Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

The statements contained herein, which are not historical facts including statements relating to our proposed acquisition of Zynga Inc. (the "Acquisition"), are considered forward-looking statements under federal securities laws and may be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects," "seeks," "should," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Such forward-looking statements are based on the current beliefs of our management as well as assumptions made by and information currently available to them, which are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and uncertainties including the uncertainty of the impact of the COVID-19 pandemic and measures taken in response thereto; the effect that measures taken to mitigate the COVID-19 pandemic have on our operations, including our ability to timely deliver our titles and other products, and on the operations of our counterparties, including retailers, including digital storefronts and platform partners, and distributors; the effects of the COVID-19 pandemic on consumer demand and the discretionary spending patterns of our customers as the situation with the pandemic continues to evolve; the impact of reductions in interest rates by the Federal Reserve and other central banks, including on our short-term investment portfolio; the impact of potential inflation; volatility in foreign currency exchange rates; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement for the acquisition; the inability to obtain our or Zynga's respective stockholder approval or the failure to satisfy other conditions to completion of the proposed acquisition, including receipt of regulatory approvals, on a timely basis or at all; risks that the proposed acquisition disrupts each company’s current plans and operations; the diversion of the attention of the respective management teams of Take-Two and Zynga from their respective ongoing business operations; the ability of either Take-Two, Zynga or the combined company to retain key personnel; the ability to realize the benefits of the proposed acquisition, including Net Bookings opportunities and cost synergies; the ability to successfully integrate Zynga’s business with Take-Two’s business or to integrate the businesses within the anticipated timeframe; the outcome of any legal proceedings that may be instituted against Take-Two, Zynga or others related to the proposed acquisition; the amount of the costs, fees, expenses and charges related to the proposed acquisition; other risks included herein; as well as, but not limited to, the risks and uncertainties discussed under the heading "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021; and our other periodic filings with the Securities and Exchange Commission. All forward-looking statements are qualified by these cautionary statements and speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion should be read in conjunction with the MD&A and our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.

Overview

Our Business

We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe. We develop and publish products principally through Rockstar Games, 2K, Private Division, and T2 Mobile Games. Our products are currently designed for console gaming systems, PC, and Mobile 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, 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, Serbia, 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 365 million units. Our most recent installment, Grand Theft Auto V, which was released in 2013, has sold-in nearly 160 million units worldwide and includes access to Grand Theft Auto Online. Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records, has sold-in more than 40 million units worldwide. Rockstar Games is also well known for developing brands in other genres, including the L.A. Noire, Bully, and Manhunt franchises. Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, and additional content. Rockstar Game's titles are published across all key platforms, including mobile.

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

Our Private Division label is dedicated to bringing titles from the industry's leading creative talent to market and is the publisher and owner of Kerbal Space Program and OlliOlli World. Kerbal Space Program 2 is planned for release in fiscal year 2023. Private Division also released The Outer Worlds and Ancestors: The Humankind Odyssey.

T2 Mobile Games includes Socialpoint, Playdots, and Nordeus, which publish popular free-to-play mobile games that deliver high quality, deeply engaging entertainment experiences and generates revenue from in-game sales and in-game advertising. T2 Mobile Games' titles include Dragon City, Monster Legends, Two Dots, and Top Eleven.

We acquired Nordeus Limited on June 1, 2021, for consideration having an acquisition date fair value of $289.8 million, consisting of $132.9 million in cash, the issuance of 0.5 million shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of $153.0 million in cash if Nordeus achieves certain performance measures over the 12- and 24-month periods following the closing (See Note 15 - Acquisitions of our Condensed Consolidated Financial Statements). Founded in 2010, Nordeus is a mobile games company based in Belgrade, Serbia, best known for Top Eleven, which has over 240 million registered users.

We are continuing our strategy in Asia to broaden the distribution of our existing products and expand our online gaming presence, especially in China and South Korea. 2K has a multi-year license from the NBA to offer an online version of the NBA simulation game in China, Taiwan, South Korea, and Southeast Asia. NBA 2K Online, our free-to-play NBA simulation game that is based on the console edition of NBA 2K, which was co-developed by 2K and Tencent, is the top online PC sports game in China with more than 55 million registered users. We have released two iterations of NBA 2K Online and continue to enhance the title with new features.

We have expanded our relationship with the NBA through the NBA 2K League. This groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises. The NBA 2K League follows a professional sports league format: head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up. The NBA 2K League's fourth season concluded in September 2021.

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 32.3% of our net revenue for the nine months ended December 31, 2021. The timing of key releases, such as 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 the evolution of the COVID-19 pandemic, including 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. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. During fiscal year 2021, as in the final quarter of fiscal year 2020, we noted a positive impact to our results that we believe was partly due to increased consumer engagement with our products because of the COVID-19 pandemic related business closures and movement restrictions, such as "shelter in place" and "lockdown" orders, implemented around the world, as well as the online accessibility and social nature of our products. However, we cannot be certain as to the duration of these effects, the impact of vaccination efforts or of the lifting of certain restrictions, and the potential offsetting impacts of deteriorating economic conditions and decreased consumer spending generally. While we expect that engagement trends will continue to be higher than they were pre-pandemic, we expect a moderation of the trends that have benefited our industry as the return to normalcy continues to unfold.

Based on our concern for the health and safety of our teams, we have developed and continue to develop plans to help mitigate the negative impacts of the pandemic on our business, including transitioning the vast majority of our teams to working from home. We are taking a prudent approach relating to our return to office cadence and planning. Some of our offices are open, and we plan for the majority of our offices to reopen in the coming months. Given the evolving dynamics of the COVID-19 pandemic, we continue to adhere to safety standards in the planning and implementation of our return to office. To date, our plans have resulted in minimal disruption. However, despite largely positive outcomes to date, these efforts may ultimately not be effective, and a protracted economic downturn may limit the effectiveness of our mitigation efforts. Any of these considerations described above could cause or contribute to the risks described under the heading "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021, and could materially adversely affect our business, financial condition, results of operations, or stock price. Therefore, the effects of the COVID-19 pandemic 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 79.2% and 77.4% of net revenue during the nine months ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and March 31, 2021, our five largest customers comprised 74.7% and 77.6% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 59.1% and 69.2% of such balance at December 31, 2021 and March 31, 2021, respectively. We had two customers who accounted for 41.9% and 17.2%, respectively, of our gross accounts receivable as of December 31, 2021 and two customers who accounted for 50.4% and 18.8%, respectively, of our gross accounts receivable as of March 31, 2021. The economic environment has affected our customers in the past and may do so in the future, including as a result of the COVID-19 pandemic. Bankruptcies or consolidations of our large retail customers could adversely affect 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 online and downloadable content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.

Hardware Platforms. We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, which comprised 72.4% of our net revenue by product platform for the nine months ended December 31, 2021. The success of our business is dependent on consumer acceptance of these platforms and the continued growth in their installed base. When new hardware platforms are introduced, such as those released in November 2020 by Sony and Microsoft, demand for interactive entertainment playable on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The new Sony and Microsoft consoles provide "backwards compatibility" (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products. Further, the COVID-19 pandemic or other events have affected and may continue to affect the availability of these new consoles, which may also affect demand. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Accordingly, our strategy is to focus our development efforts on a select number of the highest quality titles for these platforms, while also expanding our offerings for other platforms such as tablets, smartphones, and online games.

Online Content and Digital Distribution. The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings.

Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from digital storefronts we own and others owned by third parties) as well as a large selection of our catalog titles. In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, 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 89.9% of our net revenue for the nine months ended December 31, 2021. We expect online delivery of games and game offerings to continue to grow and to continue to be the primary part of our business over the long term.

Recent Developments.

Potential Acquisition. On January 9, 2022, we entered into a definitive merger agreement to acquire Zynga, a leading developer of mobile games. Under the terms and subject to the terms of the merger agreement, Zynga stockholders will receive $3.50 in cash and a number of shares of our common stock for each share of Zynga at the closing. The transaction is valued at $9.86 per share of Zynga common stock equal to the exchange ration (ranging from 0.0350 to 0.0406, as further described below)based on the market closing as of January 7, 2022, implying an enterprise value of $12.7 billion. The transaction includes a collar mechanism on the equity consideration, so that if our 20-day volume weighted average price ("VWAP") ending on the third trading day prior to closing is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration of $9.86 per Zynga share. If the VWAP exceeds the higher end of that range the exchange ratio would be 0.0350 per share and if the VWAP falls below the lower end of that range, the exchange ratio would be 0.0406 per share.

As part of the transaction, we have received aggregate committed financing of $2.7 billion from J.P. Morgan and certain other lenders, and we intend to fund the cash component of the transaction through a combination of cash from our balance sheet as well as proceeds of new debt issuance.

The transaction, which is expected to close during our first quarter of fiscal year 2023 ended June 30, 2022, is subject to approval by Take-Two and Zynga stockholders, the receipt of required regulatory approvals, and other customary closing conditions, including antitrust clearances.

Content Release Highlights

During fiscal year 2022, 2K released NBA 2K22, Private Division released Hades physically on consoles and OlliOlli World, and Rockstar released Grand Theft Auto: The Trilogy - The Definitive Edition.

To date we have announced that, during the remainder of fiscal year 2022, Rockstar Games will release Grand Theft Auto V and a standalone version of Grand Theft Auto Online for the PS5 and Xbox Series X|S, and 2K will release WWE 2K22 and Tiny Tina's Wonderlands.

In addition, throughout the year, we expect to continue to deliver new content for our franchises. We will also continue to invest in opportunities that we believe will enhance and scale our business and have the potential to drive growth over the long-term.

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. In-depth descriptions of these can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.

Recently Adopted and Recently Issued Accounting Pronouncements

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

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:

						Three Months Ended December 31,																								Nine Months Ended December 31,
						2021						2020						Increase/ (decrease)						% Increase/ (decrease)						2021						2020						Increase/ (decrease)						% Increase/ (decrease)
Net Bookings						$	866,123					$	814,282					$	51,841					6.4		%				$	2,562,405					$	2,768,066					$	(205,661)					(7.4)		%

For the three months ended December 31, 2021, Net Bookings increased by $51.8 million as compared to the prior year period due primarily to an increase in Net Bookings from our Grand Theft Auto franchise, including Grand Theft Auto: The Trilogy - The Definitive Edition, which released in November 2021, and Top Eleven, which was part of the Nordeus acquisition in June 2021*.* These increases were partially offset by a decrease in Net Bookings from our Mafia and PGA TOUR 2K franchises*,* The Outer Worlds, and our WWE 2K franchise.

For the nine months ended December 31, 2021, Net Bookings decreased by $205.7 million as compared to the prior year period due primarily to a decrease in Net Bookings from our NBA 2K, PGA TOUR 2K, and Mafia franchises, The Outer Worlds, and our WWE 2K, our Red Dead, Borderlands franchises. These decreases were partially offset by an increase in Net Bookings from Top Eleven and Two Dots.

Results of Operations

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

			Three Months Ended December 31,																								Nine Months Ended December 31,
(thousands of dollars)			2021												2020												2021												2020
Net revenue			$	903,252					100.0		%				$	860,889					100.0		%				$	2,574,796					100.0		%				$	2,533,341					100.0		%
Cost of goods sold			350,379						38.8		%				346,244						40.2		%				1,136,776						44.2		%				1,255,438						49.6		%
Gross profit			552,873						61.2		%				514,645						59.8		%				1,438,020						55.8		%				1,277,903						50.4		%
Selling and marketing			135,286						15.0		%				139,906						16.3		%				375,159						14.6		%				338,376						13.4		%
General and administrative			130,706						14.5		%				98,624						11.5		%				362,484						14.1		%				292,230						11.5		%
Research and development			116,656						12.9		%				86,428						10.0		%				310,458						12.1		%				233,752						9.2		%
Depreciation and amortization			15,996						1.8		%				14,007						1.6		%				44,642						1.7		%				40,116						1.6		%
Business reorganization			123						—		%				(377)						—		%				546						—		%				(138)						—		%
Total operating expenses			398,767						44.1		%				338,588						39.3		%				1,093,289						42.5		%				904,336						35.7		%
Income from operations			154,106						17.1		%				176,057						20.5		%				344,731						13.4		%				373,567						14.7		%
Interest and other, net			(5,629)						(0.6)		%				1,098						0.1		%				(7,228)						(0.3)		%				12,022						0.5		%
Gain on long-term investments, net			3,662						0.4		%				39,291						4.6		%				6,054						0.2		%				38,636						1.5		%
Income before income taxes			152,139						16.8		%				216,446						25.1		%				343,557						13.3		%				424,225						16.7		%
Provision for income taxes			7,642						0.8		%				34,198						4.0		%				36,507						1.4		%				54,151						2.1		%
Net income			$	144,497					16.0		%				$	182,248					21.2		%				$	307,050					11.9		%				$	370,074					14.6		%

			Three Months Ended December 31,																								Nine Months Ended December 31,
			2021												2020												2021												2020
Net revenue by geographic region:
United States			$	534,869					59.2		%				$	528,324					61.4		%				$	1,542,975					59.9		%				$	1,502,397					59.3		%
International			368,383						40.8		%				332,565						38.6		%				1,031,821						40.1		%				1,030,944						40.7		%
Net revenue by platform:
Console			$	665,535					73.7		%				$	656,079					76.2		%				$	1,864,058					72.4		%				$	1,909,033					75.4		%
PC and other			133,907						14.8		%				135,565						15.7		%				409,554						15.9		%				439,511						17.3		%
Mobile			103,810						11.5		%				69,245						8.0		%				301,184						11.7		%				184,797						7.3		%
Net revenue by distribution channel:
Digital online			$	795,715					88.1		%				$	743,141					86.3		%				$	2,315,618					89.9		%				$	2,204,401					87.0		%
Physical retail and other			107,537						11.9		%				117,748						13.7		%				259,178						10.1		%				328,940						13.0		%
Net revenue by content:
Recurrent consumer spending			$	547,788					60.6		%				$	552,320					64.2		%				$	1,683,703					65.4		%				$	1,569,070					61.9		%
Full game and other			355,464						39.4		%				308,569						35.8		%				891,093						34.6		%				964,271						38.1		%

Three Months Ended December 31, 2021 Compared to December 31, 2020

(thousands of dollars)			2021						%						2020						%						Increase/ (decrease)						% Increase/ (decrease)
Net revenue			$	903,252					100.0		%				$	860,889					100.0		%				$	42,363					4.9		%
Internal royalties			172,766						19.1		%				137,657						16.0		%				35,109						25.5		%
Software development costs and royalties (1)			43,057						4.8		%				83,514						9.7		%				(40,457)						(48.4)		%
Licenses			61,507						6.8		%				57,917						6.7		%				3,590						6.2		%
Product costs			73,049						8.1		%				67,156						7.8		%				5,893						8.8		%
Cost of goods sold			350,379						38.8		%				346,244						40.2		%				4,135						1.2		%
Gross profit			$	552,873					61.2		%				$	514,645					59.8		%				$	38,228					7.4		%

(1) Includes $9,445 and $13,100 of stock-based compensation expense in 2021 and 2020, respectively, in software development costs and royalties.

For the three months ended December 31, 2021, net revenue increased by $42.4 million as compared to the prior year period. The increase was due to an increase in net revenue of (i) $71.6 million from our Grand Theft Auto franchise, including Grand Theft Auto: The Trilogy - The Definitive Edition, which released in November 2021, (ii) $16.7 million from Top Eleven, which was part of the Nordeus acquisition in June 2021, and (iii) $12.0 million from Two Dots. These increases were partially offset by a decrease in net revenue of (i) $18.0 million from our Mafia franchise, (ii) $13.2 million from our NBA 2K franchise, (iii) $10.7 million from our PGA TOUR 2K franchise, and (iv) $10.2 million from The Outer Worlds.

Net revenue from console games increased by $9.5 million and accounted for 73.7% of our total net revenue for the three months ended December 31, 2021, as compared to 76.2% for the prior year period. The increase was due to an increase in net revenue from our Grand Theft Auto franchise, partially offset by a decrease in net revenue from our NBA 2K, Mafia, PGA TOUR 2K, WWE 2K, Borderlands, and Red Dead franchises, The Outer Worlds, and our BioShock franchise. Net revenue from PC and other decreased by $1.7 million and accounted for 14.8% of our total net revenue for the three months ended December 31, 2021, as compared to 15.7% for the prior year period. The decrease was due to a decrease in net revenue from The Outer Worlds and our Civilization and Mafia franchises, partially offset by an increase in net revenue from our Red Dead and NBA 2K franchises. Net revenue from mobile increased by $34.6 million and accounted for 11.5% of our total net revenue for three months ended December 31, 2021, as compared to 8.0% for the prior year period. The increase was due primarily to an increase in net revenue from Top Eleven, Two Dots, and our NBA 2K franchise.

Net revenue from digital online channels increased by $52.6 million and accounted for 88.1% of our total net revenue for the three months ended December 31, 2021, as compared to 86.3% for the prior year period. The increase was due to an increase in net revenue from our Grand Theft Auto franchise, Top Eleven, Two Dots, and our Red Dead franchise, partially offset by a decrease in net revenue from our Mafia franchise, The Outer Worlds, and our PGA TOUR 2K franchise*.* Net revenue from physical retail and other channels decreased by $10.2 million and accounted for 11.9% of our total net revenue for the three months ended December 31, 2021, as compared to 13.7% for the same period in the prior year period. The decrease in net revenue from physical retail and other channels was due primarily to a decrease in net revenue from our NBA 2K, Mafia, PGA TOUR 2K, WWE 2K, and Red Dead franchises, partially offset by an increase in net revenue from our Grand Theft Auto franchise.

Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases. Net revenue from recurrent consumer spending decreased by $4.5 million and accounted for 60.6% of net revenue for the three months ended December 31, 2021, as compared to 64.2% of net revenue for the prior year period. The decrease in net revenue from recurrent consumer spending is due primarily to a decrease in net revenue from our NBA 2K, Grand Theft Auto, and Borderlands franchises, Monster Legends, and our Civilization franchise, partially offset by an increase in net revenue from Top Eleven and Two Dots. Net revenue from full game and other increased by $46.9 million and accounted for 39.4% of net revenue for the three months ended December 31, 2021 as compared to 35.8% of net revenue for the prior year period. The increase in net revenue from full game and other was due primarily to an increase in net revenue from our Grand Theft Auto franchise, partially offset by a decrease in net revenue from our Mafia and PGA TOUR 2K franchises, and The Outer Worlds.

Gross profit as a percentage of net revenue for the three months ended December 31, 2021 was 61.2% as compared to 59.8% for the prior year period. The increase in gross profit as a percentage of net revenue was due to lower development royalties and lower amortization of capitalized software development cost, both due primarily to the timing of releases, partially offset by higher internal royalties due to the timing of when royalties are earned.

Net revenue earned outside of the United States increased by $35.8 million and accounted for 40.8% of our total net revenue for the three months ended December 31, 2021, as compared to 38.6% in the prior year period. The increase in net revenue outside of the United States was due to an increase in net revenue from our Grand Theft Auto franchise and Top Eleven, partially offset by a decrease in net revenue from our Mafia franchise. Changes in foreign currency exchange rates

increased net revenue by $4.1 million and increased gross profit by $3.0 million for the three months ended December 31, 2021 as compared to the prior year period.

Operating Expenses

(thousands of dollars)			2021						% of net revenue						2020						% of net revenue						Increase/ (decrease)						% Increase/ (decrease)
Selling and marketing			$	135,286					15.0		%				$	139,906					16.3		%				$	(4,620)					(3.3)		%
General and administrative			130,706						14.5		%				98,624						11.5		%				32,082						32.5		%
Research and development			116,656						12.9		%				86,428						10.0		%				30,228						35.0		%
Depreciation and amortization			15,996						1.8		%				14,007						1.6		%				1,989						14.2		%
Business reorganization			123						—		%				(377)						—		%				500						(132.6)		%
Total operating expenses**(1)**			$	398,767					44.1		%				$	338,588					39.3		%				$	60,179					17.8		%

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

			2021						2020
Selling and marketing			$	7,189					$	4,131
General and administrative			16,478						15,538
Research and development			13,232						8,347

Changes in foreign currency exchange rates increased total operating expenses by $3.6 million for the three months ended December 31, 2021, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses decreased by $4.6 million for the three months ended December 31, 2021, as compared to the prior year period, due primarily to (i) lower overall marketing expense for our NBA 2K franchise, Red Dead Online, and Borderlands 3, partially offset by higher overall marketing expenses for Top Eleven, Grand Theft Auto: The Trilogy - The Definitive Edition, and Grand Theft Auto Online, and (ii) lower customer service expenses. These decreases were partially offset by an increase in personnel expenses for additional headcount.

General and administrative

General and administrative expenses increased by $32.1 million for the three months ended December 31, 2021, as compared to the prior year period, due primarily to increases in (i) personnel expenses for additional headcount, (ii) the fair value of the contingent earn-out liability related to our acquisition of Nordeus (refer to Note 15- Acquisitions), (iii) rent expenses for additional locations and lease renewals, and (iv) IT expenses for cloud-based services.

General and administrative expenses for the three months ended December 31, 2021 and 2020 included occupancy expense (primarily rent, utilities and office expenses) of $9.3 million and $6.8 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $30.2 million for the three months ended December 31, 2021, as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount, including related to our recent acquisitions.

Depreciation and Amortization

Depreciation and amortization expenses increased by $2.0 million for the three months ended December 31, 2021 as compared to the prior year period, due primarily to IT infrastructure.

Business reorganization

For the three months ended December 31, 2021, business reorganization expense increased by $0.5 million as compared to the prior year period and was not material.

Interest and other, net

Interest and other, net was expense of $5.6 million for the three months ended December 31, 2021, as compared to income of $1.1 million for the prior year period. The change was due primarily to (i) foreign currency losses in the current year period as compared to gains in the prior year period and (ii) lower interest income on our available-for-sale securities.

Gain on long-term investments, net

Gain on long-term investments, net decreased by $35.6 million for the three months ended December 31, 2021 as compared to the prior year period. The decrease was due primarily to the sale of a portion of one of our investments and the resulting change in value based on the observable price in the prior year period, partially offset by changes in value based on the observable price changes of our long-term investments in the current year period.

Provision for Income Taxes

The provision for income taxes for the three months ended December 31, 2021 is based on our projected annual effective tax rate for fiscal year 2022, adjusted for specific items that are required to be recognized in the period in which they are incurred. The provision for income taxes was $7.6 million for the three months ended December 31, 2021 as compared to $34.2 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 5.0% for the three months ended December 31, 2021 was due primarily to excess tax benefits of $9.9 million on employee stock-based compensation, tax benefits of $9.7 million from tax credits, and a tax benefit of $7.2 million related to geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 15.8% for the three months ended December 31, 2020 was due primarily to a tax benefit of $7.1 million from tax credits and excess tax benefits of $3.4 million from employee stock-based compensation offset by the geographic mix of earnings.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increases in tax benefits from tax credits, excess tax benefits from employee stock-based compensation the current period, and by the geographic mix of earnings.

The accounting for share-based compensation will increase or decrease our effective tax rate based on the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting. Since we recognize excess tax benefits on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period.

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

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

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

Net income and earnings per share

For the three months ended December 31, 2021, net income was $144.5 million, as compared to $182.2 million in the prior year period. Diluted earnings per share for the three months ended December 31, 2021 was $1.24, as compared to diluted earnings per share of $1.57 in the prior year period. Diluted weighted average shares of 116.7 million were 0.6 million shares higher as compared to the prior year period, due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year period, partially offset by shares repurchases. See Note 11 - Earnings Per Share to our Condensed Consolidated Financial Statements for additional information.

Nine Months Ended December 31, 2021 Compared to December 31, 2020

(thousands of dollars)			2021						%						2020						%						Increase/ (decrease)						% Increase/ (decrease)
Net revenue			$	2,574,796					100.0		%				$	2,533,341					100.0		%				$	41,455					1.6		%
Internal royalties			477,730						18.6		%				479,524						18.9		%				(1,794)						(0.4)		%
Software development costs and royalties (1)			274,963						10.7		%				374,332						14.8		%				(99,369)						(26.5)		%
Licenses			198,041						7.7		%				206,880						8.2		%				(8,839)						(4.3)		%
Product costs			186,042						7.2		%				194,702						7.7		%				(8,660)						(4.4)		%
Cost of goods sold			1,136,776						44.2		%				1,255,438						49.6		%				(118,662)						(9.5)		%
Gross profit			$	1,438,020					55.8		%				$	1,277,903					50.4		%				$	160,117					12.5		%

(1) Includes $31,831 and $61,529 of stock-based compensation expense in 2021 and 2020, respectively, in software development costs and royalties.

For the nine months ended December 31, 2021, net revenue increased by $41.5 million as compared to the prior year period. The increase was due to an increase in net revenue of (i) $97.9 million from our Grand Theft Auto franchise, including Grand Theft Auto: The Trilogy - The Definitive Edition which released in November 2021, (ii) $66.5 million from Two Dots, (iii) $48.9 million from our NBA 2K franchise, and (iv) $28.8 million from Top Eleven, which was part of the Nordeus acquisition in June 2021. These increases were partially offset by a decrease in net revenue of (i) $45.9 million from our Mafia franchise, (ii) $35.7 million from our Red Dead franchise, (iii) $34.8 million from our Borderlands franchise*,* (iv) $30.4 million from our PGA TOUR 2K franchise, (v) $17.1 million from our Civilization franchise, (vi) $14.1 million from our WWE 2K franchise, (vii) $11.6 million from The Outer Worlds, and (viii) $7.6 million from our BioShock franchise.

Net revenue from console games decreased by $45.0 million and accounted for 72.4% of our total net revenue for the nine months ended December 31, 2021, as compared to 75.4% for the prior year period. The decrease was due to a decrease in net revenue from our Mafia, Borderlands, Red Dead, PGA TOUR 2K, WWE 2K, and BioShock franchises, and The Outer Worlds, partially offset by an increase in net revenue from our Grand Theft Auto and NBA 2K franchises*.* Net revenue from PC and other decreased by $30.0 million and accounted for 15.9% of our total net revenue for the nine months ended December 31, 2021, as compared to 17.3% for the prior year period. The decrease was due to a decrease in net revenue from our Grand Theft Auto, Civilization, Mafia, and XCOM franchises, and The Outer Worlds, partially offset by an increase in net revenue from our NBA 2K franchise. Net revenue from mobile increased by $116.4 million and accounted for 11.7% of our total net revenue for nine months ended December 31, 2021, as compared to 7.3% for the prior year period. The increase was due primarily to an increase in net revenue from Two Dots, Top Eleven, and our NBA 2K franchise.

Net revenue from digital online channels increased by $111.2 million and accounted for 89.9% of our total net revenue for the nine months ended December 31, 2021, as compared to 87.0% for the prior year period. The increase was due to an increase in net revenue from our Grand Theft Auto franchise, Two Dots, our NBA 2K franchise, and Top Eleven, partially offset by a decrease in net revenue from our Mafia, Red Dead, Borderlands, PGA TOUR 2K, and Civilization franchises. Net revenue from physical retail and other channels decreased by $69.8 million and accounted for 10.1% of our total net revenue for the nine months ended December 31, 2021, as compared to 13.0% for the prior year period. The decrease was due to a decrease in net revenue from our Mafia, Borderlands, Red Dead, PGA TOUR 2K, WWE 2K, and NBA 2K franchises, partially offset by an increase in net revenue from our Grand Theft Auto franchise.

Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, and in-game purchases. Net revenue from recurrent consumer spending increased by $114.6 million and accounted for 65.4% of net revenue for the nine months ended December 31, 2021, as compared to 61.9% of net revenue for the prior year period. The increase was due to an increase in net revenue from Two Dots, our NBA 2K franchise, our Grand Theft Auto franchise, and Top Eleven, partially offset by a decrease in net revenue from our Borderlands and Red Dead franchises. Net revenue from full game and other decreased by $73.2 million and accounted for 34.6% of net revenue for the nine months ended December 31, 2021 as compared to 38.1% of net revenue for the prior year period. The decrease was due to a decrease in net revenue from our Mafia, PGA TOUR 2K, Red Dead, and WWE 2K franchises, and The Outer Worlds, partially offset by an increase in net revenue from our Grand Theft Auto franchise*.*

Gross profit as a percentage of net revenue for the nine months ended December 31, 2021 was 55.8% as compared to 50.4% for the prior year period. The increase in gross profit as a percentage of net revenue was due to lower development royalties and lower amortization of capitalized software development costs, both due primarily to the timing of releases. Offsetting the increase in gross profit as a percentage of net revenue were impairments recognized against some of our capitalized software balances for nine months ended December 31, 2021. (See Note 8 - Software Development Costs and Licenses of our Condensed Consolidated Financial Statements).

Net revenue earned outside of the United States increased by $0.9 million, and accounted for 40.1% of our total net revenue for the nine months ended December 31, 2021, as compared to 40.7% in the prior year period. The increase in net revenue outside of the United States was due to an increase in net revenue from Top Eleven, our Grand Theft Auto franchise, Two Dots, and our NBA 2K franchise, partially offset by a decrease in net revenue from our Mafia, Red Dead, Borderlands, and PGA TOUR 2K franchises, and The Outer Worlds. Changes in foreign currency exchange rates increased net revenue by $6.4 million and increased gross profit by $4.7 million for the nine months ended December 31, 2021 as compared to the prior year period.

Operating Expenses

(thousands of dollars)			2021						% of net revenue						2020						% of net revenue						Increase/ (decrease)						% Increase/ (decrease)
Selling and marketing			$	375,159					14.6		%				$	338,376					13.4		%				$	36,783					10.9		%
General and administrative			362,484						14.1		%				292,230						11.5		%				70,254						24.0		%
Research and development			310,458						12.1		%				233,752						9.2		%				76,706						32.8		%
Depreciation and amortization			44,642						1.7		%				40,116						1.6		%				4,526						11.3		%
Business reorganization			546						—		%				(138)						—		%				684						(495.7)		%
Total operating expenses (1)			$	1,093,289					42.5		%				$	904,336					35.7		%				$	188,953					20.9		%

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

			2021						2020
Selling and marketing			$	22,356					$	13,298
General and administrative			50,341						42,568
Research and development			38,012						22,400

Changes in foreign currency exchange rates increased total operating expenses by $4.3 million for the nine months ended December 31, 2021, as compared to the prior year period.

Selling and marketing

Selling and marketing expenses increased by $36.8 million for the nine months ended December 31, 2021, as compared to the prior year period, due primarily to (i) higher overall marketing expenses for Two Dots, Top Eleven, Grand Theft Auto Online, and Grand Theft Auto: The Trilogy - The Definitive Edition, partially offset by lower overall marketing expenses for Borderlands 3, our Mafia franchise, Red Dead Online, and our NBA 2K franchise and (ii) higher personnel expenses for additional headcount. These increases were partially offset by a decrease in customer service expenses.

General and administrative

General and administrative expenses increased by $70.3 million for the nine months ended December 31, 2021, as compared to the prior year period, due to increases in (i) personnel expenses for additional headcount, (ii) the fair value of the contingent earn-out liability related to our acquisition of Nordeus (refer to Note 15 - Acquisitions), (iii) IT expenses for cloud-based services, (iv) transfer tax expense related to our acquisition of Nordeus, and (iv) professional fees related to acquisitions. These increases were partially offset by a decrease in charitable contributions in the prior year period related to our COVID-19 response and relief efforts.

General and administrative expenses for the nine months ended December 31, 2021 and 2020 included occupancy expense (primarily rent, utilities and office expenses) of $25.6 million and $20.5 million, respectively, related to our development studios.

Research and development

Research and development expenses increased by $76.7 million for the nine months ended December 31, 2021, as compared to the prior year period, due primarily to increases in (i) personnel expenses for higher headcount, including related to our recent acquisitions, (ii) IT expenses for cloud-based services, and (iii) production and development expenses for titles that have not yet established technological feasibility.

Depreciation and Amortization

Depreciation and amortization expenses for the nine months ended December 31, 2021 increased by $4.5 million, as compared to the prior year period, due primarily to IT infrastructure.

Business reorganization

During the nine months ended December 31, 2021, as compared to the prior year period, business reorganization expense increased $0.7 million and was not material.

Interest and other, net

Interest and other, net was expense of $7.2 million for the nine months ended December 31, 2021, as compared to income of $12.0 million for the prior year period. The change was due primarily to (i) foreign currency losses in the current year period as compared to gains in the prior year period and (ii) lower interest income on our investments due to lower rates.

Gain on long-term investments, net

Gain on long-term investments, net decreased by $32.6 million for the nine months ended December 31, 2021 as compared to the prior year period, the decrease was due primarily to the sale of a portion of one of our investments and the resulting change in value based on the observable price in the prior year period, partially offset by changes in value based on the observable price changes of our long-term investments in the current year period.

Provision for Income Taxes

The provision for income taxes for the nine months ended December 31, 2021 is based on our projected annual effective tax rate for fiscal year 2021, adjusted for specific items that are required to be recognized in the period in which they are incurred. The provision for income taxes was $36.5 million for the nine months ended December 31, 2021 as compared to a provision for income taxes of $54.2 million for the prior year period.

When compared to the statutory rate of 21.0%, the effective tax rate of 10.6% for the nine months ended December 31, 2021 was due primarily to a tax benefit of $21.1 million due to tax credits and excess tax benefits of $13.9 million from employee stock-based compensation, offset by tax expense of $5.0 million related to a nondeductible increase in fair value of the contingent consideration liability associated with the acquisition of Nordeus and by the geographic mix of earnings.

In the prior year period, when compared to our statutory rate of 21%, the effective tax rate of 12.8% for the nine months ended December 31, 2020 was due primarily to a benefit of $17.8 million as a result of tax credits anticipated to be utilized and excess tax benefits of $13.6 million from employee stock-based compensation.

The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased tax benefits from tax credits in the current period and by the geographic mix of earnings.

The accounting for share-based compensation will increase or decrease our effective tax rate based on the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting. Since we recognize excess tax benefits on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period.

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

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

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

Net income and earnings per share

For the nine months ended December 31, 2021, net income was $307.1 million, as compared to $370.1 million in the prior year period. For the nine months ended December 31, 2021, diluted earnings per share was $2.63 as compared to diluted earnings per share of $3.20 in the prior year period. Diluted weighted average shares of 116.8 million were 1.2 million shares higher as compared to the prior year period, due primarily to normal stock compensation activity, including vests as well as grants and forfeitures in the prior year being fully outstanding in the current year period, partially offset by shares repurchased. See Note 11 - Earnings Per Share to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.

Liquidity and Capital Resources

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

Short-term Investments

As of December 31, 2021, we had $1,479.0 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 December 31, 2021, based on the composition of our investment portfolio and relatively lower interest rates as a result of the 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”), and on June 28, 2021, we amended our unsecured Credit Agreement solely to increase the commitments under the facility by $50 million (as amended, the “Credit Agreement”) that runs through February 8, 2024. The Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $250 million, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $25 million and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $25 million. In addition, the Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $200 million in term loans or revolving credit facilities.

Loans under the Credit Agreement will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (3.25% at December 31, 2021) or (b) 1.125% to 1.750% above LIBOR (approximately 0.10% at December 31, 2021), which rates are determined by reference to our consolidated total net leverage ratio. The LIBOR benchmark rate is expected to be phased out by the end of June 2023. We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations.

As of December 31, 2021, there was $247.7 million available to borrow under the Credit Agreement, and we had $2.3 million of letters of credit outstanding. At December 31, 2021, and March 31, 2021, 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 79.2% and 77.4% of net revenue during the nine months ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and March 31, 2021, five customers accounted for 74.7% and 77.6% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 59.1% and 69.2% of such balances at December 31, 2021 and March 31, 2021, respectively. We had two customers who accounted for 41.9% and 17.2% of our gross accounts receivable as of December 31, 2021, respectively, and two customers who accounted for 50.4% and 18.8% of our gross accounts receivable as of March 31, 2021, respectively. Based upon performing ongoing credit evaluations, maintaining trade credit insurance on a majority of our customers and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk, although we actively monitor each customer's credit worthiness and economic conditions that may affect our customers' business and access to capital. We are monitoring the current global economic conditions, including credit markets and other factors as it relates to our customers in order to manage the risk of uncollectible accounts receivable, including as a result of the COVID-19 pandemic.

We believe our current cash and cash equivalents, short-term investments and projected cash flows from operations, along with availability under our Credit Agreement, will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis. Our liquidity and capital resources were not materially affected by the COVID-19 pandemic and related volatility and slowdown in the global financial markets to date. For further discussion regarding the potential future impacts of the COVID-19 pandemic and related economic conditions on our business, refer to Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.

As of December 31, 2021, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $306.9 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 January 9, 2022, we entered into a definitive merger agreement to acquire Zynga, a leading developer of mobile games. Under the terms and subject to the conditions of the merger agreement, Zynga stockholders will receive $3.50 in cash and a number of shares of our common stock equal to the exchange ratio (ranging from 0.0350 to 0.0406, as further described below) for each share of Zynga common stock outstanding at the closing. The transaction is valued at $9.86 per share of Zynga common stock based on the market closing as of January 7, 2022, implying an enterprise value of $12.7 billion. The transaction includes a collar mechanism on the equity consideration, so that if our 20-day volume weighted average price (“VWAP”) ending on the third trading day prior to closing is in a range from $156.50 to $181.88, the exchange ratio would be adjusted to deliver total consideration of $9.86 per Zynga share. If the VWAP exceeds the higher end of that range the exchange ratio would be 0.0350 per share and if the VWAP falls below the lower end of that range, the exchange ratio would be 0.0406 per share.

As part of the transaction, we have received aggregate committed financing of $2.7 billion from J.P. Morgan and certain other lenders, and we intend to fund the cash component of the transaction through a combination of cash from our balance sheet as well as proceeds of new debt issuance.

The transaction, which is expected to close during our first quarter of fiscal year 2023 ending June 30, 2022, is subject to approval by Take-Two and Zynga stockholders and the satisfaction of customary closing conditions, including applicable regulatory approvals.

Our Board of Directors has authorized the repurchase of up to 21.7 million shares of our common stock, including an increase of 7.4 million shares in November 2021. 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 three months ended December 31, 2021, we did not repurchase shares of our common stock in the open market, as part of the program. We have repurchased a total of 11.7 million shares of our common stock under the program, and as of December 31, 2021, 10.0 million shares of our common stock remained available for repurchase under the share repurchase program.

Our changes in cash flows were as follows:

			Nine Months Ended December 31,
(thousands of dollars)			2021						2020
Net cash provided by operating activities			$	19,161					$	787,661
Net cash used in investing activities			(479,765)						(240,899)
Net cash used in financing activities			(239,720)						(46,371)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents			(2,727)						19,006
Net change in cash, cash equivalents, and restricted cash and cash equivalents			$	(703,051)					$	519,397

At December 31, 2021, we had $1,357.2 million of cash and cash equivalents and restricted cash and cash equivalents, compared to $2,060.2 million at March 31, 2021. The decrease was due to (1) Net cash used in investing activities primarily related to (i) net purchases of available for sale securities, (ii) our acquisition of Nordeus (refer to Note 15 - Acquisitions), and (iii) purchases of fixed assets, including our acquisition of two office buildings in the UK (refer to Note 15 - Acquisitions) and (2) Net cash used in financing activities, which was primarily for (i) repurchase of our common stock and (ii) tax payments related to net share settlements of our restricted stock awards. This net decrease was partially offset by Net cash provided by operating activities from sales of our products, partially offset by the timing of payments.

Contractual Obligations and Commitments

Refer to Note 13 - Commitments and Contingencies to our Condensed Consolidated Financial Statements for disclosures regarding our commitments.

Capital Expenditures

In fiscal year 2022, we anticipate capital expenditures to be $170 million. During the nine months ended December 31, 2021, capital expenditures were $133.4 million, which includes our acquisition of two office buildings in the UK (refer to Note 15 - Acquisitions).

Off-Balance Sheet Arrangements

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

International Operations

Net revenue earned outside of the United States is principally generated by our operations in Europe, Asia, Australia, Canada, and Latin America. For the three months ended December 31, 2021 and 2020, 40.8% and 38.6%, respectively, of our net revenue was earned outside of the United States. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays, and international political, regulatory and economic developments, all of which can have a significant effect on our operating results.

Fluctuations in Quarterly Operating Results and Seasonality

We have experienced fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles; sequels or enhancements of existing titles; projected and actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us and our competitors; the accuracy of retailers' forecasts of consumer demand; the size and timing of acquisitions; the timing of orders from major customers; and order cancellations and delays in product shipment. Sales of our full game products are also seasonal, with peak demand typically occurring in the fourth calendar quarter during the holiday season. For certain of our software products with multiple performance obligations, we defer the recognition of our net revenue over an estimated service period, which generally ranges from 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.