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 Microsoft's Xbox One, 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 virtual currency, add-on content, and in-game purchases. 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 that we serve, ranging from adults to children and game enthusiasts to casual gamers. Another cornerstone of our strategy is to support the success of our products in the marketplace through innovative marketing programs and global distribution on platforms and through channels that are relevant to our target audience.

Our revenue is primarily derived from the sale of internally developed software titles and software titles developed by third parties. Operating margins are dependent in part upon our ability to release new, commercially successful software products and to manage effectively their development and marketing costs. We have internal development studios located in Australia, Canada, China, Czech Republic, Hungary, India, 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 Redemption, 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 Games has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 290 million units. The latest installment, Grand Theft Auto V, has sold-in over 105 million units worldwide and includes access to Grand Theft Auto Online. On October 26, 2018, Rockstar Games launched Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records. 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. 2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, the WWE 2K professional wrestling series, and the Golf Club.

Our Private Division label is dedicated to bringing titles from top independent developers to market. Private Division will publish three upcoming titles based on new IP from renowned industry creative talent, including The Outer Worlds and Ancestors: The Humankind Odyssey, both of which are planned for release in calendar 2019. 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 in the coming years.

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 secured 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. NBA 2K Online, our free-to-play NBA simulation game, which was co-developed by 2K and Tencent, is the top online PC

sports game in China with over 45 million registered users. On August 2, 2018, 2K and Tencent commercially launched NBA 2K Online 2 in China. The title is based on the console edition of NBA 2K and includes an array of new features.

In February 2017, we expanded our relationship with the NBA through the creation of the NBA 2K League. Launched in May 2018, this groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises. The NBA 2K League follows a professional sports league format: the inaugural season included head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up that was held in August 2018. The NBA 2K League began its second season on April 2, 2019.

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 25.7% of our net revenue for the fiscal year ended March 31, 2019. In October 2018, we released Red Dead Redemption 2. Sales of Red Dead Redemption products generated 32.1% of our net revenue for the fiscal year ended March 31, 2019. The timing of our Grand Theft Auto or Red Dead Redemption 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 70.1%, 70.7% and 65.5% of net revenue during the fiscal years ended March 31, 2019, 2018 and 2017, respectively. As of March 31, 2019 and 2018, five customers comprised 66.6% and 65.4% 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 55.8% and 53.2% of such balance at March 31, 2019 and 2018, respectively. We had two customers who accounted for 40.1% and 15.7% of our gross accounts receivable as of March 31, 2019 and two customers who accounted for 37.7% and 15.5% of our gross accounts receivable as of March 31, 2018. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2019 and 2018. 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 Microsoft's Xbox One, which comprised 83.7% of our net revenue by product platform for the fiscal year ended March 31, 2019. 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, 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. 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 larger selection of our catalog titles. In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases. We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download. Our "Results of Operations," discloses that net revenue from digital online channels comprised 63.0% of our net revenue for the fiscal year ended March 31, 2019. 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 2019:

Title		Publishing Label		Internal or External Development		Platform(s)		Date Released
Grand Theft Auto V Premium Online Edition		Rockstar Games		Internal		PS4, Xbox One, PC		April 20, 2018
The Golf Club 2019 Featuring PGA TOUR (Digital)		2K		External		PS4, Xbox One, PC		August 27, 2018
NBA 2K Online 2		2K		External		Tencent (China only)		August 2, 2018
NBA 2K19 20th Anniversary Edition		2K		Internal		PS4, Xbox One, Nintendo Switch, PC		September 7, 2018
NBA 2K19 Standard Edition		2K		Internal		PS4, Xbox One, Nintendo Switch, PC		September 11, 2018
WWE 2K19 Woooo! Deluxe Edition		2K		Internal/External		PS4, Xbox One, PC		October 5, 2018
WWE 2K19		2K		Internal/External		PS4, Xbox One, PC		October 9, 2018
NBA 2K Playgrounds 2		2K		External		PS4, Xbox One, Nintendo Switch, PC		October 16, 2018
Red Dead Redemption 2		Rockstar Games		Internal		PS4, Xbox One		October 26, 2018
Carnival Games		2K		Internal		PS4, Xbox One, Nintendo Switch		November 6, 2018
The Golf Club 2019 Featuring PGA TOUR (Physical)		2K		External		PS4, Xbox One, PC		November 13, 2018 (North America) November 16, 2018 (International)
Sid Meier's Civilization VI		2K		External		Nintendo Switch		November 16, 2018
Red Dead Online Beta		Rockstar Games		Internal		PS4, Xbox One		November 27, 2018
Sid Meier's Civilization VI: Gathering Storm		2K		Internal		PC		February 14, 2019
Borderlands: Game of the Year Edition		2K		Internal/External		PS4, Xbox One, PC		April 3, 2019

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
Borderlands 3		2K/Gearbox Software		Internal/External		PS4, Xbox One, PC		September 13, 2019
NBA 2K20		2K		Internal		TBA		TBA
WWE 2K20		2K		Internal		TBA		TBA
Ancestors: The Humankind Odyssey		Private Division		External		PS4, Xbox One, PC (digital only)		2019 (fiscal 2020)
The Outer Worlds		Private Division		External		PS4, Xbox One, PC		2019 (fiscal 2020)

Fiscal 2019 Financial Summary

On April 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments (the “New Revenue Accounting Standard”) using the modified retrospective method. Therefore, no prior amounts have been restated in our tables and discussion below. Refer to Note 1 to our Consolidated Financial Statements for our accounting policy disclosure for revenue recognition. In general, the adoption of Topic 606 results in a more accelerated revenue pattern, due primarily to (i) the elimination of the requirement for vendor-specific objective evidence ("VSOE") of fair value when allocating between multiple performance obligations and (ii) the change of our estimated service period to a user life. However, the impact on a given period may differ from this general trend. In October 2018, we released Red Dead Redemption 2. The acceleration of revenue for this title was material and is the primary component of the significant increases in certain of our operating results as a result of the adoption of Topic 606 throughout the discussion in our "Results of Operations" below. See Notes 1 and 2 to our Consolidated Financial Statements for further information.

Our Net revenue for fiscal year ended March 31, 2019 was led by titles from a variety of our top franchises, primarily Red Dead Redemption 2, Grand Theft Auto, NBA 2K, and WWE 2K. Our Net revenue increased to $2,668.4 million, an increase of $875.5 million or 48.8% compared to the fiscal year ended March 31, 2018. This increase included a $741.2 million increase

in Net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was driven by sales of the titles described above.

During the fiscal year ended March 31, 2019, we recognized a tax benefit of $107.1 million from a reduction in our valuation allowance on certain U.S. deferred tax assets as a result of a determination that it was more-likely-than-not that such deferred tax assets would be realized. Our determination took into account the successful launch of Red Dead Redemption 2 during the current fiscal year along with our recent positive trend of earnings.

For the fiscal year ended March 31, 2019, our Net income was $333.8 million, as compared to Net income of $173.5 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2019 was $2.90, as compared to Diluted income per share of $1.54 for the fiscal year ended March 31, 2018. Our operating income for the fiscal year ended March 31, 2019 increased compared to the operating income for fiscal year ended March 31, 2018, due primarily to higher Gross profit due primarily to higher revenue as a result of the adoption of Topic 606 as described above and the successful launch Red Dead Redemption 2, partially offset by higher Operating expenses primarily due to higher Selling and marketing expense for titles released during the current fiscal year.

At March 31, 2019, we had $1,392.0 million of Cash and Cash equivalents and Restricted cash, compared to 1,246.4 million at March 31, 2018. The increase in Cash and cash equivalents and Restricted cash from March 31, 2018 was due primarily to Net cash provided by operating activities from sales, primarily of Red Dead Redemption 2, partially offset by investments in software development and licenses as well as royalty payments. These net increases were offset by Net cash used in financing activities, which 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, and to a lesser extent Net cash used in investing activities, which was primarily related to bank time deposits and purchases of fixed assets.

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.

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:

	Fiscal Year Ended March 31,
	2019				2018				Increase/(decrease)				Increase/(decrease) %
Net Bookings	$	2,928,724			$	1,990,602			$	938,122			47.1	%

For the fiscal year ended March 31, 2019, Net Bookings increased by $938.1 million as compared to the prior year period due primarily to Red Dead Redemption 2, which released in October 2018, and our NBA 2K franchise, partially offset by a decrease from Grand Theft Auto V and Grand Theft Auto Online.

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,
		2019							2018							2017
Net revenue		$	2,668,394			100.0	%		$	1,792,892			100.0	%		$	1,779,748			100.0	%
Cost of goods sold		1,523,644				57.1	%		898,311				50.1	%		1,022,959				57.5	%
Gross profit		1,144,750				42.9	%		894,581				49.9	%		756,789				42.5	%
Selling and marketing		391,400				14.7	%		256,092				14.3	%		285,453				16.0	%
General and administrative		281,234				10.5	%		247,828				13.8	%		211,409				11.9	%
Research and development		230,170				8.6	%		196,373				11.0	%		137,915				7.8	%
Depreciation and amortization		40,232				1.5	%		43,969				2.5	%		30,707				1.7	%
Business reorganization		(4,958		)		(0.2	)%		14,742				0.8	%		—				—	%
Total operating expenses		938,078				35.2	%		759,004				42.3	%		665,484				37.4	%
Income from operations		206,672				7.7	%		135,577				7.6	%		91,305				5.1	%
Interest and other, net		26,113				1.0	%		1,048				0.1	%		(15,690		)		(0.9	)%
Gain on long-term investments, net		—				—	%		—				—	%		1,350				0.1	%
Income before income taxes		232,785				8.7	%		136,625				7.6	%		76,965				4.3	%
(Benefit from) provision for income taxes		(101,052		)		(3.8	)%		(36,908		)		(2.1	)%		9,662				0.5	%
Net income		$	333,837			12.5	%		$	173,533			9.7	%		$	67,303			3.8	%

		Fiscal Year Ended March 31,
		2019							2018							2017
Net revenue by geographic region:
United States		$	1,426,906			53.5	%		$	1,052,313			58.7	%		$	999,128			56.1	%
International		1,241,488				46.5	%		740,579				41.3	%		780,620				43.9	%
Net revenue by platform:
Console		$	2,233,861			83.7	%		$	1,463,306			81.6	%		1,440,724				81.0	%
PC and other		434,533				16.3	%		329,586				18.4	%		339,024				19.0	%
Net revenue by distribution channel:
Digital online		$	1,681,609			63.0	%		$	1,130,946			63.1	%		921,734				51.8	%
Physical retail and other		986,785				37.0	%		661,946				36.9	%		858,014				48.2	%
Net revenue by content:
Full game and other		$	1,597,478			59.9	%		$	1,046,176			58.4	%		$	1,320,890			74.2	%
Recurrent consumer spending		1,070,916				40.1	%		746,716				41.6	%		458,858				25.8	%

Fiscal Years ended March 31, 2019 and 2018

(thousands of dollars)		2019				% of net revenue			2018				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Net revenue		$	2,668,394			100.0	%		$	1,792,892			100.0	%		$	875,502			48.8	%
Internal royalties		610,804				22.9	%		383,020				21.4	%		227,784				59.5	%
Product costs		322,148				12.1	%		203,301				11.3	%		118,847				58.5	%
Software development costs and royalties(1)		449,198				16.8	%		191,400				10.7	%		257,798				134.7	%
Licenses		141,494				5.3	%		120,590				6.7	%		20,904				17.3	%
Cost of goods sold		1,523,644				57.1	%		898,311				50.1	%		625,333				69.6	%
Gross profit		$	1,144,750			42.9	%		$	894,581			49.9	%		$	250,169			28.0	%

(1) Includes $149,075 and $24,610 of stock-based compensation expense in 2019 and 2018, respectively.

In general, the adoption of Topic 606 results in a more accelerated revenue pattern, due primarily to (i) the elimination of the requirement for vendor-specific objective evidence ("VSOE") of fair value when allocating between multiple performance obligations and (ii) the change of our estimated service period to a user life. However, the impact on a given period may differ from this general trend. In October 2018, we released Red Dead Redemption 2. The acceleration of revenue for this title due to the adoption of Topic 606 was material and is the primary component of the significant increases as a result of the adoption of Topic 606 throughout the discussion below. See Note 1 and Note 2 to our Consolidated Financial Statements for further information.

For the fiscal year ended March 31, 2019, net revenue increased by $875.5 million, as compared to the prior year. This increase included a $741.2 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to (i) an increase of $129.6 million in net revenue from Red Dead Redemption 2, (ii) an increase of $53.4 million in net revenue from Grand Theft Auto Online, and (iii) an increase of $43.9 million in net revenue from our NBA 2K franchise. These increases were partially offset by (i) a decrease of $51.5 million in net revenue from Grand Theft Auto V, (ii) a decrease of $27.8 million in net revenue from our WWE 2K franchise and (ii) a decrease of $18.0 million in net revenue from L.A. Noire.

Net revenue from console games increased by $770.6 million and accounted for 83.7% of our total net revenue in the fiscal year ended March 31, 2019, as compared to 81.6% in the prior year. The increase in net revenue from console games included a $658.8 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from Red Dead Redemption 2, Grand Theft Auto Online, and our NBA 2K franchise. These increases were partially offset by a decrease in net revenue from Grand Theft Auto V and our WWE 2K franchise. Net revenue from PC and other increased by $104.9 million as compared to the prior year and decreased as a percentage of net revenue to 16.3% compared to 18.4% in the prior year. The increase in net revenue from PC and other included an $82.4 million increase in net revenue as the result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from Grand Theft Auto Online, Red Dead Redemption 2 merchandise, our Civilization franchise, Monster Legends, our NBA 2K franchise, and L.A. Noire. These increases were partially offset by a decrease in net revenue from XCOM 2 and Grand Theft Auto V.

Net revenue from digital online channels increased by $550.7 million and accounted for 63.0% of our total net revenue for the fiscal year ended March 31, 2019, as compared to 63.1% in the prior year. The increase in net revenue from digital online channels included a $353.2 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, and Red Dead Redemption 2, partially offset by a decrease in net revenue from XCOM 2. Net revenue from physical retail and other channels increased by $324.8 million and accounted for 37.0% of our total net revenue for the fiscal year ended March 31, 2019, as compared to 36.9% for the prior year. The increase in net revenue from physical retail and other channels included a $388.1 million increase in net revenue as a result of the adoption of Topic 606, as described above. Offsetting this increase was a net decrease due to a decrease in net revenue from Grand Theft Auto V, our NBA 2K franchise, our WWE 2K franchise, and L.A. Noire, partially offset by an increase in net revenue from Red Dead Redemption 2.

Net revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases increased by $324.2 million and accounted for 40.1% of net revenue for the fiscal year ended March 31, 2019, as compared to 41.6% for the prior year. The increase in net revenue from recurrent consumer spending included a $164.4 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, our Civilization franchise, and Red Dead Redemption 2, partially offset by a decrease in net revenue from Mafia III. Net revenue from full game and other increased by $551.3 million and accounted for 59.9% of net revenue for the fiscal year ended March 31, 2019, as compared to 58.4% for the prior year. The increase in net revenue from full game and other included a $576.9 million increase in net revenue as a result of the adoption of Topic 606, as described above. Offsetting this increase was a net decrease due to a decrease in net revenue from Grand Theft Auto V, our NBA 2K franchise, our WWE 2K franchise, L.A. Noire, and Mafia III, partially offset by an increase in net revenue from Red Dead Redemption 2.

Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2019 was 42.9%, as compared to 49.9% in the prior year. The adoption of Topic 606 resulted in a 6.1% increase in gross profit percentage. The remaining percentage decrease was due to higher internal royalties as a percentage of net revenue due to the timing of when royalties are earned and to a lesser extent higher software development costs as a percentage of net revenue due to the timing of our releases.

Net revenue earned outside of the United States increased by $500.9 million and accounted for 46.5% of our total net revenue in the fiscal year ended March 31, 2019, as compared to 41.3% in the prior year. The increase in net revenue earned outside the United States included a $438.0 million increase as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from Red Dead Redemption 2, Grand Theft Auto Online, and our NBA

2K franchise, partially offset by a decrease in net revenue from Grand Theft Auto V. Changes in foreign currency exchange rates decreased net revenue and gross profit by $10.0 million and $5.7 million, respectively, in the fiscal year ended March 31, 2019 as compared to the prior year.

Operating Expenses

(thousands of dollars)		2019				% of net revenue			2018				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Selling and marketing		$	391,400			14.7	%		$	256,092			14.3	%		$	135,308			52.8	%
General and administrative		281,234				10.5	%		247,828				13.8	%		33,406				13.5	%
Research and development		230,170				8.6	%		196,373				11.0	%		33,797				17.2	%
Depreciation and amortization		40,232				1.5	%		43,969				2.5	%		(3,737		)		(8.5	)%
Business reorganization		(4,958		)		(0.2	)%		14,742				0.8	%		(19,700		)		(133.6	)%
Total operating expenses		$	938,078			35.2	%		$	759,004			42.3	%		$	179,074			23.6	%

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

		2019				2018
Selling and marketing		$	23,685			$	13,258
General and administrative		$	51,903			$	58,037
Research and development		$	23,037			$	18,020
Business reorganization		—				2,424

Foreign currency exchange rates decreased total operating expenses by $5.1 million in the fiscal year ended March 31, 2019 as compared to the prior year.

Selling and marketing

Selling and marketing expenses increased by $135.3 million in the fiscal year ended March 31, 2019 as compared to the prior year, due primarily to $108.5 million in higher advertising expenses. Advertising expenses were higher in the current year due primarily to the release of Red Dead Redemption 2 in October 2018, our NBA 2K franchise, and Grand Theft Auto Online. The remaining increase is due to higher personnel expenses, primarily due to increased headcount.

General and administrative

General and administrative expenses increased by $33.4 million for the fiscal year ended March 31, 2019, as compared to the prior year, due primarily to (i) increases in personnel expenses due to additional headcount, (ii) a reduction of expense in the prior period related to updating the fair value of contingent consideration from our acquisition of Social Point, (iii) increases in IT related expenses for cloud-based services, and (iv) increases in rent expense. These increases were partially offset by a decrease in stock compensation expense, related primarily to share based awards granted under our management agreement with ZelnickMedia, and insurance recoveries.

General and administrative expenses for the fiscal years ended March 31, 2019 and 2018 include occupancy expense (primarily rent, utilities and office expenses) of $22.0 million and $18.2 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $33.8 million for the fiscal year ended March 31, 2019, as compared to the prior year, due primarily to increased personnel expense due to (i) increased headcount and (ii) higher stock-based compensation as well as an increase in production and development expenses for titles for which technological feasibility has not been established.

Depreciation and amortization

Depreciation and amortization expenses decreased by $3.7 million for the fiscal year ended March 31, 2019, as compared to the prior year, due primarily to the recognition of a $11.3 million impairment charge in September 2017, 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. The decrease was partially offset by an increase in depreciation expense due primarily to the move to our new corporate headquarters in December 2017 and an increase in IT infrastructure costs.

Business Reorganization

During the fiscal year ended March 31, 2019, business reorganization expense decreased $19.7 million as a result of a benefit due to updating estimates for and completing our 2016 Plan as well as costs related to our 2018 Plan in the prior year period with significantly decreased costs in the current year period. 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 these reorganizations. See Note 20 - Business Reorganization to our Consolidated Financial Statements.

Interest and other, net

(thousands of dollars)		2019				% of net revenue			2018				% of net revenue			Increase/(decrease)				% Increase/(decrease)
Interest income		$	38,019			1.4	%		$	21,264			1.2	%		$	16,755			78.8	%
Interest expense		(8,032		)		(0.3	)%		(22,269		)		(1.2	)%		14,237				(63.9	)%
Foreign currency exchange (loss) gain		(505		)		—	%		(3,038		)		(0.2	)%		2,533				(83.4	)%
Other		(3,369		)		(0.1	)%		5,091				0.3	%		(8,460		)		(166.2	)%
Interest and other, net		$	26,113			1.0	%		$	1,048			0.1	%		$	25,065			2,391.7	%

Interest and other, net was $26.1 million for the fiscal year ended March 31, 2019, as compared to $1.0 million for the fiscal year ended March 31, 2018. The increase was due primarily to a $16.8 million increase in interest income due primarily to the size of, nature of, and return on our investment portfolio and a $14.2 million decrease in interest expense primarily as a result of the settlement of our 1.00% Convertible Notes due 2018 ("Convertible Notes"), which matured July 1, 2018. The net increase was partially offset by gains in the prior period on the early conversion of our Convertible Notes, with no corresponding gains in the current period.

Provision/Benefit from income taxes

We recognized a tax benefit of $107.1 million from a reduction in our valuation allowance on certain U.S. deferred tax assets as a result of a determination that it was more-likely-than-not that such deferred tax assets would be realized. Our determination took into account the successful launch of Red Dead Redemption 2 during the year along with our recent positive trend of earnings.

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 made broad and complex changes to the U.S. tax code. The Act reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 and required companies to pay a one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries. In addition, the Act made other changes, including, but 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 SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Acts ("SAB 118"), which provides guidance on accounting for the Act's impact. SAB 118 provides a measurement period, which should not extend beyond one year from the Act enactment date, during which a company acting in good faith may complete the accounting for the impact of the Act under ASC 740. In accordance with SAB 118, the income tax effects of the Act must be reflected in the reporting period in which the accounting under ASC Topic 740 is complete. We completed the accounting and recorded a decrease to income tax expense of $4.6 million to adjust the provisional estimates related to the one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries as a result of the Act. The impact of the Act differs from these estimates due to changes in interpretations and assumptions we have made, guidance that was issued, and actions taken as a result of the Act.

The Act subjects a U.S. shareholder to current tax on GILTI earned by foreign subsidiaries. The FASB Staff Q&A Topic No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election either to recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. We have elected to recognize the resulting tax on GILTI as an expense in the period incurred.

Our income tax benefit was $101.1 million for the fiscal year ended March 31, 2019 as compared to $36.9 million for the fiscal year ended March 31, 2018.

When compared to the statutory rate of 21.0%, the effective tax rate of (43.4)% for the fiscal year ended March 31, 2019 was primarily due to a $107.1 million tax benefit from changes in valuation allowance, a benefit of $35.0 million for tax credits,

$13.3 million from excess tax benefits from employee stock compensation, and $9.0 million from our geographic mix of earnings, partially offset by tax expense from other immaterial items, which include the impact of the Act.

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 a lower U.S. statutory rate, increased tax benefits from changes in valuation allowance, increased tax benefits from tax credits, reduced tax expense from the one-time transition tax, partially offset by reduced benefits from excess tax benefits related to employee stock compensation and changes in unrecognized tax benefits.

We anticipate that additional excess tax benefits from employee stock compensation and tax credits could have a significant impact on our effective tax rate in future periods.

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.

On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, which overturned previous case law that precluded states from requiring retailers to collect sales tax on sales made to in-state customers unless the retailer had physical presence in the state. Although this case is limited to sales tax collection obligations, we continue to monitor the potential impact of this decision on our state income tax footprint.

The ultimate amount of tax payable in a given financial statement period may be materially affected by sudden or unforeseen changes in tax laws, changes in the mix and level of earnings by taxing jurisdictions, or changes to existing accounting rules or regulations. For example, on July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock compensation. On August 7, 2018, the opinion was withdrawn to allow time for a reconstituted panel to confer. We will continue to monitor ongoing developments and the final opinion could have a material impact on our Consolidated Financial Statements.

As of March 31, 2019, we had gross unrecognized tax benefits, including interest and penalties, of $139.0 million, of which $23.9 million would affect our effective tax rate if realized. For the fiscal year ended March 31, 2019, gross unrecognized tax benefits increased by $10.5 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, 2016 and state income tax returns for periods prior to the fiscal year ended March 31, 2014. 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, 2013. Certain U.S. state and foreign taxing authorities are currently examining our income tax returns for the fiscal years ended March 31, 2014 through March 31, 2017.

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, 2019, our net income was $333.8 million, as compared to $173.5 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2019 was $2.90, as compared to $1.54 for the fiscal year ended March 31, 2018. Diluted weighted average shares outstanding of 115.2 million were 2.4 million higher compared to the prior fiscal year due primarily to the settlement on conversion of our 1.00% Convertible Notes with shares of our common stock using the stated conversion rate and, to a lesser extent, normal stock compensation activity including grants and forfeitures, offset by share repurchases. See Note 1 - Basis of Presentation and Significant Accounting Policies and Note 13 - Earnings Per Share to the Consolidated Financial Statements for additional information.

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 net revenue 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 revenue 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 revenue 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	%

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 13 - Earnings Per Share for additional information.

Liquidity and Capital Resources

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

Short-term Investments

As of March 31, 2019, we had $744.5 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.

New Credit Agreement

On February 8, 2019, we entered into an unsecured Credit Agreement (the “New Credit Agreement”). The New Credit Agreement replaced our existing Credit Agreement, which was terminated on the same day. The New Credit Agreement runs through February 8, 2024. The New Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $200,000, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $25,000 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros and Canadian Dollars in an aggregate principal amount of up to $25,000. In addition, the New Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $250,000 in term loans or revolving credit facilities. Loans under the New Credit Agreement will bear interest at a margin of (a) 0.125% to 0.750% above a certain base rate (5.50% at March 31, 2019), or (b) 1.125% to 1.750% above LIBOR (approximately 2.49% at March 31, 2019), which margins are determined by reference to our consolidated total net leverage ratio.

As of March 31, 2019, there was $198.3 million available to borrow under the New Credit Agreement and we had $1.7 million of letters of credit outstanding. At March 31, 2019, we had no outstanding borrowings under the Credit Agreement.

The New 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 New 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).

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 Convertible Notes were issued at 98.5% of par value for proceeds of $283.2 million, which included a $37.5 million overallotment option that was exercised. Interest on the Convertible Notes was payable semi-annually in arrears on July 1st and January 1st of each year, commencing on January 1, 2014. The Convertible Notes matured on July 1, 2018.

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 70.1%, 70.7%, and 65.5% of net revenue during the fiscal years ended March 31, 2019, 2018, and 2017, respectively. As of March 31, 2019 and 2018, five customers accounted for 66.6% and 65.4% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 55.8% and 53.2% of such balances at March 31, 2019 and 2018, respectively. We had two customers who accounted for 40.1% and 15.7% of our gross accounts receivable as of March 31, 2019 and two customers who accounted for 37.7%, and 15.5% of our gross accounts receivable as of March 31, 2018. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2019 and 2018. 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 New 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, 2019, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $292.7 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 made broad and complex changes to the U.S. tax code, which could materially affect us. The Act included a number of provisions, including international provisions, which generally establish a territorial-style system for taxing foreign income of domestic multinational corporations. Our current intention is to reinvest indefinitely earnings of our foreign subsidiaries, and therefore we 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, 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, 2019, 2018, and 2017, we repurchased 3.7 million, 1.5 million, and 0.0 million shares of our common stock, respectively, in the open market for $362.4 million, $154.8 million, and $0.0 million, respectively, including commissions as part of the program. As of March 31, 2019, we had repurchased a total of 10.4 million shares of our common stock under the program, and 3.8 million shares of our common stock remained available for repurchase under the share repurchase program.

Our changes in cash flows were as follows:

		Fiscal Year Ended March 31,
(thousands of dollars)		2019				2018				2017
Net cash provided by operating activities		$	843,515			$	493,527			$	407,903
Net cash used in investing activities		(223,576		)		(271,827		)		(129,030		)
Net cash used in financing activities		(463,685		)		(281,467		)		(49,772		)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash		(10,639		)		24,924				(7,798		)
Net change in cash, cash equivalents, and restricted cash		$	145,615			$	(34,843	)		$	221,303

At March 31, 2019, we had 1,392.0 million of Cash, cash equivalents, and Restricted cash, compared to 1,246.4 million at March 31, 2018. The increase in Cash, cash equivalents, and Restricted cash from March 31, 2018 was due primarily to Net cash provided by operating activities from sales, primarily of Red Dead Redemption 2, partially offset by investments in software development and licenses as well as royalty payments. These net increases were offset by Net cash used in financing activities, which 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, and to a lesser extent Net cash used in investing activities, which was primarily related to bank time deposits and purchases of fixed assets.

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 March 2025. 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 September 2024.

• 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 June 2023. 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: These obligations are primarily related to agreements to purchase services that are enforceable and legally binding on us that specifies all significant terms, including fixed, minimum or variable pricing provisions; and the approximate timing of the transactions, expiring at various times through March 2024.

A summary of annual minimum contractual obligations and commitments as of March 31, 2019 is as follows (in thousands of dollars):

Fiscal Year Ending March 31,		Software Development and Licensing				Marketing				Operating Leases				Purchase Obligations					Total
2020		$	183,309			$	52,953			$	28,365			$	23,707				$	288,334
2021		120,008				28,830				27,882				9,559					186,279
2022		114,734				28,661				26,272				5,063					174,730
2023		56,884				78,100				23,787				623					159,394
2024		51,792				24,600				16,474				484					93,350
Thereafter		55,792				49,200				82,570				—					187,562
Total		$	582,519			$	262,344			$	205,350			$	39,436				$	1,089,649

Income Taxes: At March 31, 2019, we had recorded a liability for gross unrecognized tax benefits, including interest and penalties, of $23.9 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 February 7, 2019, all of the previously disclosed lawsuits, claims, and counterclaims that had been pending since April 2016 with Mr. Leslie Benzies, the former president of one of our subsidiaries, were resolved.

Off-Balance Sheet Arrangements

As of March 31, 2019 and 2018, 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, 2019, 2018 and 2017, 46.5%, 41.3% and 43.9%, 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, we defer the recognition of our net revenue over an estimated service period which generally ranges from 9 to 15 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 revenue. Quarterly comparisons of operating results are not necessarily indicative of future operating results.