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

Overview

Our Business

We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe. We develop and publish products principally through Rockstar Games, 2K, Private Division, and Social Point. Our products are currently designed for console gaming systems, such as Sony's PS4, Microsoft's Xbox One, and Nintendo's 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 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. 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 320 million units. The latest installment, Grand Theft Auto V, has sold-in over 125 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. To date, Red Dead Redemption 2 has sold-in more than 30 million units worldwide. Rockstar Games is also well known for developing brands in other genres, including the L.A. Noire, Bully and Manhunt franchises. Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, content, and virtual currency.

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 PGA Tour 2K. In March 2020, 2K announced a multi-year partnership with the National Football League encompassing multiple future video games that will be non-simulation football game experiences and will launch starting in fiscal year 2022.

Our Private Division label is dedicated to bringing titles from top independent developers to market and is the publisher and owner of Kerbal Space Program. During the fiscal year 2020, Private Division released The Outer Worlds and Ancestors: The Humankind Odyssey, based on new IP from renowned industry creative talent. Additionally, Private Division*,* has announced that Disintegration is planned for release in fiscal year 2021 and Kerbal Space Program 2 in fiscal year 2022.

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 49 million registered users. We have released two iterations of NBA 2K Online and continue to enhance the title with 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: head-to-head competition throughout a regular season followed by a bracketed playoff system and a finals match-up that was held in August in each of the NBA 2K League's first two seasons.

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 23.0% of our net revenue for the fiscal year ended March 31, 2020. The timing of our Grand Theft Auto product releases may affect our financial performance on a quarterly and annual basis.

Economic Environment and Retailer Performance. We continue to monitor economic conditions, including the impact of the COVID-19 pandemic, that may unfavorably affect our businesses, such as deteriorating consumer demand, delays in development, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. In the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of COVID-19 related business closures and movement restrictions, such as "shelter in place" and "lockdown" orders, being implemented around the world, as well as the online accessibility and social nature of our products. However, we cannot be certain as to the duration of these effects and the potential offsetting impacts of deteriorating economic conditions and decreased consumer spending generally. We have developed and continue to develop plans to help mitigate the negative impact of the pandemic on our business, such as our transition, based on our concern for the health and

safety of our teams, to working from home for the vast majority of our teams, which to date has resulted in minimal disruption. However, these efforts may not be effective, and a protracted economic downturn may limit the effectiveness of our mitigation efforts. Any of these considerations described above could cause or contribute to the risks described, above, in Item 1A of this Form 10-K and could materially adversely affect our business, financial condition, results of operations, or stock price. Therefore, the effects of COVID-19 will not be fully reflected in our financial results until future periods, and, at this time, we are not able to predict its ultimate impact on our business.

Additionally, our business is dependent upon a limited number of customers that account for a significant portion of our revenue. Our five largest customers accounted for 71.5%, 70.1% and 70.7% of net revenue during the fiscal years ended March 31, 2020, 2019 and 2018, respectively. As of March 31, 2020 and 2019, five customers comprised 58.1% and 66.6% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 48.8% and 55.8% of such balance at March 31, 2020 and 2019, respectively. We had two customers who accounted for 29.4% and 19.4% of our gross accounts receivable as of March 31, 2020 and two customers who accounted for 40.1% and 15.7% of our gross accounts receivable as of March 31, 2019. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2020 and 2019. The economic environment has affected our customers in the past, and may do so in the future, including as a result of the COVID-19 pandemic. Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers. The COVID-19 pandemic may lead to increased consolidation as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through the financial volatility. Certain of our large customers sell used copies of our games, which may negatively affect our business by reducing demand for new copies of our games. While the downloadable content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.

Hardware Platforms. We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, such as Sony's PS4 and Microsoft's Xbox One, which comprised 74.7% of our net revenue by product platform for the fiscal year ended March 31, 2020. The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those slated for release in calendar 2020 by Sony and Microsoft, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The new Sony and Microsoft consoles are expected to provide "backwards compatibility" (i.e. the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products. Further, COVID-19 or other events, may impact the timing of release and availability of these new consoles, which may also affect demand. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Accordingly, our strategy is to focus our development efforts on a select number of the highest quality titles for these platforms, while also expanding our offerings for other platforms such as tablets, smartphones, and online games.

Online Content and Digital Distribution. The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from websites we own and others owned by third parties) as well as a large selection of our catalog titles. In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases. We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download. As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 77.0% of our net revenue for the fiscal year ended March 31, 2020. We expect online delivery of games and game offerings to continue to grow and to become the primary part of our business over the long-term.

Product Releases

We released the following key titles in fiscal year 2020:

Title						Publishing Label						Internal or External Development						Platform(s)						Date Released
Borderlands: Game of the Year Edition						2K						External						PS4, Xbox One, PC						April 3, 2019
NBA 2K Mobile						2K						Internal						Android						April 17, 2019
Ancestors: The Humankind Odyssey						Private Division						External						PC (digital only)						August 27, 2019
NBA 2K20						2K						Internal						PS4, Xbox One, Nintendo Switch, PC, iOS, Android						September 6, 2019
Borderlands 3						2K						Internal/External						PS4, Xbox One, PC						September 13, 2019
WWE 2K20						2K						Internal						PS4, Xbox One, PC						October 22, 2019
The Outer Worlds						Private Division						External						PS4, Xbox One, PC						October 25, 2019
Red Dead Redemption 2						Rockstar Games						Internal						PC						November 5, 2019
Red Dead Redemption 2						Rockstar Games						Internal						Google Stadia						November 19, 2019
NBA 2K20						2K						Internal						Google Stadia						November 19, 2019
Sid Meier's Civilization VI						2K						Internal						PS4, Xbox One						November 22, 2019
Ancestors: The Humankind Odyssey						Private Division						External						PS4, Xbox One						December 6, 2019
Borderlands 3						2K						Internal/External						Google Stadia						December 17, 2019
Borderlands 3 (for Steam and other retailers)						2K						Internal/External						PC						March 13, 2020

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
XCOM: Chimera Squad						2K						Internal						PC						April 24, 2020 (released)
BioShock: The Collection						2K						Internal/External						Switch						May 29, 2020
Borderlands Legendary Collection						2K						Internal/External						Switch						May 29, 2020
XCOM 2 Collection						2K						External						Switch						May 29, 2020
The Outer Worlds						Private Division						External						Switch						June 5, 2020
Disintegration						Private Division						External						PS4, Xbox One, PC						June 16, 2020
PGA Tour 2K21						2K						External						PS4, Xbox One, Switch, PC, Stadia						August 21, 2020
NBA 2K21						2K						Internal						TBA						Fall 2020
Kerbal Space Program 2						Private Division						Internal						PS4, Xbox One, PC						Fall 2021

Fiscal 2020 Financial Summary

Our Net revenue for fiscal year ended March 31, 2020 was led by titles from a variety of our top franchises, primarily NBA 2K; Grand Theft Auto V and Grand Theft Auto Online; Red Dead Redemption 2 and Red Dead Online, which released on PC in November 2019; Borderlands 3, which released in September 2019; and The Outer Worlds, which released in October 2019*.* Our Net revenue increased to $3,089.0 million, an increase of $420.6 million or 15.8% compared to the fiscal year ended March 31, 2019.

For the fiscal year ended March 31, 2020, our Net income was $404.5 million, as compared to Net income of $333.8 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2020 was $3.54, as compared to Diluted income per share of $2.90 for the fiscal year ended March 31, 2019. Our operating income for the fiscal year ended March 31, 2020 increased compared to the operating income for fiscal year ended March 31, 2019, due primarily to higher Gross profit, which was due primarily to higher revenue from the titles described above and lower internal royalties as a percentage of net revenue, partially offset by higher Operating expenses primarily due to higher Selling and marketing expense.

At March 31, 2020, we had $1,993.4 million of Cash and cash equivalents and Restricted cash and cash equivalents, compared to $1,392.0 million at March 31, 2019. The increase in Cash and cash equivalents and Restricted cash and cash equivalents from March 31, 2019 was due primarily to Net cash provided by operating activities from sales primarily from the previously mentioned titles*,* partially offset by investments in software development and licenses as well as royalty payments,

and to a lesser extent Net cash from investing activities. These net increases were offset by Net cash used in financing activities, which was primarily related to tax payments related to net share settlements of our restricted stock.

Critical Accounting Policies and Estimates

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

Recently Adopted and Recently Issued Accounting Pronouncements

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

Operating Metric

Net Bookings

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

			Fiscal Year Ended March 31,
			2020						2019						Increase/(decrease)						Increase/(decrease) %
Net Bookings			$	2,990,358					$	2,928,724					$	61,634					2.1		%

For the fiscal year ended March 31, 2020, Net Bookings increased by $61.6 million as compared to the prior year period due primarily to Borderlands 3, which released in September 2019, Grand Theft Auto Online and Grand Theft Auto V, our NBA 2K franchise, The Outer Worlds which released in October 2019, Red Dead Online, Civilization VI, and Ancestors: The Humankind Odyssey, which released in August 2019, partially offset by a decrease in Net Bookings from Red Dead Redemption 2, which released on PS4 and Xbox One in October 2018 and PC in November 2019.

Results of Operations

In this section, we discuss the results of our operations for the fiscal year ended March 31, 2020 compared to the fiscal year ended March 31, 2019. For the comparison of fiscal year 2019 to fiscal year 2018, refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended March 31, 2019.

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

						Fiscal Year Ended March 31,
						2020																		2019																		2018
Net revenue						$	3,088,970					100.0		%				$	2,668,394					100.0		%				$	1,792,892					100.0		%
Cost of goods sold						1,542,450						49.9		%				1,523,644						57.1		%				898,311						50.1		%
Gross profit						1,546,520						50.1		%				1,144,750						42.9		%				894,581						49.9		%
Selling and marketing						458,424						14.8		%				391,400						14.7		%				256,092						14.3		%
General and administrative						318,235						10.3		%				281,234						10.5		%				247,828						13.8		%
Research and development						296,398						9.6		%				230,170						8.6		%				196,373						11.0		%
Depreciation and amortization						48,113						1.6		%				40,232						1.5		%				43,969						2.5		%
Business reorganization						83						—		%				(4,958)						(0.2)		%				14,742						0.8		%
Total operating expenses						1,121,253						36.3		%				938,078						35.2		%				759,004						42.3		%
Income from operations						425,267						13.8		%				206,672						7.7		%				135,577						7.6		%
Interest and other, net						38,505						1.2		%				26,113						1.0		%				1,048						0.1		%
Loss on long-term investments						5,333						0.2		%				—						—		%				—						—		%
Income before income taxes						458,439						14.8		%				232,785						8.7		%				136,625						7.6		%
Provision for (benefit from) income taxes						53,980						1.7		%				(101,052)						(3.8)		%				(36,908)						(2.1)		%
Net income						$	404,459					13.1		%				$	333,837					12.5		%				$	173,533					9.7		%

						Fiscal Year Ended March 31,
						2020																		2019																		2018
Net revenue by geographic region:
United States						$	1,775,682					57.5		%				$	1,426,906					53.5		%				$	1,052,313					58.7		%
International						1,313,288						42.5		%				1,241,488						46.5		%				740,579						41.3		%
Net revenue by platform:
Console						$	2,308,602					74.7		%				$	2,233,861					83.7		%				1,463,306						81.6		%
PC and other						780,368						25.3		%				434,533						16.3		%				329,586						18.4		%
Net revenue by distribution channel:
Digital online						$	2,378,563					77.0		%				$	1,681,609					63.0		%				1,130,946						63.1		%
Physical retail and other						710,407						23.0		%				986,785						37.0		%				661,946						36.9		%
Net revenue by content:
Full game and other						$	1,703,971					55.2		%				$	1,597,478					59.9		%				$	1,046,176					58.4		%
Recurrent consumer spending						1,384,999						44.8		%				1,070,916						40.1		%				746,716						41.6		%

Fiscal Years ended March 31, 2020 and 2019

(thousands of dollars)						2020						% of net revenue						2019						% of net revenue						Increase/(decrease)						% Increase/(decrease)
Net revenue						$	3,088,970					100.0		%				$	2,668,394					100.0		%				$	420,576					15.8		%
Software development costs and royalties(1)						611,198						19.8		%				449,198						16.8		%				162,000						36.1		%
Internal royalties						483,697						15.7		%				610,804						22.9		%				(127,107)						(20.8)		%
Product costs						277,147						9.0		%				322,148						12.1		%				(45,001)						(14.0)		%
Licenses						170,408						5.5		%				141,494						5.3		%				28,914						20.4		%
Cost of goods sold						1,542,450						49.9		%				1,523,644						57.1		%				18,806						1.2		%
Gross profit						$	1,546,520					50.1		%				$	1,144,750					42.9		%				$	401,770					35.1		%

(1) Includes $154,031 and $149,075 of stock-based compensation expense in 2020 and 2019, respectively.

For the fiscal year ended March 31, 2020, net revenue increased by $420.6 million, as compared to the prior year. The increase was due primarily to (i) $371.8 million in net revenue from Borderlands 3, which released in September 2019, (ii) an increase of $185.5 million in net revenue from our NBA 2K franchise*,* (iii) $159.8 million in net revenue from The Outer Worlds, which released in October 2019, and (iv) an increase of $46.6 million in net revenue from Red Dead Online. These increases were partially offset by a decrease of $402.9 million in net revenue from Red Dead Redemption 2.

Net revenue from console games increased by $74.7 million and accounted for 74.7% of our total net revenue in the fiscal year ended March 31, 2020, as compared to 83.7% in the prior year. The increase was due to an increase in net revenue from Borderlands 3, our NBA 2K franchise, The Outer Worlds, and Red Dead Online. These increases were partially offset by a decrease in net revenue from Red Dead Redemption 2. Net revenue from PC and other increased by $345.8 million and accounted for 25.3% of our total net revenue in the fiscal year ended March 31, 2020, as compared to 16.3% in the prior year. The increase was due to an increase in net revenue from Borderlands 3, Red Dead Redemption 2, which released for PC in November 2019, and The Outer Worlds.

Net revenue from digital online channels increased by $697.0 million and accounted for 77.0% of our total net revenue for the fiscal year ended March 31, 2020, as compared to 63.0% in the prior year. The increase was due to an increase in net revenue from Borderlands 3, our NBA 2K franchise, and The Outer Worlds. Net revenue from physical retail and other channels decreased by $276.4 million and accounted for 23.0% of our total net revenue for the fiscal year ended March 31, 2020, as compared to 37.0% for the prior year. The decrease was due to a decrease in net revenue from Red Dead Redemption 2, partially offset by an increase in net revenue from Borderlands 3.

Net revenue from full game and other increased by $106.5 million and accounted for 55.2% of net revenue for the fiscal year ended March 31, 2020, as compared to 59.9% for the prior year. The increase was due to an increase in net revenue from Borderlands 3, The Outer Worlds, and Civilization VI, partially offset by a decrease in net revenue from Red Dead Redemption 2. Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases. Net revenue from recurrent consumer spending increased by $314.1 million and accounted for 44.8% of net revenue for the fiscal year ended March 31, 2020, as compared to 40.1% for the prior year. The increase was due to an increase in net revenue from our NBA 2K franchise, Borderlands 3, and Red Dead Online, partially offset by a decrease in net revenue from Grand Theft Auto Online.

Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2020 was 50.1%, as compared to 42.9% in the prior year. The percentage increase was due primarily to lower internal royalties as a percentage of net revenue due to the timing of when royalties are earned and our release slate.

Net revenue earned outside of the United States increased by $71.8 million and accounted for 42.5% of our total net revenue in the fiscal year ended March 31, 2020, as compared to 46.5% in the prior year. The increase was due to an increase in net revenue from Borderlands 3, The Outer Worlds, our NBA 2K franchise, Red Dead Online, Civilization VI, Ancestors: The Humankind Odyssey, and Grand Theft Auto V, partially offset by a decrease in net revenue from Red Dead Redemption 2 and Grand Theft Auto Online. Changes in foreign currency exchange rates decreased net revenue and gross profit by $11.5 million and $4.0 million, respectively, in the fiscal year ended March 31, 2020 as compared to the prior year.

Operating Expenses

(thousands of dollars)						2020						% of net revenue						2019						% of net revenue						Increase/(decrease)						% Increase/(decrease)
Selling and marketing						$	458,424					14.8		%				$	391,400					14.7		%				$	67,024					17.1		%
General and administrative						318,235						10.3		%				281,234						10.5		%				37,001						13.2		%
Research and development						296,398						9.6		%				230,170						8.6		%				66,228						28.8		%
Depreciation and amortization						48,113						1.6		%				40,232						1.5		%				7,881						19.6		%
Business reorganization						83						—		%				(4,958)						(0.2)		%				5,041						(101.7)		%
Total operating expenses						$	1,121,253					36.3		%				$	938,078					35.2		%				$	183,175					19.5		%

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

						2020						2019
Selling and marketing						$	18,680					$	23,685
General and administrative						$	53,607					$	51,903
Research and development						$	31,563					$	23,037

Foreign currency exchange rates decreased total operating expenses by $6.7 million in the fiscal year ended March 31, 2020 as compared to the prior year.

Selling and marketing

Selling and marketing expenses increased by $67.0 million in the fiscal year ended March 31, 2020 as compared to the prior year, due primarily to $44.5 million in higher advertising and marketing expenses. Advertising and marketing expenses were higher in the current year due primarily to Borderlands 3, Grand Theft Auto Online, Red Dead Online, and The Outer Worlds, partially offset by lower advertising expenses for Red Dead Redemption 2. The increase was also due to higher personnel expenses, primarily due to increased headcount.

General and administrative

General and administrative expenses increased by $37.0 million for the fiscal year ended March 31, 2020, as compared to the prior year, due primarily to increases in (i) personnel expenses due to additional headcount, (ii) IT related expenses for cloud-based services, (iii) indirect tax expenses, and (iv) rent expenses.

General and administrative expenses for the fiscal years ended March 31, 2020 and 2019 include occupancy expense (primarily rent, utilities and office expenses) of $25.9 million and $22.0 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $66.2 million for the fiscal year ended March 31, 2020, as compared to the prior year, due primarily to (i) an increase in production and development expenses for titles for which technological feasibility has not been established or for ongoing development for titles that have already been released and (ii) increased personnel expense due to increased headcount.

Depreciation and amortization

Depreciation and amortization expenses increased by $7.9 million for the fiscal year ended March 31, 2020, as compared to the prior year, due primarily to an increase in IT infrastructure costs.

Business Reorganization

During the fiscal year ended March 31, 2020, business reorganization expense increased by $5.0 million due to a benefit in the prior year related to updating estimates for and completing our 2016 Plan and updating estimates for our 2018 Plan.

Interest and other, net

(thousands of dollars)						2020						% of net revenue						2019						% of net revenue						Increase/(decrease)						% Increase/(decrease)
Interest income						$	47,341					1.5		%				$	38,019					1.4		%				$	9,322					24.5		%
Interest expense						(2,637)						(0.1)		%				(8,032)						(0.3)		%				5,395						(67.2)		%
Foreign currency exchange loss						(3,589)						(0.1)		%				(505)						—		%				(3,084)						610.7		%
Other						(2,610)						(0.1)		%				(3,369)						(0.1)		%				759						(22.5)		%
Interest and other, net						$	38,505					1.2		%				$	26,113					1.0		%				$	12,392					47.5		%

Interest and other, net was income of $38.5 million for the fiscal year ended March 31, 2020, as compared to income of $26.1 million for the fiscal year ended March 31, 2019. The increase was due primarily to a $9.3 million increase in interest income due to the nature of our investments, higher invested balances, and higher interest rates on those investments.

Provision from income taxes

Our income tax expense was $54.0 million for the fiscal year ended March 31, 2020 as compared to a benefit of $101.1 million for the fiscal year ended March 31, 2019.

When compared to the statutory rate of 21.0%, the effective tax rate of 11.8% for the fiscal year ended March 31, 2020 was due primarily to a $37.9 million tax benefit from tax credits anticipated to be utilized, $12.7 million from our geographic mix of earnings, $11.9 million due to net deferred tax asset arising from a step up in tax basis related to the Federal Act on Tax Reform and AVH (Old-Age and Survivors Insurance) Financing ("TRAF") enacted in Switzerland during the fiscal year, discussed below, $9.2 million in changes in unrecognized tax benefits primarily due to audit settlements, and $8.4 million in excess tax benefits from employee stock compensation. These benefits were partially offset by tax expense of $19.8 million from the reversal of net deferred tax benefits relating to the Altera case, discussed below.

When compared to the statutory rate of 21%, 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 Tax Act.

The effective tax rate in the current year was higher compared to the prior year primarily due to decreased tax benefits from (i) changes in valuation allowance and (ii) geographic mix of earnings.

The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends upon the stock price at the time of employee award vesting. Since we recognize excess tax benefits and shortfalls 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.

We anticipate that additional excess tax benefits or shortfalls from employee stock compensation, tax credits, and changes in our geographic mix of earnings could have a significant impact on our effective tax rate in the future. In addition, we are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations could have an impact on our effective tax rate in future periods.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, which concluded that related parties in an intercompany cost-sharing arrangement are not required to share costs related to stock-based compensation. In February 2016, the U.S. Internal Revenue Service appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. On June 7, 2019, the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court. As a result of this decision, we are no longer reflecting a net tax benefit within our financial statements related to the removal of stock-based compensation from our intercompany cost-sharing arrangement. During the three months ended December 31, 2019, we removed the deferred tax asset and a deferred tax liability associated with this matter resulting in a cumulative net discrete income tax expense of $19.8 million. In February 2020, the taxpayer petitioned the U.S. Supreme Court to review the Ninth Circuit's decision and is awaiting the Supreme Court's decision as to whether it will hear the case. We will continue to monitor the case.

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.

On May 19, 2019, a public referendum held in Switzerland approved the TRAF, which was effective for us on January 1, 2020. The tax reform abolished preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level. The TRAF allows the cantons to establish transition rules, the implementation of which may be subject to a ruling from the canton. For the three months ended March 31, 2020, we recorded a deferred tax asset of $45.3 million offset by a valuation allowance of $33.4 million rising from the Swiss cantonal tax basis step-up.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which provides numerous tax and other stimulus measures. Although we are currently reviewing the potential implications of the CARES Act, we do not expect that it will have a material impact to our Consolidated Financial Statements.

As of March 31, 2020, we had gross unrecognized tax benefits, including interest and penalties, of $134.3 million, of which $30.7 million would affect our effective tax rate if realized. For the fiscal year ended March 31, 2020, gross unrecognized tax benefits decreased by $4.7 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, 2017 and state income tax returns for periods prior to the fiscal year ended March 31, 2016. 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, 2014. Certain taxing authorities are currently examining our income tax returns for the fiscal years ended March 31, 2015 through March 31, 2018.

Net income and earnings per share

For the fiscal year ended March 31, 2020, our net income was $404.5 million, as compared to $333.8 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2020 was $3.54, as compared to $2.90 for the fiscal year ended March 31, 2019. Diluted weighted average shares outstanding of 114.1 million were 1.1 million lower compared to the prior fiscal year due primarily to share repurchases in the last three quarters of fiscal year 2019.

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, 2020, we had $644.0 million of short-term investments, which are highly-liquid in nature and represent an investment of cash that is available for current operations. From time to time, we may purchase additional short-term investments depending on future market conditions and liquidity needs. As of March 31, 2020, based on the composition of our investment portfolio and relatively lower interest rates as a result of the recent actions by central banks around the world, including the interest rate cuts by the U.S. Federal Reserve, in response to the COVID-19 pandemic and related adverse economic conditions, we anticipate investment yields may remain low, which would lower our future interest income. Such impact is not expected to be material to our liquidity.

Credit Agreement

On February 8, 2019, we entered into an unsecured Credit Agreement (the “Credit Agreement”). The Credit Agreement replaced our existing Credit Agreement, which was terminated on the same day. The Credit Agreement runs through February 8, 2024. The 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 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 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, 2020), or (b) 1.125% to 1.750% above LIBOR (approximately 1.66% at March 31, 2020), which margins are determined by reference to our consolidated total net leverage ratio.

As of March 31, 2020, there was $198.3 million available to borrow under the Credit Agreement and we had $1.7 million of letters of credit outstanding. At March 31, 2020, we had no outstanding borrowings under the Credit Agreement.

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

Financial Condition

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

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

A majority of our trade receivables are derived from sales to major retailers, including digital storefronts and platform partners, and distributors. Our five largest customers accounted for 71.5%, 70.1%, and 70.7% of net revenue during the fiscal years ended March 31, 2020, 2019, and 2018, respectively. As of March 31, 2020 and 2019, five customers accounted for 58.1% and 66.6% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 48.8% and 55.8% of such balances at March 31, 2020 and 2019, respectively. We had two customers who accounted for 29.4% and 19.4% of our gross accounts receivable as of March 31, 2020 and two customers who accounted for 40.1%, and 15.7% of our gross accounts receivable as of March 31, 2019. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2020 and 2019. Based upon performing ongoing credit evaluations, maintaining trade credit insurance on a majority of our customers and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk, although we actively monitor each customer's credit worthiness and economic conditions that may affect our customers' business and access to capital. We are monitoring the current global economic conditions, including credit markets and other factors as it relates to our customers in order to manage the risk of uncollectible accounts receivable, including as a result of COVID-19.

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. Our liquidity and capital resources were not materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets during the fourth quarter of fiscal year 2020. For further discussion regarding the potential future impacts of the COVID-19 pandemic and related economic conditions on our business, refer to "Part II, Item 1A, Risk Factors."

As of March 31, 2020, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $573.5 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.

The Tax Act, as enacted in December 2017 includes a number of 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, 2020, 2019, and 2018, we repurchased zero, 3.7 million, and 1.5 million shares of our common stock, respectively, in the open market for $0.0 million, $362.4 million, and $154.8 million, respectively, including commissions as

part of the program. As of March 31, 2020, 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)						2020						2019						2018
Net cash provided by operating activities						$	685,678					$	843,515					$	493,527
Net cash provided by (used in) investing activities						4,049						(223,576)						(271,827)
Net cash used in financing activities						(77,453)						(463,685)						(281,467)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents						(10,868)						(10,639)						24,924
Net change in cash, cash equivalents, and restricted cash and cash equivalents						$	601,406					$	145,615					$	(34,843)

At March 31, 2020, we had 1,993.4 million of Cash, cash equivalents, and Restricted cash and cash equivalents, compared to 1,392.0 million at March 31, 2019. The increase in Cash, cash equivalents, and Restricted cash and cash equivalents from March 31, 2019 was due primarily to Net cash provided by operating activities from sales*,* partially offset by investments in software development and licenses as well as royalty payments, and to a lesser extent Net cash from investing activities. These net increases were offset by Net cash used in financing activities, which was primarily related to tax payments related to net share settlements of our restricted stock.

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 2025.

• 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, 2020 is as follows (in thousands of dollars):

Fiscal Year Ending March 31,						Software Development and Licensing						Marketing						Operating Leases												Purchase Obligations						Total
2021						$	151,123					$	11,891					$	34,119											$	38,477					$	235,610
2022						144,975						38,881						36,352												23,910						244,118
2023						150,775						40,914						34,056												12,503						238,248
2024						122,285						89,260						26,919												1,239						239,703
2025						69,188						35,528						21,549												947						127,212
Thereafter						52,880						24,788						83,801												—						161,469
Total						$	691,226					$	241,262					$	236,796											$	77,076					$	1,246,360

*•*Income Taxes: At March 31, 2020, we had recorded a liability for gross unrecognized tax benefits, including interest and penalties, of $30.7 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 and employment related 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.

Off-Balance Sheet Arrangements

As of March 31, 2020 and 2019, 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, 2020, 2019 and 2018, 42.5%, 46.5% and 41.3%, 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 demand typically occurring in the fourth calendar quarter during the holiday season. For certain of our software products with multiple performance obligations, we defer the recognition of our net revenue over an estimated service period which generally ranges from 6 to 15 months. As a result, the quarter in which we generate the highest net bookings may be different from the quarter in which we recognize the highest amount of net revenue. Quarterly comparisons of operating results are not necessarily indicative of future operating results.