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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-02-08 · 226 added, 303 removed, 190 unchanged (74% of the section changed)

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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

The statements contained herein, which are not historical facts including statements relating to our proposed acquisition of Zynga Inc.

(the "Acquisition"), are considered forward-looking statements under federal securities laws and may be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects," "seeks," "should," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance.

The statements contained herein, which are not historical facts including statements relating to our acquisition of Zynga Inc.

(the "Zynga Acquisition"), are considered forward-looking statements under federal securities laws and may be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects," "seeks," "should," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance.

Such forward-looking statements are based on the current beliefs of our management as well as assumptions made by and information currently available to them, which are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict.

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the effects of the COVID-19 pandemic on consumer demand and the discretionary spending patterns of our customers as the situation with the pandemic continues to evolve;

the impact of reductions in interest rates by the Federal Reserve and other central banks, including on our short-term investment portfolio;

the impact of potential inflation;

the impact of changes in interest rates by the Federal Reserve and other central banks, including on our short-term investment portfolio;

the impact of inflation;

volatility in foreign currency exchange rates;

the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement for the acquisition;

the inability to obtain our or Zynga's respective stockholder approval or the failure to satisfy other conditions to completion of the proposed acquisition, including receipt of regulatory approvals, on a timely basis or at all;

risks that the proposed acquisition disrupts each company’s current plans and operations;

the diversion of the attention of the respective management teams of Take-Two and Zynga from their respective ongoing business operations;

the ability of either Take-Two, Zynga or the combined company to retain key personnel;

the ability to realize the benefits of the proposed acquisition, including Net Bookings opportunities and cost synergies;

risks that the Zynga Acquisition disrupts our plans and operations;

the ability company to retain key personnel subsequent to the Zynga Acquisition;

the ability to realize the benefits of the Zynga Acquisition, including Net Bookings opportunities and cost synergies;

the ability to successfully integrate Zynga’s business with Take-Two’s business or to integrate the businesses within the anticipated timeframe;

the outcome of any legal proceedings that may be instituted against Take-Two, Zynga or others related to the proposed acquisition;

the amount of the costs, fees, expenses and charges related to the proposed acquisition;

the outcome of any legal proceedings that may be instituted against Take-Two, Zynga or others related to the acquisition;

the amount of the costs, fees, expenses and charges related to the acquisition;

other risks included herein;

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The following discussion should be read in conjunction with the MD&A and our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

All figures are in millions, except per share amounts or as otherwise noted.

Zynga Acquisition and Related Debt Transactions

We acquired Zynga on May 23, 2022, for consideration having an acquisition date fair value of $9,513.7, consisting of $3,992.4 in cash, the issuance of 46.3 shares of our common stock, and $143.6 of replacement equity awards attributable to the pre-acquisition service period.

Refer to Note 1 4 - Acquisitions of our Condensed Consolidated Financial Statements.

Zynga is a leading developer of mobile games with a mission to connect the world through games.

Also, in connection with the Zynga Acquisition, we entered into several debt transactions (refer to Note 9 - Debt ).

On April 14, 2022, we completed our offering and sale of $2,700.0 aggregate principal amount of our senior notes, consisting of $1,000.0 principal amount of our 3.300% Senior Notes due 2024 (the “2024 Notes”), $600.0 principal amount of our 3.550% Senior Notes due 2025 (the “2025 Notes”), $600.0 principal amount of our 3.700% Senior Notes due 2027 (the “2027 Notes”), and $500.0 principal amount of our 4.000% Senior Notes due 2032 (the “2032 Notes” and, together with the 2024 Notes, the 2025 Notes and the 2027 Notes, the “Senior Notes”).The Senior Notes were issued under an indenture between the Company and The Bank of New York Mellon, as trustee (the “Trustee”).

The 2024 Notes mature on March 28, 2024, and bear interest at an annual rate of 3.300%.

The 2025 Notes mature on April 14, 2025, and bear interest at an annual rate of 3.550%.

The 2027 Notes mature on April 14, 2027, and bear interest at an annual rate of 3.700%.

The 2032 Notes mature on April 14, 2032, and bear interest at an annual rate of 4.000%.

We will pay interest on the 2024 Notes semiannually on March 28 and September 28 of each year, commencing September 28, 2022.

We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually on April 14 and October 14 of each year, commencing October 14, 2022.

The proceeds were used to finance our acquisition of Zynga.

On May 23, 2022, we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement"), which replaced in its entirety the Company's prior Credit Agreement and provides for an unsecured five-year revolving credit facility with commitments of $500.0, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $100.0 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $100.0.

In addition, the 2022 Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional amount not to exceed the greater of $250.0 and 35.0% of the Company's Consolidated Adjusted EBITDA (as defined in the 2022 Credit Agreement).

Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (3.25% at June 30, 2022) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 0.10% at June 30, 2022, which rates are determined by the Company's credit rating.

On June 22, 2022, we drew down approximately $200.0 at 3.28% from our facility under the 2022 Credit Agreement.

On June 22, 2022, we entered into an unsecured 364-Day Term Loan Credit Agreement ("Term Loan").

The Term Loan provides for an unsecured 364-day term loan credit facility in the aggregate principal amount of $350.0 and matures on June 21, 2023, and will bear interest at our election at a margin of (a) 0.000% to 0.375% above an alternate base rate (defined on the basis of prime rate) or (b) 0.750% to 1.375% above SOFR, which margins are determined by reference to our credit rating.

We fully drew down on the Term Loan on June 22, 2022 at 3.6%.

The proceeds from our draw-downs of the 2022 Credit Agreement and Term Loan were used to finance a portion of the settlement of the Convertible Notes acquired from Zynga.

In total, we paid $321.6 for the tendered or converted 2024 Convertible Notes, including interest, and $845.1 for the tendered 2026 Convertible Notes in cash, and we issued 3.7 shares of our common stock upon the conversion of the 2024 Convertible Notes.

After settlement of all Convertible Notes tendered or surrendered for conversion, $21.4 aggregate principal amount of the 2024 Convertible Notes remained outstanding and $29.4 aggregate principal amount of the 2026 Convertible Notes remained outstanding at June 30, 2022.

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 T2 Mobile Games.

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

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

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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.

Our core strategy is to capitalize on the popularity of video games by creating the highest-quality, most engaging interactive entertainment franchises in the business and delivering them across an array of platforms to captivate our global audience.

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

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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, Serbia, Spain, South Korea, the United Kingdom, and the United States.

We have internal development studios located in Australia, Canada, China, Czech Republic, Finland, Germany, Hungary, India, Serbia, South Korea, Spain, Turkey, the United Kingdom (U.K.), and the United States (U.S.).

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

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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 380 million units.

Our most recent installment, Grand Theft Auto V , which was released in 2013, has sold-in nearly 160 million units worldwide and includes access to Grand Theft Auto Online .

Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records, has sold-in more than 40 million units worldwide.

Our most recent installment, Grand Theft Auto V , which was released in 2013, has sold-in more than 165 million units worldwide and includes access to Grand Theft Auto Online .

Red Dead Redemption 2, which has been a critical and commercial

success that set numerous entertainment industry records, has sold-in more than 45 million units worldwide.

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

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Rockstar Game's titles are published across all key platforms, including mobile.

In February 2022, Rockstar Games announced that active development of the next entry in the Grand Theft Auto series was well underway.

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

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

2K also publishes successful externally developed brands, such as Borderlands .

2K also publishes successful externally developed brands, such as Borderlands and Tiny Tina's Wonderlands .

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 .

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

Private Division also released The Outer Worlds and Ancestors:

Private Division also previously released The Outer Worlds and Ancestors:

The Humankind Odyssey .

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

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

We acquired Nordeus Limited on June 1, 2021, for consideration having an acquisition date fair value of $289.8 million, consisting of $132.9 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, which has over 240 million registered users.

Our Zynga label, which includes our former T2 Mobile Games label (which included Socialpoint, Playdots, and Nordeus), publishes popular free-to-play mobile games that deliver high quality, deeply engaging entertainment experiences and generates revenue from in-game sales and in-game advertising.

Zynga's diverse portfolio of popular game franchises has been downloaded more than 5 billion times on mobile, including CSR Racing , Dragon City , Empires & Puzzles , FarmVille , Golf Rival , Hair Challenge , Harry Potter:

Puzzles & Spells , High Heels , Merge Dragons , Merge Magic , Monster Legends , Toon Blast , Top Eleven , Toy Blast , Two Dots , Words With Friends , and Zynga Poker .

Zynga is also an industry-leading next-generation platform with the ability to acquire new users, cross-promote games, apply live services content updates, and optimize programmatic advertising and yields at scale through Chartboost, its leading mobile advertising and monetization platform.

We are continuing our strategy in Asia 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.

The NBA 2K League's fourth season concluded in September 2021.

The NBA 2K League's fifth season is currently underway.

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 32.3% of our net revenue for the nine months ended December 31, 2021.

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

Sales of Grand Theft Auto products generated 18.3% of our net revenue for the three months ended June 30, 2022.

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

Economic Environment and Retailer Performance.

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

We continue to monitor economic conditions, including the impact of the COVID-19 pandemic and rising inflation, that may affect our business, by affecting areas such as 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.

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.

While we expect that engagement trends will continue to be higher than they were pre-pandemic, we expect a moderation of the trends that have benefited our industry as the return to normalcy continues to unfold.

Based on our concern for the health and safety of our teams, we have developed and continue to develop plans to help mitigate the negative impacts of the pandemic on our business, including transitioning the vast majority of our teams to working from home.

We are taking a prudent approach relating to our return to office cadence and planning.

Some of our offices are open, and we plan for the majority of our offices to reopen in the coming months.

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.

As expected, during fiscal year 2022 and the first quarter of fiscal year 2023, we experienced a moderation in engagement from the all-time highs experienced in fiscal year 2021, but overall engagement continued to be notably higher than it was pre-pandemic.

Based on our concern for the health and safety of our teams, we transitioned the vast majority of our teams to working from home throughout fiscal years 2021 and 2022;

however, the majority of our offices either have reopened or are scheduled to reopen in the coming months.

Given the evolving dynamics of the COVID-19 pandemic, we continue to adhere to safety standards in the planning and implementation of our return to office.

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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.

Any of these considerations described above could cause or contribute to the risks described under the heading " Risk Factor s " included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, and could materially adversely affect our business, financial condition, results of operations, or stock price.

Therefore, the effects of the COVID-19 pandemic will not be fully reflected in our financial results until future periods, and, at this time, we are not able to predict its ultimate impact on our business.

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

Our five largest customers accounted for 79.2% and 77.4% of net revenue during the nine months ended December 31, 2021 and 2020, respectively.

As of December 31, 2021 and March 31, 2021, our five largest customers comprised 74.7% 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 59.1% and 69.2% of such balance at December 31, 2021 and March 31, 2021, respectively.

We had two customers who accounted for 41.9% and 17.2%, respectively, of our gross accounts receivable as of December 31, 2021 and two customers who accounted for 50.4% and 18.8%, respectively, of our gross accounts receivable as of March 31, 2021.

Our five largest customers accounted for 80.8% and 80.6% of net revenue during the three months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, and March 31, 2022, five customers comprised 65.0% and 72.8% 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 51.0% and 63.8% of such balance at June 30, 2022, and March 31, 2022, respectively.

We had three customers who accounted for 26.7%, 13.5%, and 10.8%, of our gross accounts receivable as of June 30, 2022, and two customers who accounted for 43.5% and 20.3% of our gross accounts receivable as of March 31, 2022.

We did not have any additional customers that exceeded 10% of our gross accounts receivable as of June 30, 2022, and March 31, 2022.

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

Bankruptcies or consolidations of our large retail customers could adversely affect our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers.

The COVID-19 pandemic may lead to increased consolidation as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through the financial volatility.

Certain of our large customers sell used copies of our games, which may negatively affect our business by reducing demand for new copies of our games.

While the online and downloadable content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.

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.

There has been increased consolidation in our industry, as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through financial volatility.

Hardware Platforms.

We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 72.4% of our net revenue by product platform for the nine months ended December 31, 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.

We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 55.1% of our net revenue by product platform for the three months ended June 30, 2022.

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 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, 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.

Further, events beyond our control 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.

Accordingly, our strategy is to focus our development efforts on a select number of the highest quality titles for these platforms, while also expanding our offerings for other platforms such as tablets, smartphones, and online games.

Accordingly, our strategy for these platforms is to focus our development efforts on a select number of the highest quality titles .

Online Content and Digital Distribution.

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Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from digital storefronts we own and others owned by third parties) as well as a large selection of our catalog titles.

In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases.

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

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 89.9% of our net revenue for the nine months ended December 31, 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.

Recent Developments.

Potential Acquisition.

On January 9, 2022, we entered into a definitive merger agreement to acquire Zynga, a leading developer of mobile games.

Under the terms and subject to the terms of the merger agreement, Zynga stockholders will receive $3.50 in cash and a number of shares of our common stock for each share of Zynga at the closing.

The transaction is valued at $9.86 per share of Zynga common stock equal to the exchange ration (ranging from 0.0350 to 0.0406, as further described below)based on the market closing as of January 7, 2022, implying an enterprise value of $12.7 billion.

The transaction includes a collar mechanism on the equity consideration, so that if our 20-day volume weighted average price ("VWAP") ending on the third trading day prior to closing is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration of $9.86 per Zynga share.

If the VWAP exceeds the higher end of that range the exchange ratio would be 0.0350 per share and if the VWAP falls below the lower end of that range, the exchange ratio would be 0.0406 per share.

As part of the transaction, we have received aggregate committed financing of $2.7 billion from J.P.

Morgan and certain other lenders, and we intend to fund the cash component of the transaction through a combination of cash from our balance sheet as well as proceeds of new debt issuance.

The transaction, which is expected to close during our first quarter of fiscal year 2023 ended June 30, 2022, is subject to approval by Take-Two and Zynga stockholders, the receipt of required regulatory approvals, and other customary closing conditions, including antitrust clearances.

In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, in-game purchases, and in-game advertising.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 94.1% of our net revenue for the three months ended June 30, 2022.

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

We also publish an expanding variety of titles for Mobile, which are delivered to consumers through digital download, and are primarily distributed, marketed and promoted through third parties, primarily Apple’s App Store and the Google Play Store.

Virtual items for our Mobile games are purchased through the payment processing systems of these platform providers.

We generate a significant portion of our net revenue through the Apple and Google platforms and expect to continue to do so for the foreseeable future as we launch more games for Mobile.

Apple and Google generally have the discretion to set the amounts of their platform fees and change their platforms’ terms of service and other policies with respect to us or other developers at their sole discretion, and those changes may be unfavorable to us.

These platform fees are recorded as cost of revenue as incurred.

Further, as a result of the platform fees associated with online game sales, our Mobile Net revenue generally generates lower gross margin percentage than our Console or PC revenue.

Accordingly, the overall product mix between Mobile and other game sales may impact our gross margins.

Player acquisition costs .

Principally for our Mobile titles, we use advertising and other forms of player acquisition and retention to grow and retain our player audience.

These expenditures, which are recorded within Sales and marketing in our Consolidated Statements of Operations generally relate to the promotion of new game launches and ongoing performance-based programs to drive new player acquisition and lapsed player reactivation.

Over time, these acquisition and retention-related programs may become either less effective or costlier, negatively impacting our operating results.

Content Release Highlights

During fiscal year 2022, 2K released NBA 2K22 , Private Division released Hades physically on consoles and OlliOlli World, and Rockstar released Grand Theft Auto:

The Trilogy - The Definitive Edition.

To date we have announced that, during the remainder of 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, and 2K will release WWE 2K22 and Tiny Tina's Wonderlands .

During fiscal year 2023, 2K released The Quarry.

To date we have announced that, during the remainder of fiscal year 2023, 2K will release NBA 2K23 , Marvel's Midnight Suns , WWE 2K23 and PGA TOUR 2K23 ;

and Private Division will release Rollerdrome and Kerbal Space Program 2 on PC.

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

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and income taxes.

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

We are reiterating our significant accounting policy on revenue recognition, which is included in Note 1 - Basis of P resentation , including certain revenue policies applied upon close of the Zynga Acquisition.

In-depth descriptions of our other critical accounting policies and estimates can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

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,

2022 2021 Increase/

(decrease) % Increase/

(decrease) 2021 2020 Increase/

(decrease) % Increase/

Net Bookings $ 1,002.5 $ 711.4 $ 291.1 40.9 %

For the three months ended December 31, 2021, Net Bookings increased by $51.8 million as compared to the prior year period due primarily to an increase in Net Bookings from our Grand Theft Auto franchise, including Grand Theft Auto:

The Trilogy - The Definitive Edition, which released in November 2021, and Top Eleven , which was part of the Nordeus acquisition in June 2021 .

These increases were partially offset by a decrease in Net Bookings from our Mafia and PGA TOUR 2K franchises , The Outer Worlds , and our WWE 2K franchise.

For the nine months ended December 31, 2021, Net Bookings decreased by $205.7 million as compared to the prior year period due primarily to a decrease in Net Bookings from our NBA 2K , PGA TOUR 2K , and Mafia franchises, The Outer Worlds , and our WWE 2K , our Red Dead , Borderlands franchises.

These decreases were partially offset by an increase in Net Bookings from Top Eleven and Two Dots.

For the three months ended June 30, 2022, Net Bookings increased by $291.1 as compared to the prior year period.

The increase was primarily due to Net Bookings from Zynga, which we acquired in May 2022 (refer to Note 1 4 - Acquisitions ), including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!

, as well as an increase in Net Bookings from (i) Tiny Tina’s Wonderlands , which released in March 2022;

(ii) our WWE 2K franchise, including our March 2022 release of WWE 2K22 ;

(iii) The Quarry , which released in June 2022;

and (iv) Top Eleven , which was part of our June 2021 Nordeus acquisition.

These increases were partially offset by a decrease in Net Bookings from our Grand Theft Auto and Borderlands franchises.

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,

(thousands of dollars) 2021 2020 2021 2020

Three Months Ended June 30,

(millions of dollars) 2022 2021

Net revenue $ 1,102.4 100.0 % $ 813.3 100.0 %

Cost of goods sold 350,379 38.8 % 346,244 40.2 % 1,136,776 44.2 % 1,255,438 49.6 %

Cost of revenue 435.7 39.5 % 329.7 40.5 %

Gross profit 666.7 60.5 % 483.6 59.5 %

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Depreciation and amortization 22.3 2.0 % 12.5 1.5 %

Business reorganization 123 — % (377) — % 546 — % (138) — %

Acquisition costs — — % — — %

Total operating expenses 704.1 63.9 % 313.1 38.5 %

Income from operations 154,106 17.1 % 176,057 20.5 % 344,731 13.4 % 373,567 14.7 %

(Loss) income from operations (37.4) (3.4) % 170.5 21.0 %

Interest and other, net (29.3) (2.7) % (1.0) (0.1) %

Gain on long-term investments, net 3,662 0.4 % 39,291 4.6 % 6,054 0.2 % 38,636 1.5 %

Income before income taxes 152,139 16.8 % 216,446 25.1 % 343,557 13.3 % 424,225 16.7 %

Provision for income taxes 7,642 0.8 % 34,198 4.0 % 36,507 1.4 % 54,151 2.1 %

Net income $ 144,497 16.0 % $ 182,248 21.2 % $ 307,050 11.9 % $ 370,074 14.6 %

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

2021 2020 2021 2020

(Loss) gain on fair value adjustments, net (39.6) (3.6) % 2.0 0.2 %

(Loss) income before income taxes (106.3) (9.6) % 171.5 21.1 %

(Benefit from) provision for income taxes (2.3) (0.2) % 19.2 2.4 %

Net (loss) income $ (104.0) (9.4) % $ 152.3 18.7 %

Three Months Ended June 30,

Net revenue by geographic region:

3 unchanged sentences

Console $ 607.2 55.1 % $ 602.4 74.1 %

PC and other 133,907 14.8 % 135,565 15.7 % 409,554 15.9 % 439,511 17.3 %

Mobile 369.6 33.5 % 82.3 10.1 %

PC and other 125.6 11.4 % 128.6 15.8 %

Net revenue by distribution channel:

4 unchanged sentences

Full game and other 276.8 25.1 % 241.0 29.6 %

Three Months Ended December 31, 2021 Compared to December 31, 2020

(thousands of dollars) 2021 % 2020 % Increase/

Three Months Ended June 30, 2022 Compared to June 30, 2021

(millions of dollars) 2022 % 2021 % Increase/

(decrease) % Increase/

Net revenue $ 903,252 100.0 % $ 860,889 100.0 % $ 42,363 4.9 %

Internal royalties 172,766 19.1 % 137,657 16.0 % 35,109 25.5 %

Total net revenue $ 1,102.4 100.0 % $ 813.3 100.0 % $ 289.1 35.5 %

Software development costs and royalties (1)

165.1 15.0 % 87.0 10.7 % 78.1 89.8 %

Licenses 61,507 6.8 % 57,917 6.7 % 3,590 6.2 %

Product costs 116.9 10.6 % 46.9 5.8 % 70.0 149.3 %

Cost of goods sold 350,379 38.8 % 346,244 40.2 % 4,135 1.2 %

Gross profit $ 552,873 61.2 % $ 514,645 59.8 % $ 38,228 7.4 %

(1) Includes $9,445 and $13,100 of stock-based compensation expense in 2021 and 2020, respectively, in software development costs and royalties.

For the three months ended December 31, 2021, net revenue increased by $42.4 million as compared to the prior year period.

The increase was due to an increase in net revenue of (i) $71.6 million from our Grand Theft Auto franchise, including Grand Theft Auto:

The Trilogy - The Definitive Edition , which released in November 2021, (ii) $16.7 million from Top Eleven , which was part of the Nordeus acquisition in June 2021, and (iii) $12.0 million from Two Dots .

These increases were partially offset by a decrease in net revenue of (i) $18.0 million from our Mafia franchise, (ii) $13.2 million from our NBA 2K franchise, (iii) $10.7 million from our PGA TOUR 2K franchise, and (iv) $10.2 million from The Outer Worlds .

Net revenue from console games increased by $9.5 million and accounted for 73.7% of our total net revenue for the three months ended December 31, 2021, as compared to 76.2% for the prior year period.

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

Net revenue from PC and other decreased by $1.7 million and accounted for 14.8% of our total net revenue for the three months ended December 31, 2021, as compared to 15.7% for the prior year period.

The decrease was due to a decrease in net revenue from The Outer Worlds and our Civilization and Mafia franchises, partially offset by an increase in net revenue from our Red Dead and NBA 2K franchises.

Net revenue from mobile increased by $34.6 million and accounted for 11.5% of our total net revenue for three months ended December 31, 2021, as compared to 8.0% for the prior year period.

The increase was due primarily to an increase in net revenue from Top Eleven, Two Dots , and our NBA 2K franchise.

Net revenue from digital online channels increased by $52.6 million and accounted for 88.1% of our total net revenue for the three months ended December 31, 2021, as compared to 86.3% for the prior year period.

The increase was due to an increase in net revenue from our Grand Theft Auto franchise, Top Eleven , Two Dots , and our Red Dead franchise, partially offset by a decrease in net revenue from our Mafia franchise, The Outer Worlds , and our PGA TOUR 2K franchise .

Net revenue from physical retail and other channels decreased by $10.2 million and accounted for 11.9% of our total net revenue for the three months ended December 31, 2021, as compared to 13.7% 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 our NBA 2K , Mafia , PGA TOUR 2K , WWE 2K , and Red Dead franchises, partially offset by an increase in net revenue from our Grand Theft Auto 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 decreased by $4.5 million and accounted for 60.6% of net revenue for the three months ended December 31, 2021, as compared to 64.2% of net revenue for the prior year period.

The decrease in net revenue from recurrent consumer spending is due primarily to a decrease in net revenue from our NBA 2K , Grand Theft Auto , and Borderlands franchises, Monster Legends , and our Civilization franchise, partially offset by an increase in net revenue from Top Eleven and Two Dots.

Net revenue from full game and other increased by $46.9 million and accounted for 39.4% of net revenue for the three months ended December 31, 2021 as compared to 35.8% of net revenue for the prior year period.

The increase in net revenue from full game and other was due primarily to an increase in net revenue from our Grand Theft Auto franchise, partially offset by a decrease in net revenue from our Mafia and PGA TOUR 2K franchises, and The Outer Worlds .

Gross profit as a percentage of net revenue for the three months ended December 31, 2021 was 61.2% as compared to 59.8% for the prior year period.

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

Net revenue earned outside of the United States increased by $35.8 million and accounted for 40.8% of our total net revenue for the three months ended December 31, 2021, as compared to 38.6% in the prior year period.

The increase in net revenue outside of the United States was due to an increase in net revenue from our Grand Theft Auto franchise and Top Eleven , partially offset by a decrease in net revenue from our Mafia 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, 2021 as compared to the prior year period.

Operating Expenses

(thousands of dollars) 2021 % of net revenue 2020 % of net revenue Increase/

(decrease) % Increase/

Selling and marketing $ 135,286 15.0 % $ 139,906 16.3 % $ (4,620) (3.3) %

General and administrative 130,706 14.5 % 98,624 11.5 % 32,082 32.5 %

Research and development 116,656 12.9 % 86,428 10.0 % 30,228 35.0 %

Depreciation and amortization 15,996 1.8 % 14,007 1.6 % 1,989 14.2 %

Business reorganization 123 — % (377) — % 500 (132.6) %

Total operating expenses (1)

$ 398,767 44.1 % $ 338,588 39.3 % $ 60,179 17.8 %

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

Selling and marketing $ 7,189 $ 4,131

General and administrative 16,478 15,538

Research and development 13,232 8,347

Changes in foreign currency exchange rates increased total operating expen ses by $3.6 million for the three months ended December 31, 2021, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses decreased by $4.6 million for the three months ended December 31, 2021, as compared to the prior year period, due primarily to (i) lower overall marketing expense for our NBA 2K franchise, Red Dead Online , and Borderlands 3 , partially offset by higher overall marketing expenses for Top Eleven , Grand Theft Auto:

The Trilogy - The Definitive Edition , and Grand Theft Auto Online , and (ii) lower customer service expenses.

These decreases were partially offset by an increase in personnel expenses for additional headcount.

General and administrative

General and administrative expenses increased by $32.1 million for the three months ended December 31, 2021, as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, (ii) the fair value of the contingent earn-out liability related to our acquisition of Nordeus (refer to Note 15- Acquisitions ), (iii) rent expenses for additional locations and lease renewals, and (iv) IT expenses for cloud-based services.

General and administrative expenses for the three months ended December 31, 2021 and 2020 included occupancy expense (primarily rent, utilities and office expenses) of $9.3 million and $6.8 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $30.2 million for the three months ended December 31, 2021, as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount, including related to our recent acquisitions.

Depreciation and Amortization

Depreciation and amortization expenses increased by $2.0 million for the three months ended December 31, 2021 as compared to the prior year period, due primarily to IT infrastructure.

Business reorganization

For the three months ended December 31, 2021, business reorganization expense increased by $0.5 million as compared to the prior year period and was not material.

Interest and other, net

Interest and other, net was expense of $5.6 million for the three months ended December 31, 2021, as compared to income of $1.1 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 and (ii) lower interest income on our available-for-sale securities.

Gain on long-term investments, net

Gain on long-term investments, net decreased by $35.6 million for the three months ended December 31, 2021 as compared to the prior year period.

The decrease 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 in the prior year period, partially offset by changes in value based on the observable price changes of our long-term investments in the current year period.

Provision for Income Taxes

The provision for income taxes for the three months ended December 31, 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 $7.6 million for the three months ended December 31, 2021 as compared to $34.2 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 5.0% for the three months ended December 31, 2021 was due primarily to excess tax benefits of $9.9 million on employee stock-based compensation, tax benefits of $9.7 million from tax credits, and a tax benefit of $7.2 million related to geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 15.8% for the three months ended December 31, 2020 was due primarily to a tax benefit of $7.1 million from tax credits and excess tax benefits of $3.4 million from employee stock-based compensation offset by the geographic mix of earnings.

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

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 March 11, 2021, the American Rescue Plan Act of 2021 (the “ARPA”) was enacted.

The ARPA, among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations.

Effective for tax years starting after December 31, 2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover the next five most highly compensated employees.

The ARPA did not have a material impact on our Condensed Consolidated Financial Statements for the three months ended December 31, 2021.

The Company continues to evaluate the potential impact the ARPA may have on its operations and consolidated financial statements in future periods.

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 Condensed Consolidated Financial Statements.

Net income and earnings per share

For the three months ended December 31, 2021, net income was $144.5 million, as compared to $182.2 million in the prior year period.

Diluted earnings per share for the three months ended December 31, 2021 was $1.24, as compared to diluted earnings per share of $1.57 in the prior year period.

Diluted weighted average shares of 116.7 million were 0.6 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, partially offset by shares repurchases.

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

Nine Months Ended December 31, 2021 Compared to December 31, 2020

(thousands of dollars) 2021 % 2020 % Increase/

(decrease) % Increase/

Net revenue $ 2,574,796 100.0 % $ 2,533,341 100.0 % $ 41,455 1.6 %

Internal royalties 93.4 8.5 % 145.4 17.9 % (52.0) (35.8) %

Software development costs and royalties (1)

274,963 10.7 % 374,332 14.8 % (99,369) (26.5) %

Licenses 60.3 5.5 % 50.4 6.2 % 9.9 19.6 %

Product costs 186,042 7.2 % 194,702 7.7 % (8,660) (4.4) %

Cost of goods sold 1,136,776 44.2 % 1,255,438 49.6 % (118,662) (9.5) %

Cost of revenue 435.7 39.5 % 329.7 40.5 % 106.0 32.2 %

Gross profit $ 666.7 60.5 % $ 483.6 59.5 % $ 183.1 37.9 %

(1) Includes $(33.4) and $12.1 of stock-based compensation expense in 2022 and 2021, respectively, in software development costs and royalties.

For the nine months ended December 31, 2021, net revenue increased by $41.5 million as compared to the prior year period.

The increase was due to an increase in net revenue of (i) $97.9 million from our Grand Theft Auto franchise, including Grand Theft Auto:

The Trilogy - The Definitive Edition which released in November 2021, (ii) $66.5 million from Two Dots , (iii) $48.9 million from our NBA 2K franchise, and (iv) $28.8 million from Top Eleven , which was part of the Nordeus acquisition in June 2021.

These increases were partially offset by a decrease in net revenue of (i) $45.9 million from our Mafia franchise, (ii) $35.7 million from our Red Dead franchise, (iii) $34.8 million from our Borderlands franchise , (iv) $30.4 million from our PGA TOUR 2K franchise, (v) $17.1 million from our Civilization franchise, (vi) $14.1 million from our WWE 2K franchise, (vii) $11.6 million from The Outer Worlds , and (viii) $7.6 million from our BioShock franchise.

Net revenue from console games decreased by $45.0 million and accounted for 72.4% of our total net revenue for the nine months ended December 31, 2021, as compared to 75.4% for the prior year period.

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

Net revenue from PC and other decreased by $30.0 million and accounted for 15.9% of our total net revenue for the nine months ended December 31, 2021, as compared to 17.3% for the prior year period.

The decrease was due to a decrease in net revenue from our Grand Theft Auto, Civilization , Mafia , and XCOM franchises, and The Outer Worlds , partially offset by an increase in net revenue from our NBA 2K franchise.

Net revenue from mobile increased by $116.4 million and accounted for 11.7% of our total net revenue for nine months ended December 31, 2021, as compared to 7.3% for the prior year period.

The increase was due primarily to an increase in net revenue from Two Dots , Top Eleven, and our NBA 2K franchise.

Net revenue from digital online channels increased by $111.2 million and accounted for 89.9% of our total net revenue for the nine months ended December 31, 2021, as compared to 87.0% for the prior year period.

The increase was due to an increase in net revenue from our Grand Theft Auto franchise, Two Dots , our NBA 2K franchise, and Top Eleven , partially offset by a decrease in net revenue from our Mafia , Red Dead , Borderlands , PGA TOUR 2K , and Civilization franchises.

Net revenue from physical retail and other channels decreased by $69.8 million and accounted for 10.1% of our total net revenue for the nine months ended December 31, 2021, as compared to 13.0% for the prior year period.

The decrease was due to a decrease in net revenue from our Mafia , Borderlands , Red Dead , PGA TOUR 2K , WWE 2K , and NBA 2K franchises, partially offset by an increase in net revenue from our Grand Theft Auto 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 $114.6 million and accounted for 65.4% of net revenue for the nine months ended December 31, 2021, as compared to 61.9% of net revenue for the prior year period.

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

Net revenue from full game and other decreased by $73.2 million and accounted for 34.6% of net revenue for the nine months ended December 31, 2021 as compared to 38.1% of net revenue for the prior year period.

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

Gross profit as a percentage of net revenue for the nine months ended December 31, 2021 was 55.8% as compared to 50.4% for the prior year period.

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

Offsetting the increase in gross profit as a percentage of net revenue were impairments recognized against some of our capitalized software balances for nine months ended December 31, 2021.

(See Note 8 - Software Development Costs and Licenses of our Condensed Consolidated Financial Statements).

Net revenue earned outside of the United States increased by $0.9 million, and accounted for 40.1% of our total net revenue for the nine months ended December 31, 2021, as compared to 40.7% in the prior year period.

The increase in net revenue outside of the United States was due to an increase in net revenue from Top Eleven , our Grand Theft Auto franchise, Two Dots , and our NBA 2K franchise, partially offset by a decrease in net revenue from our Mafia , Red Dead , Borderlands , and PGA TOUR 2K franchises, 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, 2021 as compared to the prior year period.

For the three months ended June 30, 2022, net revenue increased by $289.1 as compared to the prior year period.

The increase was primarily due to net revenue of $276.7 from Zynga, which we acquired in May 2022 (refer to Note 1 4 - Acquisitions ), including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!

, as well as an increase in net revenue of (i) $41.3 from Tiny Tina's Wonderlands , which released in March 2022, (ii) $29.8 from The Quarry which released in June 2022, (iii) $29.3 from our WWE 2K franchise, including our March 2022 release of WWE 2K22 , and (iv) $21.5 from Top Eleven , which was part of our June 2021 Nordeus acquisition.

These increases were partially offset by a decrease in net revenue of (i) $72.5 from our Grand Theft Auto franchise and (ii) $21.3 from our Borderlands franchise.

Net revenue from console games increased by $4.8 and accounted for 55.1% of our total net revenue for the three months ended June 30, 2022, as compared to 74.1% for the prior year period.

The increase in net revenue from console games was due to an increase in net revenue from Tiny Tina's Wonderlands , our WWE 2K franchise, The Quarry , and our NBA 2K franchise.

These increases in net revenue from console games were partially offset by a decrease in net revenue from our Grand Theft Auto , Borderlands , Red Dead Redemption , and PGA TOUR 2K franchises.

Net revenue from PC and other decreased by $3.0 and accounted for 11.4% of our total net revenue for the three months ended June 30, 2022, as compared to 15.8% for the prior year period.

The decrease was primarily due to a decrease in net revenue from our Grand Theft Auto franchise.

The overall decreases were partially offset by an increase in net revenue from Tiny Tina's Wonderlands .

Net revenue from mobile increased by $287.3 and accounted for 33.5% of our total net revenue for three months ended June 30, 2022, as compared to 10.1% for the prior year period.

The increase was primarily due to net revenue of $272.9 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons !

, as well as an increase in net revenue from Top Eleven .

Net revenue from digital online channels increased by $297.0 and accounted for 94.1% of our total net revenue for the three months ended June 30, 2022, as compared to 91.1% for the prior year period.

The increase was primarily due to net revenue of $276.7 from our acquisition of Zynga, including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!, as well as an increase in net revenue from Tiny Tina's Wonderlands , our WWE 2K franchise, Top Eleven , our NBA 2K franchise, and The Quarry .

These increases were partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises .

Net revenue from physical retail and other channels decreased by $7.9 and accounted for 5.9% of our total net revenue for the three months ended June 30, 2022, as compared to 8.9% 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 our NBA 2K franchise, partially offset by an increase in net revenue from The Quarry .

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

Net revenue from recurrent consumer spending increased by $253.3 and accounted for 74.9% of net revenue for the three months ended June 30, 2022, as compared to 70.4% of net revenue for the prior year period.

The increase in net revenue from recurrent consumer spending was primarily due to net revenue of $276.7 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!

, as well as an increase in net revenue from Top Eleven , Tiny Tina's Wonderlands , and our WWE 2K franchise.

These increases were partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises .

Net revenue from full game and other increased by $35.8 and accounted for 25.1% of net revenue for the three months ended June 30, 2022 as compared to 29.6% of net revenue for the prior year period.

The increase in net revenue from full game and other was due primarily to an increase in net revenue from The Quarry , Tiny Tina's Wonderlands , and our WWE 2K and NBA 2K franchises.

These increases were partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises.

Gross profit as a percentage of net revenue for the three months ended June 30, 2022 was 60.5% as compared to 59.5% 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, partially offset by (i) higher amortization related to intangible assets related to our Zynga acquisition and (ii) higher product costs for fees paid to platform partners due to an increase in Mobile revenues as a result of the Zynga acquisition.

Net revenue earned outside of the United States increased by $99.4 and accounted for 38.1% of our total net revenue for the three months ended June 30, 2022, as compared to 39.4% in the prior year period.

The increase in net revenue outside of the United States was primarily due to net revenue of $91.0 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Toon Blast , Zynga Poker , Merge Dragons!, and Toy Blast , as well as an increase in net revenue from Top Eleven , Tiny Tina's Wonderlands , and The Quarry .

These increases were partially offset by a decrease in net revenue from our Grand Theft Auto franchise.

Changes in foreign currency exchange rates decreased net revenue by $12.5 and decreased gross profit by $4.3 for the three months ended June 30, 2022 as compared to the prior year period.

Operating Expenses

(thousands of dollars) 2021 % of net revenue 2020 % of net revenue Increase/

(millions of dollars) 2022 % of net revenue 2021 % of net revenue Increase/

(decrease) % Increase/

3 unchanged sentences

Depreciation and amortization 22.3 2.0 % 12.5 1.5 % 9.8 78.4 %

Business reorganization 546 — % (138) — % 684 (495.7) %

Acquisition costs — — % — — % — 100.0 %

Total operating expenses (1)

$ 704.1 63.9 % $ 313.1 38.5 % $ 391.0 124.9 %

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

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

Selling and marketing $ 35.7 $ 8.0

1 unchanged sentence

Research and development 21.1 11.8

Changes in foreign currency exchange rates increased total operating expenses by $4.3 million for the nine months ended December 31, 2021, as compared to the prior year period.

Changes in foreign currency exchange rates decreased total operating expenses by $16.0 for the three months ended June 30, 2022, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses increased by $36.8 million for the nine months ended December 31, 2021, as compared to the prior year period, due primarily to (i) higher overall marketing expenses for Two Dots , Top Eleven, Grand Theft Auto Online , and Grand Theft Auto:

The Trilogy - The Definitive Edition , partially offset by lower overall marketing expenses for Borderlands 3 , our Mafia franchise, Red Dead Online , and our NBA 2K franchise and (ii) higher personnel expenses for additional headcount.

These increases were partially offset by a decrease in customer service expenses.

Selling and marketing expenses increased by $168.2 for the three months ended June 30, 2022, as compared to the prior year period, due primarily to (i) marketing expense for titles from our Zynga acquisition, including Rollic's hyper-casual portfolio, Toon Blast , Merge Dragons!

, Empires & Puzzles , and Toy Blast , as well as higher marketing expense for Top Eleven and our NBA 2K franchise, partially offset by lower overall marketing expenses for Red Dead Online , and (ii) higher personnel expenses for additional headcount, including our acquisition of Zynga.

General and administrative

General and administrative expenses increased by $70.3 million for the nine months ended December 31, 2021, as compared to the prior year period, due to increases in (i) personnel expenses for additional headcount, (ii) the fair value of the contingent earn-out liability related to our acquisition of Nordeus (refer to Note 15 - Acquisitions ), (iii) IT expenses for cloud-based services, (iv) transfer tax expense related to our acquisition of Nordeus, and (iv) professional fees related to acquisitions.

These increases were partially offset by 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 nine months ended December 31, 2021 and 2020 included occupancy expense (primarily rent, utilities and office expenses) of $25.6 million and $20.5 million, respectively, related to our development studios.

General and administrative expenses increased by $132.7 for the three months ended June 30, 2022, as compared to the prior year period, due primarily to increases in (i) professional fees related to our acquisition and integration of Zynga, (ii) personnel expenses for additional headcount, including our acquisition of Zynga, and (iii) the fair value of the contingent earn-out liability related to our acquisition of Nordeus.

General and administrative expenses for the three months ended June 30, 2022 and 2021 included occupancy expense (primarily rent, utilities and office expenses) of $12.9 and $6.8, respectively, related to our development studios.

Research and development

Research and development expenses increased by $76.7 million for the nine months ended December 31, 2021, as compared to the prior year period, due primarily to increases in (i) personnel expenses for higher headcount, including related to our recent acquisitions, (ii) IT expenses for cloud-based services, and (iii) production and development expenses for titles that have not yet established technological feasibility.

Research and development expenses increased by $80.3 for the three months ended June 30, 2022, as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount, including our acquisition of Zynga.

Depreciation and Amortization

Depreciation and amortization expenses for the nine months ended December 31, 2021 increased by $4.5 million, as compared to the prior year period, due primarily to IT infrastructure.

Business reorganization

During the nine months ended December 31, 2021, as compared to the prior year period, business reorganization expense increased $0.7 million and was not material.

Depreciation and amortization expenses increased by $9.8 for the three months ended June 30, 2022 as compared to the prior year period, due primarily to acquired intangible assets and depreciation expense related to Zynga.

Interest and other, net

Interest and other, net was expense of $7.2 million for the nine months ended December 31, 2021, as compared to income of $12.0 million f or 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 and (ii) lower interest income on our investments due to lower rates.

Gain on long-term investments, net

Gain on long-term investments, net decreased by $32.6 million for the nine months ended December 31, 2021 as compared to the prior year period, the decrease 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 in the prior year period, partially offset by changes in value based on the observable price changes of our long-term investments in the current year period.

Provision for Income Taxes

The provision for income taxes for the nine months ended December 31, 2021 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 $36.5 million for the nine months ended December 31, 2021 as compared to a provision for income taxes of $54.2 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 10.6% for the nine months ended December 31, 2021 was due primarily to a tax benefit of $21.1 million due to tax credits and excess tax benefits of $13.9 million from employee stock-based compensation, offset by tax expense of $5.0 million related to a nondeductible increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus and by the geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, 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.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased tax benefits from tax credits in the current period and by the geographic mix of earnings.

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.

Interest and other, net was expense of $29.3 for the three months ended June 30, 2022, as compared to $1.0 for the prior year period.

The increase was due primarily to interest expense related to our Senior Notes, Term Loan, 2022 Credit Agreement, and Bridge Loan commitment, including the amortization of related deferred costs, in connection with our acquisition of Zynga (refer to Note 9 - Debt and Note 1 4 - Acquisitions ).

(Loss) gain on fair value adjustments, net

(Loss) gain on fair value adjustments, net was a loss of $39.6 for the three months ended June 30, 2022 as compared to a gain of $2.0 for the prior year period.

The change was due primarily to a loss relating to our Convertible Notes, partially offset by a gain related to our Capped Calls, both as result of our Zynga Acquisition (refer to Note 9 - Debt and Note 1 4 - Acquisitions ).

Benefit from Income Taxes

The benefit from income taxes for the three months ended June 30, 2022 is based on our projected annual effective tax rate for fiscal year 2023, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The benefit from income taxes was $2.3 for the three months ended June 30, 2022 as compared to the provision for income taxes of $19.2 for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 2.2% for the three months ended June 30, 2022 was due primarily to tax expense of $12.1 related to the geographic mix of earnings, tax expense of $9.4 from employee stock-based compensation, nondeductible expense of $8.2 related to the settlement of convertible debt, offset by benefits of $22.4 from tax credits.

In the prior year period, when compared to our statutory rate of 21%, 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 from tax credits and excess tax benefits of $9.4 from employee stock-based compensation offset by 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 increases in tax benefits from tax credits, increased expenses from employee stock-based compensation in the current period, nondeductible expense related to the settlement of convertible debt and by the 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 on the stock price at the time of the employee award vesting.

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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.

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.

Tax Cuts and Jobs Act of 2017 (“TCJA”) requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code ("IRC") Section 174.

Although Congress is considering legislation that would defer the capitalization and amortization requirement to later years, we have no assurance that the requirement will be repealed or otherwise modified.

The requirement is effective for the Company beginning April 1, 2022.

For the three months ended June 30, 2022, we recorded an estimated increase to income tax payable and deferred tax assets of approximately $70.0 due to Section 174 capitalization.

The actual impact of Section 174 capitalization and amortization on the income tax payable and deferred tax asset will depend on multiple factors, including the amount of research and development expenses we will incur and whether we conduct our research and development activities inside or outside the United States.

If legislation is not passed to defer, repeal, or otherwise modify the capitalization and amortization requirement we expect our cash taxes payable and deferred tax assets to increase in the future.

On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARPA”) was enacted.

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Effective for tax years starting after December 31, 2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover the next five most highly compensated employees.

The ARPA did not have a material impact on our Condensed Consolidated Financial Statements for the nine months ended December 31, 2021.

The Company continues to evaluate the potential impact the ARPA may have on its operations and consolidated financial statements in future periods.

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 Condensed Consolidated Financial Statements.

Net income and earnings per share

For the nine months ended December 31, 2021, net income was $307.1 million, as compared to $370.1 million in the prior year period.

For the nine months ended December 31, 2021, diluted earnings per share was $2.63 as compared to diluted earnings per share of $3.20 in the prior year period.

Diluted weighted average shares of 116.8 million were 1.2 million shares higher as compared to the prior year period, due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year period, partially offset by shares repurchased.

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

The ARPA did not have a material impact on our Consolidated Financial Statements for the three months ended June 30, 2022.

We continue to evaluate the potential impact the ARPA may have on our operations and Consolidated Financial Statements in future periods.

Net (loss) income and (loss) earnings per share

For the three months ended June 30, 2022, net loss was $104.0, as compared to income of $152.3 in the prior year period.

Diluted loss per share for the three months ended June 30, 2022 was $0.76, as compared to diluted earnings per share of $1.30 in the prior year period.

Basic weighted average shares of 136.5 were 19.4 shares higher as compared to the prior year period diluted weighted average shares, due to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes.

See Note 1 0 - ( Loss) Earnings Per Share to our Condensed Consolidated Financial Statements for additional information.

Liquidity and Capital Resources

Our primary cash requirements have been to fund (i) the development, manufacturing, and marketing of our published products, (ii) working capital, (iii) acquisitions, and (iv) capital expenditures.

We expect to rely on cash and cash equivalents as well as on short-term investments, funds provided by our operating activities, and our Credit Agreement to satisfy our working capital needs.

Our primary cash requirements are to fund (i) the development, manufacturing, and marketing of our published products, (ii) working capital, (iii) acquisitions, (iv) capital expenditures, (v) debt and interest payments, and (vi) tax payments.

We expect to rely on cash and cash equivalents as well as on short-term investments, funds provided by our operating activities,

and our 2022 Credit Agreement to satisfy our working capital needs.

Refer to Note 9 - Debt for additional discussion of our outstanding debt obligations.

Short-term Investments

As of December 31, 2021, we had $1,479.0 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, 2022, we had $459.2 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, 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.

As of June 30, 2022, based on the composition of our investment portfolio and actions taken in recent months by central banks around the world, including the U.S.

Federal Reserve, in response to rising inflation and related adverse economic conditions, we anticipate our investment yields may increase, which could increase our future interest income.

Such impact is not expected to be material to our liquidity.

The Senior Notes are the Company’s senior unsecured obligations and rank equally with all of our other existing and future unsubordinated obligations.

The 2024 Notes mature on March 28, 2024 and bear interest at an annual rate of 3.300%.

The 2025 Notes mature on April 14, 2025 and bear interest at an annual rate of 3.550%.

The 2027 Notes mature on April 14, 2027 and bear interest at an annual rate of 3.700%.

The 2032 Notes mature on April 14, 2032 and bear interest at an annual rate of 4.000%.

We will pay interest on the 2024 Notes semi-annually on March 28 and September 28 of each year, commencing September 28, 2022.

We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually on April 14 and October 14 of each year, commencing October 14, 2022.

The proceeds were used to finance our acquisition of Zynga.

Credit Agreement

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, 2021) or (b) 1.125% to 1.750% above LIBOR (approximately 0.10% at December 31, 2021), which rates are determined by reference to our consolidated total net leverage ratio.

The LIBOR benchmark rate is expected to be phased out by the end of June 2023.

We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations.

As of December 31, 2021, there was $247.7 million available to borrow under the Credit Agreement, and we had $2.3 million of letters of credit outstanding.

At December 31, 2021, and March 31, 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:

create, incur, assume or be liable for indebtedness;

dispose of assets outside the ordinary course;

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

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

make investments;

or pay dividends or make distributions, in each case subject to certain exceptions.

In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency, and default on indebtedness held by third parties (subject to certain limitations and cure periods).

On May 23, 2022, we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement"), which replaced in its entirety the Company's prior Credit Agreement, dated as of February 8, 2019, which was paid off in full and terminated.

The 2022 Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $500.0, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $100.0 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $100.0.

On June 22, 2022, we drew down $200.0 at approximately 3.28% from our facility under the 2022 Credit Agreement.

The proceeds were used to finance a portion of the repurchase of the Convertible Notes.

After giving effect to this borrowing, we had approximately $297.5 available for additional borrowings as of June 30, 2022.

On June 22, 2022, we entered into an unsecured 364-Day Term Loan Credit Agreement ("Term Loan").

We fully drew down on the Term Loan on June 22, 2022 at approximately 3.6%.

The proceeds were used to finance a portion of the repurchase of the Convertible Notes (refer to Note 9 - Debt ).

Financial Condition

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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 79.2% and 77.4% of net revenue during the nine months ended December 31, 2021 and 2020, respectively.

As of December 31, 2021 and March 31, 2021, five customers accounted for 74.7% and 77.6% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 59.1% and 69.2% of such balances at December 31, 2021 and March 31, 2021, respectively.

We had two customers who accounted for 41.9% and 17.2% of our gross accounts receivable as of December 31, 2021, respectively, and two customers who accounted for 50.4% and 18.8% of our gross accounts receivable as of March 31, 2021, respectively.

Our five largest customers accounted for 80.8% and 80.6% of net revenue during the three months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022 and March 31, 2022, five customers accounted for 65.0% and 72.8% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 51.0% and 63.8% of such balances at June 30, 2022 and March 31, 2022, respectively.

We had two customers who accounted for 26.7% and 13.5% of our gross accounts receivable as of June 30, 2022, respectively, and two customers who accounted for 43.5% and 20.3% of our gross accounts receivable as of March 31, 2022, 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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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, 2022.

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

by our foreign subsidiaries was $306.9 million.

As of June 30, 2022, the amount of cash and cash equivalents held outside of the U.S.

by our foreign subsidiaries was $740.0.

These balances are dispersed across various locations around the world.

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

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

On January 9, 2022, we entered into a definitive merger agreement to acquire Zynga, a leading developer of mobile games.

Under the terms and subject to the conditions of the merger agreement, Zynga stockholders will receive $3.50 in cash and a number of shares of our common stock equal to the exchange ratio (ranging from 0.0350 to 0.0406, as further described below) for each share of Zynga common stock outstanding at the closing.

The transaction is valued at $9.86 per share of Zynga common stock based on the market closing as of January 7, 2022, implying an enterprise value of $12.7 billion.

The transaction includes a collar mechanism on the equity consideration, so that if our 20-day volume weighted average price (“VWAP”) ending on the third trading day prior to closing is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration of $9.86 per Zynga share.

If the VWAP exceeds the higher end of that range the exchange ratio would be 0.0350 per share and if the VWAP falls below the lower end of that range, the exchange ratio would be 0.0406 per share.

As part of the transaction, we have received aggregate committed financing of $2.7 billion from J.P.

Morgan and certain other lenders, and we intend to fund the cash component of the transaction through a combination of cash from our balance sheet as well as proceeds of new debt issuance.

The transaction, which is expected to close during our first quarter of fiscal year 2023 ending June 30, 2022, is subject to approval by Take-Two and Zynga stockholders and the satisfaction of customary closing conditions, including applicable regulatory approvals.

Our Board of Directors has authorized the repurchase of up to 21.7 million shares of our common stock, including an increase of 7.4 million shares in November 2021.

Our Board of Directors has authorized the repurchase of up to 21.7 shares of our common stock.

Under this program, we may purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws.

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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 three months ended December 31, 2021, we did not repurchase shares of our common stock in the open market, as part of the program.

We have repurchased a total of 11.7 million shares of our common stock under the program, and as of December 31, 2021, 10.0 million shares of our common stock remained available for repurchase under the share repurchase program.

During the three months ended June 30, 2022, we did not repurchase shares of our common stock in the open market, as part of the program.

We have repurchased a total of 11.7 shares of our common stock under the program, and as of June 30, 2022, 10.0 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

(thousands of dollars) 2021 2020

Three Months Ended

(millions of dollars) 2022 2021

Net cash provided by operating activities $ 100.8 $ 148.2

Net cash used in investing activities (2,807.3) (13.8)

Net cash used in financing activities (239,720) (46,371)

Net cash provided by (used in) financing activities 2,017.0 (39.1)

Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents (14.7) 1.8

Net change in cash, cash equivalents, and restricted cash and cash equivalents $ (704.2) $ 97.1

At December 31, 2021, we had $1,357.2 million of cash and cash equivalents and restricted cash and cash equivalents, compared to $2,060.2 million at March 31, 2021.

The decrease was due to (1) Net cash used in investing activities primarily related to (i) net purchases of available for sale securities, (ii) our acquisition of Nordeus (refer to Note 15 - Acquisitions ), and (iii) purchases of fixed assets, including our acquisition of two office buildings in the UK (refer to Note 15 - Acquisitions ) and (2) Net cash used in financing activities, which was primarily for (i) repurchase of our common stock and (ii) tax payments related to net share settlements of our restricted stock awards.

This net decrease was partially offset by Net cash provided by operating activities from sales of our products, partially offset by the timing of payments.

Contractual Obligations and Commitments

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

At June 30, 2022, we had $1,491.1 of cash and cash equivalents and restricted cash and cash equivalents, compared to $2,195.3 at March 31, 2022.

The decrease was due to Net cash used in investing activities primarily related to our Zynga Acquisition (refer to Note 1 4 - Acquisitions ).

This net decrease was partially offset by Net cash provided by financing activities

(refer to Note 9 - Debt ), primarily related to proceeds from the issuance of Senior Notes and draw-downs on our 2022 Credit Agreement and Term Loan, which were partially offset by payments for Convertible Notes that were part of our Zynga Acquisition.

To a lesser extent, the net decrease was also partially offset by Net cash provided by operating activities from sales of our products, partially offset by the timing of payments, including for transaction related costs related to our Zynga Acquisition.

Refer to Note 1 2 - Commitments and Contingencies for disclosures regarding our commitments.

Capital Expenditures

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

During the nine months ended December 31, 2021, capital expenditures were $133.4 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, 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.

In fiscal year 2023, we anticipate capital expenditures to be approximately $135.0.

During the three months ended June 30, 2022, capital expenditures were $42.5.

International Operations

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, 2021 and 2020, 40.8% and 38.6%, respectively, of our net revenue was earned outside of the United States.

For the three months ended June 30, 2022 and 2021, 38.1% and 39.4%, 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.

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Sales of our full game products are also seasonal, with peak demand typically occurring in the fourth calendar quarter during the holiday season.

For certain of our software products with multiple performance obligations, we defer the recognition of our net revenue over an estimated service period, which generally ranges from 6 to 15 months.

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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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