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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-02-07 · 216 added, 366 removed, 172 unchanged (77% 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 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.

The statements contained herein, which are not historical facts, including statements relating to Take-Two Interactive Software, Inc.'s ("Take-Two," the "Company," "we," "us," or similar pronouns) outlook, 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.

Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and uncertainties including the uncertainty of the impact of the COVID-19 pandemic and measures taken in response thereto;

the effect that measures taken to mitigate the COVID-19 pandemic have on our operations, including our ability to timely deliver our titles and other products, and on the operations of our counterparties, including retailers, including digital storefronts and platform partners, and distributors;

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;

Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and uncertainties including risks relating to our combination with Zynga Inc.

(the "Zynga Acquisition"), such as the ability of the company to retain key personnel subsequent to the Zynga Acquisition;

the risks of conducting business internationally;

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

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volatility in foreign currency exchange rates;

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 acquisition;

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

other risks included herein;

our dependence on key management and product development personnel;

our dependence on our NBA 2K and Grand Theft Auto products and our ability to develop other hit titles;

our ability to leverage opportunities on PlayStation®5 and Xbox Series X|S;

factors affecting our mobile business, such as player acquisition costs;

the timely release and significant market acceptance of our games;

the ability to maintain acceptable pricing levels on our games;

and other risks included herein;

as well as, but not limited to, the risks and uncertainties discussed 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, 2023;

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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 $9,521.8, 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.

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.

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

Debt Transactions

On April 14, 2023, we completed our offering and sale of $1,000.0 aggregate principal amount of our senior notes, consisting of $500.0 principal amount of our 5.000% Senior Notes due 2026 (the "2026 Notes") and $500.0 principal amount of our 4.950% Senior Notes due 2028 (the "2028 Notes").

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, 2025 Notes, 2026 Notes, 2027 Notes, and 2028 Notes, the "Senior Notes").

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

We will pay interest on the 2024 Notes, 2026 Notes, and 2028 Notes semi-annually on March 28 and September 28 of each year, commencing September 28, 2022 for the 2024 Notes and September 28, 2023 for the 2026 Notes and 2028 Notes.

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.

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 (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.

The proceeds from the issuances of the Senior Notes were used to finance a portion of our acquisition of Zynga and repay certain of our debt.

On June 5, 2023, pursuant to a tender offer, we purchased and retired $650.0 in aggregate principal amount of our 2024 Notes, resulting in a remaining principal amount of $350.0 recorded within Short-term debt, net on our Condensed Consolidated Balance Sheet.

During the three months ended June 30, 2023, we recognized a debt extinguishment gain of approximately $7.0, net of unamortized debt discount and debt issuance costs recorded within Interest and other, net in our Condensed Consolidated Statement of Operations.

The purchase of a portion of our 2024 Notes was funded with proceeds from the issuance of the 2026 Notes and 2028 Notes.

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 December 31, 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 of the next installment in the Grand Theft Auto franchise.

We immediately took steps to isolate and contain the incident.

Rockstar Games did not experience and does not anticipate any disruption to its current services nor any long-term effect on its development timelines as a result of this incident.

Subsequently, also in September 2022, we became aware that an unauthorized third party illegally accessed credentials for a vendor platform that 2K Games uses to provide help desk support to its customers.

The unauthorized party sent a communication to certain players containing a malicious link.

2K Games immediately notified all affected users and took steps to restrict further unauthorized activity until service was restored.

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 enhance further our cybersecurity protections.

We fully drew down on the Term Loan on June 22, 2022 at approximately 3.60%.

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

A portion of the proceeds from the 2026 Notes and 2028 Notes were used to fully repay the Term Loan on April 27, 2023.

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 Zynga.

We develop, operate, 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.

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

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.

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

With our diverse portfolio that spans all key platforms and numerous genres, we strive to create the highest quality, most engaging interactive entertainment franchises and captivate our global audience.

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

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

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

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

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

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.

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.

We derive substantially all of our revenue from the sale of our interactive entertainment content, which includes the sale of internally developed software titles and software titles developed by third parties, the sale of in-game virtual items and advertising, and live services on console, PC, and mobile.

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, Finland, Germany, Hungary, India, Serbia, South Korea, Spain, Turkey, the United Kingdom (U.K.), and the United States (U.S.).

Rockstar Games.

Rockstar Games' strategy is to develop a limited number of titles that are known for their quality and longevity in the market for which they can create sequels and incremental revenue opportunities through virtual currency, add-on content, and in-game purchases.

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

We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto , Max Payne , Midnight Club , Red Dead Redemption , and other popular franchises, to continue to be a leader in the action/adventure product category and to create groundbreaking entertainment.

We believe that Rockstar Games has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 390 million units.

Our most recent installment, Grand Theft Auto V , which was released in 2013, has sold-in more than 175 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 50 million units worldwide.

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

Noire , Bully, and Manhunt franchises.

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

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 is well underway.

We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto , LA Noire , Max Payne , Midnight Club , Red Dead Redemption , and other popular franchises, to continue to be a leader in the action/adventure product category and to create groundbreaking entertainment.

We believe that Rockstar Games has established a uniquely original, popular, cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 400 units worldwide.

Our most recent installment, Grand Theft Auto V , which was released in 2013, has sold-in over 180 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 50 units worldwide to date.

Rockstar Games confirmed that active development for the next entry in the Grand Theft Auto franchise is well underway with more details to be shared over time.

Rockstar Games continues to expand on its established series by developing sequels, offering downloadable episodes, and providing additional content.

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

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

In recent years, 2K has expanded its offerings to include several new franchises that are expected to diversify its slate of games and provide opportunities for sequels and post-launch monetization.

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

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

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

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

2K also publishes externally developed franchises 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 .

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

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

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

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

2K also publishes mobile titles, including WWE SuperCard .

We have expanded our relationship with the NBA through the NBA 2K League , a groundbreaking competitive gaming league jointly owned by us and the NBA.

Private Division.

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

Private Division actively

establishes relationships with new studios, and has announced upcoming projects with Bloober Team, Evening Star, Game Freak, Moon Studios, Weta Workshop, and Yellow Brick Games.

Kerbal Space Program 2 was released for early access in fiscal year 2023.

Private Division also previously released The Outer Worlds and Ancestors:

The Humankind Odyssey .

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, 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.

Our Zynga label 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 strategy is to have numerous games in concept development and to determine which titles are best suited for soft launch and worldwide launch based on the achievement of various milestones and KPI thresholds.

Zynga's diverse portfolio of popular game franchises has been downloaded more than six billion times, 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 mobile titles, including Fill the Fridge!, Parking Jam 3D , Pull the Pin, Twisted Tangle, and Tangled Snakes .

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.

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

NBA 2K Online , our free-to-play NBA simulation game that is based on the console edition of NBA 2K , which was co-developed by 2K and Tencent, is the top online PC sports game in China with more than 55 million registered users.

Expand International Business.

The global market for interactive entertainment continues to grow, and we seek to increase our presence internationally, particularly in Asia, the Middle East, and Latin America.

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

2K has secured a multi-year license from the NBA to develop an online version of our NBA simulation game in China, Taiwan, Hong Kong, and Macau.

Our first such title, NBA 2K Online , a free-to-play NBA simulation game based on the console edition of NBA 2K , which was co-developed by 2K and Tencent, is the top online PC sports game in China with over 60 million registered users.

We have released two iterations of NBA 2K Online and continue to enhance the title with new features.

Additionally, we see a long-term opportunity to expand our mobile efforts across various emerging markets, particularly throughout Asia.

We have expanded our relationship with the NBA through the NBA 2K League.

This groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises and several international partners.

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

head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up.

The NBA 2K League is currently gearing up for its sixth season.

We are also a direct publisher in Japan and South Korea.

While we retain title to all intellectual property, in some regions, local publishers, under license agreements, are responsible for localization of software content, distribution, and marketing of the products in their respective local markets.

Trends and Factors Affecting our Business

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Our financial results are affected by the timing of our product releases and the commercial success of those titles.

Generally, a significant portion of our revenue has been derived from a few popular franchises, particularly around new releases within those franchises.

Some of these franchises have annual or bi-annual releases.

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% of our net revenue for the nine months ended December 31, 2022.

Sales of Grand Theft Auto products generated 13.6% of our net revenue for the three months ended June 30, 2023.

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

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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 79.7% 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.

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.

For example, in response to the conflict in Ukraine, we suspended sales of our products in Russia and Belarus, which had a negative impact on our financial results.

Actions taken to date and other potential actions could result in additional negative impact in future periods.

The economic environment has affected our customers in the past, and may do so in the future.

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

Hardware Platforms.

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.

We derive a substantial portion of our revenue from the sale of products made for video game consoles manufactured by third parties.

Such console revenue comprised 39.3% of our net revenue for the three months ended June 30, 2023.

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 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.

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.

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

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.

As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 96.5% of our net

revenue for the three months ended June 30, 2023.

We expect online delivery of games and game offerings 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.

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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.

Accordingly, the overall product mix between mobile and other game sales may affect our gross margin percentage.

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 , 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.

During fiscal year 2024, 2K released LEGO 2K Drive, and Private Division released After Us.

To date we have announced that, during the remainder of fiscal year 2024, 2K will release NBA 2K24 and WWE 2K24 ;

Zynga will release Star Wars Hunters and Top Troops ;

and Private Division will release Penny's Big Breakaway .

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

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capitalization and recognition of software development costs and licenses;

fair value estimates including valuation of goodwill, intangible assets, and long-lived assets;

fair value estimates including valuation of goodwill, and intangible assets;

valuation and recognition of stock-based compensation;

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.

and income taxes.

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, 2023.

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Net Bookings were as follows:

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

Three Months Ended June 30,

2023 2022 Increase/

(decrease) % Increase/

(decrease) 2022 2021 Increase/

(decrease) % Increase/

Net Bookings $ 1,201.5 $ 1,002.5 $ 199.0 19.9 %

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 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 , which released in March 2022 ;

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

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.

For the three months ended June 30, 2023, Net Bookings increased by $199.0 as compared to the prior year period.

The increase was primarily due to an increase in Net Bookings of $332.0 from Zynga, which we acquired in May 2022 (refer to Note 13 - Acquisitions ), including from our hyper-casual mobile portfolio, which benefited from our November 2022 acquisition of Popcore (refer to Note 13 - Acquisitions ), and other top contributors Empires & Puzzles , Toon Blast , Merge Dragons !, and Words With Friends , as well as an increase in Net Bookings from LEGO 2K Drive , which released in May 2023.

These increases were partially offset by a decrease in Net Bookings from Tiny Tina's Wonderlands , which released in March 2022;

The Quarry , which released in June 2022;

and our NBA 2K and WWE 2K 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,

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

Three Months Ended June 30,

(millions of dollars) 2023 2022

7 unchanged sentences

Total operating expenses 883.5 68.8 % 704.1 63.9 %

(Loss) income from operations (172.9) (12.3) % 154.1 17.1 % (462.8) (11.9) % 344.7 13.4 %

Loss from operations (204.3) (15.9) % (37.4) (3.4) %

Interest and other, net (25.4) (2.0) % (29.3) (2.7) %

Gain (loss) on fair value adjustments, net 0.8 0.1 % (39.6) (3.6) %

(Loss) income before income taxes (200.1) (14.2) % 152.2 16.8 % (607.5) (15.6) % 343.6 13.3 %

(Benefit from) provision for income taxes (46.7) (3.3) % 7.6 0.8 % (93.1) (2.4) % 36.5 1.4 %

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

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

2022 2021 2022 2021

Net revenue by geographic region:

United States $ 886.8 63.0 % $ 534.9 59.2 % $ 2,412.6 61.8 % $ 1,543.0 59.9 %

International 521.0 37.0 % 368.4 40.8 % 1,491.1 38.2 % 1,031.8 40.1 %

Loss before income taxes (228.9) (17.8) % (106.3) (9.6) %

Benefit from income taxes 22.9 1.8 % 2.3 0.2 %

Net loss $ (206.0) (16.0) % $ (104.0) (9.4) %

Three Months Ended June 30,

Net revenue by platform:

2 unchanged sentences

PC and other 100.4 7.8 % 125.6 11.4 %

Net revenue by distribution channel:

Digital online $ 1,336.7 94.9 % $ 795.7 88.1 % $ 3,693.7 94.6 % $ 2,315.6 89.9 %

Physical retail and other 71.1 5.1 % 107.6 11.9 % 210.0 5.4 % 259.2 10.1 %

Net revenue by content:

1 unchanged sentence

Full game and other 216.3 16.8 % 276.8 25.1 %

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

Net revenue by distribution channel:

Digital online $ 1,240.0 96.5 % $ 1,037.8 94.1 %

Physical retail and other 44.7 3.5 % 64.6 5.9 %

Net revenue by geographic region:

United States $ 803.9 62.6 % $ 682.9 61.9 %

International 480.8 37.4 % 419.5 38.1 %

Three Months Ended June 30, 2023 Compared to June 30, 2022

(millions of dollars) 2023 % 2022 % Increase/

1 unchanged sentence

Total net revenue $ 1,284.7 100.0 % $ 1,102.4 100.0 % $ 182.3 16.5 %

Software development costs and royalties (1) 294.1 20.9 % 43.1 4.8 % 251.0 582.4 %

Game intangibles 186.9 14.5 % 96.3 8.7 % 90.6 94.1 %

Product costs 178.9 13.9 % 116.9 10.6 % 62.0 53.0 %

Software development costs and royalties (1) 115.7 9.0 % 68.8 6.2 % 46.9 68.2 %

Internal royalties 72.6 5.7 % 93.4 8.5 % (20.8) (22.3) %

3 unchanged sentences

(1) Includes $6.7 and $(33.4) of stock-based compensation expense in 2023 and 2022, respectively, in software development costs and royalties.

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 $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 $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 $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.

For the three months ended June 30, 2023, net revenue increased by $182.3 as compared to the prior year period.

The increase was primarily due to the increase in net revenue from Zynga of $320.8, which we acquired in May 2022 (refer to Note 1 3 - Acquisitions ), including from our hyper-casual mobile portfolio, which benefited from our November 2022 acquisition of Popcore (refer to Note 13 - Acquisitions ), and other top contributors Toon Blast , Merge Dragons!, Empires & Puzzles , and Words With Friends .

These increases were partially offset by a decrease in net revenue of (i) $36.0 from Tiny Tina's Wonderlands , which released in March 2022, (ii) $27.6 from The Quarry , which released in June 2022, (iii) $26.5 from our Grand Theft Auto franchise, and (iv) $23.0 from our NBA 2K franchise.

Net revenue from mobile increased by $310.4 and accounted for 52.9% of our total net revenue for three months ended June 30, 2023, as compared to 33.5% for the prior year period.

The increase was primarily due to an increase in net revenue from mobile from Zynga, including from our hyper-casual mobile portfolio, and other top contributors Toon Blast , Merge Dragons !, Empires & Puzzles , and Words With Friends .

Net revenue from console games decreased by $102.9 and accounted for 39.3% of our total net revenue for the three months ended June 30, 2023, as compared to 55.1% for the prior year period.

The decrease in net revenue from console games was due to a decrease in net revenue from Tiny Tina's Wonderlands , The Quarry , and our Grand Theft Auto and NBA 2K franchises.

Net revenue from PC and other decreased by $25.2 and accounted for 7.8% of our total net revenue for the three months ended June 30, 2023, as compared to 11.4% for the prior year period.

The decrease in net revenue from PC and other was primarily due to a decrease in net revenue from Tiny Tina's Wonderlands , our BioShock and XCOM franchises, The Quarry, and our Grand Theft Auto franchise.

Recurrent consumer spending ("RCS") 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 $242.8 and accounted for 83.2% of net revenue for the three months ended June 30, 2023, as compared to 74.9% of net revenue for the prior year period.

The increase in net revenue from recurrent consumer spending was primarily due to an increase in net revenue from Zynga, including from our hyper-casual mobile portfolio, and other top contributors Toon Blast , Merge Dragons !, Empires & Puzzles , and Words With Friends.

These increases were partially offset by a decrease in net revenue from our Grand Theft Auto franchise, Tiny Tina's Wonderlands , and our WWE 2K franchise .

Net revenue from full game and other decreased by $60.5 and accounted for 16.8% of net revenue for the three months ended June 30, 2023 as compared to 25.1% 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 The Quarry , Tiny Tina's Wonderlands , and our NBA 2K franchise.

This decrease was partially offset by an increase in net revenue from LEGO 2K Drive , which released in May 2023.

Net revenue from digital online channels increased by $202.2 and accounted for 96.5% of our total net revenue for the three months ended June 30, 2023, as compared to 94.1% for the prior year period.

The increase was primarily due to an increase in digital net revenue from Zynga, including from our hyper-casual mobile portfolio, and other top contributors Toon Blast , Merge Dragons !, Empires & Puzzles , and Words With Friends .

This increase was partially offset by a decrease in net revenue from Tiny Tina's Wonderlands, our Grand Theft Auto and NBA 2K franchises, The Quarry , and our WWE 2K franchise .

Net revenue from physical retail and other channels decreased by $19.9 and accounted for 3.5% of our total net revenue for the three months ended June 30, 2023, as compared to 5.9% 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 The Quarry , our NBA 2K franchise, Tiny Tina's Wonderlands , and our WWE 2K franchise.

The decreases were partially offset by an increase in net revenue from LEGO 2K Drive .

Gross profit as a percentage of net revenue for the three months ended June 30, 2023 was 52.9% as compared to 60.5% 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 acquired in connection with our Zynga acquisition, (ii) higher capitalized software amortization due to

lower forfeitures of awards, and (iii) higher product costs for fees paid to platform partners due to an increase in mobile revenue as a result of the Zynga acquisition, partially offset by (i) lower development royalties due to the timing of releases and (ii) lower internal royalties due to the timing of when royalties are earned.

Changes in foreign currency exchange rates increased net revenue by $1.2 and increased gross profit by $1.2 for the three months ended June 30, 2023 as compared to the prior year period.

Operating Expenses

8 unchanged sentences

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

Research and development $ 29.4 $ 13.2

General and administrative 25.9 16.5

Selling and marketing $ 24.3 $ 35.7

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.

Research and development

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 24.1 20.5

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 $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 $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 $1.1 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 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.

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 or the expiration of the statute of limitations could have an impact on our effective tax rate in future periods.

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.

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.

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 December 31, 2022.

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

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 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.

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

(millions of dollars) 2022 % 2021 % Increase/

(decrease) % Increase/

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

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

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 %

Gross profit $ 2,062.1 52.8 % $ 1,438.0 55.8 % $ 624.1 43.4 %

(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 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 $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 $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 $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 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!

, 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

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

(decrease) % Increase/

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

Research and development 23.6 21.1

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 %

Total operating expenses (1)

$ 2,524.9 64.7 % $ 1,093.3 42.5 % $ 1,431.6 130.9 %

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

General and administrative 90.6 $ 50.3

Research and development 88.7 38.0

Selling and marketing 76.2 22.4

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.

Changes in foreign currency exchange rates decreased total operating expenses by $0.9 for the three months ended June 30, 2023, 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!

Selling and marketing expenses increased by $128.8 for the three months ended June 30, 2023, as compared to the prior year period, due primarily to marketing expense for titles from Zynga, including our hyper-casual mobile portfolio, Toon Blast , Merge Dragons!

, Empires & Puzzles , and Toy Blast , as well as marketing expense for LEGO 2K Drive .

Research and development

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.

Research and development expenses increased by $71.4 for the three months ended June 30, 2023, as compared to the prior year period, due primarily to an increase in personnel expense due to increased headcount, including from our Zynga acquisition.

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.

General and administrative expenses decreased by $38.9 for the three months ended June 30, 2023, as compared to the prior year period, due primarily to a decrease in professional fees related to our acquisition and integration of Zynga, partially offset by an increase in personnel expense for additional headcount, primarily due to Zynga;

the fair value of the contingent earn-out liability related to our acquisition of Popcore;

and rent expense, primarily due to Zynga.

General and administrative expenses for the three months ended June 30, 2023 and 2022 included occupancy expense (primarily rent, utilities and office expenses) of $16.8 and $12.9, respectively, related to our development studios.

Depreciation and amortization

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.

Depreciation and amortization expenses increased by $18.1 for the three months ended June 30, 2023 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 $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.

Interest and other, net was expense of $25.4 for the three months ended June 30, 2023, as compared to $29.3 for the prior year period.

The net decrease in expense was due primarily to an increase in interest income primarily due to increases in interest rates, a gain on debt extinguishment recognized on the partial repayment of our 2024 Notes, and a decrease in interest expense related to our bridge loan commitment in connection with our acquisition of Zynga in the prior year.

These decreases were partially offset by an increase in foreign currency losses, due primarily to the devaluation of the Turkish Lira, and an increase in interest expense related to our 2026 Notes and 2028 Notes (refer to Note 9 - Debt ).

Gain (loss) on fair value adjustments, net

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 ).

Gain (loss) on fair value adjustments, net was a gain of $0.8 for the three months ended June 30, 2023 as compared to a loss of $39.6 for the prior year period.

The change was due primarily to a loss in the prior year period, which was due primarily to our Convertibles Notes, partially offset by a gain related to our Capped Calls, both as a result of our Zynga Acquisition, with no similar loss in the current year.

Benefit from income taxes

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.

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.

The benefit from income taxes for the three months ended June 30, 2023 is based on our projected annual effective tax rate for fiscal year 2024, adjusted for specific items that are required to be recognized in the period in which they are incurred.

The benefit from income taxes was $22.9 for the three months ended June 30, 2023 as compared to the benefit from income taxes of $2.3 for the prior year period.

When compared to the statutory rate of 21%, the effective tax rate of 10.0% for the three months ended June 30, 2023 was due primarily to tax expense of $25.4 related to an increase in the U.S.

valuation allowance, tax expense of $2.4 related to geographic mix of earnings, tax expense of $5.0 from employee stock-based compensation offset by benefits of $20.4 from tax credits.

In 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.

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, decreased expense from employee stock-based compensation and by the geographic mix of earnings in the current period offset by increased expenses related to an increase in the U.S.

valuation allowance.

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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.

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 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.

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.

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.

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

nine months ended December 31, 2022.

The ARPA did not have a material impact on our Consolidated Financial Statements for the three months ended June 30, 2023.

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

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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 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.

We estimate no tax liability relating to CAMT for the current fiscal year.

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

Net loss and Loss per share

For the three months ended June 30, 2023, net loss was $206.0, as compared to a net loss of $104.0 in the prior year period.

Basic and diluted loss per share for the three months ended June 30, 2023 was $1.22, as compared to basic and diluted loss per share of $0.76 in the prior year period.

Basic weighted average shares of 169.4 were 32.9 shares higher as compared to the prior year period basic weighted average shares, due primarily to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes as well as normal stock compensation activity, including vests.

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

Liquidity and Capital Resources

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

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Short-term investments

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.

As of June 30, 2023, we had $109.2 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, 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 June 30, 2023, 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.

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, 2025 Notes, 2026 Notes, 2027 Notes, and 2028 Notes, the "Senior Notes").

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.

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.

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.

The proceeds from the issuances of the Senior Notes were used to finance a portion of our acquisition of Zynga and repay certain of our debt.

The purchase of a portion of our 2024 Notes was funded with proceeds received from the 2026 Notes and 2028 Notes.

Credit Agreement

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.

On May 23, 2022, we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement").

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.

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").

We fully drew down on the Term Loan on June 22, 2022 at approximately 3.60%.

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

Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (8.25% at June 30, 2023) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 5.14% at June 30, 2023, which rates are determined by the Company's credit rating.

As of June 30, 2023, there were no borrowings under the 2022 Credit Agreement, and we had approximately $499.5 available for additional borrowings.

Convertible Notes

In conjunction with the acquisition of Zynga on May 23, 2022 (refer to Note 13 - Acquisitions ), we entered into (a) the First Supplemental Indenture (the “2024 Supplemental Indenture”) to the Indenture, dated as of June 14, 2019 (the “2024 Indenture”), between Zynga and Computershare Trust Company, N.A.

(as successor to Wells Fargo Bank, National Association) (the “Convertible Notes Trustee”), relating to Zynga’s 0.25% Convertible Senior Notes due 2024 (the “2024 Convertible Notes”), and (b) the First Supplemental Indenture (the “2026 Supplemental Indenture” and, together with the 2024 Supplemental Indenture, the “Supplemental Indentures”) to the Indenture, dated as of December 17, 2020 (the “2026 Indenture” and, together with the 2024 Indenture, the “Indentures”), between Zynga and the Convertible Notes Trustee, relating to Zynga’s 0.00% Convertible Senior Notes due 2026 (the “2026 Convertible Notes” and, together with the 2024 Convertible Notes, the “Convertible Notes”).

As of the closing date of the acquisition, approximately $690.0 aggregate principal amount of the 2024 Convertible Notes was outstanding and approximately $874.5 aggregate principal amount of the 2026 Convertible Notes was outstanding.

Following the acquisition and according to the Supplemental Indentures, we assumed all of Zynga’s rights and obligations under the Indentures, and the Company guaranteed the payment and other obligations of Zynga under the Convertible Notes.

As a result of our acquisition of Zynga, the right to convert each one thousand dollar principal amount of such Convertible Notes into shares of Zynga common stock was changed into a right to convert such principal amount of such Convertible Notes into the number of units of Reference Property equal to the conversion rate in effect immediately prior to the closing of the Zynga Acquisition, in each case pursuant to the terms and procedures set forth in the applicable Indenture.

A unit of Reference Property is defined in each Indenture as 0.0406 shares of Take-Two common stock and $3.50 in cash, without interest, plus cash in lieu of any fractional shares of Take-Two common stock.

The 2024 Convertible Notes and 2026 Convertible Notes mature on June 1, 2024, and December 15, 2026, respectively, unless earlier converted, redeemed, or repurchased in accordance with their terms, respectively, prior to the maturity date.

Interest is payable semiannually on the 2024 Convertible Notes in arrears on March 1 and September 1 of each year.

The 2026 Convertible Notes do not bear regular interest, and the principal amount does not accrete.

The acquisition of Zynga constituted a Fundamental Change, a Make-Whole Fundamental Change, and a Share Exchange Event (each as defined in the Indentures) under the Indentures.

The effective date of the Fundamental Change, Make-Whole Fundamental Change and Share Exchange Event in respect of the Convertible Notes was May 23, 2022, and the related tender and conversion periods expired on June 22, 2022.

As a result, each holder of Convertible Notes had the right to tender its Convertible Notes to the Company for cash or surrender its Convertible Notes for conversion into the Reference Property at the applicable conversion rate, in each case pursuant to the terms and procedures set forth in the applicable Indenture.

As of the expiration of the Fundamental Change, Make-Whole Fundamental Change, and Share Exchange Event, (a) $0.3 aggregate principal amount of the 2024 Convertible Notes and (b) $845.1 aggregate principal amount of the 2026 Convertible Notes were tendered for cash.

In addition, (a) $668.3 aggregate principal amount of the 2024 Convertible Notes, and (b) no 2026 Convertible Notes were surrendered for conversion into the applicable Reference Property.

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 79.7% 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.

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

We believe our current cash and cash equivalents, short-term investments, and projected cash flows from operations, along with availability under our 2022 Credit Agreement, will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis.

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

For further discussion regarding the potential future impacts of the COVID-19 pandemic and related economic conditions on our business, refer to Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

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

Our five largest customers accounted for 79.9% and 80.8% of net revenue during the three months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023 and March 31, 2023, five customers accounted for 66.7% and 61.1% of our gross accounts receivable, respectively.

Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 63.5% and 50.3% of such balances at June 30, 2023 and March 31, 2023, respectively.

We had four customers who accounted for 19.4%, 17.2%, 16.5%, and 10.4% of our gross accounts receivable as of June 30, 2023, and three customers who accounted for 21.6%, 14.5%, and 14.2% of our gross accounts receivable as of March 31, 2023.

We did not have any additional customers that exceeded 10% of our gross accounts receivable as of June 30, 2023, and March 31, 2023.

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

We are monitoring the current global economic conditions, including credit markets and other factors as they relate to our customers in order to manage the risk of uncollectible accounts receivable.

We believe that our current cash and cash equivalents, short-term investments, and projected cash flow from operations, along with availability under our 2022 Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis.

As of June 30, 2023, the amount of cash and cash equivalents held outside of the U.S.

by our foreign subsidiaries was $465.4.

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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.

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.

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 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.

During the three months ended June 30, 2023, 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, 2023, 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

Three Months Ended

(millions of dollars) 2023 2022

Net cash provided by operating activities $ 5.0 $ 100.8

Net cash used in investing activities (2,814.8) (479.8)

Net cash provided by (used in) financing activities 1,904.6 (239.7)

Net cash provided by (used in) investing activities 38.1 (2,807.3)

Net cash (used in) provided by financing activities (20.8) 2,017.0

Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents 3.8 (14.7)

Net change in cash, cash equivalents, and restricted cash and cash equivalents $ 26.1 $ (704.2)

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 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.

At June 30, 2023, we had $1,260.7 of cash and cash equivalents and restricted cash and cash equivalents, compared to $1,234.6 at March 31, 2023.

The increase was due to Net cash provided by investing activities primarily related to our sales and maturities of available for sale securities, partially offset by our purchases of fixed assets.

To a lesser extent, the net increase was also due to Net cash provided by operating activities from sales of our products, partially offset by the timing of payments.

This net increase was partially offset by Net cash used in financing activities, primarily related to net share settlements of our restricted stock awards, partially offset by issuance of common stock and our net debt activity.

The debt activity included proceeds from the issuance of 2026 Notes and 2028 Notes offset by our partial repayment of 2024 Notes and repayment of the Term Loan (refer to Note 9 - Debt ).

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

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In fiscal year 2024, we anticipate capital expenditures to be approximately $180.0.

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

During the three months ended June 30, 2023, capital expenditures were $31.5.

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, 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.

For the three months ended June 30, 2023 and 2022, 37.4% and 38.1%, respectively, of our net revenue was earned outside 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.

Fluctuations in Quarterly Operating Results and Seasonality

We have experienced fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles;

variations in sales of titles developed for particular platforms;

market acceptance of our titles;

development and promotional expenses relating to the introduction of new titles;

sequels or enhancements of existing titles;

projected and actual changes in platforms;

the timing and success of title introductions by our competitors;

product returns;

changes in pricing policies by us and our competitors;

the accuracy of retailers' forecasts of consumer demand;

the size and timing of acquisitions;

the timing of orders from major customers;

and order cancellations and delays in product shipment.

We have experienced fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles, variations in sales of titles developed for particular platforms, market acceptance of our titles, development and promotional expenses relating to the introduction of new titles, sequels or enhancements of existing titles, projected and actual changes in platforms, the timing and success of title introductions by our competitors, product returns, changes in pricing policies by us and our competitors, the accuracy of retailers' forecasts of consumer demand, the size and timing of acquisitions, the timing of orders from major customers, and order cancellations and delays in product shipment.

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

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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