ended December 31, 2020, as compared to 41.8% of net revenue for the prior year period.

The increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online and Grand Theft Auto V , Red Dead Online, Civilization VI, and Dragon City.

Net revenue from full game and other decreased by $329.9 million and accounted for 40.5% of net revenue for the nine months ended December 31, 2020 as compared to 58.2% of net revenue for the prior year period.

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 nine months ended December 31, 2020 was 50.4% as compared to 50.7% for the prior year period.

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

Net revenue earned outside of the United States increased by $64.5 million, and accounted for 40.7% of our total net revenue for the nine months ended December 31, 2020, as compared to 41.5% in the prior year period.

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

Changes in foreign currency exchange rates increased net revenue by $6.4 million and increased gross profit by $4.7 million for the nine months ended December 31, 2020 as compared to the prior year period.

Operating Expenses

(thousands of dollars) 2020 % of net revenue 2019 % of net revenue Increase/

(decrease) % Increase/

Selling and marketing $ 338,376 13.4 % $ 378,455 16.3 % $ (40,079) (10.6) %

General and administrative 292,230 11.5 % 236,023 10.1 % 56,207 23.8 %

Research and development 233,752 9.2 % 227,680 9.8 % 6,072 2.7 %

Depreciation and amortization 40,116 1.6 % 35,611 1.5 % 4,505 12.7 %

Business reorganization (138) — % 467 — % (605) (129.6) %

Total operating expenses (1)

$ 904,336 35.7 % $ 878,236 37.7 % $ 26,100 3.0 %

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

Selling and marketing 13,298 14,333

Changes in foreign currency exchange rates decreased total operating expenses by $2.0 million for the three months ended June 30, 2021, as compared to the prior year period.

General and administrative

Research and development 22,440 28,633

Changes in foreign currency exchange rates increased total operating expenses by $4.3 million for the nine months ended December 31, 2020, as compared to the prior year period.

General and administrative expenses increased by $2.3 million for the three months ended June 30, 2021, as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, (ii) professional fees related to our acquisition of Nordeus, (iii) rent expense, and (iv) IT expenses for cloud-based services.

The increase was partially offset due primarily to a decrease in charitable contributions in the prior year period related to our COVID-19 response and relief efforts.

General and administrative expenses for the three months ended June 30, 2021 and 2020 included occupancy expense (primarily rent, utilities and office expenses) of $7.8 million and $7.3 million, respectively, related to our development studios.

Selling and marketing

Selling and marketing expenses decreased by $40.1 million for the nine months ended December 31, 2020, as compared to the prior year period, due primarily to lower overall marketing expenses due to lower marketing expenses for Borderlands 3 , Red Dead Redemption 2 , The Outer Worlds , and our WWE 2K franchise, partially offset by higher marketing expenses for Dragon City, Word Life, and Two Dots .

This decrease was partially offset by higher personnel expenses due to increased headcount and higher incentive compensation.

General and administrative

General and administrative expenses increased by $56.2 million for the nine months ended December 31, 2020, as compared to the prior year period, due to increases in (i) charitable contributions made in connection with our COVID-19 pandemic response and relief efforts, (ii) personnel expenses for additional headcount and higher incentive compensation, and (iii) professional fees related to consulting, including for our acquisition of Playdots and our offer to acquire Codemasters Group Holdings PLC.

General and administrative expenses for the nine months ended December 31, 2020 and 2019 included occupancy expense (primarily rent, utilities and office expenses) of $20.5 million and $18.9 million, respectively, related to our development studios.

Selling and marketing expenses increased by $19.1 million for the three months ended June 30, 2021, as compared to the prior year period, due primarily to (i) higher overall marketing expense for Two Dots , Top Eleven , Red Dead Online , Dragon City , and Word Life , partially offset by lower marketing expenses for Disintegration and Grand Theft Auto Online and (ii) personnel expenses due to increased headcount.

Research and development

Research and development expenses increased by $6.1 million for the nine months ended December 31, 2020, as compared to the prior year period, due primarily to increases in (i) personnel expenses for higher headcount and higher incentive compensation, (ii) IT expenses for cloud-based services, (iii) online support costs, and (iv) professional fees.

These increases were partially offset by (i) lower production and development expenses primarily due to additional capitalization of costs for development on titles having established technological feasibility compared to the prior year and (ii) lower travel expenses due to restrictions as a result of the COVID-19 pandemic.

Research and development expenses increased by $19.2 million for the three months ended June 30, 2021, as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount.

Depreciation and Amortization

Depreciation and amortization expenses for the nine months ended December 31, 2020 increased by $4.5 million, as compared to the prior year period, due primarily to leasehold improvements for new office locations and IT infrastructure.

Depreciation and amortization expenses was relatively consistent year-on-year for the three months ended June 30, 2021 as compared to the prior year period.

Business reorganization

During the nine months ended December 31, 2020, as compared to the prior year period, business reorganization expense decreased $0.6 million and was not material.

For the three months ended June 30, 2021, business reorganization expense increased by $0.1 million as compared to the prior year period and was not material.

Interest and other, net

Interest and other, net was income of $12.0 million for the nine months ended December 31, 2020, as compared to $30.4 million for the prior year period.

The change was due primarily to lower interest income due to lower interest rates, partially offset by foreign currency gains including a $3.1 million reclassification from Accumulated other comprehensive loss as a result of discontinuing our cash flow hedge related to our cross-currency swap.

Interest and other, net was expense of $1.0 million for the three months ended June 30, 2021, as compared to income of $8.2 million for the prior year period.

The change was due primarily to (i) foreign currency losses in the current year period as compared to gains in the prior year period, including a $3.1 million reclassification from Accumulated other comprehensive loss as a result of discontinuing our cash flow hedge related to our cross-currency swap, and (ii) lower interest income due to lower interest rates.

Gain on long-term investments, net

Gain on long-term investments, net for the nine months ended December 31, 2020 was $38.6 million and was due primarily to the sale of a portion of one of our investments and the resulting change in value based on the observable price change of the remaining portion of that investment.

Gain on long-term investments, net for the three months ended June 30, 2021 was $2.0 million and was due primarily to changes in value based on the observable price change of our long-term investments.

Provision for Income Taxes

The provision for income taxes for the 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 $54.2 million for the nine months ended December 31, 2020 as compared to a provision for income taxes of $52.1 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 12.8% for the nine months ended December 31, 2020 was due primarily to a benefit of $17.8 million as a result of tax credits anticipated to be utilized and excess tax benefits of $13.6 million from employee stock-based compensation.

In the prior year period, when compared to our blended statutory rate of 21%, the effective tax rate of 15.6% for the nine months ended December 31, 2019 was due primarily to a benefit of $15.1 million as a result of tax credits anticipated to be utilized, a tax benefit of $11.6 million from changes in unrecognized tax benefits due to audit settlements, and a benefit of $5.8 million from our geographic mix of earnings.

To a lesser extent, the rate was also affected by excess tax benefits from employee stock-based compensation.

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

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased benefits related to excess tax benefits from employee stock-based compensation and to tax credits offset by decreased tax expense relating to the Altera case, discussed below, and decreased tax benefits related to the changes in unrecognized tax benefits due to audit settlements.

The provision for income taxes for the three months ended June 30, 2021 is based on our projected annual effective tax rate for fiscal year 2022, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The provision for income taxes was $19.2 million for the three months ended June 30, 2021 as compared to $1.9 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 11.2% for the three months ended June 30, 2021 was due primarily to a tax benefit of $12.1 million from tax credits and excess tax benefits of $9.4 million from employee stock-based compensation offset by the geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 2.1% for the three months ended June 30, 2020 was due primarily to excess tax benefits of $7.9 million from employee stock-based compensation, tax benefits of $4.9 million from tax credits and the geographic mix of earnings.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased expense related to the geographic mix of earnings and decreased excess tax benefits from employee stock-based compensation in the current period, partially offset by increased tax credits.

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

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 nine months ended December 31, 2020, 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.

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

In February 2020, the taxpayer appealed to the U.S.

Supreme Court, which denied certiorari on June 22, 2020.

The TRAF abolished preferential tax regimes at the cantonal level.

The cantons established transition rules which provided us a step-up in tax basis for which a deferred tax asset of $45.3 million and valuation allowance of $33.4 million were established.

It is possible that realization of deferred tax assets relating to the Swiss cantonal basis step-up may change due to changes in forecasted future earnings in Switzerland.

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

ARPA includes several revenue-raising and business provisions.

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

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

As June 30, 2021, ARPA did not have a material impact on our Condensed Consolidated Financial Statements.

On March 27, 2020, the U.S.

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

An additional economic stimulus package, the Consolidated Appropriations Act, 2021, was approved on December 27, 2020.

We do not expect that these measures will have a material impact to our Consolidated Financial Statements.

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 Condensed Consolidated Financial Statements.

Net income and earnings per share

For the nine months ended December 31, 2020, net income was $370.1 million, as compared to $281.7 million in the prior year period.

For the nine months ended December 31, 2020, diluted earnings per share was $3.20 as compared to diluted earnings per share of $2.47 in the prior year period.

For the three months ended June 30, 2021, net income was $152.3 million, as compared to $88.5 million in the prior year period.

Diluted earnings per share for the three months ended June 30, 2021 was $1.30, as compared to diluted earnings per share of $0.77 in the prior year period.

Diluted weighted average shares of 117.1 million were 2.2 million shares higher as compared to the prior year period, due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year period.

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

See Note 11 - Earnings Per S hare to our Condensed Consolidated Financial Statements for additional information.

Liquidity and Capital Resources

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Short-term Investments

As of December 31, 2020, we had $772.7 million of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations.

As of June 30, 2021, we had $1,135.2 million of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations.

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

As of December 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.

As of June 30, 2021, based on the composition of our investment portfolio and relatively lower interest rates as a result of the actions by central banks around the world, including the interest rate cuts by the U.S.

Federal Reserve, in response to the COVID-19 pandemic and related adverse economic conditions, we anticipate investment yields may remain low, which would lower our future interest income.

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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 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.

On February 8, 2019, we entered into an unsecured Credit Agreement (the “Credit Agreement”), and on June 28, 2021, we amended our unsecured Credit Agreement solely to increase the commitments under the facility by $50 million (as

amended, the “Credit Agreement”) that runs through February 8, 2024.

The Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $250 million, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $25 million and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $25 million.

In addition, the Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $200 million in term loans or revolving credit facilities.

Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (3.25% at 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.

As of December 31, 2020, there was $197.9 million available to borrow under the Credit Agreement, and we had $2.1 million of letters of credit outstanding.

At December 31, 2020, we had no outstanding borrowings under the Credit Agreement.

Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (3.25% at June 30, 2021) or (b) 1.125% to 1.750% above LIBOR (approximately 0.10% at June 30, 2021), which rates are determined by reference to our consolidated total net leverage ratio.

As of June 30, 2021, there was $247.9 million available to borrow under the Credit Agreement, and we had $2.1 million of letters of credit outstanding.

At June 30, 2021, we had no outstanding borrowings under the Credit Agreement.

The Credit Agreement also includes, among other terms and conditions, maximum leverage ratio, minimum cash reserves and, in certain circumstances, minimum interest coverage ratio financial covenants, as well as limitations on the Company’s and each of its subsidiaries’ ability to:

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A majority of our trade receivables are derived from sales to major retailers, including digital storefronts and platform partners, and distributors.

Our five largest customers accounted for 77.4% and 70.0% of net revenue during the nine months ended December 31, 2020 and 2019, respectively.

As of December 31, 2020 and March 31, 2020, five customers accounted for 71.8% and 58.1% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 59.1% and 48.8% of such balances at December 31, 2020 and March 31, 2020, respectively.

We had two customers who accounted for 39.5% and 19.6% of our gross accounts receivable as of December 31, 2020, respectively, and two customers who accounted for 29.4% and 19.4% of our gross accounts receivable as of March 31, 2020, respectively.

Our five largest customers accounted for 80.6% and 81.6% of net revenue during the three months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021 and March 31, 2021, five customers accounted for 74.2% and 77.6% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 65.3% and 69.2% of such balances at June 30, 2021 and March 31, 2021, respectively.

We had two customers who accounted for 47.7% and 17.6% of our gross accounts receivable as of June 30, 2021, respectively, and two customers who accounted for 50.4% and 18.8% of our gross accounts receivable as of March 31, 2021, respectively.

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

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

Our liquidity and capital resources were not materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets during the first two quarters of fiscal year 2021.

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.

As of December 31, 2020, the amount of cash and cash equivalents held outside of the U.S.

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

For further discussion regarding the potential future impacts of the COVID-19 pandemic and related economic conditions on our business, refer to Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.

As of June 30, 2021, the amount of cash and cash equivalents held outside of the U.S.

by our foreign subsidiaries was $517.8 million.

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The Tax Cuts and Jobs Act, as enacted in December 2017, includes a number of provisions, which generally establish a territorial-style system for taxing foreign income of domestic multinational corporations.

Our current intention is to reinvest indefinitely earnings of our foreign subsidiaries, and therefore we have not recorded any tax liabilities associated with the repatriation of foreign earnings.

Our current intention is to reinvest

indefinitely earnings of our foreign subsidiaries, and therefore we have not recorded any tax liabilities associated with the repatriation of foreign earnings.

Our Board of Directors has authorized the repurchase of up to 14.2 million shares of our common stock.

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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 nine months ended December 31, 2020, we did not make any repurchases of our common stock in the open market.

We have repurchased a total of 10.4 million shares of our common stock under the program, and as of December 31, 2020, 3.8 million shares of our common stock remained available for repurchase under the share repurchase program.

During the three months ended June 30, 2021, we did not make any repurchases of our common stock in the open market.

We have repurchased a total of 10.4 million shares of our common stock under the program, and as of June 30, 2021, 3.8 million shares of our common stock remained available for repurchase under the share repurchase program.

Our changes in cash flows were as follows:

Nine Months Ended

Three Months Ended

(thousands of dollars) 2021 2020

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Net change in cash, cash equivalents, and restricted cash and cash equivalents $ 97,131 $ 167,880

At December 31, 2020, we had $2,512.8 million of cash and cash equivalents and restricted cash and cash equivalents, compared to $1,993.4 million at March 31, 2020.

At June 30, 2021, we had $2,157.4 million of cash and cash equivalents and restricted cash and cash equivalents, compared to $2,060.2 million at March 31, 2021.

The increase was due to Net cash provided by operating activities from sales of our products, partially offset by the timing of payments.

This net increase was partially offset by (1) Net cash used in investing activities primarily related to changes in bank time deposits and net purchases of available for sale securities, our purchase of Playdots, as well as purchases of fixed assets and (2) Net cash used in financing activities, which was primarily for tax payments related to net share settlements of our restricted stock awards.

This net increase was partially offset by (1) Net cash used in financing activities, which was primarily for tax payments related to net share settlements of our restricted stock awards and (2) Net cash used in investing activities primarily related to (i) net purchases of available for sale securities, (ii) our acquisition of Nordeus, and (iii) purchases of fixed assets, including our acquisition of two office buildings in the UK (refer to Note 15 - Acquisitions ), partially offset by changes in bank time deposits.

Contractual Obligations and Commitments

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

Other than agreements entered into in the ordinary course of business and in addition to the agreements requiring known cash commitments as reported in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, we did not have any significant changes to our commitments since March 31, 2020.

Legal and Other Proceedings:

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

Refer to N ote 13 - Commitments and Contingencies to our Condensed Consolidated Financial Statements for disclosures regarding our commitments.

Capital Expenditures

In fiscal year 2022, we anticipate capital expenditures to be $170 million.

During the three months ended June 30, 2021, capital expenditures were $86.4 million, which includes our acquisition of two office buildings in the UK (refer to Note 15 - Acquisitions ).

Off-Balance Sheet Arrangements

As of December 31, 2020 and March 31, 2020, we did not have any material relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of June 30, 2021 and March 31, 2021, we did not have any material relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

1 unchanged sentence

Net revenue earned outside of the United States is principally generated by our operations in Europe, Asia, Australia, Canada, and Latin America.

For the three months ended December 31, 2020 and 2019, 38.6% and 42.3%, respectively, of our net revenue was earned outside of the United States.

For the three months ended June 30, 2021 and 2020, 39.4% and 43.4%, respectively, of our net revenue was earned outside of the United States.

We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays, and international political, regulatory and economic developments, all of which can have a significant effect on our operating results.

5 unchanged sentences

sequels or enhancements of existing titles;

projected and actual

changes in platforms;

projected and actual changes in platforms;

the timing and success of title introductions by our competitors;

10 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis