10-K 1 ttwo10k03312019.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended March 31, 2019
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                                    to                                     .
Commission file number 001-34003
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
51-0350842
(I.R.S. Employer
Identification No.)
110 West 44th Street
New York, New York
(Address of principal executive offices)
 
10036
(Zip Code)
Registrant's Telephone Number, Including Area Code: (646) 536-2842
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Stock, $.01 par value
TTWO
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter was approximately $15,537,179,720.
As of May 2, 2019, there were 112,541,501 shares of the Registrant's Common Stock outstanding, net of treasury stock.
Documents Incorporated by Reference:
Portions of the registrant's definitive proxy statement for the 2019 Annual Meeting of Stockholders
are incorporated by reference into Part III herein.
 



INDEX
 
 
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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained herein which are not historical facts 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 the Take-Two Interactive Software, Inc.'s ("Take-Two," the "Company," "we," "us," or similar pronouns) 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, but not limited to, those discussed under the heading "Risk Factors" included in Part I, Item 1A herein. All forward-looking statements are qualified by these cautionary statements and speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
PART I
Item 1.    Business
General
We are a leading developer, publisher and marketer of interactive entertainment for consumers around the globe. We develop and publish products principally through our two wholly-owned labels Rockstar Games and 2K, as well as our Private Division label and Social Point, a leading developer of mobile games. Our products are currently designed for console gaming systems such as the Sony Computer Entertainment, Inc. ("Sony") PlayStation®4 ("PS4"), Microsoft Corporation ("Microsoft") Xbox One® ("Xbox One"), the Nintendo Switch, and personal computers ("PC"), including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms, and cloud streaming services.
We were incorporated under the laws of the State of Delaware in 1993 and are headquartered in New York, New York with approximately 4,894 employees globally. Our website address is www.take2games.com. We make all of our filings with the Securities and Exchange Commission ("SEC") available free of charge on our website under the caption "Corporate—SEC Filings." Included in these filings are our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, which are available as soon as reasonably practicable after we electronically file or furnish such materials with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
The SEC maintains a website that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC's website is www.sec.gov.
Strategy
Overview.    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.
Support World-Class Creative Teams.    Creativity and innovation remain the core tenets of our organization, and are the lifeblood of our ongoing success. We have 3,784 employees working in game development in studios around the world - including some of the most well-known names in the business. The creative teams at our labels, Rockstar Games and 2K, are renowned for their consistent ability to deliver games that set new benchmarks for excellence. In addition, our Social Point studio further enhances our development capabilities with a track record of producing multiple hits in the free-to-play mobile sector. Whether expanding our portfolio of franchises, launching new intellectual property, or providing innovative ways for audiences

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to remain captivated and engaged, we prioritize producing the highest quality entertainment experiences. We support our teams by focusing on talent retention and acquisition, and our label structure enables us to target distinct market segments and opportunities.
Focus on Core Strength of Producing Select, High Quality Titles.    We focus on publishing a select number of high-quality titles based on internally-owned and developed intellectual properties. We currently own the intellectual property rights to 26 proprietary brands. In addition, we will selectively develop titles based on licensed properties, including sports, and also publish externally developed titles.
We use a product investment review process to evaluate potential titles for investment, to review existing titles in development, and to assess titles after release to measure their performance in the market and the return on our investment. We apply this process to all of our products, whether internally or externally developed. The product investment review process includes reviews of each project at various stages of development by our executive management team and the senior management of our publishing labels, and includes coordination between our sales and marketing personnel before the launch of titles. This disciplined approach to product investment is expected to enhance the competitiveness and profitability of our titles.
We develop our products using a combination of our internal development teams and external development resources acting under contract with us. We typically select external developers based on their track record and expertise in developing products in the same category or genre. One developer will generally produce the same game for multiple platforms and will also produce sequels to the original game. We believe that selecting and using development resources in this manner allows us to leverage the particular expertise of our internal and external development resources, which we believe increases the quality of our products.
Leverage Emerging Technologies, Platforms, and Distribution Channels, Including Digitally Delivered Content.    Interactive entertainment played online and on mobile platforms, including tablets and smartphones, represents exciting opportunities to enhance our growth and profitability. In addition, the interactive entertainment software industry is delivering a growing amount of content for traditional platforms through digital download. We provide a variety of digitally delivered products and offerings, which typically have a higher gross margin than physically delivered products. 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 third-party websites). 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. We will continue to invest in emerging opportunities in mobile and online gameplay, particularly for our wholly-owned franchises, as well as downloadable content and microtransactions that enable gamers to pay to download additional content to enhance their game playing experience.
Expand International Business.    The global market for interactive entertainment continues to grow and we seek to increase our presence internationally, particularly in Asia, Eastern Europe and Latin America. 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. We are a direct publisher in Japan and South Korea. While we retain title to all intellectual property, under license agreements local publishers are responsible for localization of software content, distribution, and marketing of the products in their respective local markets. We intend to continue to build upon our licensing relationships and also continue to expand on finished goods distribution strategies to grow our international business.
Our Businesses
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, the United Kingdom, and the United States. As of March 31, 2019, we had a research and development staff of 3,784 employees with the technical capabilities to develop software titles for all major consoles, PCs, and mobile platforms in multiple languages and territories.
Agreements with third-party developers generally give us exclusive publishing and marketing rights and require us to make development payments, pay royalties based on product sales, and to satisfy other conditions. Development payments for software titles are typically recoupable against royalties otherwise due to developers based on software sales. Our agreements with third-party developers generally provide us with the right to monitor development efforts and to cease making development payments if specified development milestones are not satisfied. We also regularly monitor the level of development payments in light of the expected sales for the related titles.
We continue to engage in evolving business models such as online gaming, virtual currency, add-on content, and in-game purchases, and we expect to continue to generate incremental revenue opportunities from these opportunities.

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Rockstar Games.    Software titles published by our Rockstar Games label are primarily internally developed. We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto, Max Payne, Midnight Club, Red Dead Redemption, and other popular franchises, to continue to be a leader in the action / adventure product category and to create groundbreaking entertainment by leveraging our existing titles as well as by developing new brands. We believe that Rockstar has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 290 million units. The latest installment, Grand Theft Auto V, has sold-in over 105 million units worldwide and includes access to Grand Theft Auto Online. On October 26, 2018, Rockstar Games launched Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records. Rockstar Games is also well known for developing brands in other genres, including the LA Noire, Bully, and Manhunt franchises. Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, content, and virtual currency, and releasing titles for smartphones and tablets.
2K.    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 externally developed franchises such as Borderlands. 2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, the WWE 2K professional wrestling series, and the Golf Club.
Private Division.    Our Private Division label is dedicated to bringing titles from top independent developers to market. Private Division has announced that it will publish three upcoming titles based on new IP from renowned industry creative talent, including The Outer Worlds and Ancestors: The Humankind Odyssey, both of which are planned for release in calendar 2019. Additionally, Private Division is the publisher of Kerbal Space Program.
Social Point.    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 establish an 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 our NBA simulation game in China, Taiwan, South Korea and Southeast Asia. NBA 2K Online, our free-to-play NBA simulation game, which was co-developed by 2K and Tencent, is the top online PC sports game in China with over 45 million registered users. On August 2, 2018, 2K and Tencent commercially launched NBA 2K Online 2 in China. The title is based on the console edition of NBA 2K and includes an array of new features.
    In February 2017, we expanded our relationship with the NBA through the creation of the NBA 2K League. Launched in May 2018, this groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises. The NBA 2K League follows a professional sports league format: the inaugural season included head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up that was held in August 2018. The NBA 2K League began its second season on April 2, 2019.
Intellectual Property
Our business is highly dependent on the creation, acquisition, licensing and protection of intellectual property. The intellectual property rights we have created or acquired for our internally-owned portfolio of brands include BioShock, Bully, Carnival Games, Dragon City, Grand Theft Auto, Kerbal Space Program, L.A. Noire, Mafia, Manhunt, Max Payne, Midnight Club, Monster Legends, Red Dead, Sid Meier's Civilization, and XCOM. We believe that content ownership facilitates our internal product development efforts and maximizes profit potential. We attempt to protect our software and production techniques under copyright, patent, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution.
We also enter into content license agreements, such as those with sports leagues, players associations, music labels and musicians. These licenses are typically limited to use of the licensed rights in products for specific time periods. In addition, we license and include console manufacturer technology in our products on a non-exclusive basis, which allows our games to be played on their respective hardware systems.
Manufacturing
Sony and Microsoft either manufacture or control the selection of approved manufacturers of software products sold for use on their respective hardware platforms. We place a purchase order for the manufacture of our products with Sony or Microsoft's approved replicator and then send software code and a prototype of the product to the manufacturer, together with related artwork, user instructions, warranty information, brochures and packaging designs for approval, defect testing and manufacture. Games are generally shipped within two to three weeks of receipt of our purchase order and all materials.

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Production of PC software is performed by third-party vendors in accordance with our specifications and includes DVD-ROM pressing, assembly of components, printing of packaging and user manuals and shipping of finished goods. We send software code and a prototype of a title, together with related artwork, user instructions, warranty information, brochures and packaging designs to the manufacturers. Games are generally shipped within two weeks of receipt of our manufacturing order.
Our software titles typically carry a 90-day limited warranty.
Arrangements with Platform Manufacturers
We have entered into license agreements with Sony and Microsoft to develop and publish software in Asia, Australia, Europe, North America, and certain Latin American, Middle Eastern, and African countries. We are not required to obtain any licenses from hardware manufacturers to develop titles for the PC.
Sony.    Effective March 23, 2017, we entered into a PlayStation Global Developer and Publisher Agreement with Sony Computer Entertainment, Inc. and certain of its affiliates, pursuant to which Sony granted us the right and license to develop, publish, have manufactured, market, advertise, distribute and sell PlayStation compatible products for all PlayStation systems, including the PS4. The agreement requires us to submit products to Sony for approval and for us to make royalty payments to Sony based on the number of units manufactured or revenue from downloaded content. In addition, products for PlayStation systems are required to be manufactured by Sony approved manufacturers.   
The term of the agreement expires on March 31, 2020, with automatic one-year renewal terms thereafter. Sony may terminate the agreement for any or no reason upon thirty days’ notice. The agreement may also be terminated by Sony immediately in the event of a breach by us or our bankruptcy or insolvency. Upon expiration or termination of the agreement, we have certain rights to sell off existing inventories.
Microsoft.    Under the terms of the license agreements that we have entered into with Microsoft Corporation and its affiliates, Microsoft granted us the right and license to develop, publish, have manufactured, market, advertise, distribute and sell Xbox compatible products for the Xbox One and Xbox 360. The agreements require us to submit products to Microsoft for approval and for us to make royalty payments to Microsoft based on the number of units manufactured or revenue from downloaded content. In addition, products for the Xbox One and Xbox 360 are required to be manufactured by Microsoft approved manufacturers.
The term of the Xbox One license agreement expires on March 31, 2020 and the term of the Xbox 360 license agreement expires on March 31, 2020, each agreement with automatic one-year renewal terms thereafter. The Xbox One and Xbox 360 license agreements may be terminated by Microsoft immediately in the event of a breach by us, and the Xbox One licensee agreement may also be terminated by Microsoft immediately in the event of our bankruptcy or insolvency. Upon expiration or termination of the Xbox One and Xbox 360 license agreements, we have certain rights to sell off existing inventories.
Sales
We sell software titles both physically and digitally in the United States, EMEA, Canada, Latin America, and Asia Pacific through direct relationships with large retail customers and third-party distributors. Our top customers include, among others, GameStop Corporation, Microsoft, Sony, Steam, and Wal-Mart. We have sales operations in Australia, Canada, France, Germany, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Taiwan, the United Kingdom, and the United States.
We are dependent on a limited number of customers that account for a significant portion of our sales. Sales to our five largest customers during the fiscal year ended March 31, 2019 accounted for 70.1% of our net revenue, with Sony, Microsoft, and Gamestop each accounting for more than 10.0% of our net revenue during the fiscal year ended March 31, 2019.
We also distribute our titles, add-on content, and in-game purchases through direct digital download via the Internet to consoles and PCs, including smartphones and tablets. We view digital distribution as an important growth opportunity for our industry and Company; however, we expect that packaged goods and traditional retailers will continue to be a significant channel for the sale of our products for the foreseeable future.
Marketing
Our marketing and promotional efforts are intended to maximize consumer interest in our titles, promote brand name recognition of our franchises, assist retailers and properly position, package and merchandise our titles. From time to time, we also receive marketing support from hardware manufacturers in connection with their own promotional efforts.
We market titles by:
•
Implementing public relations campaigns, using print and online advertising, television, radio spots and outdoor advertising. We believe that we label and market our products in accordance with the applicable principles and

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guidelines of the Entertainment Software Rating Board, or the ESRB, an independent self-regulatory body that assigns ratings and enforces advertising guidelines for the interactive software industry.
•
Satisfying certain shelf life and sales requirements under our agreements with hardware manufacturers in order to qualify for Sony's Greatest Hits Programs and Microsoft's Platinum Hits Program. In connection with these programs, we receive manufacturing discounts from Sony and Microsoft.
•
Stimulating continued sales by reducing the wholesale prices of our products to retailers at various times during the life of a product. Price protection may occur at any time in a product's life cycle, but typically occurs three to nine months after a product's initial launch. In certain international markets, we also provide volume rebates to stimulate continued product sales. Price protection, sales returns and other allowances amounted to $81.7 million, $59.7 million and $127.7 million during the fiscal years ended March 31, 2019, 2018 and 2017, respectively.
•
Employing various other marketing methods designed to promote consumer awareness, including social media, in-store promotions and point-of-purchase displays, direct mail, co-operative advertising, attendance at trade shows as well as product sampling through demonstration software distributed via the Internet or the digital online services.
As of March 31, 2019, we had a sales and marketing staff of 510 people.
Product Procurement
We procure products from suppliers principally using standard purchase orders based on our assessment of market demand. We carry inventory quantities that we believe are necessary to provide rapid response to retailer orders. We utilize electronic data interchange with many of our customers to enhance the efficiency of placing and shipping orders and receiving payments.
Competition
In our business, we compete with:
•
Companies that range in size and cost structure from very small with limited resources to very large with greater financial, marketing and technical personnel and other resources than ours, including Activision Blizzard, Inc., Electronic Arts Inc., and Ubisoft Entertainment S.A.
•
Sony and Microsoft for the sale of interactive entertainment software. Each of these competitors is a large developer and marketer of software for their own platforms and has the financial resources to withstand significant price competition and to implement extensive advertising campaigns.
•
Other software, hardware, entertainment and media for limited retail shelf space and promotional resources. The competition is intense among an increasing number of newly introduced entertainment software titles and hardware for adequate levels of shelf space and promotional support.
•
Other forms of entertainment such as motion pictures, television and audio, social networking, online computer programs, mobile games, and other forms of entertainment, which may be less expensive or provide other advantages to consumers.
Competition in the entertainment software industry is based on innovation, features, playability, product quality, brand name recognition, compatibility with popular platforms, access to distribution channels, price, marketing, and customer service. Our business is driven by hit titles, which require increasing budgets for development and marketing. Competition for our titles is influenced by the timing of competitive product releases and the similarity of such products to our titles and may result in loss of shelf space or a reduction in sell-through of our titles at retail stores.
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 substantial portion of our revenue. Sales of our Grand Theft Auto products generated 25.7% of our net revenue for the fiscal year ended March 31, 2019. In October 2018, we released Red Dead Redemption 2. Sales of Red Dead Redemption products generated 32.1% of our net revenue for the fiscal year ended March 31, 2019. The timing of our Grand Theft Auto or Red Dead Redemption product releases may affect our financial performance on a quarterly and annual basis.
Economic Environment and Retailer Performance.    We continue to monitor economic conditions that may unfavorably affect our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. Our business is dependent upon a limited number of customers who account for a significant portion of our revenue. Our five largest customers accounted for 70.1%, 70.7% and 65.5% of net revenue during the fiscal years

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ended March 31, 2019, 2018 and 2017, respectively. As of March 31, 2019 and 2018, five customers comprised 66.6% and 65.4% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 55.8% and 53.2% of such balance at March 31, 2019 and 2018, respectively. We had two customers who accounted for 40.1% and 15.7% of our gross accounts receivable as of March 31, 2019 and two customers who accounted for 37.7% and 15.5% of our gross accounts receivable as of March 31, 2018. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2019 and 2018. The economic environment has affected our customers in the past and may do so in the future. Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers. Certain of our large customers sell used copies of our games, which may negatively affect our business by reducing demand for new copies of our games. While the downloadable content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.
Hardware Platforms.    We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, such as Sony's PS4 and Microsoft's Xbox One, which comprised 83.7% of our net revenue by product platform for the fiscal year ended March 31, 2019. The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new hardware platforms are introduced, demand for software based on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. We continually monitor console hardware sales. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Accordingly, our strategy is to focus our development efforts on a select number of the highest quality titles for these platforms, while also expanding our offerings for emerging platforms such as tablets, smartphones and online games.
Online Content and Digital Distribution.    The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from websites we own and others owned by third parties). 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. Note 2 to the Consolidated Financial Statements, "Revenue from Contracts with Customers," discloses that net revenue from digital online channels comprised 63.0% of our net revenue by distribution channel for the fiscal year ended March 31, 2019. We expect online delivery of games and game offerings to become an increasing part of our business over the long-term.
International Operations
International sales are a significant part of our business. For the fiscal years ended March 31, 2019, 2018 and 2017, 46.5%, 41.3% and 43.9%, respectively, of our net revenue was earned outside the United States. We are 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. 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. See Notes 1 and 19 to the Consolidated Financial Statements.
Segment and Geographic Information
See Notes 1, 2, and 9 to the Consolidated Financial Statements.
Employees
As of March 31, 2019, we had 4,894 full-time employees, of which 2,597 were employed outside of the United States. None of our regular employees is subject to collective bargaining agreements. We consider our relations with employees to be satisfactory.

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Item 1A.    Risk Factors
Our business is subject to many risks and uncertainties, which may affect our future financial performance. Because of the risks and uncertainties described below, as well as other factors affecting our operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance and our business and financial performance could be harmed and the market value of our securities could decline.
Risks relating to our business
We are dependent on the future success of our Grand Theft Auto products and we must continue to publish "hit" titles or sequels to such "hit" titles in order to compete successfully in our industry.
Grand Theft Auto and certain of our other titles, such as Red Dead Redemption or NBA 2K, are "hit" products and have historically accounted for a substantial portion of our revenue. Grand Theft Auto products contributed 25.7% of our net revenue for the fiscal year ended March 31, 2019 and the five best-selling franchises (including Grand Theft Auto), which may change year over year, in the aggregate accounted for 91.8% of our net revenue for the fiscal year ended March 31, 2019. If we fail to continue to develop and sell new commercially successful "hit" titles or sequels to such "hit" titles or experience any delays in product releases or disruptions following the commercial release of our "hit" titles or their sequels, our revenue and profits may decrease substantially and we may incur losses. In addition, competition in our industry is intense and a relatively small number of hit titles account for a large portion of total revenue in our industry. Hit products offered by our competitors may take a larger share of consumer spending than we anticipate, which could cause revenue generated from our products to fall below our expectations. If our competitors develop more successful products or services at lower price points or based on payment models perceived as offering better value, or if we do not continue to develop consistently high quality and well-received products and services, our revenue and profitability may decline. In addition, both the online and mobile games marketplaces are characterized by frequent product introductions, relatively low barriers to entry, and new and evolving business methods, technologies and platforms for development. Widespread consumer adoption of these new platforms for games and other technological advances in and/or new business or payment models in online or mobile game offerings could negatively affect our sales of console and traditional PC products before we have an opportunity to develop profitable businesses in such markets.
We are subject to product development risks which could result in delays and additional costs, and we must adapt to changes in software technologies.
We depend on our internal development studios and third-party software developers to develop new interactive entertainment software within anticipated release schedules and cost projections. The development cycle for new titles generally ranges from 12 months for annual sports releases, to multiple years for certain of our top-selling titles. Therefore, our development costs can be substantial. If we or our third party developers experience unanticipated development delays, financial difficulties or additional costs, we may not be able to release titles according to our schedule and at budgeted costs. There can be no assurance that our products will be sufficiently successful so that we can recoup these costs or make a profit on these products.
Additionally, in order to stay competitive, our internal development studios must anticipate and adapt to rapid technological changes affecting software development. Any inability to respond to technological advances and implement new technologies could render our products obsolete or less marketable. Further, the failure to pursue the development of new technology, platforms, or business models that obtain meaningful commercial success in a timely manner may negatively affect our business, resulting in increased production costs and more strenuous competition.
The inability of our products to achieve significant market acceptance, delays in product releases or disruptions following the commercial release of our products may have a material adverse effect on our business, financial condition and operating results.
New products may not achieve significant market acceptance, generate sufficient sales or be introduced in a timely manner to permit us to recover development, manufacturing and marketing costs associated with these products. The life cycle of a title generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in sales. Because sales associated with an initial product launch generally constitute a high percentage of the total sales associated with the life of a product, delays in product releases or disruptions following the commercial release of one or more new products could have a material adverse effect on our business, financial condition and operating results and cause our operating results to be materially different from our expectations.

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Our business is subject to our ability to develop commercially successful products for the current video game platforms.
We derive most of our revenue from the sale of products made for video game platforms manufactured by third parties, such as Sony's PS4 and Microsoft's Xbox One, which comprised 83.7% of our net revenue by product platform for the fiscal year ended March 31, 2019. The success of our business is subject to the continued popularity of these platforms and our ability to develop commercially successful products for these platforms.
We may experience declines or fluctuations in the recurring portion of our business.
Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized titles and associated services, and ongoing mobile businesses. While we have been able to forecast the revenue from these areas of our business with greater certainty than for new offerings, we cannot provide assurances that consumers will purchase these games and services on a consistent basis. Furthermore, we may cease to offer games and services that we previously had deemed to be recurring in nature. Consumer purchases of our games and services may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our games and services, our ability to improve and innovate our annualized titles, our ability to adapt our games and services to new platforms, outages and disruptions of online services, the games and services offered by our competitors, our marketing and advertising efforts or declines in consumer activity generally as a result of economic downturns, among others. Any decline or fluctuation in the recurring portion of our business may have a negative impact on our financial and operating results.
Connectivity issues could affect our ability to sell and provide online services for our products and could affect our profitability.
We rely upon third-party digital delivery platforms, such as Microsoft's Xbox Live, PlayStation Network, Steam and other third-party service providers, to provide connectivity from the consumer to our digital products and our online services. Connectivity issues could prevent customers from accessing this content and our ability to successfully market and sell our products could be adversely affected. In addition, we could experience similar issues related to services we host on our internal servers. Such issues also could affect our ability to provide online services and could have a material adverse effect on our business, financial condition and operating results.
Our business could be adversely affected if our consumer data protection measures are not seen as adequate or there are breaches of our security measures or unintended disclosures of our consumer data.
We are collecting and storing consumer information, including personal information. We take measures to protect our consumer data from unauthorized access or disclosure. It is possible that our security controls over consumer data may not prevent the improper access or disclosure of personally identifiable information. In addition, due to the high profile nature of our products, we may draw a disproportionately higher amount of attention and attempts to breach our security controls than companies with lower profile products. A security breach that leads to disclosure of consumer account information (including personally identifiable information) could harm our reputation, compel us to comply with disparate breach notification laws in various jurisdictions and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. A resulting perception that our products or services do not adequately protect the privacy of personal information could result in a loss of current or potential consumers and business partners. In addition, if any of our business partners experience a security breach that leads to disclosure of consumer account information, our reputation could be harmed, resulting in loss of revenue.
In addition, certain of our products are online enabled. The ability of our products to offer online functionality, and our ability to offer content through a video game platform's digital distribution channel, is dependent upon the continued operation and security of such platform's online network. These third party networks, as well as our own internal systems and websites, and the security measures related thereto may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise, and result in someone obtaining unauthorized access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, we may lose business, suffer irreparable damage to our reputation, and/or incur significant costs and expenses relating to the investigation and possible litigation of claims relating to such event.
The laws and regulations concerning data privacy and certain other aspects of our business are continually evolving. Failure to comply with these laws and regulations could harm our business.
We are subject to certain privacy and data protection laws, including those in the United States ("U.S."). Certain activities related to processing the personal data of European Union ("E.U.") individuals are conducted by our United Kingdom ("U.K.")-based data controller or our local entities in the E.U. The U.S. Children's Online Privacy Protection Act also regulates the collection, use, and disclosure of personal information from children under 13 years of age. Failure to comply with privacy laws, data protection

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laws, or age restrictions may increase our costs, subject us to expensive and distracting government investigations, and result in substantial fines.
Privacy and data protection laws are rapidly changing and likely will continue to do so for the foreseeable future, which could have an impact on our approach to operating and marketing our games. For example, the E.U. General Data Protection Regulation ("GDPR") became effective on May 25, 2018, replacing Data Protection Directive 95/46/EC. GDPR applies to us because we receive and process the personal data of individuals in the E.U., and we maintain certain local entities in the E.U. responsible for processing personal data. GDPR contains significant penalties for non-compliance. Countries in the E.U. are still enacting national laws that correspond to certain portions of the GDPR. In the U.S., the State of California enacted the California Consumer Privacy Act ("CCPA") on June 28, 2018. The CCPA will become effective on January 1, 2020 and will apply to processing of personal data of California residents. However, several proposed amendments to the CCPA are still being considered by the California legislature. The U.S. government, including the Federal Trade Commission and the Department of Commerce, also continue to review the need for greater or different regulation over the collection of personal information and information about consumer behavior on the Internet and on mobile devices. Various government and consumer agencies worldwide have also called for new regulation and changes in industry practices.
Player use of our games is subject to our privacy policy, end user license agreements ("EULA"), and terms of service. If we fail to comply with our posted privacy policy, EULA, or terms of service, or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by governmental authorities or others, which could result in fines or judgments against us, damage our reputation, affect our financial condition and harm our business. If regulators, the media, or consumers raise any concerns about our privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, negatively affect our financial condition, and damage our business.
It is possible that a number of laws and regulations may be adopted or construed to apply to us in the U.S. and elsewhere that could restrict the interactive entertainment industry, including player privacy, advertising, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce and virtual goods may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through digital sales. Any such changes would require us to devote legal and other resources to address such regulation. For example, existing laws or new laws regarding the regulation of currency, banking institutions and unclaimed property may be interpreted to cover virtual currency or virtual goods. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the U.S. or elsewhere regarding these activities may lessen the growth of the interactive entertainment industry and impair our business, financial condition, and operating results.
Although we have structured and operate our skill tournaments with applicable laws in mind, including any applicable laws relating to gambling, and believe that playing these games does not constitute gambling, our skill tournaments could in the future become subject to gambling-related rules and regulations and expose us to civil and criminal penalties. We also sometimes offer consumers of our online and casual games various types of contests and promotional opportunities. We are subject to laws in a number of jurisdictions concerning the operation and offering of such activities and games, many of which are still evolving and could be interpreted in ways that could harm our business. Further, some of our online games and other services include random digital item mechanics, which may become subject to regulations in various jurisdictions. If these were to occur, we might be required to seek licenses, authorizations, or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements, and we may be subject to additional regulation and oversight, such as reporting to regulators, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the U.S., Europe, or elsewhere regarding these activities may lessen the growth of casual game services and impair our business. Also, existing laws or new laws regarding the marketing of in-game or in-app purchases, regulation of currency, banking institutions, unclaimed property, or money laundering may be interpreted to cover virtual currency or goods.
Security breaches involving the source code for our products or other sensitive and proprietary information could adversely affect our business.
We securely store the source code for our interactive entertainment software products as it is created. A breach, whether physical, electronic or otherwise, of the systems on which such source code and other sensitive data are stored could lead to damage or piracy of our software. In addition, certain parties with whom we do business are given access to our sensitive and proprietary information in order to provide services and support our team. These third parties may misappropriate our information and engage in unauthorized use of it. If we are subject to data security breaches, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures which could materially and adversely affect our business, financial condition and operating results. Any theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could adversely affect our competitive position, reputation, brand, and future sales of our

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products. Our business could be subject to significant disruption, and we could suffer monetary and other losses and reputational harm, in the event of such incidents and claims.
We rely on complex information technology systems and networks to operate our business. Any significant system or network disruption could have a negative impact on our business.
We rely on the efficient and uninterrupted operation of complex information technology systems and networks, some of which are within Take-Two and some of which are managed and/or hosted by third-party providers. All information technology systems and networks are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to cyber-attacks, computer viruses, malicious software, security breach, energy blackouts, natural disasters, terrorism, war and telecommunication failures. We may also face sophisticated attacks, referred to as advanced persistent threats, which are cyber-attacks aimed at compromising our intellectual property and other commercially-sensitive information, such as the source code and game assets for our software or confidential customer or employee information, which remain undetected for prolonged periods of time. Information technology system or network failure or security breach could negatively affect our business continuity, operations and financial results. These risks extend to the networks and e-commerce sites of console platform providers and other partners who sell and host our content online. Along with our partners, we have expended, and expect to continue to expend, financial and operational resources to implement certain systems, processes and technologies to guard against cyber risks and to help protect our data and systems. However, the techniques used to exploit, disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual property and other assets change frequently, continue to evolve in sophistication and volume, and often are not detected for long periods of time. Our systems, processes and technologies, and the systems, processes and technologies of our business partners or our third-party service providers, may not be adequate against all eventualities. In addition, the costs to respond to, mitigate, and/or notify affected parties of cyber-attacks and other security vulnerabilities are significant. Any failure to prevent or mitigate security breaches or cyber risks, or detect or respond adequately to a security breach or cyber risk, could result in a loss of anticipated revenue, interruptions to our products and services, cause us to incur significant remediation and notification costs, degrade the user experience, cause consumers to lose confidence in our products and services and significant legal and financial costs.
Successful exploitation of our systems can have other negative effects upon the products, services and user experience we offer. In particular, the virtual economies that we have established in many of our games are subject to abuse, exploitation and other forms of fraudulent activity that can negatively affect our business. Virtual economies involve the use of virtual currency and/or virtual assets that can be used or redeemed by a player within a particular game or service. The abuse or exploitation of our virtual economies include the illegitimate generation and sale of virtual items in black markets. These kinds of activities and the steps that we take to address these issues may result in a loss of anticipated revenue, interfere with players’ enjoyment of a balanced game environment and cause reputational harm.
Our efforts to expand into new products and services may subject us to additional risks.
In recent years, we have invested in emerging opportunities in interactive entertainment played on mobile platforms, including tablets and smartphones, and online platforms, including social networks. We have also grown our product offerings that are available through digital download, including virtual currency, through our existing franchises such as Grant Theft Auto and NBA 2K as well as through product offerings by Social Point and other mobile product offerings. We are actively investing to capitalize on these trends in order to diversify our product mix, reduce our operating risks, and increase our revenue. There are risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. There is no assurance that we will be able to attract a sufficiently large number of customers or recover costs incurred for developing and marketing any of these new products or services. For example, we may offer games that do not attract sufficient purchases of virtual currency, which may cause our investments into this product space, such as through our acquisition of Social Point, to fail to realize the expected benefits. External factors, such as competitive alternatives and shifting market preferences, may also have an impact on the successful implementation of any new products or services. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business, financial condition and operating results.
We depend on our key management and product development personnel.
Our continued success will depend to a significant extent on our senior management team and our relationship with ZelnickMedia Corporation ("ZelnickMedia"). Our Executive Chairman/Chief Executive Officer and President are partners of ZelnickMedia. We are also highly dependent on the expertise, skills and knowledge of certain of our Rockstar employees and other key creative personnel responsible for content creation and development of our Grand Theft Auto titles and titles based on other brands. We may not be able to continue to retain these personnel at current compensation levels, or at all.
The loss of the services of our executive officers, ZelnickMedia, our key Rockstar employees or other key creative personnel could significantly harm our business. In addition, if one or more key employees were to join a competitor or form a competing

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company, we may lose additional personnel, experience material interruptions in product development, delays in bringing products to market and difficulties in our relationships with licensors, suppliers and customers, which would significantly harm our business. Failure to continue to attract and retain other qualified management and creative personnel could adversely affect our business and prospects.
Declines in consumer spending and other adverse changes in the economy could have a material adverse effect on our business, financial condition and operating results.
Most of our products involve discretionary spending on the part of consumers. We believe that consumer spending is influenced by general economic conditions and the availability of discretionary income. This makes our products particularly sensitive to general economic conditions and economic cycles as consumers are generally more willing to make discretionary purchases, including purchases of products like ours, during periods in which favorable economic conditions prevail. Adverse economic conditions such as a prolonged U.S. or international general economic downturn, including periods of increased inflation, unemployment levels, tax rates, interest rates, energy prices or declining consumer confidence could also reduce consumer spending. Reduced consumer spending has and may in the future continue to result in reduced demand for our products and may also require increased selling and promotional expenses, which has had and may continue to have an adverse effect on our business, financial condition and operating results. In addition, during periods of relative economic weakness, our consolidated credit risk, reflecting our counterparty dealings with distributors, customers, capital providers and others may increase, perhaps materially so. Furthermore, uncertainty and adverse changes in the economy could also increase the risk of material losses on our investments, increase costs associated with developing and publishing our products, increase the cost and availability of sources of financing, and increase our exposure to material losses from bad debts, any of which could have a material adverse effect on our business, financial condition and operating results. If economic conditions worsen, our business, financial condition and operating results could be adversely affected.
Changes in our tax rates or exposure to additional tax liabilities could adversely affect our earnings and financial condition.
On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (herein referred to as the "Act”). The Act made broad and complex changes to the U.S. tax code that could materially affect us. The Act reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 and required companies to pay a one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries. In addition, the Act made other changes that may affect us, including but not limited to (1) a Base Erosion Anti-abuse Tax ("BEAT"), which is a new minimum tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision that taxes global intangible low-taxed income ("GILTI"), (4) the repeal of the domestic production activity deduction, and (5) other base broadening provisions.
We have completed accounting for the income tax effects of the Act. See Note 15 - Income Tax to our Consolidated Financial Statements for further information. We are continuing to evaluate the impact of the Act on us. It is possible that these changes could have an adverse impact on our effective tax rate, tax payments, financial condition, or results of operations. The new tax law is complex and additional interpretive guidance may be issued that could affect the interpretations and assumptions we have made, as well as actions we may take as a result of the Act.
We are a multinational corporation with operations in the U.S. and various other jurisdictions around the world. Accordingly, we are subject to tax in the U.S. and in various other jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, and, in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are required to estimate future taxes. Although we currently believe our tax estimates are reasonable, the estimation process is inherently uncertain, and such estimates are not binding on tax authorities. Further, our effective tax rate could be adversely affected by a variety of factors, including changes in the business, the mix of earnings in countries with differing statutory tax rates, changes in tax elections, and changes in applicable tax laws. Additionally, tax determinations are regularly subject to audit by tax authorities, and developments in those audits could adversely affect our income tax provision. Should the ultimate tax liability exceed estimates, our income tax provision and net income or loss could be materially affected.
In addition, numerous countries are evaluating their existing tax laws due in part to recommendations made by the Organization for Economic Co-operation and Development’s (“OECD’s”) Base Erosion and Profit Shifting (“BEPS”) project. Although we cannot predict whether, or in what form, any legislation based on such proposals may be adopted by the countries in which we do business, future tax reform based on such proposals may increase the amount of taxes we pay and adversely affect our operating results and cash flows.
Historically, we recorded a valuation allowance against most of our U.S. deferred tax assets. In the current fiscal year, we released our valuation allowance on certain U.S. deferred tax assets as a result of a determination that it was more-likely-than-not that such deferred tax assets would be realized. Our determination took into account the successful launch of Red Dead Redemption 2 during

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the year along with our recent positive trend of earnings. We will continue to evaluate our ability to realize our U.S. deferred tax assets. If future evidence suggests that any changes are required to reflect the amount of our U.S. deferred tax asset that is more-likely-than-not to be realized, we will adjust our valuation allowance as needed in the appropriate period.
On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, which overturned previous case law that precluded states from requiring retailers to collect and remit sales tax on sales made to in-state customers unless the retailer had a physical presence in the state. Although this case is limited to sales tax collection obligations, we continue to monitor the potential impact of this decision on our state income tax footprint.
The ultimate amount of tax payable in a given financial statement period may be materially affected by sudden or unforeseen changes in tax laws, changes in the mix and level of earnings by taxing jurisdictions, or changes to existing accounting rules or regulations. For example, on July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock compensation. On August 7, 2018, the opinion was withdrawn to allow time for a reconstituted panel to confer. We will continue to monitor ongoing developments and the final opinion could have a material impact on our Consolidated Financial Statements.
We earn a significant amount of our operating income and continue to hold a significant portion of our cash outside the U.S. 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.
We are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services taxes, in both the U.S. and foreign jurisdictions. We are regularly under examination by tax authorities with respect to these non-income taxes. There can be no assurance that the outcomes from these examinations, changes in our business or changes in applicable tax law or interpretations will not have an adverse effect on our net income or loss and financial condition.
Our quarterly operating results are dependent on the release of "hit" titles and are highly seasonal which may cause our quarterly operating results to fluctuate significantly.
We have experienced and may continue to experience wide fluctuations in quarterly operating results. The release of a "hit" title typically leads to a high level of sales during the first few months after introduction followed by a rapid decline in sales. In addition, the interactive entertainment industry is highly seasonal, with sales typically higher during the fourth calendar quarter, due primarily to increased demand for games during the holiday season. Demand for and sales of titles in our NBA 2K series are also seasonal in that they are typically released just prior to the start of the NBA season. If a key event or sports season to which our product release schedule is tied were to be delayed or canceled, our sales might also suffer disproportionately. Our failure or inability to produce "hit" titles or introduce products on a timely basis to meet seasonal fluctuations in demand could adversely affect our business, financial condition and operating results. The uncertainties associated with software development, manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship and therefore may cause us to fail to meet financial expectations.
Price protection granted to our customers and returns of our published titles by our customers may adversely affect our operating results.
We are exposed to the risk of price protection and product returns with respect to our customers. Our distribution arrangements with customers generally do not give them the right to return titles to us or to cancel firm orders. However, we sometimes accept product returns from our distribution customers for stock balancing and negotiate accommodations for customers, which include credits and returns, when demand for specific products falls below expectations. We grant price protection and accept returns in connection with our publishing arrangements and revenue is recognized after deducting estimated price protection and reserves for returns. While we believe that we can reliably estimate future price protection and returns, if price protection and return rates for our products exceed our reserves, our revenue could decline, which could have a material adverse effect on our business, financial condition and operating results.
Increased sales of used video game products could lower our sales.
Certain of our larger customers sell used video games, which are generally priced lower than new video games. If our customers increase their sales of used video games, it could negatively affect our sales of new video games and have an adverse influence on our business, financial condition and operating results.
A limited number of customers account for a significant portion of our sales. The loss of a principal customer or other significant business relationship could seriously hurt our business.
A substantial portion of our product sales are made to a limited number of customers. Sales to our five largest customers during the fiscal year ended March 31, 2019 accounted for 70.1% of our net revenue, with Sony, Microsoft, and Gamestop each accounting for more than 10.0% of our net revenue during the fiscal year ended March 31, 2019. Our sales are made primarily pursuant to

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purchase orders without long-term agreements or other commitments, and our customers may terminate their relationship with us at any time. Certain of our customers may decline to carry products containing mature content. The loss of our relationships with principal customers or a decline in sales to principal customers, including as a result of a product being rated "AO" (age 18 and over) could materially adversely affect our business, financial condition and operating results. In addition, if our customers are subject to pricing pressures due to deteriorating demand for our products, competitive pressure, or otherwise, such customers may pass those pricing pressures through to us, which could materially adversely affect our business, financial condition and operating results.
Furthermore, our customers may also be placed into bankruptcy, become insolvent or be liquidated due to economic downturns, global contractions of credit or for other factors. Bankruptcies or consolidations of certain large retail customers could seriously hurt our business, including as a result of uncollectible accounts receivable from such customers and the concentration of purchasing power among remaining large retailers. In addition, our results of operations may be adversely affected if certain of our customers who purchase on credit terms are no longer eligible to purchase on such terms due to their financial distress, which may reduce the quantity of products they demand from us.
If our marketing and advertising efforts fail to resonate with consumers, our business, financial condition and operating results could be adversely affected.
Our products are marketed worldwide through a diverse spectrum of advertising and promotional programs such as television and online advertising, social media advertising, print advertising, retail merchandising, website development and event sponsorship. Our ability to sell our products and services is dependent in part on the success of these programs. If the marketing for our products and services fails to resonate with consumers, particularly during the holiday season or other key selling periods, or if advertising rates or other media placement costs increase, these factors could have a material adverse influence on our business, financial condition and operating results.
The interactive entertainment software industry is highly competitive.
We compete for both licenses to properties and the sale of interactive entertainment software with Sony and Microsoft, each of which is a large developer and marketer of software for its own platforms. We also compete with game publishers, such as Activision Blizzard, Inc. and Electronic Arts Inc. and Ubisoft Entertainment S.A. As our business is dependent upon our ability to develop hit titles, which require increasing budgets for development and marketing, the availability of significant financial resources has become a major competitive factor in developing and marketing software games. Some of our competitors have greater financial, technical, personnel and other resources than we do and are able to finance larger budgets for development and marketing and make higher offers to licensors and developers for commercially desirable properties. Our titles also compete with other forms of entertainment, such as social media and casual games, in addition to motion pictures, television and audio and video products featuring similar themes, online computer programs and other entertainment, which may be less expensive or provide other advantages to consumers.
A number of software publishers who compete with us have developed and commercialized or are currently developing online games for use by consumers over the Internet. If technological advances significantly increase the availability of online games and if consumer acceptance of online gaming grows substantially, it could result in a decline in our platform-based software sales and negatively affect sales of such products.
Increased competition for limited shelf space and promotional support from retailers could affect the success of our business and require us to incur greater expenses to market our titles.
While digital sales are increasingly important to our business, for physical sales, retailers have limited shelf space and promotional resources and competition is intense among newly introduced interactive entertainment software titles for adequate levels of shelf space and promotional support. Competition for retail shelf space is expected to continue to increase, which may require us to increase our marketing expenditures to maintain desirable sales levels of our titles. Competitors with more extensive lines and more popular titles may have greater bargaining power with retailers. Accordingly, we may not be able, or we may have to pay more than our competitors, to achieve similar levels of promotional support and shelf space.
The increasing importance of digital sales to our business exposes us to the risks of that business model, including greater competition.
The proportion of our revenues derived from digital content delivery, as compared to traditional retail sales, may continue to increase. The increased importance of digital content delivery in our industry increases our potential competition, as the minimum capital needed to produce and publish a digitally delivered game is significantly less than that needed to produce and publish one that is purchased through retail distribution and is played on a game console. This will also require us to dedicate capital to developing and implementing alternative marketing strategies, which we may not do successfully. If either occurs, we may be unable to effectively market and distribute our products, which could materially adversely affect our business, financial condition

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and operating results. In addition, a continuing shift to digital delivery could result in a deprioritization of our products by traditional retailers. The increasing importance of digital sales to our business could also result in increasing issues with our digital distribution process, including difficulties our distributors have with collecting from consumers and any associated rebates we would owe.
Our business is partly dependent on our ability to enter into successful software development arrangements with third parties.
Our success depends on our ability to continually identify and develop new titles on a timely basis. We rely on third-party software developers for the development of some of our titles. Quality third-party developers are continually in high demand. Software developers who have developed titles for us in the past may not be available to develop software for us in the future. Due to the limited number of third-party software developers and the limited control that we exercise over them, these developers may not be able to complete titles for us on a timely basis or within acceptable quality standards, if at all. We have entered into agreements with third parties to acquire the rights to publish and distribute interactive entertainment software as well as to use licensed intellectual properties in our titles. These agreements typically require us to make development payments, pay royalties and satisfy other conditions. Our development payments may not be sufficient to permit developers to develop new software successfully, which could result in material delays and significantly increase our costs to bring particular products to market. Software development costs, promotion and marketing expenses and royalties payable to software developers and third-party licensors have increased significantly in recent years and reduce potential profits derived from sales of our software. Future sales of our titles may not be sufficient to recover development payments and advances to software developers and licensors, and we may not have adequate financial and other resources to satisfy our contractual commitments to such developers. If we fail to satisfy our obligations under agreements with third-party developers and licensors, the agreements may be terminated or modified in ways that are burdensome to us, and have a material adverse effect on our business, financial condition and operating results.
We cannot publish our titles without the approval of hardware licensors that are also our competitors.
We are required to obtain licenses from certain of our competitors, including Sony and Microsoft, to develop and publish titles for their respective hardware platforms. Our existing platform licenses require that we obtain approval for the publication of new titles on a title-by-title basis. As a result, the number of titles we are able to publish for these hardware platforms, our ability to manage the timing of the release of these titles and, accordingly, our net revenue from titles for these hardware platforms, may be limited. If a licensor chooses not to renew or extend our license agreement at the end of its current term, or if a licensor were to terminate our license for any reason or does not approve one or more of our titles, we may be unable to publish that title as well as additional titles for that licensor's platform. Termination of any such agreements or disapproval of titles could seriously hurt our business and prospects. We may be unable to continue to enter into license agreements for certain current generation platforms on satisfactory terms or at all. Failure to enter into any such agreement could also seriously hurt our business.
We rely on a limited number of channel partners some of whom influence the fee structures for online distribution of our games on their platforms.
We rely on a limited number of channel partners, some of whom have retained the right to change the fee structures for online distribution of both paid content and free content (including patches and corrections) that we license to them for distribution on their platforms. Such channel partners' ability to set or influence royalty rates may increase costs, which could negatively affect our operating margins. We may be unable to distribute our content in a cost-effective or profitable manner through such distribution channel, which could adversely affect our business, financial condition and operating results.
Outside of fee arrangements, our agreements with our channel partners sometimes give them significant control over other aspects of the distribution of our products and services that we develop for their platform. If our channel partners establish terms that restrict our offerings through their channels, or significantly affect the financial terms on which these products or services are offered to our customers, we may be unable to distribute our product offerings through them or be forced to do so on a materially worse financial or business terms.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in demand.
In the event of a significant decline in revenue, we may not be able to dispose of facilities, reduce personnel or make other changes to our cost structure without disruption to our operations or without significant termination and exit costs. Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in revenue and profit. Moreover, reducing costs may impair our ability to produce and develop software titles at sufficient levels in the future.
We use open source software in connection with certain of our games and services, which may pose particular risks to our proprietary software, products, and services in a manner that could have a negative impact on our business.
We use open source software in connection with certain of our games and the services we offer. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code on unfavorable terms or at no cost. The terms of

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various open source licenses have not been interpreted by courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our use of the open source software. Were it determined that our use was not in compliance with a particular license, we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our games, discontinue distribution in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our game development efforts, any of which could harm our business.
We depend on servers and Internet bandwidth to operate our games and digital services with online features. If we were to lose server capacity or lack sufficient Internet bandwidth for any reason, our business could suffer.
We rely on data servers, including those owned or controlled by third parties, to enable our customers to download our games and other downloadable content, and to operate our online games and other products with online functionality. Events such as limited hardware failure, any broad-based catastrophic server malfunction, a significant intrusion by hackers that circumvents security measures, or a failure of disaster recovery services would likely interrupt the functionality of our games with online services and could result in a loss of sales for games and related services. An extended interruption of service could materially adversely affect our business, financial condition and operating results.
We expect a significant portion of our games to be on-line enabled in the future, and therefore we must project our future server needs and make advance purchases of servers or server capacity to accommodate expected business demands. If we underestimate the amount of server capacity our business requires or if our business were to grow more quickly than expected, our consumers may experience service problems, such as slow or interrupted gaming access. Insufficient server capacity may result in decreased sales, a loss of our consumer base and adverse consequences to our reputation. Conversely, if we overestimate the amount of server capacity required by our business, we may incur additional operating costs.
Because of the potential importance of our online business to our revenues and results of operations, our ability to access adequate Internet bandwidth and online computational resources to support our business is critical. If the price of either such resource increases, we may not be able to increase our prices or subscriber levels to compensate for such costs, which could materially adversely affect our business, financial condition and operating results.
We submit our products for rating by the Entertainment Software Rating Board ("ESRB") in the United States and other voluntary or government ratings organizations in foreign countries. Failure to obtain a target rating for certain of our products could negatively affect our ability to distribute and sell those games, as could the re-rating of a game for any reason.
We voluntarily submit our game products to the ESRB, a U.S.-based non-profit and independent ratings organization. The ESRB system provides consumers with information about game content using a rating symbol that generally suggests the appropriate player age group and specific content descriptors, such as graphic violence, profanity or sexually explicit material. The ESRB may impose significant penalties on game publishers for violations of its rules related to rating or marketing games, including revocation of a rating or monetary fines. Other countries require voluntary or government backed ratings as prerequisites for product sales. In some instances, we may have to modify our products in order to market them under the target rating, which could delay or disrupt the release of our products. In addition, some of our titles may not be sold at all or without extensive edits in certain countries, such as Germany.
In the U.S., if the ESRB rates a game as "AO" (age 18 and older), platform licensors may not certify the game and retailers may refuse to sell it. In addition, some consumers have reacted to re-ratings or controversial game content by refusing to purchase such games, demanding refunds for games that they had already purchased, and refraining from buying other games published by us. Many of our Rockstar titles and certain of our 2K titles have been rated "M" (age 17 and older) by the ESRB. If we are unable to obtain "M" ratings and instead receive "AO" ratings on future versions of those or similar titles as a result of changes in the ESRB's ratings standards or for other reasons, including the adoption of legislation in this area, our business and prospects could be negatively affected. If any of our games are re-rated by the ESRB or other foreign based ratings organizations, we could be exposed to litigation, administrative fines and penalties and other potential liabilities, and our operating results and financial condition could be significantly affected.
We have implemented processes to comply with the requirements of the ESRB and other ratings organizations and properly display the designated rating symbols and content descriptions. Nonetheless, these processes are subject to human error, circumvention, overriding and reasonable resource constraints. If a video game we published were found to contain undisclosed pertinent content, the ESRB could re-rate a game, retailers could refuse to sell it and demand that we accept the return of any unsold copies or returns from customers, and consumers could refuse to buy it or demand that we refund their money. This could have a material negative affect on our operating results and financial condition. In addition, we may be exposed to litigation, administrative fines and penalties and our reputation could be harmed, which could affect sales of other video games we sell. If any of these consequences were to occur, our business and financial performance could be significantly harmed.

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Content policies adopted by retailers, consumer opposition and litigation could negatively affect sales of our products.
Retailers may decline to sell interactive entertainment software containing what they judge to be graphic violence or sexually explicit material or other content that they deem inappropriate for their businesses. If retailers decline to sell our products based upon their opinion that they contain objectionable themes, graphic violence or sexually explicit material or other generally objectionable content, or if any of our previously "M" rated series products are rated "AO," we might be required to significantly change or discontinue particular titles or series, which in the case of our best-selling Grand Theft Auto titles could seriously affect our business. Consumer advocacy groups have opposed sales of interactive entertainment software containing objectionable themes, violence or sexual material or other objectionable content by pressing for legislation in these areas and by engaging in public demonstrations and media campaigns. Additionally, although lawsuits seeking damages for injuries allegedly suffered by third parties as a result of video games have generally been unsuccessful in the courts, claims of this kind have been asserted against us from time to time and may be asserted and be successful in the future. An increase in the number of lawsuits filed by the families of victims of violence may trigger supplemental governmental scrutiny, damage our reputation, and negatively affect the sale of our products. Further, in 2018, gaming disorder was listed in a version of the World Health Organization's International Classification of Diseases, and some countries have introduced legislation attempting to address this issue. Moreover, the public dialogue concerning interactive entertainment may have an adverse impact on our reputation and our customer's willingness to purchase our products.
Our results of operations or reputation may be harmed as a result of offensive consumer-created content.
We are subject to risks associated with the collaborative online features in our games which allow consumers to post narrative comments, in real time, that are visible to other consumers. From time to time, objectionable and offensive consumer content may be posted to a gaming or other site with online chat features or game forums which allow consumers to post comments. We may be subject to lawsuits, governmental regulation or restrictions, and consumer backlash (including decreased sales and harmed reputation), as a result of consumers posting offensive content. We may also be subject to consumer backlash from comments made in response to postings we make on social media sites such as Facebook, YouTube and Twitter.
We are subject to risks and uncertainties of international trade, including fluctuations in the values of local foreign currencies against the dollar.
Sales in international markets, primarily in Europe, have accounted for a significant portion of our net revenue. For the fiscal year ended March 31, 2019, 46.5% of our net revenue was earned outside the U.S. 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. 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 influence on our operating results. Many of our international sales are made in local currencies, which could fluctuate against the dollar. While we may use forward exchange contracts to a limited extent to seek to mitigate foreign currency risk, our operating results could be adversely affected by unfavorable foreign currency fluctuations.
We face risks from our international operations.
We are subject to certain risks because of our international operations, particularly as we continue to grow our business and presence in Asia, Latin America and other parts of the world. Changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business and our inability or failure to obtain required approvals could harm our international and domestic sales. Trade legislation in either the U.S. or other countries, such as a change in the current tariff structures, import/export compliance laws or other trade laws or policies, could adversely affect our ability to sell or to distribute in international markets.
The current U.S. administration has voiced concerns about imports from countries potentially engaging in unfair trade practices, increased tariffs on certain goods imported into the U.S. from those countries, including China and other countries to which we sell products, and raised the possibility of imposing significant additional tariff increases. The announcement of tariffs and proposed tariffs on imported products by the U.S. has triggered actions from certain foreign governments, including China, and may trigger additional actions by those and other foreign governments that could have a negative impact on our business. Further, the enforcement of regulations relating to mobile and other games with an online element in China remains uncertain, and further changes, either in the regulation or their enforcement could have a negative impact on our business in China. In order to operate in China, all games must have regulatory approval. A decision by the Chinese government to revoke its approval for any of our games or to decline to approve any products we desire to sell in China in the future could have a negative impact on our business.
We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations which may be substantially different from those in the U.S. In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by U.S. laws and regulations, such as the Foreign Corrupt Practices Act, and by local laws, such as laws

16


prohibiting corrupt payments to government officials. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices which violate such laws may be customary, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit.” On March 29, 2017, the U.K. notified the European Council, in accordance with Article 50 of the Treaty on European Union, of the U.K.’s intention to withdraw from the E.U. As a result, the British government has been negotiating the terms of the U.K.’s future relationship with the E.U. A substantial amount of uncertainty remains regarding the outcome of the ongoing negotiations. We continue to assess and monitor the risks our business is likely to face as a result of Brexit. We are preparing to mitigate those risks with operational and commercial changes to the extent possible and warranted. However, the legal and regulatory landscape remains uncertain, and we have no assurance that such preparations will enable us to avoid a material adverse impact on our business from Brexit.
The effects of Brexit will depend on any agreements the U.K. makes to retain access to the E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and may cause us to lose customers, distributors and employees. If the U.K. loses access to the single E.U. market and the global trade deals negotiated by the E.U., it could have a detrimental impact on our U.K. growth. Such a decline could also make our doing business in Europe more difficult, which could negatively affect sales to consumers of our products. Without access to the single E.U. market, it may be more challenging and costly to distribute our products in Europe. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace and replicate. If there are changes to U.K. immigration policy as a result of Brexit, this could affect our employees and their ability to move freely between the E.U. member states for work related matters.
If we are unable to protect the intellectual property relating to our software, the commercial value of our products will be adversely affected and our competitive position could be harmed.
We develop proprietary software and have obtained the rights to publish and distribute software developed by third-parties. We attempt to protect our software and production techniques under patent, copyright, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution. Nonetheless, our software is susceptible to piracy and unauthorized copying, and third parties may potentially exploit or misappropriate our intellectual property and proprietary information, causing significant reputational damage. Unauthorized third parties, for example, may be able to copy or to reverse engineer our software to obtain and use programming or production techniques that we regard as proprietary. Well organized piracy operations have also proliferated in recent years, resulting in the ability to download pirated copies of our software over the Internet. Although we attempt to incorporate protective measures into our software, piracy of our products could negatively affect our future profitability. In addition, "cheating" programs or other unauthorized software tools and modifications that enable consumers to cheat in games harm the experience of players who play fairly and could negatively impact the volume of microtransactions or purchases of downloadable content. Also, vulnerabilities in the design of our applications and of the platforms upon which they run could be discovered after their release. This may lead to lost revenues from paying consumers or increased cost of developing technological measures to respond to these, either of which could negatively affect our business.
If we infringe on or are alleged to infringe on the intellectual property rights of third parties, our business could be adversely affected.
As our industry grows, we may be subject to an increasing amount of litigation that is common in the software industry based on allegations of infringement or other alleged violations of patent, copyright and/or trademarks. In addition, we believe that interactive entertainment software will increasingly become the subject of claims that such software infringes on the intellectual property rights of others with both the growth of online functionality and advances in technology, game content and software graphics as games become more realistic. From time to time, we receive notices from third parties or are named in lawsuits by third parties alleging infringement of their proprietary rights. Although we believe that our software and technologies and the software and technologies of third-party developers and publishers with whom we have contractual relations do not and will not infringe or violate proprietary rights of others, it is possible that infringement of proprietary rights of others may occur. Any claims of infringement, with or without merit, could be time consuming, costly and difficult to defend. Moreover, intellectual property litigation or claims could require us to discontinue the distribution of products, obtain a license or redesign our products, which could result in additional substantial costs and material delays.
Our software is susceptible to errors, which can harm our financial results and reputation.
The technological advancements of new hardware platforms result in the development of more complex software products. As software products become more complex, the risk of undetected errors in new products increases. We may need to produce and

17


distribute patches in order to repair such errors, which could be costly and may distract our developers from working on new products. If, despite testing, errors are found in new products or releases after shipments have been made, we may have to consider suspending distribution of defective products or offering refunds, and we could experience a loss of or delay in timely market acceptance, product returns, loss of revenue, increases in costs relating to the repair of such errors and damage to our reputation.
If we acquire or invest in other businesses, intellectual properties or other assets, we may be unable to integrate them with our business, our financial performance may be impaired and/or we may not realize the anticipated financial and strategic goals for such transactions.
If appropriate opportunities present themselves, we may acquire or make investments in businesses, intellectual properties and other assets that we believe are strategic. We may not be able to identify, negotiate or finance any future acquisition or investment successfully. Even if we do succeed in acquiring or investing in a business, intellectual property or other asset, such acquisitions and investments involve a number of risks, including:
•
retaining key employees and maintaining the key business and customer relationships of the businesses we acquire;
•
cultural challenges associated with integrating employees from an acquired company or business into our organization;
•
the possibility that the combined company would not achieve the expected benefits, including any anticipated operating and product synergies, of the acquisition as quickly as anticipated or that the costs of, or operational difficulties arising from, an acquisition would be greater than anticipated;
•
significant acquisition-related accounting adjustments, particularly relating to an acquired company's deferred revenue, that may cause reported revenue and profits of the combined company to be lower than the sum of their stand-alone revenue and profits;
•
significant accounting charges resulting from the completion and integration of a sizable acquisition and increased capital expenditures, including potential impairment charges incurred to write down the carrying amount of intangible assets generated as a result of an acquisition;
•
the possibility that significant acquisitions, when not managed cautiously, may result in the over-extension of our existing operating infrastructures, internal controls and information technology systems;
•
the possibility that we will not discover important facts during due diligence that could have a material adverse effect on the value of the businesses we acquire, including the possibility that a change of control of a company we acquire triggers a termination of contractual or intellectual property rights important to the operation of its business;
•
the need to integrate an acquired company's accounting, management information, human resource and other administrative systems to permit effective management and timely reporting, and the need to implement or remediate controls, procedures and policies appropriate for a public company in an acquired company that, prior to the acquisition, lacked these controls, procedures and policies;
•
litigation or other claims in connection with, or inheritance of claims or litigation risks as a result of, an acquisition, including claims from terminated employees, customers or other third-parties; and
•
to the extent that we engage in strategic transactions outside of the U.S., we face additional risks, including risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.
Future acquisitions and investments could also involve the issuance of our equity and equity-linked securities (potentially diluting our existing stockholders), the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased cash and non-cash expenses such as stock-based compensation. Any of the foregoing factors could harm our financial condition or prevent us from achieving improvements in our financial condition and operating performance that could have otherwise been achieved by us on a stand-alone basis. Our stockholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.
Our ability to acquire and maintain licenses to intellectual property, especially for sports titles, affects our revenue and profitability. Competition for these licenses may make them more expensive and increase our costs.
Certain of our products are based on or incorporate intellectual property owned by others. For example, certain of our 2K products include rights licensed from major sports leagues and players' associations. Similarly, some of our other titles are based on licenses of popular entertainment products. Competition for these licenses is intense. If we are unable to maintain and renew these licenses or obtain additional licenses on reasonable economic terms or with significant commercial value, our revenue and profitability could decline significantly. Competition for these licenses may also increase the advances, guarantees and royalties that we must

18


pay to the licensor, which could significantly increase our costs and adversely affect our profitability. In addition, on certain intellectual property licenses, we are subject to guaranteed minimum payments, royalties or standards of performance and may not be able to terminate these agreements prior to their stated expiration. If such licensed products do not generate revenues in excess of such minimum guarantees, our profitability will be adversely affected.
We are subject to contractual covenants which place certain limitations on how we manage our business.
Our New Credit Agreement (the "New Credit Agreement") may limit our ability to take various actions, including incurring additional debt, paying dividends, repurchasing shares and acquiring or disposing of assets or businesses. In addition, we have granted a security interest in connection with certain compensatory arrangements which limits our ability to incur senior debt in excess of certain amounts. Accordingly, we may be restricted from taking actions that management believes would be desirable and in the best interests of us and our stockholders. Our New Credit Agreement also requires us to satisfy specified financial covenants and comply with other affirmative and negative covenants. A breach of any of the covenants contained in our New Credit Agreement could result in an event of default, which would allow our lenders to pursue various remedies, including accelerating the repayment of any outstanding indebtedness under our New Credit Agreement.
Our business and products are subject to potential legislation. The adoption of such proposed legislation could limit the retail market for our products.
Several proposals have been made for federal legislation to regulate our industry. Such proposals seek to prohibit the sale of products containing certain content included in some of our games. If any such proposals are enacted into law, it may limit the potential market for some of our games in the U.S., and adversely affect our business, financial condition and operating results. Other countries, such as Germany, have adopted laws regulating content both in packaged games and those transmitted over the Internet that are stricter than current U.S. laws. In the U.S., proposals have also been made by numerous state legislators to regulate and prohibit the sale of interactive entertainment software products containing certain types of violent or sexual content to under 17 or 18 audiences, such as the State of California's "ultraviolent video games law" that sought to ban the sale or rental of violent video games to minors. While such legislation to date has been enjoined by industry and retail groups or been found unconstitutional, the adoption into law of such legislation in federal and/or in state jurisdictions in which we do significant business could severely limit the retail market for some of our games.
Change in government regulations relating to the Internet could have a negative impact on our business.
We rely on our consumers' access to significant levels of Internet bandwidth for the sale and digital delivery of our content and the functionality of our games with online features. Changes in laws or regulations that adversely affect the growth, popularity or use of the Internet, including laws affecting "net neutrality," could decrease the demand for our products and services or increase our cost of doing business. Although certain jurisdictions have implemented laws and regulations intended to prevent Internet service providers from discriminating against particular types of legal traffic on their networks, other jurisdictions may lack such laws and regulations or repeal existing laws or regulations. For example, on December 14, 2017, the Federal Communications Commission voted to repeal net neutrality regulations in the U.S. Given uncertainty around these rules, including changing interpretations, amendments, or repeal, coupled with the potentially significant political and economic power of local Internet service providers and the relatively significant level of Internet bandwidth access our products and services require, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expenses, or otherwise negatively affect our business.
We may be required to record a significant charge to earnings if our goodwill becomes impaired.
We are required under U.S. generally accepted accounting principles to review our goodwill for impairment at least annually or more frequently when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances, indicating a requirement to reevaluate whether our goodwill continues to be recoverable, include a significant decline in stock price and market capitalization, slower growth rates in our industry or other materially adverse events. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined. This may adversely affect our operating results.
Our reported financial results could be adversely affected by the application of existing or future accounting standards to our business as it evolves.
Our reported financial results are affected by the accounting policies promulgated by the SEC and national accounting standards bodies and the methods, estimates, and judgments that we use in applying our accounting policies. For example, standards regarding revenue recognition have and could further significantly affect the way we account for revenue related to our products and services. We expect that an increasing number of our games will be supported with material post-release activities, such as content updates and online-enabled features, and we could therefore be required to recognize more of the related revenues for those games over

19


a period of time rather than at the time of sale. Further, as we increase our downloadable content and add new features to our online services, user playing patterns can affect our estimate of the service period may change and we could be required to recognize revenues, and defer related costs, over a shorter or longer period of time than we initially allocated. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenue, could have a significant adverse effect on our reported results although not necessarily on our cash flows.
We are subject to risks related to corporate and social responsibility and reputation.
Many factors influence our reputation including the perception held by our customers, business partners and other key stakeholders. Our business faces increasing scrutiny related to environmental, social and governance activities. We risk damage to our reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, supply chain management, climate change, workplace conduct, human rights and philanthropy. Any harm to our reputation could impact employee engagement and retention and the willingness of customers and our partners to do business with us, which could have a material adverse effect on our business, results of operations and cash flows.
Risks relating to our common stock
For purposes of this section "Risks relating to our common stock," references to "the Company," "we," "our," and "us" refer only to Take-Two Interactive Software, Inc. and not to its subsidiaries.
Additional issuances or sales of equity securities by us would dilute the ownership of our existing stockholders and could adversely affect the market price of our common stock.
We may issue equity or equity-based securities in the future in connection with acquisitions or strategic transactions, to adjust our ratio of debt to equity, including through repayment of outstanding debt, to fund expansion of our operations or for other purposes. To the extent we issue additional equity securities, the percentage ownership of our existing stockholders would be reduced. The sale of substantial amounts of our common stock could adversely affect its price. The sale or the availability for sale of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.
There is no guarantee that we will do additional share repurchases in the future.
The share repurchase program authorized by the Board of Directors, which authorized the repurchase of up to 14.2 million shares of our common stock and had 3.8 million shares available for repurchase as of the date of this filing, does not obligate us to make any purchases at any specific time or situation. Discontinuing repurchases could adversely affect the price of our common stock. The program may be suspended or discontinued at any time for any reason.
Our stock price has been volatile and may continue to fluctuate significantly.
The market price of our common stock historically has been, and we expect will continue to be, subject to significant fluctuations. These fluctuations may be due to factors specific to us including those discussed in the risk factors in this section as well as others not currently known to us or that we currently do not believe are material, to changes in securities analysts' earnings estimates or ratings, to our results or future financial guidance falling below our expectations and analysts' and investors' expectations, to factors affecting the computer, software, entertainment, media or electronics industries, or to national or international economic conditions.
Stock markets, in general, have experienced over the years, and continue to experience significant price and volume fluctuations that have affected market prices for companies such as ours and that may be unrelated or disproportionate to the operating performance of the affected companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.
Delaware law, our charter documents, and provisions of our debt agreements may impede or discourage a takeover, which could cause the market price of our shares to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our Board of Directors has the power, without stockholder approval, to adopt a stockholder rights plan and/or to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our Board of Directors to create and issue a new series of preferred stock and certain provisions of Delaware law, our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock and the value of any outstanding notes.

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Our ability to use net operating loss and tax credit carryforwards to reduce future years' taxes could be substantially limited under Internal Revenue Code Sections 382 and 383 if we experience an ownership change as defined in the Internal Revenue Code Section 382.
Section 382 of the Internal Revenue Code contains rules that limit the ability of a company to use its net operating loss and tax credit carryforwards in years after an ownership change, which is generally defined as any change in ownership of more than 50% of its stock over a three-year testing period. These rules generally operate by focusing on ownership changes among stockholders owning directly or indirectly 5% or more of the stock of a company and/or any change in ownership arising from a new issuance of stock by the company. If, as a result of future transactions involving our common stock, including purchases or sales of stock by 5% stockholders, we undergo cumulative ownership changes which exceed 50% over the testing period, our ability to use our net operating loss and tax credit carryforwards would be subject to additional limitations under Sections 382 and 383.
Generally, if an ownership change occurs, the annual taxable income limitation on the use of net operating loss and tax credit carryforwards is equal to the product of the applicable long-term tax-exempt rate and the value of the company's stock immediately before the ownership change. Depending on the resulting limitation, a portion of our net operating loss and tax credit carryforwards could expire before we would be able to use them.
Our inability to fully utilize any net operating losses or tax credit carryforwards to reduce tax liability in the future could have a material and negative affect on our future financial position and results of operations.
Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
Our principal executive offices are located at 110 West 44th Street (also known as 1133 Avenue of the Americas), New York, New York, in approximately 76,000 square feet of space under a lease expiring in December 2032.
We also lease approximately 64,000 square feet of space under a lease expiring in March 2023 at 622 Broadway, New York, New York.
Take-Two Interactive Software Europe Ltd, our wholly-owned subsidiary, leases 12,500 square feet of office space in Windsor, United Kingdom, which expires in January 2022. Rockstar North, our wholly-owned subsidiary, leases 72,000 square feet of office space in Edinburgh, Scotland, which expires in June 2024.
2K corporate offices and two development studios occupy approximately 123,000 square feet of leased office space in Novato, California. The lease expires in June 2023 with respect to approximately 59,000 square feet and July 2025 with respect to approximately 64,000 square feet.
In addition, our other subsidiaries lease office space in Sydney, Australia; Oakville, Canada; Chengdu and Shanghai, China; Brno, Czech Republic; Paris, France; Munich, Germany; Budapest, Hungary; Bangalore, India; Tokyo, Japan; Breda, Netherlands; Auckland, New Zealand; Singapore; Seoul, South Korea; Madrid and Barcelona, Spain; Lucerne, Switzerland; Taipei, Taiwan; Brighton, London, Lincoln, Leeds, and Oxford, United Kingdom; and, in the United States, Carlsbad, Petaluma, and Moorpark, California; Sparks, Maryland; Andover and Westwood, Massachusetts; Las Vegas, Nevada; Bethpage and New York, New York; and Kirkland, Washington.
For information regarding our lease commitments, see Note 14 to the Consolidated Financial Statements.
Item 3.    Legal Proceedings
We are, or may become, subject to demands and claims (including intellectual property claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial statements. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.
On February 7, 2019, all of the previously disclosed lawsuits, claims, and counterclaims that had been pending since April 2016 with Mr. Leslie Benzies, the former president of one of our subsidiaries, were resolved.

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Item 4.    Mine Safety Disclosures
Not applicable.

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PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
Our common stock trades on the NASDAQ Global Select Market under the symbol "TTWO." The number of record holders of our common stock was 55 as of May 10, 2019.
Dividend Policy
We have never declared or paid cash dividends. We currently anticipate that all future earnings will be retained to finance the growth of our business and we do not expect to declare or pay any cash dividends in the foreseeable future. The payment of dividends in the future is within the discretion of our Board of Directors and will depend upon future earnings, capital requirements and other relevant factors. Our New Credit Agreement requires us to meet certain incurrence tests prior to paying a dividend. See "Liquidity and Capital Resources" under Item 7 for additional information on our New Credit Agreement.
Securities Authorized for Issuance under Equity Compensation Plans
The table setting forth this information is included in Part III—Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Stock Performance Graph
This performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of the Company under the Exchange Act or the Securities Act of 1933.
The following line graph compares, from March 31, 2014 through March 31, 2019, the cumulative total stockholder return on our common stock with the cumulative total return on the stocks comprising the NASDAQ Composite Index and the stocks comprising a peer group index consisting of Activision Blizzard, Inc. and Electronic Arts Inc. The comparison assumes $100 was invested on March 31, 2014 in our common stock and in each of the following indices and assumes reinvestment of all cash dividends, if any, paid on such securities. We have not paid any cash dividends and, therefore, our cumulative total return calculation is based solely upon stock price appreciation and not upon reinvestment of cash dividends. Historical stock price is not necessarily indicative of future stock price performance.

23


Comparison of 5 Year Cumulative Total Return*
Among Take-Two Interactive Software, Inc., the NASDAQ Composite Index and a Peer Group
March 2019


ttwo2019a01.jpg

* $100 invested on March 31, 2014 in stock or index - including reinvestment of dividends.
 
March 31,
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Take-Two Interactive Software, Inc.
$
100.00

 
$
116.10

 
$
171.77

 
$
270.27

 
$
445.87

 
$
430.32

NASDAQ Composite Index
100.00

 
118.12

 
118.77

 
145.94

 
176.24

 
194.97

Peer Group
100.00

 
146.81

 
191.27

 
272.47

 
369.88

 
276.19

Issuer Purchases of Equity Securities
Share Repurchase Program—Our Board of Directors has authorized the repurchase of up to 14,217,683 shares of our common stock. Under this program, we may purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance and other conditions. The program does not require us to repurchase shares and may be suspended or discontinued at any time for any reason.
During the fiscal years ended March 31, 2019, 2018, and 2017 we repurchased 3,715,642, 1,512,557, and 0 shares of our common stock in the open market, respectively, for $362.4 million, $154.8 million, and $0.0 million, respectively, including commissions, as part of the program. As of March 31, 2019, we had repurchased a total of 10,399,529 shares of our common stock under the program, and 3,818,154 shares of our common stock remained available for repurchase under the share repurchase program. All of the repurchased shares are classified as Treasury stock in our Consolidated Balance Sheets.
Summary Table—The table below details the share repurchases that were made by us during the three months ended March 31, 2019:
Period
 
Shares
purchased
 
Average price
per share
 
Total number of shares
purchased as part of publicly
announced plans or programs
 
Maximum number of shares that
may yet be purchased under the
repurchase program
January 1 - 31, 2019
 
—

 
—

 
—

 
4,937

February 1 - 28, 2019
 
1,119

 
$
89.53

 
1,119

 
3,818

March 1 - 31, 2019
 
—

 
$
—

 
—

 
3,818



24


Item 6.    Selected Financial Data
The following Selected Financial Data should be read in conjunction with our Consolidated Financial Statements and related Notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. (in thousands, except per share data)
 
Fiscal Year Ended March 31,
STATEMENT OF OPERATIONS DATA:
2019 (1)
 
2018
 
2017
 
2016
 
2015
Net revenue
$
2,668,394

 
$
1,792,892

 
$
1,779,748

 
$
1,413,698

 
$
1,082,938

Gross profit
1,144,750

 
894,581

 
756,789

 
599,825

 
288,071

Net income (loss)
$
333,837

 
$
173,533

 
$
67,303

 
$
(8,302
)
 
$
(279,470
)
Earnings per share:
 

 
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

 
 

Earnings (loss) per share:
$
2.95

 
$
1.57

 
$
0.73

 
$
(0.10
)
 
$
(3.48
)
Diluted:
 

 
 

 
 

 
 

 
 

Earnings (loss) per share:
$
2.90

 
$
1.54

 
$
0.72

 
$
(0.10
)
 
$
(3.48
)

 
As of March 31,
BALANCE SHEET DATA:
2019
 
2018
 
2017
 
2016
 
2015(2)
Total assets
$
4,243,065

 
$
3,737,841

 
$
3,149,154

 
$
2,590,277

 
$
2,228,073

Long-term debt
—

 
8,068

 
251,929

 
497,935

 
473,030

 
(1) During fiscal 2019, we adopted Accounting Standards Update 2014-09, "Revenue from Contracts with Customers (Topic 606)," using a modified retrospective method. Therefore, prior periods were not restated.
(2) During fiscal 2016, we retrospectively adopted Accounting Standards Update 2015-03, "Simplifying the Presentation of Debt Issuance Costs," and as a result previously reported Total assets and Long-term debt have both decreased from previously reported amounts by $3,027 as of March 31, 2015, to reflect the deduction of debt issuance costs from the carrying amount of the related debt liability.

25


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our Business
We are a leading developer, publisher and marketer of interactive entertainment for consumers around the globe. Our products are currently designed for console gaming systems, such as Sony's PS4 and Microsoft's Xbox One, and PC, including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms and cloud streaming services.
We endeavor to be the most creative, innovative and efficient company in our industry. Our core strategy is to capitalize on the popularity of video games by developing and publishing high-quality interactive entertainment experiences across a range of genres. We focus on building compelling entertainment franchises by publishing a select number of titles for which we can create sequels and incremental revenue opportunities through virtual currency, add-on content, and in-game purchases. Most of our intellectual property is internally owned and developed, which we believe best positions us financially and competitively. We have established a portfolio of proprietary software content for the major hardware platforms in a wide range of genres, including action, adventure, family/casual, racing, role-playing, shooter, sports and strategy, which we distribute worldwide. We believe that our commitment to creativity and innovation is a distinguishing strength, enabling us to differentiate our products in the marketplace by combining advanced technology with compelling storylines and characters that provide unique gameplay experiences for consumers. We have created, acquired or licensed a group of highly recognizable brands to match the broad consumer demographics that we serve, ranging from adults to children and game enthusiasts to casual gamers. Another cornerstone of our strategy is to support the success of our products in the marketplace through innovative marketing programs and global distribution on platforms and through channels that are relevant to our target audience.
Our revenue is primarily derived from the sale of internally developed software titles and software titles developed by third parties. Operating margins are dependent in part upon our ability to release new, commercially successful software products and to manage effectively their development and marketing costs. We have internal development studios located in Australia, Canada, China, Czech Republic, Hungary, India, Spain, South Korea, the United Kingdom, and the United States.
Software titles published by our Rockstar Games label are primarily internally developed. We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto, Max Payne, Midnight Club, Red Dead Redemption, and other popular franchises, to continue to be a leader in the action / adventure product category and to create groundbreaking entertainment by leveraging our existing titles as well as by developing new brands. We believe that Rockstar Games has established a uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 290 million units. The latest installment, Grand Theft Auto V, has sold-in over 105 million units worldwide and includes access to Grand Theft Auto Online. On October 26, 2018, Rockstar Games launched Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records. Rockstar Games is also well known for developing brands in other genres, including the L.A. Noire, Bully and Manhunt franchises. Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable episodes, content and virtual currency, and releasing titles for smartphones and tablets.
Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres including shooter, action, role-playing, strategy, sports and family/casual entertainment. We expect 2K to continue to develop new, successful franchises in the future. 2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia, Sid Meier's Civilization, and XCOM series. 2K also publishes successful externally developed franchises, such as Borderlands. 2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, the WWE 2K professional wrestling series, and the Golf Club.
Our Private Division label is dedicated to bringing titles from top independent developers to market. Private Division will publish three upcoming titles based on new IP from renowned industry creative talent, including The Outer Worlds and Ancestors: The Humankind Odyssey, both of which are planned for release in calendar 2019. Additionally, Private Division is the publisher of Kerbal Space Program, which we acquired in May 2017.
Social Point develops and publishes popular free-to-play mobile games that deliver high quality, deeply-engaging entertainment experiences, including its two most successful games, Dragon City and Monster Legends. In addition, Social Point has a robust development pipeline with a number of exciting games planned for launch in the coming years.
We are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden the distribution of our existing products and expand our online gaming presence, especially in China and South Korea. 2K has secured a multi-year license from the NBA to develop an online version of the NBA simulation game in China, Taiwan, South Korea, and Southeast Asia. NBA 2K Online, our free-to-play NBA simulation game, which was co-developed by 2K and Tencent, is the top online PC

26


sports game in China with over 45 million registered users. On August 2, 2018, 2K and Tencent commercially launched NBA 2K Online 2 in China. The title is based on the console edition of NBA 2K and includes an array of new features.
In February 2017, we expanded our relationship with the NBA through the creation of the NBA 2K League. Launched in May 2018, this groundbreaking competitive gaming league is jointly owned by us and the NBA and consists of teams operated by actual NBA franchises. The NBA 2K League follows a professional sports league format: the inaugural season included head-to-head competition throughout a regular season, followed by a bracketed playoff system and a finals match-up that was held in August 2018. The NBA 2K League began its second season on April 2, 2019.
Trends and Factors Affecting our Business
Product Release Schedule.    Our financial results are affected by the timing of our product releases and the commercial success of those titles. Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue. Sales of Grand Theft Auto products generated 25.7% of our net revenue for the fiscal year ended March 31, 2019. In October 2018, we released Red Dead Redemption 2. Sales of Red Dead Redemption products generated 32.1% of our net revenue for the fiscal year ended March 31, 2019. The timing of our Grand Theft Auto or Red Dead Redemption product releases may affect our financial performance on a quarterly and annual basis.
Economic Environment and Retailer Performance.    We continue to monitor economic conditions that may unfavorably affect our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. Our business is dependent upon a limited number of customers that account for a significant portion of our revenue. Our five largest customers accounted for 70.1%, 70.7% and 65.5% of net revenue during the fiscal years ended March 31, 2019, 2018 and 2017, respectively. As of March 31, 2019 and 2018, five customers comprised 66.6% and 65.4% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for 55.8% and 53.2% of such balance at March 31, 2019 and 2018, respectively. We had two customers who accounted for 40.1% and 15.7% of our gross accounts receivable as of March 31, 2019 and two customers who accounted for 37.7% and 15.5% of our gross accounts receivable as of March 31, 2018. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2019 and 2018. The economic environment has affected our customers in the past, and may do so in the future. Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration of purchasing power among the remaining large retailers. Certain of our large customers sell used copies of our games, which may negatively affect our business by reducing demand for new copies of our games. While the downloadable content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.
Hardware Platforms.    We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, such as Sony's PS4 and Microsoft's Xbox One, which comprised 83.7% of our net revenue by product platform for the fiscal year ended March 31, 2019. The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new hardware platforms are introduced, demand for software used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. We continually monitor console hardware sales. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Accordingly, our strategy is to focus our development efforts on a select number of the highest quality titles for these platforms, while also expanding our offerings for emerging platforms such as tablets, smartphones and online games.
Online Content and Digital Distribution.    The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from websites we own and others owned by third parties) as well as a larger selection of our catalog titles. In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases. We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download. Our "Results of Operations," discloses that net revenue from digital online channels comprised 63.0% of our net revenue for the fiscal year ended March 31, 2019. We expect online delivery of games and game offerings to continue to grow and to become an increasing part of our business over the long-term.

27


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

Product Pipeline
We have announced the following key titles to date (this list does not represent all titles currently in development):
Title
 
Publishing Label
 
Internal or
External
Development
 
Platform(s)
 
Expected Release Date
Borderlands 3
 
2K/Gearbox Software
 
Internal/External
 
PS4, Xbox One, PC
 
September 13, 2019
NBA 2K20
 
2K
 
Internal
 
TBA
 
TBA
WWE 2K20
 
2K
 
Internal
 
TBA
 
TBA
Ancestors: The Humankind Odyssey
 
Private Division
 
External
 
PS4, Xbox One,
PC (digital only)
 
2019 (fiscal 2020)
The Outer Worlds
 
Private Division
 
External
 
PS4, Xbox One, PC
 
2019 (fiscal 2020)
Fiscal 2019 Financial Summary
On April 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments (the “New Revenue Accounting Standard”) using the modified retrospective method. Therefore, no prior amounts have been restated in our tables and discussion below. Refer to Note 1 to our Consolidated Financial Statements for our accounting policy disclosure for revenue recognition. In general, the adoption of Topic 606 results in a more accelerated revenue pattern, due primarily to (i) the elimination of the requirement for vendor-specific objective evidence ("VSOE") of fair value when allocating between multiple performance obligations and (ii) the change of our estimated service period to a user life. However, the impact on a given period may differ from this general trend. In October 2018, we released Red Dead Redemption 2. The acceleration of revenue for this title was material and is the primary component of the significant increases in certain of our operating results as a result of the adoption of Topic 606 throughout the discussion in our "Results of Operations" below. See Notes 1 and 2 to our Consolidated Financial Statements for further information.    
Our Net revenue for fiscal year ended March 31, 2019 was led by titles from a variety of our top franchises, primarily Red Dead Redemption 2, Grand Theft Auto, NBA 2K, and WWE 2K. Our Net revenue increased to $2,668.4 million, an increase of $875.5 million or 48.8% compared to the fiscal year ended March 31, 2018. This increase included a $741.2 million increase

28


in Net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was driven by sales of the titles described above.
During the fiscal year ended March 31, 2019, we recognized a tax benefit of $107.1 million from a reduction in our valuation allowance on certain U.S. deferred tax assets as a result of a determination that it was more-likely-than-not that such deferred tax assets would be realized. Our determination took into account the successful launch of Red Dead Redemption 2 during the current fiscal year along with our recent positive trend of earnings.
For the fiscal year ended March 31, 2019, our Net income was $333.8 million, as compared to Net income of $173.5 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2019 was $2.90, as compared to Diluted income per share of $1.54 for the fiscal year ended March 31, 2018. Our operating income for the fiscal year ended March 31, 2019 increased compared to the operating income for fiscal year ended March 31, 2018, due primarily to higher Gross profit due primarily to higher revenue as a result of the adoption of Topic 606 as described above and the successful launch Red Dead Redemption 2, partially offset by higher Operating expenses primarily due to higher Selling and marketing expense for titles released during the current fiscal year.
At March 31, 2019, we had $1,392.0 million of Cash and Cash equivalents and Restricted cash, compared to 1,246.4 million at March 31, 2018. The increase in Cash and cash equivalents and Restricted cash from March 31, 2018 was due primarily to Net cash provided by operating activities from sales, primarily of Red Dead Redemption 2, partially offset by investments in software development and licenses as well as royalty payments. These net increases were offset by Net cash used in financing activities, which was primarily related to repurchases of common stock under our share repurchase program and tax payments related to net share settlements of our restricted stock, and to a lesser extent Net cash used in investing activities, which was primarily related to bank time deposits and purchases of fixed assets.
Critical Accounting Policies and Estimates
Our most critical accounting policies, which are those that require significant judgment, include revenue recognition; price protection and allowances for returns; capitalization and recognition of software development costs and licenses; fair value estimates including valuation of goodwill, intangible assets, and long-lived assets; valuation and recognition of stock-based compensation; and income taxes. See Note 1 - Basis of Presentation and Significant Accounting Policies in the Notes to our Consolidated Financial Statements in this Annual Report on Form 10-K.
Recently Adopted and Recently Issued Accounting Pronouncements
See Note 1 - Basis of Presentation and Significant Accounting Policies.

Operating Metric

Net Bookings

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

 
Fiscal Year Ended March 31,
 
2019
 
2018
 
Increase/(decrease)
 
Increase/(decrease) %
Net Bookings
$
2,928,724

 
$
1,990,602

 
$
938,122

 
47.1
%

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

29


Results of Operations
The following table sets forth, for the periods indicated, our statements of operations, net revenue by geographic region, net revenue by platform and net revenue by distribution channel:
 
 
Fiscal Year Ended March 31,
 
 
2019
 
2018
 
2017
Net revenue
 
$
2,668,394

 
100.0
 %
 
$
1,792,892

 
100.0
 %
 
$
1,779,748

 
100.0
 %
Cost of goods sold
 
1,523,644

 
57.1
 %
 
898,311

 
50.1
 %
 
1,022,959

 
57.5
 %
Gross profit
 
1,144,750

 
42.9
 %
 
894,581

 
49.9
 %
 
756,789

 
42.5
 %
Selling and marketing
 
391,400

 
14.7
 %
 
256,092

 
14.3
 %
 
285,453

 
16.0
 %
General and administrative
 
281,234

 
10.5
 %
 
247,828

 
13.8
 %
 
211,409

 
11.9
 %
Research and development
 
230,170

 
8.6
 %
 
196,373

 
11.0
 %
 
137,915

 
7.8
 %
Depreciation and amortization
 
40,232

 
1.5
 %
 
43,969

 
2.5
 %
 
30,707

 
1.7
 %
Business reorganization
 
(4,958
)
 
(0.2
)%
 
14,742

 
0.8
 %
 
—

 
—
 %
Total operating expenses
 
938,078

 
35.2
 %
 
759,004

 
42.3
 %
 
665,484

 
37.4
 %
Income from operations
 
206,672

 
7.7
 %
 
135,577

 
7.6
 %
 
91,305

 
5.1
 %
Interest and other, net
 
26,113

 
1.0
 %
 
1,048

 
0.1
 %
 
(15,690
)
 
(0.9
)%
Gain on long-term investments, net
 
—

 
—
 %
 
—

 
—
 %
 
1,350

 
0.1
 %
Income before income taxes
 
232,785

 
8.7
 %
 
136,625

 
7.6
 %
 
76,965

 
4.3
 %
(Benefit from) provision for income taxes
 
(101,052
)
 
(3.8
)%
 
(36,908
)
 
(2.1
)%
 
9,662

 
0.5
 %
Net income
 
$
333,837

 
12.5
 %
 
$
173,533

 
9.7
 %
 
$
67,303

 
3.8
 %

 
 
Fiscal Year Ended March 31,
 
 
2019
 
2018
 
2017
Net revenue by geographic region:
 
 

 
 

 
 

 
 

 
 

 
 

United States
 
$
1,426,906

 
53.5
%
 
$
1,052,313

 
58.7
%
 
$
999,128

 
56.1
%
International
 
1,241,488

 
46.5
%
 
740,579

 
41.3
%
 
780,620

 
43.9
%
Net revenue by platform:
 
 

 
 

 
 

 
 

 
 

 
 

Console
 
$
2,233,861

 
83.7
%
 
$
1,463,306

 
81.6
%
 
1,440,724

 
81.0
%
PC and other
 
434,533

 
16.3
%
 
329,586

 
18.4
%
 
339,024

 
19.0
%
Net revenue by distribution channel:
 
 

 
 

 
 

 
 

 
 

 
 

Digital online
 
$
1,681,609

 
63.0
%
 
$
1,130,946

 
63.1
%
 
921,734

 
51.8
%
Physical retail and other
 
986,785

 
37.0
%
 
661,946

 
36.9
%
 
858,014

 
48.2
%
Net revenue by content:
 
 
 
 
 
 
 
 
 
 
 
 
Full game and other
 
$
1,597,478

 
59.9
%
 
$
1,046,176

 
58.4
%
 
$
1,320,890

 
74.2
%
Recurrent consumer spending
 
1,070,916

 
40.1
%
 
746,716

 
41.6
%
 
458,858

 
25.8
%
Fiscal Years ended March 31, 2019 and 2018
(thousands of dollars)
 
2019
 
% of net revenue
 
2018
 
% of net revenue
 
Increase/(decrease)
 
% Increase/(decrease)
Net revenue
 
$
2,668,394

 
100.0
%
 
$
1,792,892

 
100.0
%
 
$
875,502

 
48.8
%
Internal royalties
 
610,804

 
22.9
%
 
383,020

 
21.4
%
 
227,784

 
59.5
%
Product costs
 
322,148

 
12.1
%
 
203,301

 
11.3
%
 
118,847

 
58.5
%
Software development costs and royalties(1)
 
449,198

 
16.8
%
 
191,400

 
10.7
%
 
257,798

 
134.7
%
Licenses
 
141,494

 
5.3
%
 
120,590

 
6.7
%
 
20,904

 
17.3
%
Cost of goods sold
 
1,523,644

 
57.1
%
 
898,311

 
50.1
%
 
625,333

 
69.6
%
Gross profit
 
$
1,144,750

 
42.9
%
 
$
894,581

 
49.9
%
 
$
250,169

 
28.0
%

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


30


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

For the fiscal year ended March 31, 2019, net revenue increased by $875.5 million, as compared to the prior year. This increase included a $741.2 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to (i) an increase of $129.6 million in net revenue from Red Dead Redemption 2, (ii) an increase of $53.4 million in net revenue from Grand Theft Auto Online, and (iii) an increase of $43.9 million in net revenue from our NBA 2K franchise. These increases were partially offset by (i) a decrease of $51.5 million in net revenue from Grand Theft Auto V, (ii) a decrease of $27.8 million in net revenue from our WWE 2K franchise and (ii) a decrease of $18.0 million in net revenue from L.A. Noire.
  
Net revenue from console games increased by $770.6 million and accounted for 83.7% of our total net revenue in the fiscal year ended March 31, 2019, as compared to 81.6% in the prior year. The increase in net revenue from console games included a $658.8 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from Red Dead Redemption 2, Grand Theft Auto Online, and our NBA 2K franchise. These increases were partially offset by a decrease in net revenue from Grand Theft Auto V and our WWE 2K franchise. Net revenue from PC and other increased by $104.9 million as compared to the prior year and decreased as a percentage of net revenue to 16.3% compared to 18.4% in the prior year. The increase in net revenue from PC and other included an $82.4 million increase in net revenue as the result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from Grand Theft Auto Online, Red Dead Redemption 2 merchandise, our Civilization franchise, Monster Legends, our NBA 2K franchise, and L.A. Noire. These increases were partially offset by a decrease in net revenue from XCOM 2 and Grand Theft Auto V.
Net revenue from digital online channels increased by $550.7 million and accounted for 63.0% of our total net revenue for the fiscal year ended March 31, 2019, as compared to 63.1% in the prior year. The increase in net revenue from digital online channels included a $353.2 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, and Red Dead Redemption 2, partially offset by a decrease in net revenue from XCOM 2. Net revenue from physical retail and other channels increased by $324.8 million and accounted for 37.0% of our total net revenue for the fiscal year ended March 31, 2019, as compared to 36.9% for the prior year. The increase in net revenue from physical retail and other channels included a $388.1 million increase in net revenue as a result of the adoption of Topic 606, as described above. Offsetting this increase was a net decrease due to a decrease in net revenue from Grand Theft Auto V, our NBA 2K franchise, our WWE 2K franchise, and L.A. Noire, partially offset by an increase in net revenue from Red Dead Redemption 2.

Net revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and in-game purchases increased by $324.2 million and accounted for 40.1% of net revenue for the fiscal year ended March 31, 2019, as compared to 41.6% for the prior year. The increase in net revenue from recurrent consumer spending included a $164.4 million increase in net revenue as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from our NBA 2K franchise, Grand Theft Auto Online, our Civilization franchise, and Red Dead Redemption 2, partially offset by a decrease in net revenue from Mafia III. Net revenue from full game and other increased by $551.3 million and accounted for 59.9% of net revenue for the fiscal year ended March 31, 2019, as compared to 58.4% for the prior year. The increase in net revenue from full game and other included a $576.9 million increase in net revenue as a result of the adoption of Topic 606, as described above. Offsetting this increase was a net decrease due to a decrease in net revenue from Grand Theft Auto V, our NBA 2K franchise, our WWE 2K franchise, L.A. Noire, and Mafia III, partially offset by an increase in net revenue from Red Dead Redemption 2.
Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2019 was 42.9%, as compared to 49.9% in the prior year. The adoption of Topic 606 resulted in a 6.1% increase in gross profit percentage. The remaining percentage decrease was due to higher internal royalties as a percentage of net revenue due to the timing of when royalties are earned and to a lesser extent higher software development costs as a percentage of net revenue due to the timing of our releases.
Net revenue earned outside of the United States increased by $500.9 million and accounted for 46.5% of our total net revenue in the fiscal year ended March 31, 2019, as compared to 41.3% in the prior year. The increase in net revenue earned outside the United States included a $438.0 million increase as a result of the adoption of Topic 606, as described above. The remaining increase was due to an increase in net revenue from Red Dead Redemption 2, Grand Theft Auto Online, and our NBA

31


2K franchise, partially offset by a decrease in net revenue from Grand Theft Auto V. Changes in foreign currency exchange rates decreased net revenue and gross profit by $10.0 million and $5.7 million, respectively, in the fiscal year ended March 31, 2019 as compared to the prior year.
Operating Expenses
(thousands of dollars)
 
2019
 
% of net revenue
 
2018
 
% of net revenue
 
Increase/(decrease)
 
% Increase/(decrease)
Selling and marketing
 
$
391,400

 
14.7
 %
 
$
256,092

 
14.3
%
 
$
135,308

 
52.8
 %
General and administrative
 
281,234

 
10.5
 %
 
247,828

 
13.8
%
 
33,406

 
13.5
 %
Research and development
 
230,170

 
8.6
 %
 
196,373

 
11.0
%
 
33,797

 
17.2
 %
Depreciation and amortization
 
40,232

 
1.5
 %
 
43,969

 
2.5
%
 
(3,737
)
 
(8.5
)%
Business reorganization
 
(4,958
)
 
(0.2
)%
 
14,742

 
0.8
%
 
(19,700
)
 
(133.6
)%
Total operating expenses
 
$
938,078

 
35.2
 %
 
$
759,004

 
42.3
%
 
$
179,074

 
23.6
 %

Includes stock-based compensation expense, which was allocated as follows (in thousands):
 
 
2019
 
2018
Selling and marketing
 
$
23,685

 
$
13,258

General and administrative
 
$
51,903

 
$
58,037

Research and development
 
$
23,037

 
$
18,020

Business reorganization
 
—

 
2,424

Foreign currency exchange rates decreased total operating expenses by $5.1 million in the fiscal year ended March 31, 2019 as compared to the prior year.
Selling and marketing
Selling and marketing expenses increased by $135.3 million in the fiscal year ended March 31, 2019 as compared to the prior year, due primarily to $108.5 million in higher advertising expenses. Advertising expenses were higher in the current year due primarily to the release of Red Dead Redemption 2 in October 2018, our NBA 2K franchise, and Grand Theft Auto Online. The remaining increase is due to higher personnel expenses, primarily due to increased headcount.
General and administrative
General and administrative expenses increased by $33.4 million for the fiscal year ended March 31, 2019, as compared to the prior year, due primarily to (i) increases in personnel expenses due to additional headcount, (ii) a reduction of expense in the prior period related to updating the fair value of contingent consideration from our acquisition of Social Point, (iii) increases in IT related expenses for cloud-based services, and (iv) increases in rent expense. These increases were partially offset by a decrease in stock compensation expense, related primarily to share based awards granted under our management agreement with ZelnickMedia, and insurance recoveries.
General and administrative expenses for the fiscal years ended March 31, 2019 and 2018 include occupancy expense (primarily rent, utilities and office expenses) of $22.0 million and $18.2 million, respectively, related to our development studios.
Research and development
Research and development expenses increased by $33.8 million for the fiscal year ended March 31, 2019, as compared to the prior year, due primarily to increased personnel expense due to (i) increased headcount and (ii) higher stock-based compensation as well as an increase in production and development expenses for titles for which technological feasibility has not been established.
Depreciation and amortization
Depreciation and amortization expenses decreased by $3.7 million for the fiscal year ended March 31, 2019, as compared to the prior year, due primarily to the recognition of a $11.3 million impairment charge in September 2017, as a result of our decision not to proceed with further development of a certain in-process research and development ("IPR&D") intangible asset from our acquisition of Social Point. The decrease was partially offset by an increase in depreciation expense due primarily to the move to our new corporate headquarters in December 2017 and an increase in IT infrastructure costs.

32


Business Reorganization
During the fiscal year ended March 31, 2019, business reorganization expense decreased $19.7 million as a result of a benefit due to updating estimates for and completing our 2016 Plan as well as costs related to our 2018 Plan in the prior year period with significantly decreased costs in the current year period. Although we may record additional expense or benefit in future periods to true-up estimates, we do not expect to incur additional reorganization costs in connection with these reorganizations. See Note 20 - Business Reorganization to our Consolidated Financial Statements.
Interest and other, net
(thousands of dollars)
 
2019
 
% of net revenue
 
2018
 
% of net revenue
 
Increase/(decrease)
 
% Increase/(decrease)
Interest income
 
$
38,019

 
1.4
 %
 
$
21,264

 
1.2
 %
 
$
16,755

 
78.8
 %
Interest expense
 
(8,032
)
 
(0.3
)%
 
(22,269
)
 
(1.2
)%
 
14,237

 
(63.9
)%
Foreign currency exchange (loss) gain
 
(505
)
 
—
 %
 
(3,038
)
 
(0.2
)%
 
2,533

 
(83.4
)%
Other
 
(3,369
)
 
(0.1
)%
 
5,091

 
0.3
 %
 
(8,460
)
 
(166.2
)%
Interest and other, net
 
$
26,113

 
1.0
 %
 
$
1,048

 
0.1
 %
 
$
25,065

 
2,391.7
 %
Interest and other, net was $26.1 million for the fiscal year ended March 31, 2019, as compared to $1.0 million for the fiscal year ended March 31, 2018. The increase was due primarily to a $16.8 million increase in interest income due primarily to the size of, nature of, and return on our investment portfolio and a $14.2 million decrease in interest expense primarily as a result of the settlement of our 1.00% Convertible Notes due 2018 ("Convertible Notes"), which matured July 1, 2018. The net increase was partially offset by gains in the prior period on the early conversion of our Convertible Notes, with no corresponding gains in the current period.
Provision/Benefit from income taxes
We recognized a tax benefit of $107.1 million from a reduction in our valuation allowance on certain U.S. deferred tax assets as a result of a determination that it was more-likely-than-not that such deferred tax assets would be realized. Our determination took into account the successful launch of Red Dead Redemption 2 during the year along with our recent positive trend of earnings.

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

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

The Act subjects a U.S. shareholder to current tax on GILTI earned by foreign subsidiaries. The FASB Staff Q&A Topic No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election either to recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. We have elected to recognize the resulting tax on GILTI as an expense in the period incurred.
Our income tax benefit was $101.1 million for the fiscal year ended March 31, 2019 as compared to $36.9 million for the fiscal year ended March 31, 2018.
When compared to the statutory rate of 21.0%, the effective tax rate of (43.4)% for the fiscal year ended March 31, 2019 was primarily due to a $107.1 million tax benefit from changes in valuation allowance, a benefit of $35.0 million for tax credits,

33


$13.3 million from excess tax benefits from employee stock compensation, and $9.0 million from our geographic mix of earnings, partially offset by tax expense from other immaterial items, which include the impact of the Act.
When compared to the statutory rate of 31.6%, the effective tax rate of (27.0)% for the fiscal year ended March 31, 2018 was primarily due to $53.2 million from excess tax benefits from employee stock compensation as a component of the benefit from income taxes (previously excess tax benefit and tax deficiencies were recognized in additional paid-in-capital), a benefit of $22.6 million for tax credits anticipated to be utilized, a benefit of $15.1 million from changes in unrecognized tax benefits primarily due to expiration of statute of limitations, and a benefit of $7.9 million from our geographic mix of earnings, partially offset by provisional amounts recorded as a result of the Act and $10.4 million for changes in our valuation allowance.
The effective tax rate in the current year was lower compared to the prior year primarily due to a lower U.S. statutory rate, increased tax benefits from changes in valuation allowance, increased tax benefits from tax credits, reduced tax expense from the one-time transition tax, partially offset by reduced benefits from excess tax benefits related to employee stock compensation and changes in unrecognized tax benefits.
We anticipate that additional excess tax benefits from employee stock compensation and tax credits could have a significant impact on our effective tax rate in future periods.
The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends upon the stock price at the time of employee award vesting. Since we recognize excess tax benefits on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period.
On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, which overturned previous case law that precluded states from requiring retailers to collect sales tax on sales made to in-state customers unless the retailer had physical presence in the state. Although this case is limited to sales tax collection obligations, we continue to monitor the potential impact of this decision on our state income tax footprint.
The ultimate amount of tax payable in a given financial statement period may be materially affected by sudden or unforeseen changes in tax laws, changes in the mix and level of earnings by taxing jurisdictions, or changes to existing accounting rules or regulations. For example, on July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to stock compensation. On August 7, 2018, the opinion was withdrawn to allow time for a reconstituted panel to confer. We will continue to monitor ongoing developments and the final opinion could have a material impact on our Consolidated Financial Statements.
As of March 31, 2019, we had gross unrecognized tax benefits, including interest and penalties, of $139.0 million, of which $23.9 million would affect our effective tax rate if realized. For the fiscal year ended March 31, 2019, gross unrecognized tax benefits increased by $10.5 million.
We are no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended March 31, 2016 and state income tax returns for periods prior to the fiscal year ended March 31, 2014. With few exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to fiscal year ended March 31, 2013. Certain U.S. state and foreign taxing authorities are currently examining our income tax returns for the fiscal years ended March 31, 2014 through March 31, 2017.
We are regularly audited by domestic and foreign taxing authorities. We believe that our tax positions comply with applicable tax law and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations may impact our effective tax rate in future periods.
Net income and earnings per share
For the fiscal year ended March 31, 2019, our net income was $333.8 million, as compared to $173.5 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2019 was $2.90, as compared to $1.54 for the fiscal year ended March 31, 2018. Diluted weighted average shares outstanding of 115.2 million were 2.4 million higher compared to the prior fiscal year due primarily to the settlement on conversion of our 1.00% Convertible Notes with shares of our common stock using the stated conversion rate and, to a lesser extent, normal stock compensation activity including grants and forfeitures, offset by share repurchases. See Note 1 - Basis of Presentation and Significant Accounting Policies and Note 13 - Earnings Per Share to the Consolidated Financial Statements for additional information.

34


Fiscal Years Ended March 31, 2018 and 2017
(thousands of dollars)
 
2018
 
% of net revenue
 
2017
 
% of net revenue
 
Increase/(decrease)
 
% Increase/(decrease)
Net revenue
 
$
1,792,892

 
100.0
%
 
$
1,779,748

 
100.0
%
 
$
13,144

 
0.7
 %
Internal royalties
 
383,020

 
21.4
%
 
330,782

 
18.6
%
 
52,238

 
15.8
 %
Product costs
 
203,301

 
11.3
%
 
255,914

 
14.4
%
 
(52,613
)
 
(20.6
)%
Software development costs and royalties(1)
 
191,400

 
10.7
%
 
335,675

 
18.9
%
 
(144,275
)
 
(43.0
)%
Licenses
 
120,590

 
6.7
%
 
100,588

 
5.6
%
 
20,002

 
19.9
 %
Cost of goods sold
 
898,311

 
50.1
%
 
1,022,959

 
57.5
%
 
(124,648
)
 
(12.2
)%
Gross profit
 
$
894,581

 
49.9
%
 
$
756,789

 
42.5
%
 
$
137,792

 
18.2
 %

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

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

Net revenue from console games increased by $22.6 million and accounted for 81.6% of our total net revenue in the fiscal year ended March 31, 2018, as compared to 81.0% in the prior year. The increase in net revenue from console games was due primarily to higher net revenue from our NBA 2K franchise, partially offset by lower net revenue from Mafia III, which released in October 2016. Net revenue from PC and other decreased by $9.4 million as compared to the prior year and decreased as a percentage of net revenue to 18.4% compared to 19.0% in the prior year. The decrease in net revenue from PC and other was due primarily to lower net revenue from Civilization VI, which released on the PC in the prior year, partially offset by higher net revenue from Social Point titles for which we had only two months of net revenue in the prior year as it was acquired in January 2017.
Net revenue from digital online channels increased by $209.2 million and accounted for 63.1% of our total net revenue for the fiscal year ended March 31, 2018, as compared to 51.8% in the prior year. The increase in net revenue from digital online channels was due primarily to higher revenue related to our NBA 2K franchise and Grand Theft Auto Online, partially offset by lower net revenue from Civilization VI and Grand Theft Auto V. Net revenue from physical retail and other channels decreased by $196.1 million and accounted for 36.9% of our total net revenue for the fiscal year ended March 31, 2018, as compared to 48.2% for the prior year. The decrease in net revenue from physical retail and other channels was due primarily to lower net revenue from Mafia III, Grand Theft Auto V, and BioShock: The Collection, which released in September 2016, partially offset by higher net revenue from L.A. Noire due to releases on PS4, Xbox One, Switch, and HTC Vive.

Net revenue from recurrent consumer spending on our titles through virtual currency, add-on content, and microtransactions increased by $287.9 million and accounted for 41.6% of net revenue for the fiscal year ended March 31, 2018, as compared to 25.8% for the prior year. The increase in recurrent consumer spending was due primarily to higher virtual currency net revenue from Grand Theft Auto Online, our NBA 2K franchise, and Social Point titles with only two months of net revenue in the prior year as it was acquired in January 2017.
Gross profit as a percentage of net revenue for the fiscal year ended March 31, 2018 was 49.9%, as compared to 42.5% in the prior year. The percentage increase was due primarily to lower software development costs as a percentage of net revenue due to Mafia III and Civilization VI releasing in the prior year, as well as lower product costs as a percentage of net revenue due to the decrease in net revenue from physical retail sales. The increase was offset by higher internal royalties as a percentage of net revenue due to the timing of when royalties are earned and to a lesser extent higher stock-based compensation costs as a percentage of net revenue.
Net revenue earned outside of the United States decreased by $40.0 million and accounted for 41.3% of our total net revenue in the fiscal year ended March 31, 2018, as compared to 43.9%. The decrease in net revenue was due primarily to a decrease in net revenue from Mafia III, partially offset by higher net revenue from our NBA 2K franchise. Changes in foreign currency exchange rates increased net revenue and gross profit by $9.8 million and $6.7 million, respectively, in the fiscal year ended March 31, 2018 as compared to the prior year.

35


Operating Expenses
(thousands of dollars)
 
2018
 
% of net revenue
 
2017
 
% of net revenue
 
Increase/(decrease)
 
% Increase/(decrease)
Selling and marketing
 
$
256,092

 
14.3
%
 
$
285,453

 
16.0
%
 
$
(29,361
)
 
(10.3
)%
General and administrative
 
247,828

 
13.8
%
 
211,409

 
11.9
%
 
36,419

 
17.2
 %
Research and development
 
196,373

 
11.0
%
 
137,915

 
7.8
%
 
58,458

 
42.4
 %
Depreciation and amortization
 
43,969

 
2.5
%
 
30,707

 
1.7
%
 
13,262

 
43.2
 %
Business reorganization
 
14,742

 
0.8
%
 
—

 
—
%
 
14,742

 
100.0
 %
Total operating expenses
 
$
759,004

 
42.3
%
 
$
665,484

 
37.4
%
 
$
93,520

 
14.1
 %

Includes stock-based compensation expense, which was allocated as follows (in thousands):
 
2018
 
2017
Selling and marketing
$
13,258

 
$
9,963

General and administrative
$
58,037

 
$
42,908

Research and development
$
18,020

 
$
7,952

Business reorganization
$
2,424

 
$
—

Foreign currency exchange rates increased total operating expenses by $8.4 million in the fiscal year ended March 31, 2018 as compared to the prior year.
Selling and marketing
Selling and marketing expenses decreased by $29.4 million in the fiscal year ended March 31, 2018 as compared to the prior year, due primarily to $44.2 million in lower advertising expenses. Advertising expenses were lower in the current year due primarily to the releases of Mafia III and Civilization VI in October 2016 and Battleborn in May 2016, partially offset by higher marketing in the current year period for Grand Theft Auto Online and Red Dead Redemption 2. The decrease was partially offset by higher personnel expenses, primarily due to higher incentive compensation expense.
General and administrative
General and administrative expenses increased by $36.4 million for the fiscal year ended March 31, 2018, as compared to the prior year, due primarily to (i) increases in personnel expenses, including stock and incentive compensation expense, due to additional headcount, including our acquisition of Social Point, (ii) increases in professional fees, related primarily to our management agreement with ZelnickMedia as a result of the increase in our share price, (iii) increases in IT related expenses from the purchase of computer hardware and software, and (iv) increases in rent expense due to new locations, including our new corporate headquarters in New York and for Social Point, as well as increased rent in other locations. This overall increase was partially offset primarily by a $6.5 million reduction of expense related to reversing a contingent consideration liability recognized in connection with the Social Point acquisition as we determined that the fair value of this contingent consideration was $0 based on the lower probability of Social Point achieving certain performance measures in the 24-month period following the acquisition.
General and administrative expenses for the fiscal years ended March 31, 2018 and 2017 include occupancy expense (primarily rent, utilities and office expenses) of $18.2 million and $15.8 million, respectively, related to our development studios.
Research and development
Research and development expenses increased by $58.5 million for the fiscal year ended March 31, 2018, as compared to the prior year, due primarily to increased personnel expense due to (i) increased headcount, including our acquisition of Social Point, and (ii) higher stock-based compensation. These increases were partially offset by lower production expenses for titles that have not reached technological feasibility.
Depreciation and amortization
Depreciation and amortization expenses increased by $13.3 million for the fiscal year ended March 31, 2018, as compared to the prior year, due primarily to the recognition of a $11.3 million impairment charge as a result of our decision not to proceed with further development of a certain in-process research and development ("IPR&D") intangible asset from our acquisition of Social Point.

36


Business Reorganization
During the fiscal year ended March 31, 2018, we announced and initiated actions to implement a strategic reorganization at one of our labels. In connection with this initiative we incurred business reorganization expenses of $14.7 million for the fiscal year ended March 31, 2018, due primarily to employee separation costs with no corresponding costs in the prior year. Although we may record additional expense or benefit in future periods to true-up estimates, we do not expect to incur additional reorganization costs in connection with this reorganization. See Note 20 - Business Reorganization.
Interest and other, net
(thousands of dollars)
 
2018
 
% of net
revenue
 
2017
 
% of net
revenue
 
(Increase)/
decrease
 
% Increase/
(decrease)
Interest expense, net
 
$
(1,005
)
 
(0.1
)%
 
$
(21,700
)
 
(1.2
)%
 
$
20,695

 
(95.4
)%
Foreign currency exchange (loss) gain
 
(3,038
)
 
(0.2
)%
 
4,990

 
0.3
 %
 
(8,028
)
 
(160.9
)%
Other
 
5,091

 
0.3
 %
 
1,020

 
0.1
 %
 
4,071

 
399.1
 %
Interest and other, net
 
$
1,048

 
0.1
 %
 
$
(15,690
)
 
(0.9
)%
 
$
16,738

 
(106.7
)%
Interest and other, net was income of $1.0 million for the fiscal year ended March 31, 2018, as compared to an expense of $15.7 million for the fiscal year ended March 31, 2017. The increase was due primarily to a $20.7 million decrease in interest expense as a result of the settlement of our 1.75% Convertible Notes in December 2016 and higher gains on early conversions of our 1.00% Convertible Notes as well as higher interest income due to the nature of our investments and the rise of interest rates, partially offset by foreign exchange transaction losses for the fiscal year ended March 31, 2018 as compared to foreign exchange transaction gains in the prior year.
Provision/Benefit from income taxes
On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (herein referred to as the "Act”). The Act makes broad and complex changes to the U.S. tax code that could materially affect us. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 and requires companies to pay a one-time transition tax on the previously untaxed earnings of certain foreign subsidiaries. In addition, the Act makes other changes that may affect us, beginning April 1, 2018. These changes include but are not limited to (1) a Base Erosion Anti-abuse Tax (BEAT), which is a new minimum tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision that taxes global intangible low-taxed income (GILTI), (4) the repeal of the domestic production activity deduction, and (5) other base broadening provisions.

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

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

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

37


take as a result of the Act. We expect to continue to analyze the Act and its impact and expect to record any adjustments to provisional estimates no later than the third quarter of fiscal 2019.
Our income tax benefit was $36.9 million for the fiscal year ended March 31, 2018 as compared to income tax expense of $9.7 million for the fiscal year ended March 31, 2017.
When compared to the statutory rate of 31.6%, the effective tax rate of (27.0)% for the fiscal year ended March 31, 2018 was primarily due to $53.2 million from excess tax benefits from employee stock compensation as a component of the benefit from income taxes (previously excess tax benefit and tax deficiencies were recognized in additional paid-in-capital), a benefit of $22.6 million for tax credits anticipated to be utilized, a benefit of $15.1 million from changes in unrecognized tax benefits primarily due to expiration of statute of limitations, and a benefit of $7.9 million from our geographic mix of earnings, partially offset by provisional amounts recorded as a result of the Act and $10.4 million for changes in our valuation allowance.
The effective tax rate in the current year was lower compared to the prior year primarily due to $53.2 million from excess tax benefits related to employee stock compensation reflected as a component of the benefit from income taxes in the current year, an increased benefit from changes in unrecognized tax benefits of $17.3 million primarily due to expiration of statute of limitations, and $11.0 million of increased tax benefits due to mix of earnings, partially offset by a reduced benefit from tax credits of $12.7 million and provisional amounts recorded as a result of the Act.
We anticipate that additional excess tax benefits from employee stock compensation, tax credits, changes in valuation allowance, and changes as a result of the Act may arise in future periods, which could have a significant impact on our effective tax rate.
The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends upon the stock price at the time of employee award vesting. Since we recognize excess tax benefits on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending on our stock price in each period.
As of March 31, 2018, we had gross unrecognized tax benefits, including interest and penalties, of $128.5 million, of which $22.8 million would affect our effective tax rate if realized. For the fiscal year ended March 31, 2018, gross unrecognized tax benefits increased by $8.3 million.
We are no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended March 31, 2016 and state income tax returns for periods prior to the fiscal year ended March 31, 2013. With few exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to fiscal year ended March 31, 2012. Certain U.S. state and foreign taxing authorities are currently examining our income tax returns for the fiscal years ended March 31, 2012 through March 31, 2016.
We are regularly audited by domestic and foreign taxing authorities. We believe that our tax positions comply with applicable tax law and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations may impact our effective tax rate in future periods.
Net income and earnings per share
For the fiscal year ended March 31, 2018, our net income was $173.5 million, as compared to $67.3 million in the prior year. Diluted earnings per share for the fiscal year ended March 31, 2018 was $1.54, as compared to $0.72 for the fiscal year ended March 31, 2017. Basic weighted average shares outstanding of 110.1 million were 19.9 million higher compared to the prior fiscal year due primarily to the settlement on conversion of our 1.75% Convertible Notes and our 1.00% Convertible Notes with shares of our common stock using the stated conversion rate and, to a lesser extent the vesting of restricted stock awards. See Note 1 - Basis of Presentation and Significant Accounting Policies and Note 13 - Earnings Per Share for additional information.
Liquidity and Capital Resources
Our primary cash requirements have been to fund (i) the development, manufacturing and marketing of our published products, (ii) working capital, (iii) acquisitions and (iv) capital expenditures. We expect to rely on cash and cash equivalents as well as on short-term investments, funds provided by our operating activities, and our New Credit Agreement to satisfy our working capital needs.
Short-term Investments
As of March 31, 2019, we had $744.5 million of short-term investments, which are highly-liquid in nature and represent an investment of cash that is available for current operations. From time to time, we may purchase additional short-term investments depending on future market conditions and liquidity needs.

38


New Credit Agreement
On February 8, 2019, we entered into an unsecured Credit Agreement (the “New Credit Agreement”). The New Credit Agreement replaced our existing Credit Agreement, which was terminated on the same day. The New Credit Agreement runs through February 8, 2024. The New Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $200,000, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $25,000 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros and Canadian Dollars in an aggregate principal amount of up to $25,000. In addition, the New Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional $250,000 in term loans or revolving credit facilities. Loans under the New Credit Agreement will bear interest at a margin of (a) 0.125% to 0.750% above a certain base rate (5.50% at March 31, 2019), or (b) 1.125% to 1.750% above LIBOR (approximately 2.49% at March 31, 2019), which margins are determined by reference to our consolidated total net leverage ratio.
As of March 31, 2019, there was $198.3 million available to borrow under the New Credit Agreement and we had $1.7 million of letters of credit outstanding. At March 31, 2019, we had no outstanding borrowings under the Credit Agreement.
The New Credit Agreement also includes, among other terms and conditions, maximum leverage ratio, minimum cash reserves and, in certain circumstances, minimum interest coverage ratio financial covenants, as well as limitations on the Company’s and each of its subsidiaries’ ability to: create, incur, assume or be liable for indebtedness; dispose of assets outside the ordinary course; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of its property; make investments; or pay dividends or make distributions, in each case subject to certain exceptions. In addition, the New Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on indebtedness held by third parties (subject to certain limitations and cure periods).
1.00% Convertible Notes Due 2018
On June 18, 2013, we issued $250.0 million aggregate principal amount of 1.00% Convertible Notes due 2018. The Convertible Notes were issued at 98.5% of par value for proceeds of $283.2 million, which included a $37.5 million overallotment option that was exercised. Interest on the Convertible Notes was payable semi-annually in arrears on July 1st and January 1st of each year, commencing on January 1, 2014. The Convertible Notes matured on July 1, 2018.
Financial Condition
We are subject to credit risks, particularly if any of our receivables represent a limited number of customers or are concentrated in foreign markets. If we are unable to collect our accounts receivable as they become due, it could adversely affect our liquidity and working capital position.
Generally, we have been able to collect our accounts receivable in the ordinary course of business. We do not hold any collateral to secure payment from customers. We have trade credit insurance on the majority of our customers to mitigate accounts receivable risk.
A majority of our trade receivables are derived from sales to major retailers and distributors. Our five largest customers accounted for 70.1%, 70.7%, and 65.5% of net revenue during the fiscal years ended March 31, 2019, 2018, and 2017, respectively. As of March 31, 2019 and 2018, five customers accounted for 66.6% and 65.4% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 55.8% and 53.2% of such balances at March 31, 2019 and 2018, respectively. We had two customers who accounted for 40.1% and 15.7% of our gross accounts receivable as of March 31, 2019 and two customers who accounted for 37.7%, and 15.5% of our gross accounts receivable as of March 31, 2018. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2019 and 2018. Based upon performing ongoing credit evaluations, maintaining trade credit insurance on a majority of our customers and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk, although we actively monitor each customer's credit worthiness and economic conditions that may affect our customers' business and access to capital. We are monitoring the current global economic conditions, including credit markets and other factors as it relates to our customers in order to manage the risk of uncollectible accounts receivable.
We believe our current cash, short-term investments and projected cash flow from operations, along with availability under our New Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis.
As of March 31, 2019, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $292.7 million. These balances are dispersed across various locations around the world. We believe that such dispersion meets

39


the business and liquidity needs of our foreign affiliates. In addition, we expect to have the ability to generate sufficient cash domestically to support ongoing operations for the foreseeable future.

On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the "Tax Cuts and Jobs Act” (herein referred to as the "Act”). The Act made broad and complex changes to the U.S. tax code, which could materially affect us. The Act included a number of provisions, including international provisions, which generally establish a territorial-style system for taxing foreign income of domestic multinational corporations. Our current intention is to reinvest indefinitely earnings of our foreign subsidiaries, and therefore we have not recorded any tax liabilities associated with the repatriation of foreign earnings.
Our Board of Directors has authorized the repurchase of up to 14.2 million shares of our common stock. Under this program, we may purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance and other conditions. The program does not require us to repurchase shares and may be suspended or discontinued at any time for any reason. During the fiscal years ended March 31, 2019, 2018, and 2017, we repurchased 3.7 million, 1.5 million, and 0.0 million shares of our common stock, respectively, in the open market for $362.4 million, $154.8 million, and $0.0 million, respectively, including commissions as part of the program. As of March 31, 2019, we had repurchased a total of 10.4 million shares of our common stock under the program, and 3.8 million shares of our common stock remained available for repurchase under the share repurchase program.
Our changes in cash flows were as follows:
 
 
Fiscal Year Ended March 31,
(thousands of dollars)
 
2019
 
2018
 
2017
Net cash provided by operating activities
 
$
843,515

 
$
493,527

 
$
407,903

Net cash used in investing activities
 
(223,576
)
 
(271,827
)
 
(129,030
)
Net cash used in financing activities
 
(463,685
)
 
(281,467
)
 
(49,772
)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash
 
(10,639
)
 
24,924

 
(7,798
)
Net change in cash, cash equivalents, and restricted cash
 
$
145,615

 
$
(34,843
)
 
$
221,303

At March 31, 2019, we had 1,392.0 million of Cash, cash equivalents, and Restricted cash, compared to 1,246.4 million at March 31, 2018. The increase in Cash, cash equivalents, and Restricted cash from March 31, 2018 was due primarily to Net cash provided by operating activities from sales, primarily of Red Dead Redemption 2, partially offset by investments in software development and licenses as well as royalty payments. These net increases were offset by Net cash used in financing activities, which was primarily related to repurchases of common stock under our share repurchase program and tax payments related to net share settlements of our restricted stock, and to a lesser extent Net cash used in investing activities, which was primarily related to bank time deposits and purchases of fixed assets.
Contractual Obligations and Commitments
We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years. Generally, these include:
•Software Development and Licensing:  We make payments to third-party software developers that include contractual payments to developers under several software development agreements that expire at various times through March 2025. Our aggregate outstanding software development commitments assume satisfactory performance by third-party software developers. We also have licensing commitments that primarily consist of obligations to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of our products.
•Marketing:  We have certain minimum marketing support commitments where we commit to spend specified amounts related to marketing our products. Marketing commitments expire at various times through September 2024.
•Operating Leases:  Our offices are occupied under non-cancelable operating leases expiring at various times through December 2032. We also lease certain furniture, equipment and automobiles under non-cancelable leases expiring through June 2023. Some of the leases have fixed rent increases and also include inducements to enter into the lease. The effect of such amounts are deferred and recognized on a straight-line basis over the related lease term.
•Purchase obligations: These obligations are primarily related to agreements to purchase services that are enforceable and legally binding on us that specifies all significant terms, including fixed, minimum or variable pricing provisions; and the approximate timing of the transactions, expiring at various times through March 2024.

40


A summary of annual minimum contractual obligations and commitments as of March 31, 2019 is as follows (in thousands of dollars):
Fiscal Year Ending March 31,
 
Software
Development
and Licensing
 
Marketing
 
Operating
Leases
 
Purchase
Obligations
 
 
Total
2020
 
$
183,309

 
$
52,953

 
$
28,365

 
$
23,707

 
 
$
288,334

2021
 
120,008

 
28,830

 
27,882

 
9,559

 
 
186,279

2022
 
114,734

 
28,661

 
26,272

 
5,063

 
 
174,730

2023
 
56,884

 
78,100

 
23,787

 
623

 
 
159,394

2024
 
51,792

 
24,600

 
16,474

 
484

 
 
93,350

Thereafter
 
55,792

 
49,200

 
82,570

 
—

 
 
187,562

Total
 
$
582,519

 
$
262,344

 
$
205,350

 
$
39,436

 
 
$
1,089,649

Income Taxes: At March 31, 2019, we had recorded a liability for gross unrecognized tax benefits, including interest and penalties, of $23.9 million, for which we are unable to make a reasonable and reliable estimate of the period in which these liabilities will be settled with the respective tax authorities; therefore, these liabilities have not been included in the contractual obligations table.
Legal and Other Proceedings: We are, or may become, subject to demands and claims (including intellectual property claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial statements. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.
On February 7, 2019, all of the previously disclosed lawsuits, claims, and counterclaims that had been pending since April 2016 with Mr. Leslie Benzies, the former president of one of our subsidiaries, were resolved.
Off-Balance Sheet Arrangements
As of March 31, 2019 and 2018, we did not have any material relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
International Operations
Net revenue earned outside of the United States is principally generated by our operations in Europe, Asia, Australia, Canada and Latin America. For the fiscal years ended March 31, 2019, 2018 and 2017, 46.5%, 41.3% and 43.9%, respectively, of our net revenue was earned outside the United States. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays and international political, regulatory and economic developments, all of which can have a significant effect on our operating results.
Fluctuations in Quarterly Operating Results and Seasonality
We have experienced fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles; sequels or enhancements of existing titles; projected and actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us and our competitors; the accuracy of retailers' forecasts of consumer demand; the size and timing of acquisitions; the timing of orders from major customers; and order cancellations and delays in product shipment. Sales of our products are also seasonal, with peak shipments typically occurring in the fourth calendar quarter as a result of increased demand for products during the holiday season. For certain of our software products with multiple element revenue arrangements, we defer the recognition of our net revenue over an estimated service period which generally ranges from 9 to 15 months. As a result, the quarter in which we generate the highest net sales volume may be different from the quarter in which we recognize the highest amount of net revenue. Quarterly comparisons of operating results are not necessarily indicative of future operating results.

41


Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to fluctuations in interest rates relates primarily to our short-term investment portfolio and variable rate debt under the New Credit Agreement.
We seek to manage our interest rate risk by maintaining a short-term investment portfolio that includes corporate bonds with high credit quality and maturities less than two years. Since short-term investments mature relatively quickly and can be reinvested at the then-current market rates, interest income on a portfolio consisting of short-term securities is more subject to market fluctuations than a portfolio of longer-term maturities. However, the fair value of a short-term portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. We do not currently use derivative financial instruments in our short-term investment portfolio. Our investments are held for purposes other than trading.
As of March 31, 2019, we had $744.5 million of short-term investments, which included $356.8 million of available-for-sale securities. The available-for-sale securities were recorded at fair market value with unrealized gains or losses resulting from changes in fair value reported as a separate component of accumulated other comprehensive income (loss), net of tax, in stockholders' equity. We also had $826.5 million of cash and cash equivalents that are comprised primarily of money market funds and bank-time deposits. We determined that, based on the composition of our investment portfolio, there was no material interest rate risk exposure to our Consolidated Financial Statements or liquidity as of March 31, 2019.
Historically, fluctuations in interest rates have not had a significant effect on our operating results. Under our New Credit Agreement, loans will bear interest at a rate of (a) 0.250% to 0.750% above a certain base rate (5.50% at March 31, 2019) or (b) 1.125% to 1.750% above LIBOR (approximately 2.49% at March 31, 2019), which rates are determined by reference to our consolidated total net leverage ratio. Changes in market rates may affect our future interest expense if there is an outstanding balance on our line of credit. At March 31, 2019, there were no outstanding borrowings under our New Credit Agreement.
Foreign Currency Exchange Rate Risk
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the relevant period end. Translation adjustments are included as a separate component of stockholders' equity on our Consolidated Balance Sheets. For the fiscal years ended March 31, 2019 and 2018, our foreign currency translation adjustment was a loss of $28.8 million and a gain of $43.4 million, respectively. We recognized a foreign currency exchange transaction loss of $0.5 million, a loss of $3.0 million, and a gain of $5.0 million for the fiscal years ended March 31, 2019, 2018, and 2017, respectively, in Interest and other, net in our Consolidated Statements of Operations.
Balance Sheet Hedging Activities
We use foreign currency forward contracts to mitigate foreign currency exchange rate risk associated with non-functional currency denominated cash balances and inter-company funding loans, non-functional currency denominated accounts receivable and non-functional currency denominated accounts payable. These transactions are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts is reported as either assets or liabilities on our Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other, net, in our Consolidated Statements of Operations. We do not enter into derivative financial contracts for speculative or trading purposes. At March 31, 2019, we had $116.6 million of forward contracts outstanding to buy foreign currencies in exchange for U.S. dollars and $87.8 million of forward contracts outstanding to sell foreign currencies in exchange for U.S. dollars all of which have maturities of less than one year. At March 31, 2018, we had $4.4 million of forward contracts outstanding to buy foreign currencies in exchange for U.S. dollars and $67.6 million of forward contracts outstanding to sell foreign currencies in exchange for U.S. dollars all of which have maturities of less than one year. For the fiscal years ended March 31, 2019, 2018 and 2017, we recorded a gain of $16.8 million, a loss of $19.5 million, and a gain of $7.2 million, respectively, related to foreign currency forward contracts in Interest and other, net on the Consolidated Statements of Operations. As of March 31, 2019 and 2018, the fair value of these outstanding forward contracts were losses of $0.4 million and $0.0 million, respectively, and is included in accrued and other current liabilities. The fair value of these outstanding forward contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
Our hedging programs are designed to reduce, but do not entirely eliminate, the effect of currency exchange rate movements. We believe the counterparties to these foreign currency forward contracts are credit-worthy multinational commercial banks and that the risk of counterparty nonperformance is not material. Notwithstanding our efforts to mitigate some foreign

42


currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. For the fiscal year ended March 31, 2019, 46.5% of our revenue was generated outside the United States. Using sensitivity analysis, a hypothetical 10% increase in the value of the U.S. dollar against all currencies would decrease revenue by 4.7%, while a hypothetical 10% decrease in the value of the U.S. dollar against all currencies would increase revenue by 4.7%. In the opinion of management, a substantial portion of this fluctuation would be offset by cost of goods sold and operating expenses incurred in local currency.
Item 8.    Financial Statements and Supplementary Data
The financial statements and supplementary data appear in a separate section of this report following Part IV. We provide details of our valuation and qualifying accounts in Note 21 - Supplementary Financial Information to the Consolidated Financial Statements. All schedules have been omitted since the information required to be submitted has been included on the Consolidated Financial Statements or notes thereto or has been omitted as not applicable or not required.
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.    Controls and Procedures
Definition and Limitations of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource constraints. In addition, because we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures at March 31, 2019, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at March 31, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported on a timely basis, and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework ("COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of March 31, 2019.
Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on our internal control over financial reporting. The report on the audit of internal control over financial reporting is included in this Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2019, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

43


Item 9B.    Other Information
None.

44


PART III
Item 10.    Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference to the sections entitled "Proposal 1—Election of Directors" and "Executive Compensation—Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement (the "Proxy Statement") for the Annual Meeting of Stockholders to be held in 2019. We intend to file the Proxy Statement within 120 days after the end of the fiscal year (i.e. on or before July 29, 2019). Our Code of Business Conduct and Ethics applicable to our directors and all employees, including senior financial officers, is available on our website at www.take2games.com. If we make any amendment to our Code of Business Conduct and Ethics that is required to be disclosed pursuant to the Exchange Act, we will make such disclosures on our website.
Item 11.    Executive Compensation
The information required by this Item is incorporated herein by reference to the section entitled "Executive Compensation" in our Proxy Statement.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the sections entitled "Voting Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement.
Item 13.    Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in our Proxy Statement.
Item 14.    Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the section entitled "Independent Auditor Fee Information" in our Proxy Statement.

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PART IV
Item 15.    Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this Report:

(i)
Financial Statements. See Index to Financial Statements on page 53 of this Report.
(ii)
Financial Statement Schedule. See Note 21 to the Consolidated Financial Statements.
(iii)
Index to Exhibits:
 
 
 
 
Incorporated by Reference
Exhibit Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit
 
Filed
Herewith
2.1
 
Share Sale and Purchase Agreement, dated January 31, 2017, by and among Take-Two Interactive Software, Inc., Take-Two Invest Espana, S.L., Andres Bou Ortiz, Horacio Martos Borja, Marc Canaleta Caupena, Voladuras Hinojo, S.L., Nauta Tech Invest III, S.C.R., S.A., Bilbao Vizcaya Holding, S.A., La Banque Postale Innovation 11 FCPI, Capital Croissance 4, Objectif Innovation Patrimoine 4 FCPI, Strategie PME 2011 FCPI, Idinvest Patrimoine FCPI, Allianz Eco Innovation 3 FCPI, Objectif Innovation 5 FCPI, Idinvest Crossance FCPI, SG Innovation 2011 FCPI, Allianz Eco Innovation 2 FCPI, Objectif Innovation 4 FCPI, Idinvest Flexible 2016 FCPI, Capital Croissance 5 FCPI, Objectif Innovation Patrimoine 5 FCPI, Idinvest Patrimoine 2 FCPI, Objectif Innovation Patrimoine 6 FCPI, Idinvest Patrimoine 3 FCPI, Greylock Israel Investment Vehicle in Social Point, LTD, and HCPESP, S.a.r.l. †

 
8-K
 
2/3/2017
 
2.1
 
 
3.1
 
 
10-K
 
2/12/2004
 
3.1
 
 
3.1.1
 
 
10-K
 
2/12/2004
 
3.1.2
 
 
3.1.2
 
 
10-K
 
2/12/2004
 
3.1.3
 
 
3.1.3
 
 
8-K
 
4/23/2009
 
3.1
 
 
3.1.4
 
 
8-K
 
9/24/2012
 
3.1
 
 
3.2
 
 
10-K
 
2/12/2004
 
3.1.1
 
 
3.3
 
 
8-A12B
 
3/26/2008
 
4.2
 
 
3.4
 
 
8-K
 
9/18/2017
 
3.1
 
 
10.1
 
 
8-K
 
3/7/2008
 
10.1
 
 
10.2
 
 
14A
 
7/28/2016
 
Annex A
 
 

46


 
 
 
 
Incorporated by Reference
Exhibit Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit
 
Filed
Herewith
10.3
 
 
10-Q
 
6/5/2009
 
10.2
 
 
10.4
 
 
10-Q
 
6/5/2009
 
10.3
 
 
10.5
 
 
10-Q
 
8/1/2012
 
10.1
 
 
10.6
 
 
10-Q
 
10/30/2013
 
10.1
 
 
10.7
 
 
10-Q
 
10/30/2013
 
10.2
 
 
10.8
 
 
10-Q
 
10/30/2013
 
10.3
 
 
10.9
 
 
10-Q
 
10/30/2013
 
10.4
 
 
10.10
 
 
10-Q
 
10/30/2013
 
10.5
 
 
10.11
 
 
14A
 
7/27/2017
 
Annex B
 
 
10.12
 
 
14A
 
7/27/2017
 
Annex C
 
 
10.13
 
 
 
 
 
 
 
 
X
10.14
 
 
10-Q
 
11/8/2017
 
10.4
 
 
10.15
 
 
10-Q
 
11/8/2017
 
10.5
 
 
10.16
 
 
10-Q
 
11/8/2017
 
10.6
 
 
10.17
 
 
10-Q
 
11/8/2017
 
10.7