# TAKE TWO INTERACTIVE SOFTWARE INC (TTWO) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TAKE TWO INTERACTIVE SOFTWARE INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/946581/000162828022014580/ttwo-20220331.htm
Accession: 0001628280-22-014580
Filing date: 2022-05-17
Report date: 2022-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TTWO/
All MD&A years: /company/TTWO/mda/
Next year: /company/TTWO/mda/fy2023/ (FY 2023)

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our Business

    We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe. We develop and publish products principally through Rockstar Games, 2K, Private Division, and T2 Mobile Games. Our products are currently designed for console gaming systems and PC, including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms and cloud streaming services.

Recent Developments

Pending Acquisition.    On January 9, 2022, we entered into a definitive merger agreement to acquire Zynga Inc. ("Zynga"), a leading developer of mobile games. Under the terms and subject to the conditions of the merger agreement, Zynga stockholders will receive $3.50 in cash and a number of shares of our common stock equal to the exchange ratio for each share of Zynga common stock outstanding at the closing. The transaction is valued at $9.86 per share of Zynga common stock based on the market closing as of January 7, 2022, implying an enterprise value of $12.7 billion. The transaction includes a collar mechanism on the equity consideration, so that if the volume weighted average price ("VWAP") of Take-Two common stock on the Nasdaq Global Select Market for the consecutive period beginning at 9:30 a.m. New York time on the twenty-third trading day immediately preceding the closing date of the transaction and concluding at 4:00 p.m. New York time on the third trading day preceding such closing date is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration of $9.86 per Zynga share. If the VWAP of our common stock for the period noted in the prior sentence exceeds the higher end of that range the exchange ratio would be 0.0350 per share, and, if the VWAP is below the lower end of that range, the exchange ratio would be 0.0406 per share.

The transaction, which is currently anticipated to close on Monday May 23, 2022, is subject to approval by Take-Two and Zynga stockholders and the satisfaction of the other customary closing conditions.

In connection with the transaction, on April 14, 2022, we completed our offering and sale of $2.7 billion aggregate principal amount of our senior notes, consisting of $1.0 billion principal amount of our 3.300% Senior Notes due 2024 (the “2024 Notes”), $600 million principal amount of our 3.550% Senior Notes due 2025 (the “2025 Notes”), $600 million principal amount of our 3.700% Senior Notes due 2027 (the “2027 Notes”) and $500 million 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 “Notes”).The Notes were issued under an indenture between the Company and The Bank of New York Mellon, as trustee (the “Trustee”).

The 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 semiannually on March 28 and September 28 of each year, commencing September 28, 2022. We will pay interest on each of the 2025 Notes, 2027 Notes and 2032 Notes semi-annually on April 14 and October 14 of each year, commencing October 14, 2022.

Trends and Factors Affecting our Business

    Product Release Schedule.    Our financial results are affected by the timing of our product releases and the commercial success of those titles. Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue. Sales of Grand Theft Auto products generated 30.9% of our net revenue for the fiscal year ended March 31, 2022. The timing of our Grand Theft Auto product releases may affect our financial performance on a quarterly and annual basis.

    Economic Environment and Retailer Performance.    We continue to monitor economic conditions, including the impact of the COVID-19 pandemic, that may affect our businesses, such as consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. During fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of the COVID-19 related business closures and movement restrictions, such as "shelter in place" and "lockdown" orders, implemented around the world, as well as the online accessibility and social nature of our products. As

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

Based on our concern for the health and safety of our teams, we have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, including transitioning the vast majority of our teams to working from home. The majority of our offices either have reopened or are scheduled to reopen in the coming months. Given the evolving dynamics of the COVID-19 pandemic, we continue to adhere to safety standards in the planning and implementation of our return to office. To date, our plans have resulted in minimal disruption. However, despite largely positive outcomes to date, these efforts may ultimately not be effective, and a protracted economic downturn may limit the effectiveness of our mitigation efforts. Any of these considerations described above could cause or contribute to the risks described, above, in Item 1A of this Form 10-K and could materially adversely affect our business, financial condition, results of operations, or stock price. Therefore, the effects of COVID-19 may not be fully reflected in our financial results until future periods, and, at this time, we are not able to predict its ultimate impact on our business.

Additionally, our business is dependent upon a limited number of customers that account for a significant portion of our revenue. Our five largest customers accounted for 79.0%, 78.4% and 71.5% of net revenue during the fiscal years ended March 31, 2022, 2021 and 2020, respectively. As of March 31, 2022, and 2021, five customers comprised 72.8% and 77.6% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 63.8% and 69.2% of such balance at March 31, 2022, and 2021, respectively. We had two customers who accounted for 43.5% and 20.3% of our gross accounts receivable as of March 31, 2022, and two customers who accounted for 50.4% and 18.8% of our gross accounts receivable as of March 31, 2021. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2022, and 2021. The economic environment has affected our customers in the past, and may do so in the future, including as a result of the COVID-19 pandemic. Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers. The COVID-19 pandemic has led, and may continue to lead, to increased consolidation as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through the financial volatility. Certain of our large customers sell used copies of our games, which may negatively affect our business by reducing demand for new copies of our games. While the downloadable content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.

    Hardware Platforms.    We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 72.2% of our net revenue by product platform for the fiscal year ended March 31, 2022. The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released in November 2020 by Sony and Microsoft, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The new Sony and Microsoft consoles provide "backwards compatibility" (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. 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. Accordingly, our strategy is to focus our development efforts on a select number of the highest quality titles for these platforms, while also expanding our offerings for other platforms such as tablets, smartphones, and online games.

    Online Content and Digital Distribution.    The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from websites we own and others owned by third parties) as well as a large selection of our catalog titles. In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases. We also publish an expanding variety of titles for Mobile, which are delivered to consumers through digital download. As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 89.8% of our net revenue for the fiscal year ended March 31, 2022. We expect online delivery of games and game offerings to continue to grow and to be the primary part of our business over the long term.

Content Release Highlights

    During fiscal year 2022, 2K released NBA 2K22, WWE 2K22, and Tiny Tina's Wonderlands, Private Division released Hades physically on consoles and OlliOlli World, and Rockstar released Grand Theft Auto: The Trilogy - The Definitive Edition and Grand Theft Auto V and a standalone version of Grand Theft Auto Online for the PS5 and Xbox Series X|S.

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To date we have announced that, during fiscal year 2023, 2K will release The Quarry, Marvel's Midnight Suns, NBA 2K23, WWE 2K23, and PGA TOUR 2K23, and Private Division will release Kerbal Space Program 2. In addition, throughout the year, we expect our labels to deliver new content for our franchises. We will also continue to invest in opportunities that we believe will enhance and scale our business and have the potential to drive growth over the long-term.

Fiscal 2022 Financial Summary

We acquired Nordeus Limited ("Nordeus") on June 1, 2021, for initial consideration having an acquisition date fair value of $289.8 million, consisting of $132.9 million in cash, the issuance of 0.5 million shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of $153.0 million in cash if Nordeus achieves certain performance measures over the 12- and 24-month periods following the closing (refer to Note 22 - Acquisitions). Founded in 2010, Nordeus is a free-to-play mobile game company based in Belgrade, Serbia, best known for Top Eleven.

    Our Net revenue for fiscal year ended March 31, 2022 was led by a variety of our top franchises, primarily NBA 2K, Grand Theft Auto, Red Dead Redemption, Borderlands, and WWE 2K. Our Net revenue increased to $3,504.8 million, an increase of $132.0 million or 3.9% compared to the fiscal year ended March 31, 2021.

    For the fiscal year ended March 31, 2022, our Net income was $418.0 million, as compared to $588.9 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2022 was $3.58, as compared to Diluted income per share of $5.09 for the fiscal year ended March 31, 2021. Our operating income for the fiscal year ended March 31, 2022 decreased compared to the operating income for fiscal year ended March 31, 2021, due to (i) higher operating expenses for personnel and marketing and (ii) increases in the fair value of the contingent earn-out liability related to our June 2021 acquisition of Nordeus.

    At March 31, 2022, we had $2,195.3 million of Cash and cash equivalents and Restricted cash and cash equivalents, compared to $2,060.2 million at March 31, 2021. The increase in Cash and cash equivalents and Restricted cash and cash equivalents from March 31, 2021 was due primarily to (i) Net cash provided by operating activities from sales primarily from the previously mentioned titles, partially offset by investments in software development and licenses as well as royalty payments and (ii) Net cash provided by investing activities primarily related to net proceeds from available for sale securities changes in bank time deposits, partially offset primarily by our acquisition of Nordeus, and purchases of fixed assets including our acquisition of two office buildings in the U.K. (refer to Note 22 - Acquisitions). This net increase was partially offset by Net cash used in financing activities, which was primarily related to repurchase of our common stock and tax payments related to net share settlements of our restricted stock.

Critical Accounting Policies and Estimates

    Our most critical accounting policies, which are those that require significant judgment, include revenue recognition; price protection and allowances for returns; capitalization and recognition of software development costs and licenses; fair value estimates including valuation of goodwill, and intangible assets; valuation and recognition of stock-based compensation; and income taxes. See Note 1 - Basis of Presentation and Significant Accounting Policies in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K.

Recently Adopted and Recently Issued Accounting Pronouncements

See Note 1 - Basis of Presentation and Significant Accounting Policies.

Operating Metric

Net Bookings

    We monitor Net Bookings as a key operating metric in evaluating the performance of our business. Net Bookings is defined as the net amount of products and services sold digitally or sold-in physically during the period and includes licensing fees, merchandise, in-game advertising, strategy guides, and publisher incentives. Net Bookings were as follows:

[[GREPCENT_TABLE]]
[["","Fiscal Year Ended March 31,"],["","2022","","2021","","Increase/(decrease)","","Increase/(decrease) %"],["Net Bookings","$","3,408,184","","","$","3,552,598","","","$","(144,414)","","","(4.1)","%"]]
[[/GREPCENT_TABLE]]

    For the fiscal year ended March 31, 2022, Net Bookings decreased by $144.4 million as compared to the prior year due primarily to a decrease in Net Bookings from our NBA 2K franchise; our PGA TOUR 2K franchise, which benefited from the release of PGA TOUR 2K21 in the prior year; and our Mafia franchise, which benefited from the releases of Mafia: Definitive Editions and Mafia: Trilogy in the prior year; and The Outer Worlds, which released in October 2020. These

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decreases were partially offset by an increase in Net Bookings from Top Eleven, which was part of our Nordeus acquisition in June 2021; Tiny Tina’s Wonderlands, which released in March 2022; Two Dots, which was part of our Playdots acquisition in September 2020; and our WWE 2K franchise, including WWE 2K22, which released in March 2022.

Results of Operations

In this section, we discuss the results of our operations for the fiscal year ended March 31, 2022 compared to the fiscal year ended March 31, 2021. For the comparison of fiscal year 2021 to fiscal year 2020, refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended March 31, 2021.

The following table sets forth, for the periods indicated, our statements of operations, net revenue by geographic region, net revenue by platform, net revenue by distribution channel, and net revenue by content type:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31,"],["","","2022","","2021","","2020"],["Net revenue","","$","3,504,800","","","100.0","%","","$","3,372,772","","","100.0","%","","$","3,088,970","","","100.0","%"],["Cost of goods sold","","1,535,401","","","43.8","%","","1,535,085","","","45.5","%","","1,542,450","","","49.9","%"],["Gross profit","","1,969,399","","","56.2","%","","1,837,687","","","54.5","%","","1,546,520","","","50.1","%"],["Selling and marketing","","516,429","","","14.7","%","","444,985","","","13.2","%","","458,424","","","14.8","%"],["General and administrative","","510,855","","","14.6","%","","390,683","","","11.6","%","","318,235","","","10.3","%"],["Research and development","","406,566","","","11.6","%","","317,311","","","9.4","%","","296,398","","","9.6","%"],["Depreciation and amortization","","61,105","","","1.7","%","","55,596","","","1.6","%","","48,113","","","1.6","%"],["Business reorganization","","849","","","\u2014","%","","(272)","","","\u2014","%","","83","","","\u2014","%"],["Total operating expenses","","1,495,804","","","42.7","%","","1,208,303","","","35.8","%","","1,121,253","","","36.3","%"],["Income from operations","","473,595","","","13.5","%","","629,384","","","18.7","%","","425,267","","","13.8","%"],["Interest and other, net","","(14,212)","","","(0.4)","%","","8,796","","","0.3","%","","38,505","","","1.2","%"],["Gain (loss) on long-term investments, net","","6,015","","","0.2","%","","39,636","","","1.2","%","","(5,333)","","","(0.2)","%"],["Income before income taxes","","465,398","","","13.3","%","","677,816","","","20.1","%","","458,439","","","14.8","%"],["Provision for income taxes","","47,376","","","1.4","%","","88,930","","","2.6","%","","53,980","","","1.7","%"],["Net income","","$","418,022","","","11.9","%","","$","588,886","","","17.5","%","","$","404,459","","","13.1","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended March 31,"],["","","2022","","2021","","2020"],["Net revenue by geographic region:"],["United States","","$","2,100,237","","","59.9","%","","$","2,015,885","","","59.8","%","","$","1,775,682","","","57.5","%"],["International","","1,404,563","","","40.1","%","","1,356,887","","","40.2","%","","1,313,288","","","42.5","%"],["Net revenue by platform:"],["Console","","$","2,528,857","","","72.2","%","","$","2,516,993","","","74.6","%","","$","2,308,602","","","74.7","%"],["PC and other","","572,506","","","16.3","%","","581,702","","","17.2","%","","594,619","","","19.2","%"],["Mobile","","403,437","","","11.5","%","","274,077","","","8.1","%","","185,749","","","6.0","%"],["Net revenue by distribution channel:"],["Digital online","","$","3,148,957","","","89.8","%","","$","2,972,403","","","88.1","%","","$","2,405,097","","","77.9","%"],["Physical retail and other","","355,843","","","10.2","%","","400,369","","","11.9","%","","683,873","","","22.1","%"],["Net revenue by content:"],["Recurrent consumer spending","","$","2,271,171","","","64.8","%","","$","2,151,952","","","63.8","%","","$","1,448,191","","","46.9","%"],["Full game and other","","1,233,629","","","35.2","%","","1,220,820","","","36.2","%","","1,640,779","","","53.1","%"]]
[[/GREPCENT_TABLE]]

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Fiscal Years ended March 31, 2022 and 2021

[[GREPCENT_TABLE]]
[["(thousands of dollars)","","2022","","% of net revenue","","2021","","% of net revenue","","Increase/(decrease)","","% Increase/(decrease)"],["Net revenue","","$","3,504,800","","","100.0","%","","$","3,372,772","","","100.0","%","","$","132,028","","","3.9","%"],["Internal royalties","","619,902","","","17.7","%","","637,652","","","18.9","%","","(17,750)","","","(2.8)","%"],["Software development costs and royalties(1)","","417,431","","","11.9","%","","396,797","","","11.8","%","","20,634","","","5.2","%"],["Licenses","","254,203","","","7.3","%","","260,721","","","7.7","%","","(6,518)","","","(2.5)","%"],["Product costs","","243,865","","","7.0","%","","239,915","","","7.1","%","","3,950","","","1.6","%"],["Cost of goods sold","","1,535,401","","","43.8","%","","1,535,085","","","45.5","%","","316","","","\u2014","%"],["Gross profit","","$","1,969,399","","","56.2","%","","$","1,837,687","","","54.5","%","","$","131,712","","","7.2","%"]]
[[/GREPCENT_TABLE]]

(1) Includes $48,381 and $8,707 of stock-based compensation expense in fiscal year 2022 and 2021, respectively.

    For the fiscal year ended March 31, 2022, net revenue increased by $132.0 million, as compared to the prior year. The increase was due primarily to an increase in net revenue of (i) $96.3 million from our Grand Theft Auto franchise, (ii) $83.9 million from Tiny Tina's Wonderlands, which released in March 2022, (iii) $75.0 million from Two Dots, which was part of our Playdots acquisition completed in September 2020, (iv) $51.3 million from Top Eleven, which was part of our Nordeus acquisition completed in June 2021, and (v) $36.6 million from our WWE 2K franchise, including WWE 2K22, which released in March 2022. These increases were offset by a decrease in net revenue of (i) $46.7 million from our Mafia franchise, (ii) 41.4 million from our Borderlands franchise, (iii) $39.3 million from our PGA TOUR 2K franchise, (iv) $29.0 million from our Civilization franchise, and (v) $25.2 million from our Red Dead Redemption franchise.

    Net revenue from console games increased by $11.9 million and accounted for 72.2% of our total net revenue in the fiscal year ended March 31, 2022, as compared to 74.6% in the prior year. The increase was due to an increase in net revenue from our Grand Theft Auto franchise, Tiny Tina's Wonderlands, and our WWE 2K franchise, partially offset by a decrease in net revenue from our Mafia, Borderlands, PGA TOUR 2K, Red Dead Redemption, and BioShock franchises, The Outer Worlds, and our Civilization and NBA 2K franchises. Net revenue from PC and other decreased by $9.2 million and accounted for 16.3% of our total net revenue in the fiscal year ended March 31, 2022, as compared to 17.2% in the prior year. The decrease was due to a decrease in net revenue from our Grand Theft Auto, Civilization, and XCOM franchises, The Outer Worlds, our Mafia franchise, L.A. Noire, and our Borderlands franchise, partially offset by an increase in net revenue from Tiny Tina's Wonderlands and our NBA 2K franchise. Net revenue from mobile increased by $129.4 million and accounted for 11.5% of our total net revenue in the fiscal year ended March 31, 2022, as compared to 8.1% in the prior year. The increase was due to an increase in net revenue from Top Eleven and Two Dots.

    Net revenue from digital online channels increased by $176.6 million and accounted for 89.8% of our total net revenue for the fiscal year ended March 31, 2022, as compared to 88.1% in the prior year. The increase was due to an increase in net revenue from Two Dots, our Grand Theft Auto franchise, Tiny Tina's Wonderlands, Top Eleven, our NBA 2K and WWE 2K franchises, partially offset by a decrease in net revenue from our Mafia, Civilization, PGA TOUR 2K, and Borderlands franchises and The Outer Worlds. Net revenue from physical retail and other channels decreased by $44.5 million and accounted for 10.2% of our total net revenue for the fiscal year ended March 31, 2022, as compared to 11.9% for the prior year. The decrease was due to a decrease in net revenue from our Borderlands, Mafia, PGA TOUR 2K, NBA 2K, and Red Dead Redemption franchises, partially offset by an increase in net revenue from our Grand Theft Auto franchise and Tiny Tina's Wonderlands.

    Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases. Net revenue from recurrent consumer spending increased by $119.2 million and accounted for 64.8% of net revenue for the fiscal year ended March 31, 2022, as compared to 63.8% for the prior year. The increase was due to an increase in net revenue from Two Dots, Top Eleven, and our Grand Theft Auto and NBA 2K franchises, partially offset by a decrease in net revenue from our Borderlands franchise. Net revenue from full game and other increased by $12.8 million and accounted for 35.2% of net revenue for the fiscal year ended March 31, 2022, as compared to 36.2% for the prior year. The increase was due to an increase in net revenue from Tiny Tina's Wonderlands, our Grand Theft Auto, and WWE 2K franchises, partially offset by a decrease in net revenue from our Mafia and PGA TOUR 2K franchises, The Outer Worlds, and our NBA 2K, Red Dead Redemption, Civilization, BioShock and XCOM franchises and L.A. Noire.

    Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2022 was 56.2%, as compared to 54.5% in the prior year. The percentage increase was due primarily to lower development royalties due primarily to the timing of releases, partially offset by impairments recognized against some of our capitalized software balances (refer to Note 8 - Software Development Costs and Licenses).

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    Net revenue earned outside of the United States increased by $47.7 million and accounted for 40.1% of our total net revenue in the fiscal year ended March 31, 2022, as compared to 40.2% in the prior year. The increase in net revenue outside of the United States was due to an increase in net revenue from Top Eleven, Two Dots, Tiny Tina's Wonderlands, and our Grand Theft Auto, and WWE 2K franchises, partially offset by a decrease in net revenue from our Mafia, Borderlands, Civilization, PGA TOUR 2K, Red Dead Redemption franchises and The Outer Worlds. Changes in foreign currency exchange rates decreased net revenue and gross profit by $1.7 million and $4.2 million, respectively, in the fiscal year ended March 31, 2022 as compared to the prior year.

Operating Expenses

[[GREPCENT_TABLE]]
[["(thousands of dollars)","","2022","","% of net revenue","","2021","","% of net revenue","","Increase/(decrease)","","% Increase/(decrease)"],["Selling and marketing","","$","516,429","","","14.7","%","","$","444,985","","","13.2","%","","$","71,444","","","16.1","%"],["General and administrative","","510,855","","","14.6","%","","390,683","","","11.6","%","","120,172","","","30.8","%"],["Research and development","","406,566","","","11.6","%","","317,311","","","9.4","%","","89,255","","","28.1","%"],["Depreciation and amortization","","61,105","","","1.7","%","","55,596","","","1.6","%","","5,509","","","9.9","%"],["Business reorganization","","849","","","\u2014","%","","(272)","","","\u2014","%","","1,121","","","(412.1)","%"],["Total operating expenses","","$","1,495,804","","","42.7","%","","$","1,208,303","","","35.8","%","","$","287,501","","","23.8","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","2022","","2021"],["Selling and marketing","","$","30,027","","","$","18,348"],["General and administrative","","$","66,443","","","$","56,830"],["Research and development","","$","38,118","","","$","26,587"]]
[[/GREPCENT_TABLE]]

    Foreign currency exchange rates increased total operating expenses by $5.5 million in the fiscal year ended March 31, 2022 as compared to the prior year.

Selling and marketing

    Selling and marketing expenses increased by $71.4 million in the fiscal year ended March 31, 2022 as compared to the prior year, due primarily to (i) $62.2 million in higher overall marketing expenses due primarily to Top Eleven, with no corresponding expense in the prior fiscal year and higher spend on Two Dots, Grand Theft Auto Online, and our WWE 2K franchise and (ii) an increase in personnel expenses, primarily due to increased headcount.

General and administrative

    General and administrative expenses increased by $120.2 million for the fiscal year ended March 31, 2022, as compared to the prior year, due primarily to increases in (i) personnel expenses for additional headcount and higher incentive compensation, (ii) the fair value of the contingent earn-out liability related to our acquisition of Nordeus (refer to Note 22 - Acquisitions), (iii) professional fees related to acquisitions, including our pending acquisition of Zynga, (iv) IT expenses, primarily for cloud-based services, and (v) rent expenses for additional locations and lease renewals. These increases were partially offset by a decrease in charitable contributions, primarily related to our COVID-19 response and relief efforts in the prior fiscal year.

    General and administrative expenses for the fiscal years ended March 31, 2022 and 2021 include occupancy expense (primarily rent, utilities and office expenses) of $37.2 million and $27.5 million, respectively, related to our development studios.

Research and development

    Research and development expenses increased by $89.3 million for the fiscal year ended March 31, 2022, as compared to the prior year, due primarily to increased personnel expense due to increased headcount including related to our recent acquisitions.

Depreciation and amortization

    Depreciation and amortization expenses increased by $5.5 million for the fiscal year ended March 31, 2022, as compared to the prior year, due primarily to an increase in costs related to IT infrastructure.

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Business Reorganization

    During the fiscal year ended March 31, 2022, business reorganization expense increased by $1.1 million as compared to the prior year period and was not material.

Interest and other, net

[[GREPCENT_TABLE]]
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    Interest and other, net was expense of $14.2 million for the fiscal year ended March 31, 2022, as compared to income of $8.8 million for the fiscal year ended March 31, 2021. The change was due primarily to (i) an increase in interest expense primarily related to an unsecured bridge loan facility related to our pending acquisition of Zynga with no corresponding expense in the prior year period (refer to Note 12 - Debt), (ii) lower interest income on our available-for-sale securities due to lower interest rates, and (iii) foreign currency losses in the current year period as compared to gains in the prior year period.

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

Gain/(loss) on long-term investments, net for the fiscal year ended March 31, 2022 was a gain of $6.0 million compared to a gain of $39.6 million in the prior year period. The decrease was due primarily to the sale of one of our investments in the prior year period (see Note 4 - Fair Value Measurements).

Provision for income taxes

    Our income tax expense was $47.4 million for the fiscal year ended March 31, 2022 as compared to $88.9 million for the fiscal year ended March 31, 2021.

    When compared to the statutory rate of 21%, the effective tax rate of 10.2% for the fiscal year ended March 31, 2022 was due primarily to a $30.9 million benefit from tax credits anticipated to be utilized, $14.6 million in excess tax benefits from employee stock compensation, an $11.6 million benefit due to an increase to the net deferred tax asset that arose from a step up in tax basis related to the Federal Act on Tax Reform and AVH (Old-Age and Survivors Insurance) Financing ("TRAF") enacted in Switzerland, discussed below, and an $8.0 million benefit from our geographic mix of earnings, partially offset by a $10.1 million nondeductible expense due to an increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus.

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

    The effective tax rate in the current year was lower compared to the prior year primarily due an increased benefit to the net deferred tax asset related to TRAF, increased benefits from tax credits and excess tax benefits from employee stock compensation partially offset by a nondeductible expense due to an increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus.

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

36

otherwise modified. The requirement is effective for the Company for fiscal year 2023, beginning April 1, 2022. It is possible that this change could have a significant adverse impact on our effective tax rate, tax payments, and financial condition in future periods.

On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARPA”) was enacted. The ARPA, among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations. Effective for tax years starting after December 31, 2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover the next five most highly compensated employees. The ARPA did not have a material impact on our Consolidated Financial Statements for the fiscal year ended March 31, 2022. We continue to evaluate the potential impact the ARPA may have on our operations and Consolidated Financial Statements in future periods.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which provides numerous tax and other stimulus measures that generally support the U.S. economy. The CARES Act did not have a material impact on our Consolidated Financial Statements.

On May 19, 2019, a public referendum held in Switzerland approved the TRAF, which was effective for us on January 1, 2020. The TRAF abolished preferential tax regimes for holding companies, domicile companies, and mixed companies at the cantonal level. The TRAF allows the cantons to establish transition rules, the implementation of which may be subject to a ruling from the canton. On March 31, 2020, we recorded a deferred tax asset of $45.3 million offset by a valuation allowance of $33.4 million arising from the Swiss cantonal tax basis step-up. For the fiscal year ended March 31, 2022, we recorded a net tax benefits of $11.6 million due to an increase in the deferred tax asset of $13.2 million offset by an increase in the valuation allowance of $1.6 million, as it is more-likely-than-not that such deferred tax assets would be realized.

As of March 31, 2022, we had gross unrecognized tax benefits, including interest and penalties, of $176.0 million, of which $65.8 million would affect our effective tax rate if realized. For the fiscal year ended March 31, 2022, gross unrecognized tax benefits increased by $8.5 million.

    We are no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended March 31, 2019 and state income tax returns for periods prior to the fiscal year ended March 31, 2018. With few exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to fiscal year ended March 31, 2016. Certain taxing authorities are currently examining our income tax returns for the fiscal years ended March 31, 2015 through March 31, 2019.

Net income and earnings per share

    For the fiscal year ended March 31, 2022, our net income was $418.0 million, as compared to $588.9 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2022 was $3.58, as compared to $5.09 for the fiscal year ended March 31, 2021. Diluted weighted average shares outstanding of 116.8 million were 1.0 million higher due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year.

Liquidity and Capital Resources

    Our primary cash requirements have been to fund (i) the development, manufacturing and marketing of our published products, (ii) working capital, (iii) acquisitions and (iv) capital expenditures. We expect to rely on cash and cash equivalents as well as on short-term investments, funds provided by our operating activities, and our Credit Agreement to satisfy our working capital needs.

Short-term Investments

    As of March 31, 2022, we had $820.1 million of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations. From time to time, we may purchase additional short-term investments depending on future market conditions and liquidity needs. As of March 31, 2022, based on the composition of our investment portfolio and actions taken in recent years by central banks around the world to cut interest rates, including the U.S. Federal Reserve, in response to the COVID-19 pandemic and related adverse economic conditions, we anticipate investment yields to remain low, which would lower our future interest income. Such impact is not expected to be material to our liquidity.

Credit Agreement

    On February 8, 2019, we entered into an unsecured Credit Agreement (the “Credit Agreement”), and on June 28, 2021, we amended our unsecured Credit Agreement solely to increase the commitments under the facility by $50 million (as amended, the “Credit Agreement”) that runs through February 8, 2024. The Credit Agreement provides for an unsecured five-

37

year revolving credit facility with commitments of $250 million, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $25 million and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $25 million. In addition, the Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $200 million in term loans or revolving credit facilities.

Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (3.50% at March 31, 2022) or (b) 1.125% to 1.750% above LIBOR (approximately 0.45% at March 31, 2022), which rates are determined by reference to our consolidated total net leverage ratio. The LIBOR benchmark rate is expected to be phased out by the end of June 2023. We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations.

    As of March 31, 2022, there was $247.5 million available to borrow under the Credit Agreement and we had $2.5 million of letters of credit outstanding. At March 31, 2022, we had no outstanding borrowings under the Credit Agreement.

    The Credit Agreement also includes, among other terms and conditions, maximum leverage ratio, minimum cash reserves and, in certain circumstances, minimum interest coverage ratio financial covenants, as well as limitations on the Company’s and each of its subsidiaries’ ability to create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of its property; make investments; or pay dividends or make distributions, in each case subject to certain exceptions. In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on indebtedness held by third parties (subject to certain limitations and cure periods).

Financial Condition

    We are subject to credit risks, particularly if any of our receivables represent a limited number of customers or are concentrated in foreign markets. If we are unable to collect our accounts receivable as they become due, it could adversely affect our liquidity and working capital position.

    Generally, we have been able to collect our accounts receivable in the ordinary course of business. We do not hold any collateral to secure payment from customers. We have trade credit insurance on the majority of customers who sell our physical products to mitigate accounts receivable risk.

    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 79.0%, 78.4%, and 71.5% of net revenue during the fiscal years ended March 31, 2022, 2021, and 2020, respectively. As of March 31, 2022 and 2021, five customers accounted for 72.8% and 77.6% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 63.8% and 48.8% of such balances at March 31, 2022 and 2021, respectively. We had two customers who accounted for 43.5% and 20.3% of our gross accounts receivable as of March 31, 2022 and two customers who accounted for 50.4%, and 18.8% of our gross accounts receivable as of March 31, 2021. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2022 and 2021. 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 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 that our current cash and cash equivalents, short-term investments, and projected cash flow from operations, along with availability under our Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis. Our liquidity and capital resources have not been materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets to date. For further discussion regarding the potential future impacts of the COVID-19 pandemic and related economic conditions on our business, refer to Item 1A, Risk Factors.

As of March 31, 2022, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $657.2 million. These balances are dispersed across various locations around the world. We believe that such dispersion meets the business and liquidity needs of our foreign affiliates. In addition, we expect to have the ability to generate sufficient cash domestically to support ongoing operations for the foreseeable future.

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    On January 9, 2022, we entered into a definitive merger agreement to acquire Zynga Inc. ("Zynga"), a leading developer of mobile games. Under the terms and subject to the conditions of the merger agreement, Zynga stockholders will receive $3.50 in cash and a number of shares of our common stock equal to the exchange ratio for each share of Zynga common stock outstanding at the closing. The transaction is valued at $9.86 per share of Zynga common stock based on the market closing as of January 7, 2022, implying an enterprise value of $12.7 billion. The transaction includes a collar mechanism on the equity consideration, so that if the volume weighted average price ("VWAP") of Take-Two common stock on the Nasdaq Global Select Market for the consecutive period beginning at 9:30 a.m. New York time on the twenty-third trading day immediately preceding the closing date of the transaction and concluding at 4:00 p.m. New York time on the third trading day preceding such closing date is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration of $9.86 per Zynga share. If the VWAP of our common stock for the period noted in the prior sentence exceeds the higher end of that range the exchange ratio would be 0.0350 per share, and, if the VWAP is below the lower end of that range, the exchange ratio would be 0.0406 per share.

The transaction, which is currently anticipated to close on Monday, May 23, 2022, is subject to approval by Take-Two and Zynga stockholders and the satisfaction of the other customary closing conditions.

In connection with the transaction, on April 14, 2022, we terminated our Bridge Loan and completed our offering and sale of $2.7 billion aggregate principal amount of our senior notes, consisting of $1.0 billion principal amount of our 3.300% Senior Notes due 2024 (the “2024 Notes”), $600 million principal amount of our 3.550% Senior Notes due 2025 (the “2025 Notes”), $600 million principal amount of our 3.700% Senior Notes due 2027 (the “2027 Notes”) and $500 million 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 “Notes”).The Notes were issued under an indenture between the Company and The Bank of New York Mellon, as trustee (the “Trustee”).

The 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 semiannually on March 28 and September 28 of each year, commencing September 28, 2022. We will pay interest on each of the 2025 Notes, 2027 Notes and 2032 Notes semi-annually on April 14 and October 14 of each year, commencing October 14, 2022.

    Our Board of Directors has authorized the repurchase of up to 21.7 million 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. The program does not require us to repurchase shares and may be suspended or discontinued at any time for any reason.

During the fiscal years ended March 31, 2022, 2021, and 2020, we repurchased 1.3 million, zero, and zero shares of our common stock, respectively, in the open market for $200 million, $0.0 million, and $0.0 million, respectively, including commissions as part of the program. As of March 31, 2022, we had repurchased a total of 11.7 million shares of our common stock under the program, and 10.0 million shares of our common stock remained available for repurchase under the share repurchase program.

Our changes in cash flows were as follows:

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    At March 31, 2022, we had $2,195.3 million of Cash, cash equivalents, and restricted cash and cash equivalents, compared to $2,060.2 million at March 31, 2021. The increase in Cash, cash equivalents, and restricted cash and cash equivalents from March 31, 2021 was due primarily to (i) Net cash provided by operating activities from sales primarily from the previously mentioned titles, partially offset by investments in software development and licenses as well as royalty payments and (ii) Net cash provided by investing activities primarily related to net proceeds from available for sale securities

39

changes in bank time deposits, partially offset primarily by our acquisition of Nordeus (refer to Note 22 - Acquisitions), and purchases of fixed assets including our acquisition of two office buildings in the U.K. (refer to Note 22 - Acquisitions). This net increase was partially offset by Net cash used in financing activities, which was primarily related to repurchase of our common stock and tax payments related to net share settlements of our restricted stock.

Commitments

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

Capital Expenditures

    In fiscal year 2023, we anticipate capital expenditures to be $120 million.

Off-Balance Sheet Arrangements

    As of March 31, 2022 and 2021, we did not have any material relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

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 fiscal years ended March 31, 2022, 2021 and 2020, 40.1%, 40.2% and 42.5%, 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. Sales of our full game products are also seasonal, with peak demand typically occurring in the fourth calendar quarter during the holiday season. For certain of our software products with multiple performance obligations, we defer the recognition of our net revenue over an estimated service period which generally ranges from six to fifteen months. As a result, the quarter in which we generate the highest Net Bookings may be different from the quarter in which we recognize the highest amount of Net revenue. Quarterly comparisons of operating results are not necessarily indicative of future operating results.