Take-Two Interactive Software, Inc.

View:

ttwo-20221231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022


OR
☐			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		51-0350842
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
110 West 44th Street		10036
New York	New York	(Zip Code)
(Address of principal executive offices)

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, $0.01 par value	TTWO	NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

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 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

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 ☐ No ý

As of January 26, 2023, there were 168,674,529 shares of the Registrant's Common Stock outstanding, net of treasury stock.

Table of Contents

INDEX


PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive (Loss) Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Equity	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	50
PART II.	OTHER INFORMATION	51
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6.	Exhibits	52
	Signatures	53

(All other items in this report are inapplicable)

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)


	December 31, 2022		March 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	860.9	$	1,732.1
Short-term investments	268.6		820.1
Restricted cash and cash equivalents	331.5		359.8
Accounts receivable, net of allowances of $1.3 and $0.4 at December 31, 2022 and March 31, 2022, respectively	711.1		579.4
Software development costs and licenses	68.1		81.4
Contract assets	84.4		104.9
Prepaid expenses and other	282.1		193.4
Total current assets	2,606.7		3,871.1
Fixed assets, net	360.6		242.0
Right-of-use assets	319.9		217.2
Software development costs and licenses, net of current portion	1,035.9		755.9
Goodwill	6,788.2		674.6
Other intangibles, net	5,222.6		266.5
Deferred tax assets	123.9		73.8
Long-term restricted cash and cash equivalents	109.9		103.5
Other assets	313.7		341.7
Total assets	$	16,881.4	$	6,546.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	151.6	$	125.9
Accrued expenses and other current liabilities	1,313.3		1,074.9
Deferred revenue	1,136.4		865.3
Lease liabilities	58.5		38.9
Short-term debt	350.0		—
Total current liabilities	3,009.8		2,105.0
Long-term debt, net	2,735.5		—
Non-current deferred revenue	31.0		70.9
Non-current lease liabilities	354.2		211.3
Non-current software development royalties	121.2		115.5
Deferred tax liabilities, net	711.3		21.8
Other long-term liabilities	368.0		212.1
Total liabilities	$	7,331.0	$	2,736.6
Commitments and contingencies (See Note 12)
Stockholders' equity:
Preferred stock, $0.01 par value, 5.0 shares authorized; no shares issued and outstanding at December 31, 2022 and March 31, 2022	—		—
Common stock, $0.01 par value, 300.0 and 200.0 shares authorized; 192.2 and 139.0 shares issued and 168.5 and 115.4 outstanding at December 31, 2022 and March 31, 2022, respectively	1.9		1.4
Additional paid-in capital	8,928.7		2,597.2
Treasury stock, at cost; 23.7 and 23.7 common shares at December 31, 2022 and March 31, 2022, respectively	(1,020.6)		(1,020.6)
Retained earnings	1,774.6		2,289.0
Accumulated other comprehensive loss	(134.2)		(57.3)
Total stockholders' equity	$	9,550.4	$	3,809.7
Total liabilities and stockholders' equity	$	16,881.4	$	6,546.3

See accompanying Notes.

Table of Contents

TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in millions, except per share amounts)


	Three Months Ended December 31,				Nine Months Ended December 31,
	2022		2021		2022		2021
Net revenue:
Game	$	1,231.3	$	883.3	$	3,469.3	$	2,512.3
Advertising	176.5		20.0		434.4		62.5
Total net revenue	1,407.8		903.3		3,903.7		2,574.8
Cost of revenue	691.9		350.4		1,841.6		1,136.8
Gross profit	715.9		552.9		2,062.1		1,438.0
Selling and marketing	446.7		135.3		1,163.1		375.2
Research and development	238.2		116.7		655.2		310.5
General and administrative	168.9		130.8		620.6		363.0
Depreciation and amortization	35.0		16.0		86.0		44.6
Total operating expenses	888.8		398.8		2,524.9		1,093.3
(Loss) income from operations	(172.9)		154.1		(462.8)		344.7
Interest and other, net	(28.3)		(5.6)		(108.1)		(7.2)
Gain (loss) on fair value adjustments, net	1.1		3.7		(36.6)		6.1
(Loss) income before income taxes	(200.1)		152.2		(607.5)		343.6
(Benefit from) provision for income taxes	(46.7)		7.6		(93.1)		36.5
Net (loss) income	$	(153.4)	$	144.6	$	(514.4)	$	307.1
Earnings (loss) per share:
Basic (loss) earnings per share	$	(0.91)	$	1.25	$	(3.27)	$	2.66
Diluted (loss) earnings per share	$	(0.91)	$	1.24	$	(3.27)	$	2.63

See accompanying Notes.

Table of Contents

TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

(in millions)


	Three Months Ended December 31,				Nine Months Ended December 31,
	2022		2021		2022		2021
Net (loss) income	$	(153.4)	$	144.6	$	(514.4)	$	307.1
Other comprehensive (loss) income:
Foreign currency translation adjustment	100.7		(13.5)		$	(78.4)	(24.1)








Change in fair value of available for sale securities	1.4		(1.4)		$	1.5	(1.8)
Other comprehensive income (loss)	102.1		(14.9)		$	(76.9)	(25.9)
Comprehensive (loss) income	$	(51.3)	$	129.7	$	(591.3)	$	281.2

See accompanying Notes.

TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in millions)


	Nine Months Ended December 31,
	2022		2021
Operating activities:
Net (loss) income	$	(514.4)	$	307.1
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization and impairment of software development costs and licenses	147.6		177.8
Stock-based compensation	238.5		142.5
Noncash lease expense	35.2		25.2
Amortization of intellectual property	740.1		49.5
Depreciation	62.9		44.7

Amortization of debt issuance costs	12.3		—
Interest expense	79.0		—
Fair value adjustments	37.1		(6.1)
Other, net	(36.0)		12.2
Changes in assets and liabilities, net of effect from purchases of businesses:
Accounts receivable	158.0		(85.8)
Software development costs and licenses	(362.9)		(376.5)
Prepaid expenses and other current and other non-current assets	(23.5)		(142.7)
Deferred revenue	(88.1)		10.6
Accounts payable, accrued expenses and other liabilities	(450.0)		(139.3)
Net cash provided by operating activities	35.8		19.2
Investing activities:
Change in bank time deposits	123.0		(43.9)
Sale and maturities of available-for-sale securities	436.1		494.9
Purchases of available-for-sale securities	—		(632.5)
Purchases of fixed assets	(137.7)		(133.4)
Proceeds from sale of long-term investment	20.6		—
Purchases of long-term investments	(10.2)		(8.7)
Business acquisitions	(3,241.8)		(157.3)
Other	(4.8)		1.1

Net cash used in investing activities	(2,814.8)		(479.8)
Financing activities:
Tax payment related to net share settlements on restricted stock awards	(90.6)		(59.1)
Issuance of common stock	22.3		19.6
Payment for settlement of convertible notes	(1,166.8)		—
Proceeds from issuance of debt	3,248.9		—
Cost of debt	(22.4)		—
Repayment of debt	(200.0)		—
Settlement of capped calls	140.1		—
Loan repayment	—		(0.2)
Repurchase of common stock	—		(200.0)
Payment of contingent earn-out consideration	(26.9)		—
Net cash provided by (used in) financing activities	1,904.6		(239.7)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents	(18.6)		(2.7)
Net change in cash, cash equivalents, and restricted cash and cash equivalents	(893.0)		(703.0)
Cash, cash equivalents, and restricted cash and cash equivalents, beginning of year (1)	2,195.3		2,060.2
Cash, cash equivalents, and restricted cash and cash equivalents, end of period (1)	$	1,302.3	$	1,357.2

(1) Cash, cash equivalents and restricted cash and cash equivalents shown on our Condensed Consolidated Statements of Cash Flow includes amounts in the Cash and cash equivalents, Restricted cash and cash equivalents, and Long-term restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet.

See accompanying Notes.

TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

(in millions)


	Three Months Ended December 31, 2022

	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholder's Equity
	Shares	Amount				Shares	Amount

Balance, September 30, 2022	191.2	$	1.9	$	8,760.5	(23.7)	$	(1,020.6)	$	1,928.0	$	(236.3)	$	9,433.5
Net income	—	—		—		—	—		(153.4)		—		(153.4)
Change in cumulative foreign currency translation adjustment	—	—		—		—	—		—		100.7		100.7
Net unrealized gain on available-for-sale securities, net of tax	—	—		—		—	—		—		1.4		1.4
Stock-based compensation	—	—		104.2		—	—		—		—		104.2
Issuance of restricted stock, net of forfeitures and cancellations	0.4	—		—		—	—		—		—		—
Net share settlement of restricted stock awards	(0.1)	—		(12.9)		—	—		—		—		(12.9)
Exercise of stock options	—	—		0.1		—	—		—		—		0.1
Issuance of shares related to Popcore acquisition	0.6	—		57.8		—	—		—		—		57.8
Stock-based compensation assumed in Zynga Acquisition	—	—		8.1		—	—		—		—		8.1
Employee share purchase plan settlement	0.1	—		10.9		—	—		—		—		10.9
Balance, December 31, 2022	192.2	$	1.9	$	8,928.7	(23.7)	$	(1,020.6)	$	1,774.6	$	(134.2)	$	9,550.4


	Three Months Ended December 31, 2021

	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholder's Equity
	Shares	Amount				Shares	Amount

Balance, September 30, 2021	138.9	$	1.4	$	2,475.1	(23.7)	$	(1,020.6)	$	2,033.5	$	(19.7)	$	3,469.7
Net income	—	—		—		—	—		144.6		—		144.6
Change in cumulative foreign currency translation adjustment	—	—		—		—	—		—		(13.5)		(13.5)
Net unrealized gain on available-for-sale securities, net of taxes	—	—		—		—	—		—		(1.4)		(1.4)
Stock-based compensation	—	—		61.7		—	—		—		—		61.7

Issuance of restricted stock, net of forfeitures and cancellations	0.1	—		—		—	—		—		—		—
Net share settlement of restricted stock awards	—	—		(5.8)		—	—		—		—		(5.8)
Employee share purchase plan settlement	0.1	—		10.4		—	—		—		—		10.4
Balance, December 31, 2021	139.1	$	1.4	$	2,541.4	(23.7)	$	(1,020.6)	$	2,178.1	$	(34.6)	$	3,665.7

See accompanying Notes.


	Nine Months Ended December 31, 2022
	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount				Shares	Amount

Balance, March 31, 2022	139.0	$	1.4	$	2,597.2	(23.7)	$	(1,020.6)	$	2,289.0	$	(57.3)	$	3,809.7
Net loss	—	—		—		—	—		(514.4)		—		(514.4)
Change in cumulative foreign currency translation adjustment	—	—		—		—	—		—		(78.4)		(78.4)
Net unrealized gain on available-for-sale securities, net of taxes	—	—		—		—	—		—		1.5		1.5
Stock-based compensation	—	—		290.5		—	—		—		—		290.5

Issuance of restricted stock, net of forfeitures and cancellations	2.2	—		—		—	—		—		—		—
Exercise of stock options	0.9	—		42.9		—	—		—		—		42.9
Net share settlement of restricted stock awards	(0.7)	—		(90.6)		—	—		—		—		(90.6)
Employee share purchase plan settlement	0.2	—		22.3		—	—		—		—		22.3
Issuance of shares related to Zynga Acquisition	46.3	0.5		5,377.2		—	—		—		—		5,377.7
Issuance of shares related to Popcore acquisition	0.6	—		57.8		—	—		—		—		57.8
Stock-based compensation assumed in Zynga Acquisition	—	—		151.7		—	—		—		—		151.7
Issuance of shares related to Zynga convertible notes	3.7	—		479.7		—	—		—		—		479.7
Balance, December 31, 2022	192.2	$	1.9	$	8,928.7	(23.7)	$	(1,020.6)	$	1,774.6	$	(134.2)	$	9,550.4


	Nine Months Ended December 31, 2021
	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount				Shares	Amount

Balance, March 31, 2021	137.6	$	1.4	$	2,288.8	(22.4)	$	(820.6)	$	1,871.0	$	(8.7)	$	3,331.9
Net income	—	—		—		—	—		307.1		—		307.1
Change in cumulative foreign currency translation adjustment	—	—		—		—	—		—		(24.1)		(24.1)
Net unrealized gain on available-for-sale securities, net of taxes	—	—		—		—	—		—		(1.8)		(1.8)
Stock-based compensation	—	—		198.0		—	—		—		—		198.0
Repurchased common stock	—	—		—		(1.3)	(200.0)		—		—		(200.0)
Issuance of restricted stock, net of forfeitures and cancellations	1.1	—		—		—	—		—		—		—
Net share settlement of restricted stock awards	(0.3)	—		(59.1)		—	—		—		—		(59.1)
Employee share purchase plan settlement	0.2	—		19.6		—	—		—		—		19.6
Issuance of shares related to Nordeus acquisition	0.5	—		94.1		—	—		—		—		94.1
Balance, December 31, 2021	139.1	$	1.4	$	2,541.4	(23.7)	$	(1,020.6)	$	2,178.1	$	(34.6)	$	3,665.7

See accompanying Notes.

Table of Contents

TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in millions, except per share amounts)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Take-Two Interactive Software, Inc. (the "Company," "we," "us," or similar pronouns) was incorporated in the state of Delaware in 1993. We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe. We develop and publish products principally through Rockstar Games, 2K, Private Division, and Zynga. Our products are designed for console gaming systems, personal computers ("PC"), and mobile including smart phones and tablets ("Mobile"), and are delivered through physical retail, digital download, online platforms, and cloud streaming services.

Acquisition of Zynga

On May 23, 2022, we completed our acquisition of Zynga Inc. ("Zynga"), a leading developer of mobile games. Refer to Note 14 - Acquisitions for additional information.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements are unaudited and include the accounts of the Company and its wholly-owned subsidiaries and, in our opinion, reflect all normal and recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows. Interim results may not be indicative of the results that may be expected for the full fiscal year. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of these Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. As permitted under U.S. GAAP, interim accounting for certain expenses, including income taxes, are based on full year assumptions when appropriate. Actual results could differ materially from those estimates, including as a result of the COVID-19 pandemic, which may affect economic conditions in a number of different ways and result in uncertainty and risk.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual Consolidated Financial Statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.

Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.

We are reiterating our significant accounting policy on revenue recognition included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, including certain revenue policies applied upon the close of the Zynga acquisition.

Revenue Recognition

We derive revenue primarily from the sale of our interactive entertainment content, principally for console gaming systems, PC, and Mobile. We also generate revenue from advertising within our software products.

Game. Our interactive entertainment content consists of full game software products that may contain offline gameplay, online gameplay, or a combination of offline and online gameplay. We may also sell separate downloadable add-on content to supplement our full game software products. Certain of our software products provide customers with the option to acquire virtual currency or make in-game purchases.

We determine revenue recognition by:

•identifying the contract, or contracts, with the customer;

•identifying the performance obligations in the contract;

•determining the transaction price;

•allocating the transaction price to performance obligations in the contract; and

•recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.

We recognize revenue in the amount that reflects the consideration we expect to receive in exchange for the sales of software products and game related services when control of the promised products and services is transferred to our customers and our performance obligations under the contract have been satisfied. Revenue is recorded net of transaction taxes assessed by governmental authorities such as sales, value-added and other similar taxes.

Our software products are sold as full games, which typically provide access to the main game content, primarily for console and PC. Generally, our full game software products deliver a license of our intellectual property that provides a functional offline gaming experience (i.e., one that does not require an Internet connection to access the main game content or other significant game related services). We recognize revenue related to the license of our intellectual property that provides offline functionality at the time control of the products has been transferred to our customers (i.e. upon delivery of the software product).

In addition, some of our full game software products that provide a functional offline gaming experience may also include significant game related services delivered over time, such as online functionality that is dependent upon online support services and/or additional free content updates. For full game sales that offer offline functionality and significant game related services we evaluate whether the license of our intellectual property and the game related services are distinct and separable. This evaluation is performed for each software product sold. If we determine that our software products contain a license of intellectual property separate from the game related services (i.e. multiple performance obligations), we estimate a standalone selling price for each identified performance obligation. We allocate the transaction price to each performance obligation using a relative standalone selling price method (the transaction price is allocated to a performance obligation based on the proportion of the standalone selling price of each performance obligation to the sum of the standalone selling prices for all performance obligations in the contract). For the portion of the transaction price allocable to the license, revenue is recognized when the customer takes control of the product. For the portion of the transaction price allocated to game related services, revenue is recognized ratably over an estimated service period for the related software product. We also defer related product costs and recognize the costs as the revenues are recognized.

Certain of our full game software products are delivered primarily as an online gaming experience with substantially all gameplay requiring online access to our game related services. We recognize revenue for full game software products that are dependent on our game related services over an estimated service period. For our full game online software products, we also defer related product costs and recognize the costs as the revenue is recognized.

We also sell separate downloadable add-on content to supplement our full game software products. Revenue from the sale of separate downloadable add-on content is evaluated for revenue recognition on the same basis as our full game software products.

In addition to sales of our full game software products, we also offer free-to-play software products, both of which may provide customers with the option to acquire virtual currency or make in-game purchases. For virtual currency and in-game purchases the satisfaction of our performance obligation is dependent on the nature of the virtual item purchased and as a result, we categorize our virtual items as follows:

•Consumable: Consumable virtual items represent items that can be consumed by a specific player action. Consumable virtual items do not result in a direct benefit that the player keeps or provide the player any continuing benefit following consumption, and they often enable a player to perform an in-game action immediately. For the sale of consumable virtual items, we recognize revenue as the items are consumed (i.e., over time), which approximates less than one month.

•Durable: Durable virtual items represent items that are accessible to the player over an extended period of time. We recognize revenue from the sale of durable virtual items ratably over the estimated service period for the applicable game (i.e., over time), which represents our best estimate of the average life of the durable virtual item.

Certain software products are sold to customers with a “street date” (the earliest date these products may be sold by these retailers). For the transaction price related to the license for these products that also provide a functional offline gaming experience, we recognize revenue on the later of the street date or the sale date as this is generally when we have transferred control of this performance obligation. For the sale of physical software products, recognition of revenue allocated to game related services does not begin until the product is sold-through by our customer to the end user. We currently estimate sell-through to the end user for all our titles to be approximately two months after we have sold-in the software products to retailers. Determining the estimated sell-through period requires management judgment and estimates.

In addition, some of our software products are sold as digital downloads. Revenue from digital downloads generally commences when the download is made available to the end user by a third-party digital storefront.

In certain countries, we use third-party licensees to distribute and host our games in accordance with license agreements, for which the licensees typically pay us a fixed minimum guarantee and sales-based royalties. These arrangements typically include multiple performance obligations, such as an upfront license of intellectual property and rights to future updates. Based on the allocated transaction price, we recognize revenue associated with the minimum guarantee when we transfer control of the upfront license of intellectual property (generally upon commercial launch) and the remaining portion ratably over the contractual term in which we provide the licensee with future update rights. Royalty payments in excess of the minimum guarantee are generally recognized when the licensed product is sold by the licensee.

Advertising. We have contractual relationships with advertising networks, agencies, advertising brokers, and directly with advertisers to display advertisements in our games. For our in-game advertising arrangements, our performance obligation is to provide the inventory for advertisements to be displayed in our games. For contracts made directly with advertisers, we are also obligated to serve the advertisements in our games. However, for those direct advertising arrangements, providing the advertising inventory and serving the advertisement is considered a single performance obligation, as the advertiser cannot benefit from the advertising space without its advertisements being displayed.

For in-game display advertisements, in-game offers, engagement advertisements, and other advertisements, our performance obligation is satisfied over the life of the contract, with revenue being recognized as advertising units are delivered.

Contract Balances

We generally record a receivable related to revenue when we have an unconditional right to invoice and receive payment, and we record deferred revenue when cash payments are received or due in advance of satisfying our performance obligations, even if amounts are refundable. Contract assets generally consist of arrangements for which we have recognized revenue to the extent it is probable that significant reversal will not occur but do not have a right to invoice as of the reporting date.

Our allowances for doubtful accounts are typically immaterial and, if required, are based on our best estimate of expected credit losses inherent in our accounts receivable balance.

Deferred revenue is comprised primarily of unsatisfied revenue related to the portion of the transaction price allocable to game related services of our full game software products and sales of virtual currency. These sales are typically invoiced at the beginning of the contract period, and revenue is recognized ratably over the estimated service period. Deferred revenue may also include amounts related to software products with future street dates.

Refer to Note 2 - Revenue from Contracts with Customers for further information, including changes in deferred revenue during the period.

Principal Agent Considerations

We offer certain software products via third-party digital storefronts, such as Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve's Steam, Epic Games Store, Apple's App Store, and the Google Play Store. For sales of our software products via third-party digital storefronts, we determine whether or not we are acting as the principal in the sale to the end user, which we consider in determining if revenue should be reported based on the gross transaction price to the end user or based on the transaction price net of fees retained by the third-party digital storefront. An entity is the principal if it controls a good or service before it is transferred to the customer. Key indicators that we use in evaluating these sales transactions include, but are not limited to, the following:

•the underlying contract terms and conditions between the various parties to the transaction;

•which party is primarily responsible for fulfilling the promise to provide the specified good or service; and

•which party has discretion in establishing the price for the specified good or service.

Based on our evaluation of the above indicators, for sales arrangements via Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve's Steam, and Epic Games Store we have determined we are not the principal in the sales transaction to the end user and therefore we report revenue based on the consideration received from the digital storefront. For sales arrangements via Apple's App Store and the Google Play Store, we have determined that we are the principal to the end user and thus report revenue on a gross basis and mobile platform fees charged by these digital storefronts are expensed as incurred and reported within Cost of revenue.

Shipping and Handling

Shipping and handling costs are incurred to move physical software products to customers. We recognize all shipping and handling costs as an expense in Cost of revenue because we are responsible for delivery of the product to our customers prior to transfer of control to the customer.

Estimated Service Period

For certain performance obligations satisfied over time, we have determined that the estimated service period is the time period in which an average user plays our software products (“user life”) which most faithfully depicts the timing of satisfying our performance obligation. We consider a variety of data points when determining and subsequently reassessing the estimated service period for players of our software products. Primarily, we review the weighted average number of days between players’ first and last days played online. When a new game is launched and therefore no history of online player data is available, we consider other factors to determine the user life, such as the estimated service period of other games actively being sold with similar characteristics. We also consider known online trends, the service periods of our previously released software products, and, to the extent publicly available, the service periods of our competitors’ software products that are similar in nature to ours. We believe this provides a reasonable depiction of the transfer of our game related services to our customers, as it is the best representation of the period during which our customers play our software products. Determining the estimated service period is subjective and requires significant management judgment and estimates. Future usage patterns may differ from historical usage patterns, and therefore the estimated service period may change in the future. The estimated service periods for players of our current software products are generally between six and fifteen months depending on the software product.

Revenue Arrangements with Multiple Performance Obligations

Our contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together requires significant judgment. For software products in which the software license has offline functionality and benefits from meaningful game related services, which may include online functionality that is dependent on our online support services and/or additional free content updates, we believe we have separate performance obligations for the license of the intellectual property and the game related services. Additionally, because each of our product offerings has unique features and because we do not sell our game related services separately, we typically do not have observable standalone selling prices for each performance obligation. Significant judgment and estimates are also required to determine the standalone selling price for each distinct performance obligation and whether a discount needs to be allocated based on the relative standalone selling price of our products and services.

To estimate the standalone selling price for each performance obligation, we consider, to the extent available, a variety of data points such as past selling prices of the product or other similar products, competitor pricing, and market data. If observable pricing is not available, we use an expected cost-plus margin approach taking into account relevant costs including product development, post-release support, marketing and licensing costs. This evaluation is performed on a product by product basis.

Price Protection, Allowances for Returns, and Sales Incentives

We grant price protection and accept returns in connection with our distribution arrangements. Following reductions in the price of our physical software products, we grant price protection to permit customers to take credits against amounts they owe us with respect to merchandise unsold by them. Our customers must satisfy certain conditions to entitle them to receive price protection or return products, including compliance with applicable payment terms and confirmation of field inventory levels.

At contract inception and at each subsequent reporting period, we make estimates of price protection and product returns related to current period software product revenue. We estimate the amount of price protection and returns for software products based upon, among other factors, historical experience and performance of the titles in similar genres, historical performance of the hardware platform, customer inventory levels, analysis of sell-through rates, sales force and retail customer feedback, industry pricing, market conditions, and changes in demand and acceptance of our products by consumers.

We enter into various sales incentive arrangements with our customers, such as rebates, discounts, and cooperative marketing. These incentives are considered adjustments to the transaction price of our software products and are reflected as reductions to revenue. Sales incentives incurred by us for distinct goods or services received, such as the appearance of our products in a customer’s national circular ad, are included in Selling and marketing expense if there is a separate identifiable benefit and the benefit’s fair value can be established. Otherwise, such sales incentives are reflected as a reduction to revenue.

Revenue is recognized after deducting the estimated price protection, allowances for returns, and sales incentives, which are accounted for as variable consideration. Price protection, allowances for returns, and sales incentives are considered refund liabilities and are reported within Accrued expenses and other current liabilities on our Consolidated Balance Sheet.

Significant Estimates

Significant management judgment and estimates must be used in connection with many of the determinations described above, such as estimating the fair value allocation to distinct and separable performance obligations, the service period over which to defer recognition of revenue, and the amounts of price protection. We believe we can make reliable estimates. However, actual results may differ from initial estimates due to changes in circumstances, market conditions, and assumptions. Adjustments to estimates are recorded in the period in which they become known.

Payment Terms

Our payment terms and conditions vary by customer and typically provide net 30- to 60-day terms. In instances where the timing of revenue recognition differs from the timing of invoicing, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to our customer and payment for that product or service will be one year or less.

Recently Adopted Accounting Pronouncements

Accounting for Government Assistance

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on any entity's financial statements. The new guidance is effective for fiscal years beginning after December 15, 2021, with the new disclosures required on an annual basis, and can be applied either prospectively or retrospectively. We adopted the new guidance on April 1, 2022 and will include the disclosures as required in its annual reporting with respect to any government assistance or grants subject to the scope of the guidance to the extent material.

Accounting for Contract Assets and Contract Liabilities

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under this new standard, deferred revenue acquired in a business combination is measured pursuant to ASC 606, Revenue from Contracts with Customers, rather than its assumed acquisition date fair value under the current guidance. We adopted this effective April 1, 2022. The adoption of this update did not have an impact on our Condensed Consolidated Financial Statements and was applied to our acquisition of Zynga. Refer to Note 14 - Acquisitions.

Accounting for Convertible Debt

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for convertible instruments by reducing the number of accounting models and generally requiring that a convertible instrument be accounted for as a single liability measured at amortized cost, with no conversion feature separately recorded in equity. Similarly, no portion of issuance costs will be allocated to equity under the ASU. Further, the ASU amends the earnings per share guidance by requiring the diluted earnings per share calculation for convertible instruments to follow the if-converted method, with use of the treasury stock method no longer permitted. We adopted this effective April 1, 2022. The adoption of this update did not have an impact on our Condensed Consolidated Financial Statements.

2. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

Timing of recognition

Net revenue recognized at a point in time is primarily comprised of the portion of revenue from software products that is recognized when the customer takes control of the product (i.e. upon delivery of the software product).

Net revenue recognized over time is primarily comprised of revenue from our software products that include game related services, separate virtual currency transactions, and in-game purchases, which are recognized over an estimated service period. Over time net revenue includes in-game advertising.

Net revenue by timing of recognition was as follows:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2022		2021		2022		2021
Net revenue recognized:
Over time	$	1,120.0	$	555.6	$	3,043.9	$	1,665.4
Point in time	287.8		347.7		859.8		909.4
Total net revenue	$	1,407.8	$	903.3	$	3,903.7	$	2,574.8

Content

Recurrent consumer spending is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, in-game purchases, and in-game advertising.

Full game and other revenue primarily includes the initial sale of full game software products, which may include offline and/or significant game related services.

Net revenue by content was as follows:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2022		2021		2022		2021
Net revenue recognized:
Recurrent consumer spending	$	1,115.4	$	547.8	$	3,042.8	$	1,683.7
Full game and other	292.4		355.5		860.9		891.1
Total net revenue	$	1,407.8	$	903.3	$	3,903.7	$	2,574.8

Geography

We attribute net revenue to geographic regions based on software product destination. Net revenue by geographic region was as follows:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2022		2021		2022		2021
Net revenue recognized:
United States	$	886.8	$	534.9	$	2,412.6	$	1,543.0
International