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. Our products are currently designed for console gaming systems such as Sony's PS4 and PS3, Microsoft's Xbox One and Xbox 360, the Nintendo Switch, and PC, including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms and cloud streaming services.

We endeavor to be the most creative, innovative and efficient company in our industry. Our core strategy is to capitalize on the popularity of video games by developing and publishing high-quality interactive entertainment experiences across a range of genres. We focus on building compelling entertainment franchises by publishing a select number of titles for which we can create sequels and incremental revenue opportunities through add-on content, microtransactions and online play. Most of our intellectual property is internally owned and developed, which we believe best positions us financially and competitively. We have established a portfolio of proprietary software content for the major hardware platforms in a wide range of genres, including action, adventure, family/casual, racing, role-playing, shooter, sports and strategy, which we distribute worldwide. We 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 we serve, ranging from adults to children and game enthusiasts to casual gamers. Another cornerstone of our strategy is to support the success of our products in the marketplace through innovative marketing programs and global distribution on platforms and through channels that are relevant to our target audience.

Our revenue is primarily derived from the sale of internally developed software titles and software titles developed by third-parties. Operating margins are dependent in part upon our ability to release new, commercially successful software products and to manage effectively their development costs. We have internal development studios located in Australia, Canada, China, Czech Republic, Hungary, India, Spain, South Korea, the United Kingdom, and the United States.

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 and other popular franchises, to continue to be a leader in the action / adventure product category and to create groundbreaking entertainment by leveraging our existing titles as well as by developing new brands. We believe that Rockstar 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 280 million units. The latest installment, Grand Theft Auto V, was released on Sony's PS3 and Microsoft's Xbox 360 in September 2013, on Sony's PS4 and Microsoft's Xbox One in November 2014, and on PC in April 2015. Grand Theft Auto V includes access to Grand Theft Auto Online, which initially launched in October 2013. Rockstar Games is also well known for developing brands in other genres, including the L.A. Noire, Bully and Manhunt franchises. Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, content and virtual currency, and releasing titles for smartphones and tablets.

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

We are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden the distribution of our existing products and expand our online gaming presence, especially in China and South Korea. 2K has a multi-year license from the NBA to develop an online version of the NBA simulation game in China, Taiwan, South Korea and Southeast Asia. In October 2012, NBA 2K Online, our free-to-play NBA simulation game, which was co-developed by 2K and Tencent, launched commercially on the Tencent Games portal in China.

On December 14, 2017, we announced the formation of Private Division, our new label that is dedicated to bringing titles from top independent developers to market. Private Division will publish several upcoming titles based on new IP from renowned industry creative talent, including the previously announced Ancestors: The Humankind Odyssey from Panache Digital Game, a studio led by the creator of the Assassin's Creed franchise Patrice Désilets; an unannounced role-playing game ("RPG") currently code-named Project Wight from The Outsiders, a studio formed by ex-DICE developers David Goldfarb and Ben Cousins; an unannounced RPG from Obsidian Entertainment led by Tim Cain and Leonard Boyarsky, co-creators of Fallout; and an

unannounced sci-fi first-person shooter from V1 Interactive, a studio founded by Halo co-creator Marcus Lehto. Additionally, Private Division is the publisher of Kerbal Space Program, which we acquired in May 2017.

Social Point develops and publishes popular free-to-play mobile games that deliver high quality, deeply-engaging entertainment experiences, including its two most successful games, Dragon City and Monster Legends. In addition, Social Point has a robust development pipeline with a number of exciting games planned for launch over the next two years.

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 39.7% of our net revenue for the fiscal year ended March 31, 2018. 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 that may unfavorably affect our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. 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 70.7%, 65.5% and 58.9% of net revenue during the fiscal years ended March 31, 2018, 2017 and 2016, respectively. As of March 31, 2018 and 2017, five customers comprised 65.4% and 69.9% 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 53.2% and 57.6% of such balance at March 31, 2018 and 2017, respectively. We had two customers who accounted for 37.7% and 15.5% of our gross accounts receivable as of March 31, 2018 and two customers who accounted for 40.2% and 17.4% of our gross accounts receivable as of March 31, 2017. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2018 and 2017. 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 receivables and the concentration of purchasing power among the remaining large retailers. 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, such as Sony's PS4 and PS3, Microsoft's Xbox One and Xbox 360, and the Nintendo Switch, which comprised 81.6% of our net revenue by product platform for the fiscal year ended March 31, 2018. The success of our business is dependent upon the consumer acceptance of these consoles and continued growth in their installed base. When new hardware platforms are introduced, demand for software used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. We continually monitor console hardware sales. 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 emerging 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. Most 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). In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles after their initial purchase through downloadable offerings, including add-on content, microtransactions and online play. We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download via the Internet. Our "Results of Operations," discloses that net revenue from digital online channels comprised 63.1% of our net revenue for the fiscal year ended March 31, 2018. We expect online delivery of games and game offerings to continue to grow and to become an increasing part of our business over the long-term.

Product Releases

We released the following key titles in fiscal year 2018:

Title		Publishing Label		Internal or External Development		Platform(s)		Date Released
NBA 2K18		2K		Internal		Xbox 360, Xbox One, PS3, PS4, PC, Switch (digital)		September 19, 2017
WWE 2K18		2K		Internal/External		Xbox One, PS4		October 13, 2017
NBA 2K18		2K		Internal		Switch (physical)		October 17, 2017
WWE 2K18		2K		Internal/External		PC		October 17, 2017
L.A. Noire		Rockstar Games		Internal		Xbox One, PS4, Switch		November 14, 2017
WWE 2K18		2K		Internal/External		Switch		December 6, 2017
L.A. Noire: The VR Case Files		Rockstar Games		Internal		HTC Vive		December 15, 2017
Kerbal Space Program: Enhanced Edition		Private Division		External		Xbox One, PS4		January 16, 2018
XCOM 2 Collection		2K		External		PC		February 1, 2018
Sid Meier's Civilization VI: Rise and Fall (DLC)		2K		Internal		PC		February 8, 2018
XCOM 2 Collection		2K		External		PS4, Xbox One		February 21, 2018
L.A. Noire: The VR Case Files		Rockstar Games		Internal		Oculus Rift		March 29, 2018
Grand Theft Auto V: Premium Online Edition		Rockstar Games		Internal		PS4, Xbox One, PC		April 20, 2018

Product Pipeline

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

Title		Publishing Label		Internal or External Development		Platform(s)		Expected Release Date
Red Dead Redemption 2		Rockstar Games		Internal		Xbox One, PS4		October 26, 2018
NBA 2K19		2K		Internal		TBA		Fall 2018
WWE 2K19		2K		Internal/External		TBA		Fall 2018

Fiscal 2018 Financial Summary

Our net revenue for fiscal year ended March 31, 2018 was led by titles from a variety of our top franchises, primarily Grand Theft Auto, NBA 2K, and WWE 2K. Our net revenue increased to $1,792.9 million, an increase of $13.1 million or 0.7% compared to the fiscal year ended March 31, 2017.

For the fiscal year ended March 31, 2018, our net income was $173.5 million, as compared to a net income of $67.3 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2018 was $1.54, as compared to diluted income per share of $0.72 for the fiscal year ended March 31, 2017. Our operating income for the fiscal year ended March 31, 2018 increased compared to the operating income for fiscal year ended March 31, 2017, due primarily to higher gross profit due primarily to lower Software development costs and royalties and Product costs due to having released more titles in the prior year period, partially offset by higher Research and development costs related to titles that have not reached technological feasibility.

At March 31, 2018 we had $809.0 million of cash and cash equivalents, compared to $943.4 million at March 31, 2017. The decrease in cash and cash equivalents from March 31, 2017 was due primarily to cash used in financing and investing activities, partially offset by cash provided by operating activities. Net cash used in financing activities was primarily related to repurchases of common stock under our share repurchase program and tax payments related to net share settlements of our restricted stock awards. Net cash used in investing activities was primarily related to net purchases of available for sale securities, purchases of fixed assets, and our asset acquisition of Kerbal Space Program. Net cash provided by operating activities was due primarily to cash generated from sales of virtual currency, NBA 2K18, Grand Theft Auto V, and WWE 2K18, partially offset by investments in software development and licenses as well as the funding of internal royalty payments.

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, intangible assets, and long-lived 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.

Results of Operations

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

		Fiscal Year Ended March 31,
		2018							2017							2016
Net revenue		$	1,792,892			100.0	%		$	1,779,748			100.0	%		$	1,413,698			100.0	%
Cost of goods sold		898,311				50.1	%		1,022,959				57.5	%		813,873				57.6	%
Gross profit		894,581				49.9	%		756,789				42.5	%		599,825				42.4	%
Selling and marketing		256,092				14.3	%		285,453				16.0	%		198,309				14.0	%
General and administrative		247,828				13.8	%		211,409				11.9	%		192,452				13.6	%
Research and development		196,373				11.0	%		137,915				7.8	%		119,807				8.5	%
Business reorganization		14,742				0.8	%		—				—	%		71,285				5.1	%
Depreciation and amortization		43,969				2.5	%		30,707				1.7	%		28,800				2.0	%
Total operating expenses		759,004				42.3	%		665,484				37.4	%		610,653				43.2	%
Income (loss) from operations		135,577				7.6	%		91,305				5.1	%		(10,828		)		(0.8	)%
Interest and other, net		1,048				0.1	%		(15,690		)		(0.9	)%		(30,205		)		(2.1	)%
Gain on long-term investments, net		—				—	%		1,350				0.1	%		2,683				0.2	%
Income (loss) before income taxes		136,625				7.6	%		76,965				4.3	%		(38,350		)		(2.7	)%
(Benefit from) provision for income taxes		(36,908		)		(2.1	)%		9,662				0.5	%		(30,048		)		(2.1	)%
Net income (loss)		$	173,533			9.7	%		$	67,303			3.8	%		$	(8,302	)		(0.6	)%

		Fiscal Year Ended March 31,
		2018							2017							2016
Net revenue by geographic region:
United States		$	1,052,313			58.7	%		$	999,128			56.1	%		$	742,963			52.6	%
International		740,579				41.3	%		780,620				43.9	%		670,735				47.4	%
Net revenue by platform:
Console		1,463,306				81.6	%		1,440,724				81.0	%		1,167,623				82.6	%
PC and other		329,586				18.4	%		339,024				19.0	%		246,075				17.4	%
Net revenue by distribution channel:
Digital online		1,130,946				63.1	%		921,734				51.8	%		697,658				49.3	%
Physical retail and other		661,946				36.9	%		858,014				48.2	%		716,040				50.7	%

Fiscal Years ended March 31, 2018 and 2017

(thousands of dollars)		2018				% of net revenue			2017				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Net revenue		$	1,792,892			100.0	%		$	1,779,748			100.0	%		$	13,144			0.7	%
Internal royalties		383,020				21.4	%		330,782				18.6	%		52,238				15.8	%
Product costs		203,301				11.3	%		255,914				14.4	%		(52,613		)		(20.6	)%
Software development costs and royalties(1)		191,400				10.7	%		335,675				18.9	%		(144,275		)		(43.0	)%
Licenses		120,590				6.7	%		100,588				5.6	%		20,002				19.9	%
Cost of goods sold		898,311				50.1	%		1,022,959				57.5	%		(124,648		)		(12.2	)%
Gross profit		$	894,581			49.9	%		$	756,789			42.5	%		$	137,792			18.2	%

(1)	Includes $24,610 and $21,056 of stock-based compensation expense in 2018 and 2017, respectively.

For the fiscal year ended March 31, 2018, net revenue increased by $13.1 million, as compared to the prior year. This increase was due primarily to an increase of $159.4 million in revenues from our NBA 2K franchise, partially offset by a decrease of $134.9 million in net revenue from Mafia III, which released in October 2016. Net revenue from our Grand Theft Auto franchise increased $32.0 million as compared to the prior year. This increase was due primarily to an increase of $114.9 million in net revenue from Grand Theft Auto Online, partially offset by a decrease of $78.0 million from Grand Theft Auto V.

Net revenue from console games increased by $22.6 million and accounted for 81.6% of our total net revenue in the fiscal year ended March 31, 2018, as compared to 81.0% in the prior year. The increase in net revenue from console games was due primarily to higher net revenue from our NBA 2K franchise, partially offset by lower net revenues from Mafia III, which released in October 2016. Net revenue from PC and other decreased by $9.4 million as compared to the prior year and decreased as a percentage of net revenue to 18.4% compared to 19.0% in the prior year. The decrease in net revenue from PC and other was due primarily to lower net revenue from Civilization VI, which released on the PC in the prior year, partially offset by higher net revenue from Social Point titles for which we had only two months of net revenue in the prior year as it was acquired in January 2017.

Net revenue from digital online channels increased by $209.2 million and accounted for 63.1% of our total net revenue for the fiscal year ended March 31, 2018, as compared to 51.8% in the prior year. The increase in net revenue from digital online channels was due primarily to higher revenue related to our NBA 2K franchise and Grand Theft Auto Online, partially offset by lower net revenue from Civilization VI and Grand Theft Auto V. Net revenue from physical retail and other channels decreased by $196.1 million and accounted for 36.9% of our total net revenue for the fiscal year ended March 31, 2018, as compared to 48.2% for the prior year. The decrease in net revenue from physical retail and other channels was due primarily to lower net revenue from Mafia III, Grand Theft Auto V, and BioShock: The Collection, which released in September 2016, partially offset by higher net revenue from L.A. Noire due to releases on PS4, Xbox One, Switch, and HTC Vive.

Net revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and microtransactions increased by $287.9 million and accounted for 41.6% of net revenue for the fiscal year ended March 31, 2018, as compared to 25.8% for the prior year. The increase in recurrent consumer spending was due primarily to higher virtual currency net revenue from Grand Theft Auto Online, our NBA 2K franchise, and Social Point titles with only two months of net revenue in the prior year as it was acquired in January 2017.

Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2018 was 49.9%, as compared to 42.5% in the prior year. The percentage increase was due primarily to lower software development costs as a percentage of net revenue due to Mafia III and Civilization VI releasing in the prior year, as well as lower product costs as a percentage of net revenue due to the decrease in net revenue from physical retail sales. The increase was offset by higher internal royalties as a percentage of net revenue due to the timing of when royalties are earned and to a lesser extent higher stock-based compensation costs as a percentage of net revenue.

Net revenue earned outside of the United States decreased by $40.0 million and accounted for 41.3% of our total net revenue in the fiscal year ended March 31, 2018, as compared to 43.9%. The decrease in net revenue was due primarily to a decrease in net revenue from Mafia III, partially offset by higher net revenues from our NBA 2K franchise. Changes in foreign currency exchange rates increased net revenue and gross profit by $9.8 million and $6.7 million, respectively, in the fiscal year ended March 31, 2018 as compared to the prior year.

Operating Expenses

(thousands of dollars)		2018				% of net revenue			2017				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Selling and marketing		$	256,092			14.3	%		$	285,453			16.0	%		$	(29,361	)		(10.3	)%
General and administrative		247,828				13.8	%		211,409				11.9	%		36,419				17.2	%
Research and development		196,373				11.0	%		137,915				7.8	%		58,458				42.4	%
Depreciation and amortization		43,969				2.5	%		30,707				1.7	%		13,262				43.2	%
Business reorganization		14,742				0.8	%		—				—	%		14,742				100.0	%
Total operating expenses		$	759,004			42.3	%		$	665,484			37.4	%		$	93,520			14.1	%

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

		2018				2017
Selling and marketing		$	13,258			$	9,963
General and administrative		$	58,037			$	42,908
Research and development		$	18,020			$	7,952
Business reorganization		2,424				—

Foreign currency exchange rates increased total operating expenses by $8.4 million in the fiscal year ended March 31, 2018 as compared to the prior year.

Selling and marketing

Selling and marketing expenses decreased by $29.4 million in the fiscal year ended March 31, 2018 as compared to the prior year, due primarily to $44.2 million in lower advertising expenses. Advertising expenses were lower in the current year due primarily to the releases of Mafia III and Civilization VI in October 2016 and Battleborn in May 2016, partially offset by higher marketing in the current year period for Grand Theft Auto Online and Red Dead Redemption 2. The decrease was partially offset by higher personnel expenses, primarily due to higher incentive compensation expense.

General and administrative

General and administrative expenses increased by $36.4 million for the fiscal year ended March 31, 2018, as compared to the prior year, due primarily to (i) increases in personnel expenses, including stock and incentive compensation expense, due to additional headcount, including our acquisition of Social Point, (ii) increases in professional fees, related primarily to our management agreement with ZelnickMedia as a result of the increase in our share price, (iii) increases in IT related expenses from the purchase of computer hardware and software, and (iv) increases in rent expense due to new locations, including our new corporate headquarters in New York and for Social Point, as well as increased rent in other locations. This overall increase was partially offset primarily by a $6.5 million reduction of expense related to reversing a contingent consideration liability recognized in connection with the Social Point acquisition as we determined that the fair value of this contingent consideration was $0 based on the lower probability of Social Point achieving certain performance measures in the 24-month period following the acquisition.

General and administrative expenses for the fiscal years ended March 31, 2018 and 2017 include occupancy expense (primarily rent, utilities and office expenses) of $18.2 million and $15.8 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $58.5 million for the fiscal year ended March 31, 2018, as compared to the prior year, due primarily to increased personnel expense due to (i) increased headcount, including our acquisition of Social Point, and (ii) higher stock-based compensation. These increases were partially offset by lower production expenses for titles that have not reached technological feasibility.

Depreciation and amortization

Depreciation and amortization expenses increased by $13.3 million for the fiscal year ended March 31, 2018, as compared to the prior year, due primarily to the recognition of a $11.3 million impairment charge as a result of our decision not to proceed with further development of a certain in-process research and development ("IPR&D") intangible asset from our acquisition of Social Point.

Business Reorganization

During the fiscal year ended March 31, 2018, we announced and initiated actions to implement a strategic reorganization at one of our labels. In connection with this initiative we incurred business reorganization expenses of $14.7 million for the fiscal year ended March 31, 2018, due primarily to employee separation costs with no corresponding costs in the prior year. Although we may record additional expense or benefit in future periods to true-up estimates, we do not expect to incur additional reorganization costs in connection with this reorganization. See Note 20 - Business Reorganization.

Interest and other, net

(thousands of dollars)		2018				% of net revenue			2017				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Interest expense, net		$	(1,005	)		(0.1	)%		$	(21,700	)		(1.2	)%		$	20,695			(95.4	)%
Foreign currency exchange (loss) gain		(3,038		)		(0.2	)%		4,990				0.3	%		(8,028		)		(160.9	)%
Other		5,091				0.3	%		1,020				0.1	%		4,071				399.1	%
Interest and other, net		$	1,048			0.1	%		$	(15,690	)		(0.9	)%		$	16,738			(106.7	)%

Interest and other, net was income of $1.0 million for the fiscal year ended March 31, 2018, as compared to an expense of $15.7 million for the fiscal year ended March 31, 2017. The increase was due primarily to a $20.7 million decrease in interest expense as a result of the settlement of our 1.75% Convertible Notes in December 2016 and higher gains on early conversions of our 1.00% Convertible Notes as well as higher interest income due to the nature of our investments and the rise of interest rates, partially offset by foreign exchange transaction losses for the fiscal year ended March 31, 2018 as compared to foreign exchange transaction gains in the prior year.

Provision/Benefit from income taxes

On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (herein referred to as the "Act”). The Act makes broad and complex changes to the U.S. tax code that could materially affect us. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 and requires companies to pay a one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries. In addition, the Act makes other changes that may affect us, beginning April 1, 2018. These changes include but are not limited to (1) a Base Erosion Anti-abuse Tax (BEAT), which is a new minimum tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision that taxes global intangible low-taxed income (GILTI), (4) the repeal of the domestic production activity deduction, and (5) other base broadening provisions.

The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy. As of March 31, 2018, the Company is still evaluating the GILTI provisions and analysis of future taxable income that is subject to GILTI and therefore is unable to make a reasonable estimate and has not reflected any adjustments related to GILTI in the Consolidated Financial Statements.

We recorded an estimated increase to income tax expense of $18.1 million related to the one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries as a result of the Act. The estimated increase was a result of a transition tax of $26.6 million, offset by increased benefits from domestic production deductions and tax credits. In addition, as a result of the decrease in the U.S. federal corporate income tax rate from 35% to 21%, we recorded a decrease to net deferred tax assets of $47.7 million and a corresponding decrease to the valuation allowance of $39.8 million after taking into account a portion of the deferred tax liability from indefinite lived intangibles as a source of income against deferred tax assets, resulting in a tax benefit of $7.9 million. The re-measurement of the deferred tax liability relating to indefinite lived intangibles, due to the rate change, resulted in a tax benefit of $6.2 million.

We are currently evaluating the potential impact of the Act, and the amounts recorded represent provisional estimates for certain identified income tax effects for which the accounting is incomplete but a reasonable estimate can be determined, in accordance with Staff Accounting Bulletin No. 118 (SAB 118). Further analysis is required to review historical practices used to calculate the untaxed earnings of certain foreign subsidiaries and additional time to evaluate the complexities of the new tax law along with additional interpretative guidance that may be issued. The impact of the Act may differ from these estimates, possibly materially, due to changes in interpretations and assumptions we have made, guidance that may be issued, and actions we may take as a result of the Act. We expect to continue to analyze the Act and its impact and expect to record any adjustments to provisional estimates no later than the third quarter of fiscal 2019.

Our income tax benefit was $36.9 million for the fiscal year ended March 31, 2018 as compared to income tax expense of $9.7 million for the fiscal year ended March 31, 2017.

When compared to the statutory rate of 31.6%, the effective tax rate of (27.0)% for the fiscal year ended March 31, 2018 was primarily due to $53.2 million from excess tax benefits from employee stock compensation as a component of the benefit from income taxes (previously excess tax benefit and tax deficiencies were recognized in additional paid-in-capital), a benefit of $22.6 million for tax credits anticipated to be utilized, a benefit of $15.1 million from changes in unrecognized tax benefits primarily due to expiration of statute of limitations, and a benefit of $7.9 million from our geographic mix of earnings, partially offset by provisional amounts recorded as a result of the Act and $10.4 million for changes in our valuation allowance.

The effective tax rate in the current year was lower compared to the prior year primarily due to $53.2 million from excess tax benefits related to employee stock compensation reflected as a component of the benefit from income taxes in the current year, an increased benefit from changes in unrecognized tax benefits of $17.3 million primarily due to expiration of statute of limitations, and $11.0 million of increased tax benefits due to mix of earnings, partially offset by a reduced benefit from tax credits of $12.7 million and provisional amounts recorded as a result of the Act.

We anticipate that additional excess tax benefits from employee stock compensation, tax credits, changes in valuation allowance, and changes as a result of the Act may arise in future periods, which could have a significant impact on our effective tax rate.

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 upon the stock price at the time of 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.

As of March 31, 2018, we had gross unrecognized tax benefits, including interest and penalties, of $128.5 million, of which $22.8 million would affect our effective tax rate if realized. For the fiscal year ended March 31, 2018, gross unrecognized tax benefits increased by $8.3 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, 2016 and state income tax returns for periods prior to the fiscal year ended March 31, 2013. 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, 2012. Certain U.S. state and foreign taxing authorities are currently examining our income tax returns for the fiscal years ended March 31, 2012 through March 31, 2016.

We are regularly audited by domestic and foreign taxing authorities. We believe that 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 may impact our effective tax rate in future periods.

Net income and earnings per share

For the fiscal year ended March 31, 2018, our net income was $173.5 million, as compared to $67.3 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2018 was $1.54, as compared to $0.72 for the fiscal year ended March 31, 2017. Basic weighted average shares outstanding of 110.1 million were 19.9 million higher compared to the prior fiscal year due primarily to the settlement on conversion of our 1.75% Convertible Notes and our 1.00% Convertible Notes with shares of our common stock using the stated conversion rate and, to a lesser extent the vesting of restricted stock awards. See Note 1 - Basis of Presentation and Significant Accounting Policies and Note 12 - Earnings (Loss) Per Share for additional information.

Fiscal Years Ended March 31, 2017 and 2016

(thousands of dollars)		2017				% of net revenue			2016				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Net revenue		$	1,779,748			100.0	%		$	1,413,698			100.0	%		$	366,050			25.9	%
Software development costs and royalties(1)		335,675				18.9	%		223,512				15.8	%		112,163				50.2	%
Internal royalties		330,782				18.6	%		328,610				23.2	%		2,172				0.7	%
Product costs		255,914				14.4	%		200,206				14.2	%		55,708				27.8	%
Licenses		100,588				5.6	%		61,545				4.4	%		39,043				63.4	%
Cost of goods sold		1,022,959				57.5	%		813,873				57.6	%		209,086				25.7	%
Gross profit		$	756,789			42.5	%		$	599,825			42.4	%		$	156,964			26.2	%

(1)	Includes $21,056 and $15,323 of stock-based compensation expense in 2017 and 2016, respectively.

For the fiscal year ended March 31, 2017, net revenue increased by $366.1 million, as compared to the prior year. This increase was due primarily to (1) an increase of $265.8 million in revenues from our NBA 2K franchise; (2) an increase of $161.2 million in net revenues from Mafia III, which released in October 2016; and (3) an increase of $63.8 million in net revenues from Civilization VI, which released in October 2016. The increase was partially offset by a decrease of $91.2 million in net revenue from our Grand Theft Auto franchise, due primarily to lower net revenues from Grand Theft Auto V, and a decrease of $80.3 million in net revenues from Evolve, which released in fiscal 2016.

Net revenue from console games increased by $273.1 million, and accounted for 81.0% of our total net revenue in the fiscal year ended March 31, 2017, as compared to 82.6% in the prior year. The increase in net revenues from console games was due primarily to higher net revenue from our NBA 2K franchise and Mafia III. Net revenue from PC and other increased by $92.9 million, as compared to the prior year, and increased as a percentage of revenue to 19.0% compared to 17.4% in the prior year. The increase in net revenue from PC and other was due primarily to higher net revenues from Civilization VI, which released on the PC in the current year and higher net revenues from Grand Theft Auto V and Grand Theft Auto Online.

Net revenue from digital online channels increased by $224.1 million and accounted for 51.8% of our total net revenue for the fiscal year ended March 31, 2017, as compared to 49.3% in the prior year. The increase in net revenue from digital online channels was due primarily to higher revenues related to our NBA 2K franchise, Civilization VI, Mafia III, and Grand Theft Auto Online, partially offset by lower revenues from Evolve. Recurrent consumer spending (including virtual currency, add-on content, and microtransactions) increased by $97.2 million and accounted for 49.8% of net revenue from digital online channels for the fiscal year ended March 31, 2017, as compared to 51.8% for the prior year. The increase in recurrent consumer spending was due primarily to higher virtual currency net revenues from our NBA 2K franchise. Net revenue from physical retail and other channels increased by 142.0 million and accounted for 48.2% of our total net revenues for the fiscal year ended March 31, 2017, as compared to 50.7% for the prior year. The increase in net revenue from physical retail and other channels was due primarily to higher net revenues from the current year release of Mafia III and the performance of our NBA 2K franchise, which was partially offset by lower net revenues from our Grand Theft Auto franchise.

Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2017 was 42.5%, as compared to 42.4% in the prior year.

Net revenue earned outside of the United States increased by $109.9 million and accounted for 43.9% of our total net revenue in the fiscal year ended March 31, 2017, as compared to 47.4%. The increase in net revenue was due primarily to an increase in net revenues from the current year release of Mafia III and our NBA 2K franchise outside of the United States, which was partially offset by lower net revenues from our Grand Theft Auto franchise. Changes in foreign currency exchange rates decreased net revenue and gross profit by $18.7 million and $8.1 million, respectively, in the fiscal year ended March 31, 2017 as compared to the prior year.

Operating Expenses

(thousands of dollars)		2017				% of net revenue			2016				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Selling and marketing		$	285,453			16.0	%		$	198,309			14.0	%		$	87,144			43.9	%
General and administrative		211,409				11.9	%		192,452				13.6	%		18,957				9.9	%
Research and development		137,915				7.8	%		119,807				8.5	%		18,108				15.1	%
Business reorganization		—				—	%		71,285				5.1	%		(71,285		)		(100.0	)%
Depreciation and amortization		30,707				1.7	%		28,800				2.0	%		1,907				6.6	%
Total operating expenses		$	665,484			37.4	%		$	610,653			43.2	%		$	54,831			9.0	%

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

	2017				2016
Selling and marketing	$	9,963			$	9,425
General and administrative	$	42,908			$	40,322
Research and development	$	7,952			$	4,926

Foreign currency exchange rates decreased total operating expenses by $11.4 million in the fiscal year ended March 31, 2017 as compared to the prior year.

Selling and marketing

Selling and marketing expenses increased by $87.1 million in the fiscal year ended March 31, 2017 as compared to the prior year, due primarily to $81.4 million in higher advertising expenses. Advertising expenses were higher in the current year due primarily

to the fiscal 2017 releases of Mafia III, Battleborn, and Civilization VI, and BioShock: The Collection. These were slightly offset by lower advertising expense for Grand Theft Auto V and Grand Theft Auto Online.

General and administrative

General and administrative expenses increased by $19.0 million for the fiscal year ended March 31, 2017, as compared to the prior year, due to increases in professional fees for our acquisition of Social Point and litigation related charges, stock compensation associated with our management agreement, expenses associated with unclaimed property, personnel expenses due to an increase in headcount, and external software costs.

General and administrative expenses for the fiscal years ended March 31, 2017 and 2016 include occupancy expense (primarily rent, utilities and office expenses) of $15.8 million and $17.2 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $18.1 million for the fiscal year ended March 31, 2017, as compared to the prior year, due primarily to higher production expenses for new titles in development that have not reached technological feasibility as well as higher personnel expenses related to employees in our development studios.

Business Reorganization

Business reorganization expense decreased by $71.3 million for the fiscal year ended March 31, 2017, as compared to the prior year. During the fiscal year ended March 31, 2016, we incurred business reorganization expenses of $71.3 million due primarily to employee separation costs in connection with reorganizing one development studio and closing two development studios. Through March 31, 2017, we have paid $5.4 million related to these reorganization activities and $65.9 million remains accrued for in Accrued expenses and other current liabilities. See Note 20 to the Consolidated Financial Statements.

Depreciation and amortization

Depreciation and amortization expenses increased by $1.9 million for the fiscal year ended March 31, 2017, as compared to the prior year, due primarily to higher purchases of fixed assets for information technology infrastructure and studio build-outs as well as the amortization of intangible assets related to our acquisition of Social Point.

Interest and other, net

(thousands of dollars)		2017				% of net revenue			2016				% of net revenue			(Increase)/ decrease				% Increase/ (decrease)
Interest expense, net		$	(21,700	)		(1.2	)%		$	(29,239	)		(2.1	)%		$	7,539			(25.8	)%
Foreign currency exchange (loss) gain		4,990				0.3	%		(1,407		)		(0.1	)%		6,397				(454.7	)%
Other		1,020				0.1	%		441				—	%		579				131.3	%
Interest and other, net		$	(15,690	)		(0.9	)%		$	(30,205	)		(2.1	)%		$	14,515			(48.1	)%

Interest and other, net was an expense of $15.7 million for the fiscal year ended March 31, 2017, as compared to an expense of $30.2 million for the fiscal year ended March 31, 2016. The decrease was due primarily to a $7.5 million decrease in interest expense, as our 1.75% Convertible Note due 2016 (the "1.75% Convertible Notes") settled in December 2016 and to foreign exchange gains.

Provision for (benefit from) income taxes

Income tax expense was $9.7 million for the fiscal year ended March 31, 2017 as compared to income tax benefit of $30.0 million for the fiscal year ended March 31, 2016. The increase in income tax expense was primarily attributable to a discrete tax benefit of approximately $26.4 million recognized in the previous year relating to a tax deduction and due to an increase in net income in the current year. Our effective rate differed from the federal statutory rate due primarily to changes in valuation allowances related to tax loss and tax credit carryforwards and mix of earnings. Our valuation allowances increased by $13.5 million during the fiscal year ended March 31, 2017 and increased by $37.1 million during the fiscal year ended March 31, 2016 due to changes in net operating loss and tax credit carryforwards.

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

For the fiscal year ended March 31, 2017, our net income was $67.3 million, as compared to a net loss of $8.3 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2017 was $0.72, as compared basic and diluted loss per share of $0.10 for the fiscal year ended March 31, 2016. Basic weighted average shares outstanding were higher compared to the prior

fiscal year due primarily to the issuance of 4.6 million shares for settlements of conversions our 1.00% Convertible Notes and our 1.75% Convertible Notes (together, the "Convertible Notes") and net stock-based compensation activity of 1.5 million shares. See Notes 1 and 12 to the Consolidated Financial Statements for additional information regarding earnings (loss) earnings per share.

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, 2018, we had $615.4 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.

Credit Agreement

In December 2017, we entered into a Seventh Amendment to our Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement provides for borrowings of up to $100.0 million which may be increased by up to $100.0 million pursuant to the terms of the Credit Agreement and which is secured by substantially all of our assets and the equity of our subsidiaries. The Credit Agreement expires on August 18, 2019. Revolving loans under the Credit Agreement bear interest at our election of (a) 0.25% to 0.75% above a certain base rate (4.75% at March 31, 2018), or (b) 1.25% to 1.75% above the LIBOR Rate (approximately 1.88% at March 31, 2018), with the margin rate subject to the achievement of certain average liquidity levels. We are also required to pay a monthly fee on the unused available balance, ranging from 0.25% to 0.375% based on availability. We had no outstanding borrowings at March 31, 2018 and 2017.

Availability under the Credit Agreement is unrestricted when liquidity, as defined in the Credit Agreement, is at least $300.0 million. When liquidity is below $300.0 million availability under the Credit Agreement is restricted by our United States and United Kingdom based accounts receivable and inventory balances. The Credit Agreement also allows for the issuance of letters of credit in an aggregate amount of up to $5.0 million.

As of March 31, 2018, there was $98.3 million available to borrow under the Credit Agreement and we had $1.7 million of letters of credit outstanding. At March 31, 2018 and 2017, we had no outstanding borrowings under the Credit Agreement.

The Credit Agreement contains covenants that substantially limit our and our subsidiaries' ability to: create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course of business; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of their respective properties; make investments; or pay dividends or make distributions (each subject to certain limitations); or optionally prepay any indebtedness (subject to certain exceptions, including an exception permitting the redemption of the Company's unsecured convertible senior notes upon the meeting of certain minimum liquidity requirements). In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest, breaches of representations and warranties, noncompliance with covenants, acts of insolvency, default on indebtedness held by third parties and default on certain material contracts (subject to certain limitations and cure periods). The Credit Agreement also contains a requirement that we maintain an interest coverage ratio of more than one to one for the trailing twelve month period, if certain average liquidity levels fall below $30.0 million.

1.00% Convertible Notes Due 2018

On June 18, 2013, we issued $250.0 million aggregate principal amount of 1.00% Convertible Notes due 2018. The 1.00% Convertible Notes were issued at 98.5% of par value for proceeds of $246.3 million. Interest on the 1.00% Convertible Notes is payable semi-annually in arrears on July 1st and January 1st of each year, commencing on January 1, 2014. The 1.00% Convertible Notes mature on July 1, 2018, unless earlier repurchased by the Company or converted. We do not have the right to redeem the 1.00% Convertible Notes prior to maturity. We also granted the underwriters a 30-day option to purchase up to an additional $37.5 million principal amount of 1.00% Convertible Notes to cover overallotments, if any. On July 17, 2013, we closed our public offering of $37.5 million principal amount of our 1.00% Convertible Notes as a result of the underwriters exercising their overallotment option in full on July 12, 2013, bringing the total proceeds to $283.2 million.

The 1.00% Convertible Notes are convertible at an initial conversion rate of 46.4727 shares of our common stock per $1,000 principal amount of 1.00% Convertible Notes (representing an initial conversion price of approximately $21.52 per share of common stock for a total of approximately 13.4 million underlying conversion shares) subject to adjustment in certain circumstances.

During the fiscal year ended March 31, 2018, 1.00% Convertible Notes with an aggregate principal value of $260.0 million were submitted for conversion. We elected to settle in shares of our common stock. As a result of early conversions of the 1.00% Convertible Notes, we recorded a gain within Interest and other, net on our Consolidated Statement of Operations of $4.9 million for the fiscal year ended March 31, 2018.

As of April 1, 2018 until the close of business on the business day immediately preceding the maturity date, holders may convert their 1.00% Convertible Notes at any time. Prior to April 26, 2018, upon conversion, the 1.00% Convertible Notes were eligible to be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. Effective April 26, 2018, we elected to settle our remaining conversion obligations in connection with the 1.00% Convertible Notes solely in shares of our common stock and accordingly notified the Trustee. As such, we have continued to classify these 1.00% Convertible Notes as long-term debt.

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 our customers to mitigate accounts receivable risk.

A majority of our trade receivables are derived from sales to major retailers and distributors. Our five largest customers accounted for 70.7%, 65.5%, and 58.9% of net revenue during the fiscal years ended March 31, 2018, 2017, and 2016, respectively. As of March 31, 2018 and 2017, five customers accounted for 65.4% and 69.9% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 53.2% and 57.6% of such balances at March 31, 2018 and 2017, respectively. We had two customers who accounted for 37.7% and 15.5% of our gross accounts receivable as of March 31, 2018 and two customers who accounted for 40.2%, and 17.4% of our gross accounts receivable as of March 31, 2017. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2018 and 2017. 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.

We believe our current cash, 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.

As of March 31, 2018, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $266.6 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.

On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the "Tax Cuts and Jobs Act” (herein referred to as the "Act”). The Act makes broad and complex changes to the U.S. tax code, which could materially affect us.

The Act includes a number of provisions, including international provisions, which generally establish a territorial-style system for taxing foreign income of domestic multinational corporations. We are reviewing whether the Act will affect our current intention to reinvest indefinitely earnings of our foreign subsidiaries and therefore have not recorded any tax liabilities associated with the repatriation of foreign earnings.

Our Board of Directors has authorized the repurchase of up to 14.2 million shares of our common stock. 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, the Company's 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, 2018, 2017, and 2016, we repurchased 1.5 million, 0, and 1.0 million, respectively, shares of our common stock in the open market for $154.8 million, $0.0 million, and $26.6 million, respectively, including commissions as part of the program. As of March 31, 2018, we had repurchased a total of 6.7 million shares of our common stock under the program, and 7.5 million shares of our common stock remained available for repurchase under the share repurchase program.

Subsequent to March 31, 2018 and through the date of this filing, we repurchased an additional 1.6 million shares of our common stock in the open market for $153.5 million, including commissions. After these additional purchases, 5.9 million shares of our common stock remain available for repurchase under the share repurchase program.

Our changes in cash flows were as follows:

		Fiscal Year Ended March 31,
(thousands of dollars)		2018				2017				2016
Net cash provided by operating activities		$	393,947			$	331,429			$	261,305
Net cash used in investing activities		(271,827		)		(129,030		)		(324,516		)
Net cash used in financing activities		(281,467		)		(49,772		)		(48,047		)
Effects of foreign currency exchange rates on cash and cash equivalents		24,924				(7,973		)		(1,120		)
Net change in cash and cash equivalents		$	(134,423	)		$	144,654			$	(112,378	)

At March 31, 2018 we had $809.0 million of cash and cash equivalents, compared to $943.4 million at March 31, 2017. The decrease in cash and cash equivalents from March 31, 2017 was due primarily to cash used in financing and investing activities, partially offset by cash provided by operating activities. Net cash used in financing activities was primarily related to repurchases of common stock under our share repurchase program and tax payments related to net share settlements of our restricted stock awards. Net cash used in investing activities was primarily related to net purchases of available for sale securities, purchases of fixed assets, and other asset acquisitions. Net cash provided by operating activities was due primarily to cash generated from sales of virtual currency. NBA 2K18, Grand Theft Auto V, and WWE 2K18, partially offset by investments in software development and licenses and funding of internal royalty payments.

Contractual Obligations and Commitments

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

• Software Development and Licensing: We make payments to third-party software developers that include contractual payments to developers under several software development agreements that expire at various times through January 2022. Our aggregate outstanding software development commitments assume satisfactory performance by third-party software developers. We also have licensing commitments that primarily consist of obligations to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of our products.

• Marketing: We have certain minimum marketing support commitments where we commit to spend specified amounts related to marketing our products. Marketing commitments expire at various times through December 2022.

• Operating Leases: Our offices are occupied under non-cancelable operating leases expiring at various times through December 2032. We also lease certain furniture, equipment and automobiles under non-cancelable leases expiring through March 2021. Some of the leases have fixed rent increases and also include inducements to enter into the lease. The effect of such amounts are deferred and recognized on a straight-line basis over the related lease term.

• Purchase obligations primarily related to agreements to purchase services that are enforceable and legally binding on the Company that specifies all significant terms, including fixed, minimum or variable pricing provisions; and the approximate timing of the transactions, expiring at various times through September 2021.

A summary of annual minimum contractual obligations and commitments as of March 31, 2018 is as follows (in thousands of dollars):

Fiscal Year Ending March 31,		Software Development and Licensing				Marketing				Operating Leases				Purchase Obligations				Convertible Notes Interest				Convertible Notes				Total
2018		$	116,242			$	49,725			$	39,113			$	21,549			$	20			$	8,160			$	234,809
2019		53,534				4,060				29,620				7,046				—				—				94,260
2020		28,999				13,480				23,092				1,629				—				—				67,200
2021		21,748				3,773				21,665				—				—				—				47,186
2022		6,250				3,500				19,571				—				—				—				29,321
Thereafter		5,250				—				62,476				—				—				—				67,726
Total		$	232,023			$	74,538			$	195,537			$	30,224			$	20			$	8,160			$	540,502

Income Taxes: At March 31, 2018, we had recorded a liability for gross unrecognized tax benefits, including interest and penalties, of $22.8 million, for which we are unable to make a reasonable and reliable estimate of the period in which these liabilities will be settled with the respective tax authorities; therefore, these liabilities have not been included in the contractual obligations table.

Legal and Other Proceedings: We are, or may become, subject to demands and claims (including intellectual property claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial statements. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.

On April 11, 2016, we filed a declaratory judgment action in the United States District Court for the Southern District of New York seeking, among other things, a judicial declaration that Leslie Benzies, the former president of one of our subsidiaries with whom we had been in ongoing discussions regarding his separation of employment, is not entitled to any minimum allocation or financial parity with any other person under the applicable royalty plan. We believe we will prevail in this matter, although there can be no assurance of the outcome. On April 12, 2016, Mr. Benzies filed a complaint in the Supreme Court of the State of New York, New York County against us, and certain of our subsidiaries and employees. We removed this case to the United States District Court for the Southern District of New York, but the case was subsequently remanded to state court. The complaint claims damages of at least $150 million and contains allegations of breach of fiduciary duty; fraudulent inducement and fraudulent concealment; aiding and abetting breach of fiduciary duty; breach of various contracts; breach of implied duty of good faith and fair dealing; tortious interference with contract; unjust enrichment; reformation; constructive trust; declaration of rights; constructive discharge; defamation and fraud. We have asserted counterclaims for breach of contract, theft of trade secrets, and misappropriation.

As a result of amended pleadings, motion practice and appeals to date, twelve of Mr. Benzies’ claims have been dismissed, leaving only six remaining claims: breach of various contracts, constructive discharge, breach of implied duty of good faith and fair dealing, and tortious interference with contract. Our federal court action has been stayed pending the conclusion of the state court action. We believe that we have meritorious defenses to the remaining claims, and we intend to vigorously defend against them and to pursue our counterclaims.

Off-Balance Sheet Arrangements

As of March 31, 2018 and 2017, 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, 2018, 2017 and 2016, 41.3%, 43.9% and 47.4%, 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 products are also seasonal, with peak shipments typically occurring in the fourth calendar quarter as a result of increased demand for products during the holiday season. For certain of our software products with multiple element revenue arrangements where we do not have VSOE for each element and the deliverables are deemed more-than-inconsequential, we defer the recognition of our net revenues over an estimated service period which generally ranges from 12 to 62 months. As a result, the quarter in which we generate the highest net sales volume may be different from the quarter in which we recognize the highest amount of net revenues. Quarterly comparisons of operating results are not necessarily indicative of future operating results.