What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-07 compared with 2022-11-08 · 185 added, 188 removed, 353 unchanged (51% of the section changed)

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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.

We acquired Zynga on May 23, 2022, for consideration having an acquisition date fair value of $9,521.8, consisting of $3,992.4 in cash, the issuance of 46.3 shares of our common stock, valued at $5,377.7, and $151.7 of replacement equity awards attributable to the pre-acquisition service period.

Refer to Note 14 - Acquisitions of our Condensed Consolidated Financial Statements.

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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 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%.

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

During the three months ended September 30, 2022, we made interest payments of $15.0.

During the nine months ended December 31, 2022, we made interest payments of $15.0.

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.

During the three and nine months ended December 31, 2022, we made interest payments of $31.8.

The proceeds were used to finance a portion of 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 (6.25% at September 30, 2022) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 3.04% at September 30, 2022, which rates are determined by the Company's credit rating.

Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (7.50% at December 31, 2022) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 4.36% at December 31, 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.

In December 2022, we fully repaid the $200.0 drawdown, and, at December 31, 2022, there were no borrowings against the 2022 Credit Agreement.

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

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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 September 30, 2022.

Cybersecurity Incident

In September 2022, we experienced a network intrusion in which an unauthorized third party illegally accessed and downloaded confidential information from our systems, including early development footage for the next Grand Theft Auto.

We immediately took steps to isolate and contain the incident.

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In connection with this activity (the “Cybersecurity Incident”), we have incurred certain immaterial incremental one-time costs related to consultants, experts and data recovery efforts and expect to incur additional costs related to cybersecurity protections in the future.

We are in the process of implementing a variety of measures to further enhance our cybersecurity protections.

We are in the process of implementing a variety of measures to enhance further our cybersecurity protections.

We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe.

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

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

Our core strategy is to capitalize on the popularity of video games by 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.

Our strategy is to be the most creative, innovative, and efficient company in our industry.

Our ambition 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.

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, in-game purchases, and in-game advertising.

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

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

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

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

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

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

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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 6 billion times on mobile, including CSR Racing , Dragon City , Empires & Puzzles , FarmVille , Golf Rival , Harry Potter:

Puzzles & Spells , Merge Dragons , Merge Magic , Monster Legends , Toon Blast , Top Eleven , Toy Blast , Two Dots , Words With Friends , Zynga Poker , and a high volume of hyper-casual titles, including Hair Challenge and High Heels , published by Rollic.

Zynga's diverse portfolio of popular game franchises has been downloaded more than 6 billion times, including CSR Racing , Dragon City , Empires & Puzzles , FarmVille , Golf Rival , Harry Potter:

Puzzles & Spells , Merge Dragons , Merge Magic , Monster Legends , Parking Jam 3D , Toon Blast , Top Eleven , Toy Blast , Two Dots , Words With Friends , Zynga Poker , and a high volume of hyper-casual titles, including Hair Challenge and High Heels , published by Rollic.

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 acquired Popcore on November 16, 2022 for consideration having an acquisition date fair value of $199.2, consisting of $116.9 in cash, the issuance of 0.6 shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of $105.0 in cash if Popcore achieves certain performance measures over each of the three calendar years following the closing (See Note 14 - Acquisitions to our Condensed Consolidated Financial Statements).

Founded in 2018, Popcore is a mobile games company based in Berlin best known for Parking Jam 3D and Pull the Pin .

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

Sales of Grand Theft Auto products generated 15.8% of our net revenue for the six months ended

September 30, 2022.

Sales of Grand Theft Auto products generated 15% of our net revenue for the nine months ended December 31, 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 economic conditions, including the impact of various macroeconomic and geopolitical factors, including inflation and the COVID-19 pandemic, 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 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 two quarters 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.

To date, our plans have resulted in minimal disruption.

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

Any of these considerations described above could cause or contribute to the risks described under the heading " Risk Factors " included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 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.

We continue to monitor various macroeconomic and geopolitical factors that may affect our business in several areas, including consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates.

For example, 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.

We transitioned the vast majority of our teams to working from home throughout fiscal years 2021 and 2022 in response to the health and safety threats relating to COVID-19.

Since that time, the majority of our global offices have reopened.

We continue to follow protocols from local governments and health officials to safety standards.

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 79.9% and 79.8% of net revenue during the six months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, and March 31, 2022, five customers comprised 68.9% 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 September 30, 2022, and March 31, 2022, respectively.

We had two customers who accounted for 32.4% and 18.6% of our gross accounts receivable as of September 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 September 30, 2022, and March 31, 2022.

Our five largest customers accounted for 79.7% and 79.2% of net revenue during the nine months ended December 31, 2022 and 2021, respectively.

As of December 31, 2022, and March 31, 2022, five customers comprised 57.6% 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 34.7% and 63.8% of such balance at December 31, 2022, and March 31, 2022, respectively.

We had two customers who accounted for 21.4% and 13.3% of our gross accounts receivable as of December 31, 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 December 31, 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.

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Hardware Platforms.

We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 46.4% of our net revenue by product platform for the six months ended September 30, 2022.

We derive a substantial portion of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 44.1% of our net revenue by product platform for the nine months ended December 31, 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.

The latest 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.

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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 94.4% of our net revenue for the six months ended September 30, 2022.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 94.6% of our net revenue for the nine months ended December 31, 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.

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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.

Further, as a result of the platform fees associated with online game sales, our Mobile Net revenue generally generates a 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.

We are also starting to expand our direct-to-consumer efforts more meaningfully across our mobile portfolio to enhance profitability.

Player acquisition costs .

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Content Release Highlights

During fiscal year 2023, Private Division released Rollerdrome , and 2K released The Quarry, NBA 2K23, PGA TOUR 2K23 , and New Tales from the Borderlands.

To date we have announced that, during the remainder of fiscal year 2023, 2K will release Marvel's Midnight Suns and WWE 2K23 , and Private Division will release Kerbal Space Program 2 early access on PC.

During fiscal year 2023, Private Division released Rollerdrome , and 2K released The Quarry, NBA 2K23, PGA TOUR 2K23 , New Tales from the Borderlands , and Marvel's Midnight Suns.

To date we have announced that, during the remainder of fiscal year 2023, 2K will release WWE 2K23 , and Private Division will release Kerbal Space Program 2 early access on PC.

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

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valuation and recognition of stock-based compensation;

and income taxes.

income taxes;

and contingent earnout consideration.

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

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Net Bookings were as follows:

Three Months Ended September 30, Six Months Ended September 30,

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

2022 2021 Increase/

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Net Bookings $ 1,382.8 $ 866.1 $ 516.7 59.7 % $ 3,890.1 $ 2,562.4 $ 1,327.7 51.8 %

For the three months ended September 30, 2022, Net Bookings increased by $519.9 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 14 - Acquisitions ), including top contributors Rollic's hyper-casual portfolio, Empires & Puzzles , Toon Blast , Words With Friends, and Merge Dragons!

, as well as an increase in Net Bookings from Tiny Tina’s Wonderlands , which released in March 2022.

For the three months ended December 31, 2022, Net Bookings increased by $516.7 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 14 - 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 our PGA TOUR 2K franchise, including PGA TOUR 2K23 ,

which released in October 2022 and Marvel's Midnight Suns , which released in December 2022.

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

For the six months ended September 30, 2022, Net Bookings increased by $811.0 as compared to the prior year period.

For the nine months ended December 31, 2022, Net Bookings increased by $1,327.7 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 14 - Acquisitions ), including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons!

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

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

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

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

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

and (iii) our WWE 2K franchise, including our March 2022 release of WWE 2K22 .

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

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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 September 30, Six Months Ended September 30,

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

(millions of dollars) 2022 2021 2022 2021

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Selling and marketing 446.7 31.7 % 135.3 15.0 % 1,163.1 29.8 % 375.2 14.6 %

General and administrative 214.6 15.4 % 127.8 14.9 % 451.7 18.1 % 232.2 13.9 %

Research and development 238.2 17.4 % 116.7 12.9 % 655.2 16.8 % 310.5 12.1 %

General and administrative 168.9 12.0 % 130.8 14.5 % 620.6 15.9 % 363.0 14.1 %

Depreciation and amortization 35.0 2.5 % 16.0 1.8 % 86.0 2.2 % 44.6 1.7 %

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Net (loss) income $ (153.4) (10.9) % $ 144.6 16.0 % $ (514.4) (13.2) % $ 307.1 11.9 %

Three Months Ended September 30, Six Months Ended September 30,

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

2022 2021 2022 2021

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Net revenue by platform:

Console $ 551.9 39.6 % $ 596.1 69.5 % $ 1,159.1 46.4 % $ 1,198.5 71.7 %

Mobile $ 721.2 51.2 % $ 103.8 11.5 % $ 1,820.9 46.6 % $ 301.2 11.7 %

Console 561.4 39.9 % 665.5 73.7 % 1,720.5 44.1 % 1,864.0 72.4 %

PC and other 125.2 8.9 % 134.0 14.8 % 362.3 9.3 % 409.6 15.9 %

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Full game and other 292.4 20.8 % 355.5 39.4 % 860.9 22.1 % 891.1 34.6 %

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

Three Months Ended December 31, 2022 Compared to December 31, 2021

(millions of dollars) 2022 % 2021 % Increase/

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(1) Includes $8.4 and $9.4 of stock-based compensation expense in 2022 and 2021, respectively, in software development costs and royalties.

For the three months ended September 30, 2022, net revenue increased by $535.3 as compared to the prior year period.

The increase was primarily due to net revenue of $639.3 from Zynga, which we acquired in May 2022 (refer to Note 14- Acquisitions ), including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons!

, as well as an increase in net revenue of $20.0 from Tiny Tina's Wonderlands , which released in March 2022.

These increases were partially offset by a decrease in net revenue of (i) $54.5 from our Grand Theft Auto franchise and (ii) $42.0 from our Borderlands franchise.

Net revenue from console games decreased by $44.2 and accounted for 39.6% of our total net revenue for the three months ended September 30, 2022, as compared to 69.5% for the prior year period.

The decrease in net revenue from console games was due to a decrease in net revenue from our Grand Theft Auto , Red Dead Redemption , and Borderlands franchises and Hades , which released in August 2021 .

These decreases in net revenue from console games were partially offset by an increase in net revenue from our WWE 2K franchise, Tiny Tina's Wonderlands , and The Quarry .

Net revenue from PC and other decreased by $35.5 and accounted for 8.0% of our total net revenue for the three months ended September 30, 2022, as compared to 17.1% for the prior year period.

The decrease was primarily due to a decrease in net revenue from Tiny Tina's Wonderlands.

Net revenue from mobile increased by $615.0 and accounted for 52.4% of our total net revenue for three months ended September 30, 2022, as compared to 13.4% for the prior year period.

The increase was primarily due to net revenue of $630.3 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons !

For the three months ended December 31, 2022, net revenue increased by $504.5 as compared to the prior year period.

The increase was primarily due to net revenue of $631.2 from Zynga, which we acquired in May 2022 (refer to Note 14- 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 $19.9 from our PGA TOUR 2K franchise, including PGA TOUR 2K23 , which released in October 2022 and $20.5 from Marvel's Midnight Suns , which released in December 2022.

These increases were partially offset by a decrease in net revenue of (i) $117.1 from our Grand Theft Auto franchise and (ii) $25.8 from our NBA 2K franchise.

Net revenue from console games decreased by $104.1 and accounted for 39.9% of our total net revenue for the three months ended December 31, 2022, as compared to 73.7% for the prior year period.

The decrease in net revenue from console games was due to a decrease in net revenue from our Grand Theft Auto and NBA 2K franchises.

These decreases in net revenue from console games were partially offset by an increase in net revenue from our PGA TOUR 2K franchise and Marvel's Midnight Suns .

Net revenue from PC and other decreased by $8.8 and accounted for 8.9% of our total net revenue for the three months ended December 31, 2022, as compared to 14.8% for the prior year period.

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

These decreases in net revenue from PC and other were partially offset by an increase in net revenue from Zynga.

Net revenue from mobile increased by $617.4 and accounted for 51.2% of our total net revenue for three months ended December 31, 2022, as compared to 11.5% for the prior year period.

The increase was primarily due to net revenue of $620.8 from 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 $540.1 and accounted for 94.7% of our total net revenue for the three months ended September 30, 2022, as compared to 90.8% for the prior year period.

The increase was primarily due to net revenue of $638.8 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons!

This increase was 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 $4.8 and accounted for 5.3% of our total net revenue for the three months ended September 30, 2022, as compared to 9.2% 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 Hades .

Net revenue from digital online channels increased by $541.0 and accounted for 94.9% of our total net revenue for the three months ended December 31, 2022, as compared to 88.1% for the prior year period.

The increase was primarily due to net revenue of $631.1 from Zynga, including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!

This increase was partially offset by a decrease in net revenue from our Grand Theft Auto franchise .

Net revenue from physical retail and other channels decreased by $36.5 and accounted for 5.1% of our total net revenue for the three months ended December 31, 2022, as compared to 11.9% 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 Grand Theft Auto franchise.

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 $538.2 and accounted for 79.1% of net revenue for the three months ended September 30, 2022, as compared to 65.7% of net revenue for the prior year period.

The increase in net revenue from recurrent consumer spending was primarily due to net revenue of $628.9 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons!.

Net revenue from recurrent consumer spending increased by $567.6 and accounted for 79.2% of net revenue for the three months ended December 31, 2022, as compared to 60.6% of net revenue for the prior year period.

The increase in net revenue from recurrent consumer spending was primarily due to net revenue of $621.3 from Zynga, including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!.

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

Net revenue from full game and other decreased by $2.9 and accounted for 20.9% of net revenue for the three months ended September 30, 2022 as compared to 34.3% of net revenue for the prior year period.

The decrease in net revenue from full game and other was due primarily to a decrease in net revenue from our Borderlands franchise.

This decrease was partially offset by an increase in net revenue from Tiny Tina's Wonderlands , our NBA 2K franchise and The Quarry .

Gross profit as a percentage of net revenue for the three months ended September 30, 2022 was 48.8% as compared to 46.8% for the prior year period.

The increase in gross profit as a percentage of net revenue was due to (i) lower internal royalties due to the timing of when royalties are earned and (ii) lower capitalized software amortization due to impairments recognized in the prior year period, 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 $207.3 and accounted for 39.5% of our total net revenue for the three months ended September 30, 2022, as compared to 40.0% in the prior year period.

The increase in net revenue outside of the United States was primarily due to net revenue of $255.5 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Zynga Poker , and Merge Dragons!

Thin increase was partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises.

Changes in foreign currency exchange rates decreased net revenue by $8.3 and decreased gross profit by $4.4 for the three months ended September 30, 2022 as compared to the prior year period.

Net revenue from full game and other decreased by $63.1 and accounted for 20.8% of net revenue for the three months ended December 31, 2022 as compared to 39.4% of net revenue for the prior year period.

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

This decrease was partially offset by an increase in net revenue from Marvel's Midnight Suns and our PGA TOUR 2K franchise.

Gross profit as a percentage of net revenue for the three months ended December 31, 2022 was 50.9% as compared to 61.2% for the prior year period.

The decrease in gross profit as a percentage of net revenue was due to (i) higher amortization related to intangible assets related to our Zynga acquisition, (ii) higher product costs for fees paid to platform partners due to an increase in Mobile revenues as a result of the Zynga acquisition, and (iii) higher capitalized software amortization due to the timing of releases, partially offset by lower internal royalties due to the timing of when royalties are earned.

Net revenue earned outside of the United States increased by $152.6 and accounted for 37.0% of our total net revenue for the three months ended December 31, 2022, as compared to 40.8% in the prior year period.

The increase in net revenue outside of the United States was primarily due to net revenue of $220.4 from Zynga, including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Zynga Poker , and Merge Dragons!

This increase was partially offset by a decrease in net revenue from our Grand Theft Auto franchise.

Changes in foreign currency exchange rates decreased net revenue by $8.2 and decreased gross profit by $6.4 for the three months ended December 31, 2022 as compared to the prior year period.

Operating Expenses

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Selling and marketing $ 446.7 31.7 % $ 135.3 15.0 % $ 311.4 230.2 %

General and administrative 214.6 15.4 % 127.8 14.9 % 86.8 67.9 %

Research and development 238.2 16.9 % 116.7 12.9 % 121.5 104.1 %

General and administrative 168.9 12.0 % 130.8 14.5 % 38.1 29.1 %

Depreciation and amortization 35.0 2.5 % 16.0 1.8 % 19.0 118.8 %

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

Selling and marketing $ 17.5 $ 7.1

General and administrative 44.2 16.7

Research and development $ 29.4 $ 13.2

Changes in foreign currency exchange rates decreased total operating expenses by $19.8 for the three months ended September 30, 2022, as compared to the prior year period.

General and administrative 25.9 16.5

Selling and marketing 23.0 7.2

Selling and marketing expenses increased by $308.4 for the three months ended September 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!

Changes in foreign currency exchange rates decreased total operating expenses by $21.3 for the three months ended December 31, 2022, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses increased by $311.4 for the three months ended December 31, 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, (ii) higher amortization related to intangible assets related to our Zynga acquisition, and (iii) higher personnel expenses for additional headcount, including related to our acquisition of Zynga.

General and administrative

General and administrative expenses increased by $86.8 for the three months ended September 30, 2022, as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, including our acquisition of Zynga and (ii) professional fees related to our acquisition and integration of Zynga.

General and administrative expenses for the three months ended September 30, 2022 and 2021 included occupancy expense (primarily rent, utilities and office expenses) of $16.6 and $8.4, respectively, related to our development studios.

Research and development

Research and development expenses increased by $141.7 for the three months ended September 30, 2022, as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount, including related to our acquisition of Zynga.

Research and development expenses increased by $121.5 for the three months ended December 31, 2022, as compared to the prior year period, due primarily to increases in (i) personnel expenses due to increased headcount, including related to our acquisition of Zynga and (ii) production and development expenses related to Zynga.

General and administrative

General and administrative expenses increased by $38.1 for the three months ended December 31, 2022, as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, including our acquisition of Zynga, (ii) rent expense, including Zynga locations, (ii) professional fees related to our acquisition and integration of Zynga, and (iv) IT expenses for cloud based services.

General and administrative expenses for the three months ended December 31, 2022 and 2021 included occupancy expense (primarily rent, utilities and office expenses) of $16.3 and $9.7, respectively, related to our development studios.

Depreciation and Amortization

Depreciation and amortization expenses increased by $13.8 for the three months ended September 30, 2022 as compared to the prior year period, due primarily to acquired intangible assets and depreciation expense related to Zynga.

Depreciation and amortization expenses increased by $19.0 for the three months ended December 31, 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 $50.5 for the three months ended September 30, 2022, as compared to $0.6 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 14 - Acquisitions ) and foreign currency losses.

Interest and other, net was expense of $28.3 for the three months ended December 31, 2022, as compared to $5.6 for the prior year period.

The increase in expense was due primarily to interest expense related to our Senior Notes, Term Loan, and 2022 Credit Agreement, in connection with our acquisition of Zynga (refer to Note 9 - Debt and Note 14 - Acquisitions ), partially offset by interest income on our available-for-sale securities.

Gain (loss) on fair value adjustments, net

Gain (loss) on fair value adjustments, net was a gain of $1.9 for the three months ended September 30, 2022 as compared to $0.4 for the prior year period.

Gain (loss) on fair value adjustments, net was a gain of $1.1 for the three months ended December 31, 2022 as compared to $3.7 for the prior year period.

The change was due primarily to changes in fair value based on the observable price changes of our long-term investments.

Benefit from Income Taxes

The benefit from income taxes for the three months ended September 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 $44.1 for the three months ended September 30, 2022 as compared to the provision for income taxes of $9.7 for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 14.6% for the three months ended September 30, 2022 was due primarily to tax benefits of $8.5 from tax credits, tax benefits of $3.4 from employee stock-based compensation, and tax expense of $12.8 related to geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 48.4% for the three months ended September 30, 2021 was due primarily to a tax expense of $2.4 related to a nondeductible increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus, tax expense of $5.4 from a shortfall on employee stock-based compensation offset by $2.6 from the geographic mix of earnings.

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

The benefit from income taxes for the three months ended December 31, 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 $46.7 for the three months ended December 31, 2022 as compared to the provision for income taxes of $7.6 for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 23.3% for the three months ended December 31, 2022 was due primarily to tax benefits of $2.4 related to geographic mix of earnings, tax benefits of $1.0 from tax credits, and tax expense of $0.5 from employee stock-based compensation.

In 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 on employee stock-based compensation, tax benefits of $9.7 from tax credits, and a tax benefit of $7.2 related to 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 decreased tax benefits from tax credits, and from employee stock-based compensation in 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 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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The 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 was effective for the Company beginning April 1, 2022.

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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.

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.

The American Rescue Plan Act of 2021 (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 Consolidated Financial Statements for the three months ended September 30, 2022.

The ARPA did not have a material impact on our Consolidated Financial Statements for the three months ended December 31, 2022.

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

In August 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), which includes a 15% book-income alternative minimum tax on corporations with average applicable financial statement income over $1 billion for any 3-year period ending with 2022 or later and a 1% excise tax on the fair market value of stock that is repurchased by publicly traded U.S.

corporations or their specified affiliates.

The alternative minimum tax and the excise tax are effective in taxable years beginning after December 31, 2022.

The Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) includes a new corporate alternative minimum tax (CAMT) of 15% on the adjusted financial statement income (AFSI) of corporations with an average AFSI exceeding $1.0 billion over a consecutive three-year period.

The CAMT is effective for taxable year ending March 31, 2024.

It is possible that the CAMT could result in an additional tax liability over the regular federal corporate tax liability in a particular year based on differences between book and taxable income.

We will continue to evaluate the potential impact of the Inflation Reduction Act 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 September 30, 2022, net loss was $257.0, as compared to income of $10.2 in the prior year period.

Diluted loss per share for the three months ended September 30, 2022 was $1.54, as compared to diluted earnings per share of $0.09 in the prior year period.

Basic weighted average shares of 166.9 were 50.1 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.

For the three months ended December 31, 2022, net loss was $153.4, as compared to income of $144.6 in the prior year period.

Diluted loss per share for the three months ended December 31, 2022 was $0.91, as compared to diluted earnings per share of $1.24 in the prior year period.

Basic weighted average shares of 168.0 were 51.3 shares higher as compared to the

prior year period diluted weighted average shares, due primarily to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes.

See Note 10 - (Loss) Earnings Per Share to our Condensed Consolidated Financial Statements for additional information.

Six Months Ended September 30, 2022 Compared to September 30, 2021

Nine Months Ended December 31, 2022 Compared to December 31, 2021

(millions of dollars) 2022 % 2021 % Increase/

1 unchanged sentence

Total net revenue $ 3,903.7 100.0 % $ 2,574.8 100.0 % $ 1,328.9 51.6 %

Internal royalties 217.7 8.7 % 305.0 18.2 % (87.3) (28.6) %

Software development costs and royalties (1) 749.1 19.2 % 275.0 10.7 % 474.1 172.4 %

455.0 18.2 % 231.9 13.9 % 223.1 96.2 %

Licenses 155.6 6.2 % 136.5 8.2 % 19.1 14.0 %

Product costs 526.0 13.5 % 186.0 7.2 % 340.0 182.8 %

Internal royalties 334.4 8.6 % 477.8 18.6 % (143.4) (30.0) %

Licenses 232.1 5.9 % 198.0 7.7 % 34.1 17.2 %

Cost of revenue 1,841.6 47.2 % 1,136.8 44.2 % 704.8 62.0 %

1 unchanged sentence

(1) Includes $(17.0) and $31.8 of stock-based compensation expense in 2022 and 2021, respectively, in software development costs and royalties.

For the six months ended September 30, 2022, net revenue increased by $824.4 million as compared to the prior year period.

The increase was primarily due to net revenue of $916.1 from Zynga, which we acquired in May 2022 (refer to Note 14- Acquisitions ), including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons!

, as well an increase in net revenue of $61.3 million from Tiny Tina's Wonderlands , which released in March 2022.

These increases were partially offset by a decrease in net revenue of (i) $127.1 million from our Grand Theft Auto franchise and (ii) $63.3 million from our Borderlands franchise.

Net revenue from console games decreased by $39.4 million and accounted for 46.4% of our total net revenue for the six months ended September 30, 2022, as compared to 71.7% for the prior year period.

The decrease was due to a decrease in net revenue from our Grand Theft Auto , Red Dead Redemption , and Borderlands franchises, partially offset by an increase in net revenue from Tiny Tina's Wonderlands , our WWE 2K franchise, and The Quarry .

Net revenue from PC and other decreased by $38.5 million and accounted for 9.5% of our total net revenue for the six months ended September 30, 2022, as compared to 16.5% for the prior year period.

The decrease was due to a decrease in net revenue from our Borderlands and Grand Theft Auto franchises, partially offset by an increase in net revenue from Tiny Tina's Wonderlands .

Net revenue from mobile increased by $902.3 million and accounted for 44.1% of our total net revenue for six months ended September 30, 2022, as compared to 11.8% for the prior year period.

The increase was primarily due to net revenue of $903.2 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends , and Merge Dragons!

For the nine months ended December 31, 2022, net revenue increased by $1,328.9 as compared to the prior year period.

The increase was primarily due to net revenue of $1,547.2 from Zynga, which we acquired in May 2022 (refer to Note 14- Acquisitions ), including top contributors Empires & Puzzles , Toon Blast , Rollic's hyper-casual portfolio, Words With Friends, and Merge Dragons!

, as well an increase in net revenue of $74.3 from Tiny Tina's Wonderlands , which released in March 2022.

These increases were partially offset by a decrease in net revenue of (i) $244.2 from our Grand Theft Auto franchise and (ii) $76.8 from our Borderlands franchise.

Net revenue from console games decreased by $143.5 and accounted for 44.1% of our total net revenue for the nine months ended December 31, 2022, as compared to 72.4% for the prior year period.

The decrease was due to a decrease in net revenue from our Grand Theft Auto , Red Dead Redemption , and Borderlands franchises, partially offset by an increase in net revenue from our WWE 2K franchise, Tiny Tina's Wonderlands , and The Quarry .

Net revenue from PC and other decreased by $47.3 and accounted for 9.3% of our total net revenue for the nine months ended December 31, 2022, as compared to 15.9% for the prior year period.

The decrease was due to a decrease in net revenue from our Borderlands , Grand Theft Auto , and Red Dead Redemption franchises, partially offset by an increase in net revenue from Tiny Tina's Wonderlands and Zynga.

Net revenue from mobile increased by $1,519.7 and accounted for 46.6% of our total net revenue for nine months ended December 31, 2022, as compared to 11.7% for the prior year period.

The increase was primarily due to net revenue of $1,524.0 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 $837.1 million and accounted for 94.4% of our total net revenue for the six months ended September 30, 2022, as compared to 90.9% for the prior year period.

The increase was primarily due to net revenue of $915.5 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons!

Net revenue from digital online channels increased by $1,378.1 and accounted for 94.6% of our total net revenue for the nine months ended December 31, 2022, as compared to 89.9% for the prior year period.

The increase was primarily due to net revenue of $1,546.6 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 Tiny Tina's Wonderlands .

These increases in net revenue from digital online channels 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 $12.7 million and accounted for 5.6% of our total net revenue for the six months ended September 30, 2022, as compared to 9.1% for the prior year period.

The decrease was due to a decrease in net revenue from our NBA 2K franchise, partially offset by an increase in net revenue from The Quarry.

Net revenue from physical retail and other channels decreased by $49.2 and accounted for 5.4% of our total net revenue for the nine months ended December 31, 2022, as compared to 10.1% for the prior year period.

The decrease was due to a decrease in net revenue from our Grand Theft Auto and NBA 2K franchises, 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 $791.5 million and accounted for 77.2% of net revenue for the six months ended September 30, 2022, as compared to 68.0% of net revenue for the prior year period.

The increase was primarily due to net revenue of $902.4 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Words With Friends, and Merge Dragons!

Net revenue from recurrent consumer spending increased by $1,359.1 and accounted for 77.9% of net revenue for the nine months ended December 31, 2022, as compared to 65.4% of net revenue for the prior year period.

The increase was primarily due to net revenue of $902.4 from 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.

The increase in net revenue from recurrent consumer spending was partially offset by a decrease in net revenue from our Grand Theft Auto franchise.

Net revenue from full game and other increased by $32.9 million and accounted for 22.8% of net revenue for the six months ended

September 30, 2022 as compared to 32.0% of net revenue for the prior year period.

The increase was due to an increase in net revenue from The Quarry , Tiny Tina's Wonderlands , and our NBA 2K and WWE 2K franchises, partially offset by a decrease in net revenue from our Borderlands, Grand Theft Auto, and Red Dead Redemption franchises .

Gross profit as a percentage of net revenue for the six months ended September 30, 2022 was 53.9% as compared to 53.0% for the prior year period.

The increase in gross profit as a percentage of net revenue was due to lower internal royalties due to the timing of when royalties are earned and (ii) lower capitalized software amortization due to impairments recognized in the prior year period, 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 $306.7 million and accounted for 38.9% of our total net revenue for the six months ended September 30, 2022, as compared to 39.7% in the prior year period.

Net revenue from full game and other decreased by $30.2 and accounted for 22.1% of net revenue for the nine months ended December 31, 2022 as compared to 34.6% of net revenue for the prior year period.

The decrease was due to an decrease in net revenue from our Grand Theft Auto , Borderlands, and Red Dead Redemption franchises, partially offset by an increase in net revenue from The Quarry , Tiny Tina's Wonderlands , our WWE 2K franchise , Zynga, and Marvel's Midnight Suns.

Gross profit as a percentage of net revenue for the nine months ended December 31, 2022 was 52.8% as compared to 55.8% for the prior year period.

The decrease in gross profit as a percentage of net revenue was due to (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, partially offset by (i) lower internal royalties due to the timing of when royalties are earned and (ii) lower capitalized software amortization due to impairments recognized in the prior year period.

Net revenue earned outside of the United States increased by $459.3 and accounted for 38.2% of our total net revenue for the nine months ended December 31, 2022, as compared to 40.1% in the prior year period.

The increase in net revenue outside of the United States was primarily due to net revenue of $346.5 from our May 2022 acquisition of Zynga, including top contributors Empires & Puzzles , Rollic's hyper-casual portfolio, Toon Blast , Zynga Poker , and Merge Dragons!

, as well as an increase in net revenue from Top Eleven, partially offset by a decrease in net revenue from our Grand Theft Auto and Borderlands franchises.

Changes in foreign currency exchange rates decreased net revenue by $20.8 million and decreased gross profit by $8.8 million for the six months ended September 30, 2022 as compared to the prior year period.

, partially offset by a decrease in net revenue from our Grand Theft Auto franchise.

Changes in foreign currency exchange rates decreased net revenue by $29.0 and decreased gross profit by $15.2 for the nine months ended December 31, 2022 as compared to the prior year period.

Operating Expenses

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Selling and marketing $ 1,163.1 29.8 % $ 375.2 14.6 % $ 787.9 210.0 %

General and administrative 451.7 18.1 % 232.2 13.9 % 219.5 94.5 %

Research and development 655.2 16.8 % 310.5 12.1 % 344.7 111.0 %

General and administrative 620.6 15.9 % 363.0 14.1 % 257.6 71.0 %

Depreciation and amortization 86.0 2.2 % 44.6 1.7 % 41.4 92.8 %

2 unchanged sentences

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

Selling and marketing 53.2 $ 15.2

General and administrative 90.6 $ 50.3

Research and development 88.7 38.0

Changes in foreign currency exchange rates decreased total operating expenses by $35.8 million for the six months ended September 30, 2022, as compared to the prior year period.

Selling and marketing 76.2 22.4

Selling and marketing expenses increased by $476.5 million for the six months ended September 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!

Changes in foreign currency exchange rates decreased total operating expenses by $57.1 for the nine months ended December 31, 2022, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses increased by $787.9 for the nine months ended December 31, 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!

General and administrative

General and administrative expenses increased by $219.5 million for the six months ended September 30, 2022, as compared to the prior year period, due to increases in (i) professional fees related to our acquisition and integration of Zynga and (ii) personnel expenses for additional headcount, including our acquisition of Zynga.

General and administrative expenses for the six months ended September 30, 2022 and 2021 included occupancy expense (primarily rent, utilities and office expenses) of $29.5 million and $15.9 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $223.2 million for the six months ended September 30, 2022, as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount, including related to our acquisition of Zynga.

Research and development expenses increased by $344.7 for the nine months ended December 31, 2022, as compared to the prior year period, due primarily to increases in (i) personnel expenses due to increased headcount, including related to our acquisition of Zynga and (ii) production and development expenses related to Zynga.

General and administrative

General and administrative expenses increased by $257.6 for the nine months ended December 31, 2022, as compared to the prior year period, due to increases in (i) professional fees related to our acquisition and integration of Zynga and (ii) personnel expenses for additional headcount, including our acquisition of Zynga.

General and administrative expenses for the nine months ended December 31, 2022 and 2021 included occupancy expense (primarily rent, utilities and office expenses) of $45.8 and $25.6, respectively, related to our development studios.

Depreciation and Amortization

Depreciation and amortization expenses for the six months ended September 30, 2022 increased by $22.4 million, as compared to the prior year period, due primarily to acquired intangible assets and depreciation expense related to Zynga.

Depreciation and amortization expenses for the nine months ended December 31, 2022 increased by $41.4, 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 $79.8 million for the six months ended September 30, 2022, as compared to $1.6 million f or the prior year period.

Interest and other, net was expense of $108.1 for the nine months ended December 31, 2022, as compared to $7.2 f or the prior year period.

The increase in expense 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 14 - Acquisitions ) and foreign currency losses.

Gain (loss) on fair value adjustments, net

Gain (loss) on fair value adjustments, net was a loss of $37.7 for the six months ended September 30, 2022 as compared to a gain of $2.4 for the prior year period.

Gain (loss) on fair value adjustments, net was a loss of $36.6 for the nine months ended December 31, 2022 as compared to a gain of $6.1 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 14 - Acquisitions ).

Benefit from Income Taxes

The benefit from income taxes for the six months ended September 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 for income taxes was $46.4 for the six months ended September 30, 2022 as compared to a provision for income taxes of $28.9 for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 11.4% for the six months ended September 30, 2022 was due primarily to a tax expense of $22.6 related to the geographic mix of earnings, nondeductible expense of $8.2 related to the settlement of convertible debt, tax expense of $6.0 from employee stock-based compensation, offset by benefits of $30.9 from tax credits.

In the prior year period, when compared to the statutory rate of 21.0%, the effective tax rate of 15.1% for the six months ended September 30, 2021 was due primarily to a tax benefit of $11.4 as a result of tax credits anticipated to be utilized and excess tax benefits of $4.0 from employee stock-based compensation offset by a tax expense of $2.4 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.

The benefit from income taxes for the nine months ended December 31, 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 for income taxes was $93.1 for the nine months ended December 31, 2022 as compared to a provision for income taxes of $36.5 for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 15.3% for the nine months ended December 31, 2022 was due primarily to tax expense of $20.3 related to geographic mix of earnings, tax expense of $6.5 from employee stock-based compensation, nondeductible expense of $10.0 related to the settlement of convertible debt, offset by benefits of $31.9 from tax credits.

In 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 due to tax credits and excess tax benefits of $13.9 from employee stock-based compensation, offset by tax expense of $5.0 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.

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, increased expense from employee stock-based compensation, nondeductible expense related to the settlement of convertible debt and by the geographic mix of earnings.

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The 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.

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

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

For the nine months ended December 31, 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.

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.

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.

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 Consolidated Financial Statements for the six months ended September 30, 2022.

The ARPA did not have a material impact on our Consolidated Financial Statements for the

nine months ended December 31, 2022.

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

corporations or their specified affiliates.

The alternative minimum tax and the excise tax are effective in taxable years beginning after December 31, 2022.

The CAMT is effective for taxable year ending March 31, 2024.

It is possible that the CAMT could result in an additional tax liability over the regular federal corporate tax liability in a particular year based on differences between book and taxable income.

We will continue to evaluate the potential impact of the Inflation Reduction Act may have on our operations and Consolidated Financial Statements in future periods.

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

For the six months ended September 30, 2022, net loss was $361.0 million, as compared to income of $162.5 million in the prior year period.

For the six months ended September 30, 2022, diluted loss per share was $2.38 as compared to diluted earnings per share of $1.39 in the prior year period.

Basic weighted average shares of 151.8 million were 34.9 million shares higher as compared to the prior year period, due to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes.

For the nine months ended December 31, 2022, net loss was $514.4, as compared to income of $307.1 in the prior year period.

For the nine months ended December 31, 2022, diluted loss per share was $3.27 as compared to diluted earnings per share of $2.63 in the prior year period.

Basic weighted average shares of 157.2 were 40.4 shares higher as compared to the prior year period, due to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes.

See Note 10 - (Loss) Earnings Per Share to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.

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Short-term Investments

As of September 30, 2022, we had $348.0 of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations.

As of December 31, 2022, we had $268.6 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 September 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.

As of December 31, 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 were issued under an indenture between the Company and The Bank of New York Mellon, as trustee.

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

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

During the three months ended September 30, 2022, we made interest payments of $15.0.

During the nine months ended December 31, 2022, we made interest payments of $15.0.

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.

During the three and nine months ended December 31, 2022, we made interest payments of $31.8.

The proceeds were used to finance a portion of our acquisition of Zynga.

Credit Agreement

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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.

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).

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 $299.5 available for additional borrowings as of September 30, 2022.

On September 22, 2022, we repriced our outstanding borrowing at approximately 4.84%.

In December 2022, we fully repaid the $200.0 drawdown.

As of December 31, 2022, there were no borrowings under the 2022 Credit Agreement, and we had approximately $499.5 available for additional borrowings.

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

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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 79.9% and 79.8% of net revenue during the six months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022 and March 31, 2022, five customers accounted for 68.9% 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 September 30, 2022 and March 31, 2022, respectively.

We had two customers who accounted for 32.4% and 18.6% of our gross accounts receivable as of September 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.

Our five largest customers accounted for 79.7% and 79.2% of net revenue during the nine months ended December 31, 2022 and 2021, respectively.

As of December 31, 2022 and March 31, 2022, five customers accounted for 57.6% and 72.8% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 34.7% and 63.8% of such balances at December 31, 2022 and March 31, 2022, respectively.

We had two customers who accounted for 21.4% and 13.3% of our gross accounts receivable as of December 31, 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 September 30, 2022, the amount of cash and cash equivalents held outside of the U.S.

As of December 31, 2022, the amount of cash and cash equivalents held outside of the U.S.

by our foreign subsidiaries was $738.9.

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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.

Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance, and other conditions.

Repurchases are subject to the availability of stock,

prevailing market conditions, the trading price of the stock, our financial performance, and other conditions.

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 September 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 September 30, 2022, 10.0 shares of our common stock remained available for repurchase under the share repurchase program.

During the three months ended December 31, 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 December 31, 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:

Six Months Ended

September 30,

Nine Months Ended

(millions of dollars) 2022 2021

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Net change in cash, cash equivalents, and restricted cash and cash equivalents $ (893.0) $ (703.0)

At September 30, 2022, we had $1,657.4 of cash and cash equivalents and restricted cash and cash equivalents, compared to $2,195.3 at March 31, 2022.

At December 31, 2022, we had $1,302.3 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 14 - 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.

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 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.

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In fiscal year 2023, we anticipate capital expenditures to be approximately $170.0.

During the six months ended September 30, 2022, capital expenditures were $99.4.

During the nine months ended December 31, 2022, capital expenditures were $137.7.

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 September 30, 2022 and 2021, 39.5% and 40.0%, respectively, of our net revenue was earned outside of the United States.

For the three months ended December 31, 2022 and 2021, 37.0% and 40.8%, 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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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