Greetings, and welcome to Take 2 Interactive's fiscal 4th quarter 2012 results conference call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Diamond, Senior Vice President of Investor Relations And Corporate Communications for Take 2 Interactive.
Thank you, Mister Diamond. You may begin
Good afternoon. Welcome and thank you for joining Take 2's conference call to discuss its results for the 4th quarter and fiscal year 2012 ended March 31 2012. Today's call will be led by Strauss Zelnick, take to his chairman and chief executive officer Carl Sladoff, our chief operating officer, and Laney Goldstein, our chief financial officer. We will be available Before we begin, I'm obliged to review our safe harbor statement by reminding everyone that the statements made during this call that are not historical facts are considered forward looking statements of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward looking statements Actual operating results may vary significantly from these forward looking statements based on a variety of factors.
These important factors are described in our filings with including the company's annual report on Form 10 K for the fiscal year ended March 31, 20 These documents may be obtained from our website at www.take2games.com.
And now I'll turn the call over to Strauss. Thanks, Hank. Good afternoon, everyone, and thanks for joining us. Compelling entertainment franchises in our business and deliver them on any platform that's relevant to our audience. We're actively investing in both our core console and PC businesses as well as in offerings active, but we didn't achieve our revenue and profit goals.
Our financial results for the year were affected by our decision to postpone the release of several titles in order to allow for additional development time. Even though income may occasionally be deferred in the short term. As we announced in today's press release, we expect to generate substantial revenue growth and profitability in this fiscal year. Turning to our key achievements during the past fiscal year, LANOR and NBA 2K-twelve were created within commercial highlights. LA noire reinvented interactive storytelling.
This groundbreaking title from Rockstar Games received excellent reviews and according to NPD data for the US, with the highest in to date. The first video game ever selected for inclusion in the prestigious Tribeca film festival, la noire transcends the boundary interactive entertainment and cinema. NBA 2k12 built upon the franchise's tradition of excellence by delivering the top ranked and top selling basketball video game for the 11th year in a row. The title received the highest Metacritic score in the history of 2 K sports and was the 1st in our basketball series to downloadable add on content and a mobile version for iOS. Despite the challenge of the NBA lock out, For the 2nd year in a row, the title both sold in over 5,000,000 units and enabled 2 K sports to achieve profitability.
Operationally, we took several measures to bolster our already sound foundation for growth and efficiency. In November, we raised through a convertible notes offering on very attractive terms. Together with our improved, renewed credit facility, take 2 today possesses the strongest liquidity and balance sheet in its history and the ability to invest aggressively for long term growth. We also launched new online stores for Rockstar and 2 k these destinations enabled to consumers to discover and purchase games directly from our labels. Additionally, they offer branded merchandise that further and content and emerging platforms both enhanced our fiscal 2012 results and informed our business decisions for the future.
Specifically, we released 3 new titles for iOS, as well as our first offering for Android. Rockstar Games, Grand Theft Auto 3 10th edition for the first time delivered the full console experience of Grand Theft Auto to smartphones and tablets and has been our highest selling and most profitable mobile release to date. Mobile gaming, particularly on tablets, represents an important incremental growth opportunity for our company. And we'll continue to invest to bring both our catalog of titles as well as select new titles to mobile platforms. 2 k games launched our first social game, SIV World for Facebook, which received excellent reviews and is the most immersive game available on Facebook.
While not a meaningful contributor to revenue, this project was invaluable in helping us understand what success on social platforms. We'll apply this knowledge to our future social gaming initiatives. We expanded our frontline and catalog offerings for online retailers such as steam and game fly and cloud gaming services, including on live and Gaikai. And we continue to make substantial progress on our 3 online games for Asian markets. If successful, these initiatives will be significantly accretive to revenue and earnings, and provide a more predictable and recurring revenue stream other downloadable offerings, we grew our revenue from digitally delivered content to a record $107,000,000.
Representing 13% of our total net revenue in fiscal 2012. Our digitally delivered content not only generates incremental revenue, it also provides attractive margins, by making expanding our business and creating value over
time.
Be a success with initial selling of approximately 3,000,000 units. The New York Times wrote, quote, Max Payne 3 is a taut and compelling action game wrapped in the sumptuous, gritty, and delightful production detail that is the Rockstar Hallmark. G Four TV delivered a perfect score stating, quote, Max Payne 3 is a technological tour to force. These are just two examples of the many outstanding reviews that the title is received to date. A to congratulate the team at Rockstar for delivering what is shaping up to be another groundbreaking hit.
Building upon our momentum today, We have a terrific pipeline of titles in development for launch during the balance of the year beyond, which Carl will discuss. Today, as a result of the progress we've made over the past 5 years, Take 2 is stronger in every facet of its business and well positioned for growth and profitability. We're exceedingly optimistic about the outlook for our organization, which has never been more promising. I'll now turn the call over Carl.
Thanks, Strauss. Take 2 currently has the most robust development pipeline in the company's history. On June 1st, Rockstar will build upon the successful launch of Max Payne 3 with the release of the PC version, which will be followed by a dynamic lineup of innovative, downloadable Beginning in June and continuing throughout the summer and fall, new multiplayer maps, modes, items, playable characters, and challenges will be available on Xbox Live, PlayStation Network purchasing 3 multiplayer crews, which they can use across other Rockstar games in the future, including Grand Theft Auto V. This is an incredibly innovative approach to make multiplayer gaming deeper, richer, and easily accessible to newcomers and hardcore gamers. On June 19th, For Access Games will release Sid Meier Civilization 5, gods and kings, a massive expansion pack for the award winning strategy title, Spanding the breath of human civilization, this quintessential add on will make the civilization 5 experience even more addictive.
On June 26th, 2 k games will launch spec ops the line, a military shooter that combines intense action with a riveting narrative. Players will blast their way through a sandstorm ravaged Dubai with a variety of weapons and explosives, including the strategic use of sand, which can be used to bury their enemies. In addition to the single player campaign, spec ops the line features an expansive multiplayer experience that is fun for both casual and core gamers. Earlier this month, 2 k released a demo for the game on Xbox Live and PlayStation Network, and be sure to watch the launch of our television ad campaign during the upcoming NDA files. On September 18th, 2K games will launch Borderlands 2, the next installment in the critically acclaimed franchise that is sold in nearly 6,000,000 units worldwide.
Developed by your box software, the eagerly anticipated return of this shooter lueder will feature an environment, characters, and story line that are all larger than life. With action packed single player and cooperative multiplayer experiences, Borderlands 2 will continue to define the role playing shooter genre. The game was at PAX East this spring, and consumer reaction was outstanding, with gamers standing in line for hours to be among the first to play. In addition, Borderlands 2 was featured on the covers of the current issues of both PlayStation the official magazine and at gamer magazine. On October 2nd, 2 k Sports will release NBA 2 k 13.
The next installment in our number 1 rated and number 1 selling basketball franchise. 2 k sports has broken the sports gaming mode by bringing back legends like Michael Jordan Larry Bird, and Magic Johnson. The NBA 2k franchise will continue its strong charge ahead yet again this year, breaking new ground entering uncharted territory as it leads a new era of basketball video gaming. On October 9th, we k games will bring 1 of gaming's most beloved franchises back to fans with Xcom, enemy unknown. The team at For Access Games will build upon 4 gameplay experiences of the original XCOM by providing a strong emphasis on both deep strategy and intense tactical combat.
Players will defend against a terrifying alien invasion by managing resources, technology, and combat strategy. In addition, 2K Marin continues to move forward with the development of the shooter version of XCOM, which is now planned for release during fiscal year 2014. Earlier this month, 2K games announced that BioShock Infinite is now planned to launch on February 26, 2013. This highly anticipated title from irrational games will put players in the center of Booker DeWitt's struggle to escape from Columbia, a city in the skies of a 1912 America that might have been. Fans of the franchise can look forward to classic bioshock gameplay and an immersive story as well as exciting innovations that include aerial combat on high speed skylines and an arsenal new weapons and abilities.
Our 3 online initiatives in Asia are making significant progress. NBA 2k online is in development with Tencent for China and other key markets. We are very encouraged by the potential of this and expect to have some exciting news an online baseball game with Nexon Corporation and an MMOG with Excel games are both making great strides and building momentum. With e3 2 weeks away, We're looking forward to having many of our titles from 2K on display and available for hands on trial. We encourage you to stop by our booth and see for yourself why we're excited about our outlook for year and beyond.
Thanks, and I'd now like to turn the call over to Lainie. Thanks, Carl, and good afternoon, everyone. Today, I'll review our results for the fourth quarter and full year 2012, then provide some details around our outlook for the first quarter full year fiscal 2013. All of the numbers I'll be providing today are non GAAP results from continuing operations unless otherwise stated. Our press release provides a reconciliation of our GAAP to non GAAP measurements.
Starting with our results for fiscal 2012, we delivered net revenue of $825,800,000, down 27% from the prior year. The decrease is primarily due to the tremendously successful release of Red Dead Redemption in fiscal 2011. The strongest contributors to revenue were the releases of LA and AWARE, NBA 2k12, and Duke Nukem forever. Catalog sales accounted for approximately 32% of our net revenue, led by the Grand Theft Auto franchise and Red Dead Redemption. And revenue from digitally delivered content grew to a record $106,600,000, up 5% year over year, accounting for 13% of our total net revenue.
The largest contributors were offerings for the Grand Theft Auto franchise Red Dead Redemption and the Sid Meier Civilization franchise, which included downloadable add on content, mobile games, and full game downloads. Gross margin was 37%, down approximately four percentage points versus the prior year. The decrease resulted primarily from higher software development costs and royalties as a percentage of revenue due to the mix of titles released during the year. And non GAAP net loss was $59,400,000, or $0.71 per share as compared to non GAAP net income of $94,300,000 or $1.02 per share in fiscal 20 11. GAAP net loss from continuing operations was $107,700,000 or $1.30 per share.
Moving on to the fourth quarter, our results were within the outlook range we provided in our 3rd quarter earnings release. We delivered net revenue of $148,100,000, down 90% year over year, primarily due to the strong post launch performance of Red Dead Redemption in fiscal fourth quarter 20 11. The strongest contributors to revenue were the releases of NBA 2k12, Major League Baseball 2k12, and the darkness 2. Cadillac sales accounted for approximately 39 percent of our revenue during the fourth quarter, led by the Grand Theft Auto franchise, Red Dead Redemption, and the Sid Meier's civilization franchise. And digitally delivered content accounted for $27,600,000 or 19% of our net led by the Grand Theft Auto franchise, the Sid Meier Civilization franchise, and Red Dead Redemption.
Gross margin for the 4th quarter was 22% down from 35% in the prior year's fourth quarter. This decrease was primarily driven by higher external royalties, resulting from a change in the mix of revenues and higher license fees. Operating expenses were approximately $83,500,000, up about $6,000,000 versus the prior year 4th quarter, driven by higher selling and marketing to support the launch primarily due to the convertible notes that we issued in November. A non GAAP net loss was $50,900,000 or $0.60 per share as compared to $14,400,000 or $0.18 per share in fiscal fourth quarter 20 11. GAAP net loss from continuing operations was $66,000,000 or $0.78 per share.
Turning to some key items from our balance sheet and more 31, 2012, as compared to December 31, 2011. Our cash balance decreased to 420,000,000 Our accounts receivable balance decreased to $45,000,000, primarily reflecting lower sales during the fourth quarter. Inventory remains flat at approximately $22,000,000, and software development costs and licenses increased to $316,000,000 reflecting the significant development efforts around our pipeline of upcoming releases. Now I will review our financial outlook for the full year in first quarter fiscal 2013, which is all provided on a non GAAP basis. For the full year, we expect revenue to more than double to a range of 1.7 $5,000,000,000 to $1,850,000,000 and non GAAP net income to range from $2 per share to $2.25 per share.
While we expect to report a net loss in the first quarter, based on our current outlook, we expect to be profitable on a non GAAP basis in each of the remaining 3 quarters of the year. Our fiscal 2013 Because our earnings per share for the first quarter and full fiscal year are calculated using different share accounts, the impact of this one time payment Our non GAAP net income per share is $0.18 for the first quarter and $0.13 for the full range assumes the on time release of the titles we have announced to date, as well as other titles yet to be announced cycle 2013. We expect the revenue breakdown from our labels to be roughly 60% from Rockstar and 40% from 2K. We expect our geographic revenue split to be about 50% United States and 50% international. We expect gross margins in the low 40 up from 37% in fiscal 2012.
This increase is driven both by our strong slate of new releases and the expiration of our current license with the MLB, which generated a loss of approximately $30,000,000 in fiscal 2012, and approximately 60% of this loss will go away this year and the entire amount net year. Total operating expenses are expected to increase by approximately 40% from fiscal 2012 primarily driven higher marketing expense to support our new releases and the $15,000,000 one time payment in June recorded in G And A expense. Selling and marketing expense is expected to be about 16% of net revenue using the midpoint of our outlook range. And we project interest and other expense of approximately $13,000,000, tax expense of about $10,000,000 and fully diluted shares of approximately $117,000,000, which includes 5,000,000 of participating shares for our unvested restricted stock grants and 26,000,000 shares, representing the potential dilution from our convertible notes under the if converted method of accounting. Turning to our outlook for the first quarter of fiscal 2013.
$225,000,000 to $275,000,000 and a non GAAP net loss ranging from $0.75 to $0.60 per share. Which includes the $0.18 per share negative impact from the one time payment. The majority of our revenue in the first quarter is expected to come from the releases of Maxim 3 and backups of the line. We expect 1st quarter gross profit margins in the mid-30s. Total operating expenses are rates increased by approximately $17,000,000 or 15 percent from the prior year's first quarter.
This increase is primarily driven by the $60,000,000 one time payment in G And A expense. Selling and marketing expense is expected to be about 31% of net revenue based on the midpoint of our outlook range. Our first quarter outlook also reflects interest and other expense of approximately $3,000,000, tax expense of about 2,500,000 dollars and their share count of approximately $85,000,000. Today, our company benefits from a strong balance sheet and sound infrastructure, which positions us to support our strategic initiatives and to invest for growth. Couples with our industry leading IP and world class creative talent, we believe our organization has significant competitive advantage in the market.
Fiscal 2013 is poised to be one of Take 2's best years ever, and we are diligently focused on delivering growth and profits and driving shareholder value both this year and over
forward to seeing many of you at E3 and sharing our progress with you in the coming months. I'd like to thank our colleagues for their continued dedication and hard work throughout this past year and our shareholders for their valued support. And now we'll take your questions.
And answer Our first question is from the line of Arvind Bhatia with Cernigy. Please go ahead.
Okay. Thank you. I wanted to see if you can shed some more light on how you're looking at the next generation. And if you're starting to make some there. And if your fiscal 13 guidance incorporates any new investments, so for new technology, that's one And just wondering, if you can, you know, talk about the retail environment today and, particularly in Europe, what you're seeing there.
Thank you.
Thanks, Arvind. In terms of next gen, we're going to leave it to our business partner to discuss that and make announcements when they feel the time is right. But I think you're right to ask the question. Because those transitions, you know, can actually make great challenges for certain companies and create opportunities for others. Typically, the companies that are best positioned through the hardware transitions have been those with strong technology, strong owned intellectual property, top talent and strong balance sheets.
And we think that describes us and doesn't describe too many of our competitors. It will be a challenge for us. Frankly, we see it as an enormous opportunity, and we expect to be at the front of the line when the time comes. In terms of the retail environment, I think what we've seen in the U. S.
In the past quarter has been a dearth of high quality releases. Our strategy for the better part of 5 years has been a limited number of the highest quality releases. We're proud of the track record we've developed in executing against that strategy. And, I think what you've seen is just not that many releases, and some of the releases that have come out in the last quarter have not been of the same quality, as some might have hoped. It doesn't just affect frontline.
Of course, it affects catalog because floor traffic, foot traffic affects catalog. And in terms of of Europe, we are witnessing some softness in Europe, and we're not immune from that. And hopefully that that's something that will turn around. But right now, we are seeing some of that.
Great. I appreciate it. Thank you.
Next question is from the line of Justin Post with Bank of America Merrill Lynch. Please go ahead.
Great. Thank you. I guess, saying 60 percent of your revenues from Rockstar, which implies about $1,100,000,000 of revenues this year. And of course, you had issues with, title slippage in the past. Our titles will indeed make the year and you don't have to lower numbers this year as we work through it.
Are you more farther along in your titles this year than you were at this point last year? And then the second question is, we are seeing incremental share dilution from the convertible and other stock option issuances. What can the company do to really stop the stock dilution and keep the share count flat instead of keep growing. Thank you.
Thanks for your question. Yeah, I mean, look, this is this past year, we we've acknowledged that the financial results were meaningfully influenced negatively by slippage. And obviously, titles have slipped last year are farther along in their development cycles. So we feel quite confident about our upcoming release schedule, not just Rockstar, release scheduled with 2 Ks as well. And in terms of share count, as you know, one does have the option to satisfy converts in cash or in stock.
We do account as though those will be satisfied with equity. And as you know, the share count changes depending on whether you're reporting profits or losses. So it can appear to be more of a moving target than it is. But you know, we, we felt that the right way to finance the organization has been the way we've done it. We were not unmindful of the meltdown that occurred in the marketplace in 2008.
And we think at the end of the day, the most important thing is to be a solid enterprise that can invest for the future. We have indeed taken some dilution. Look, when we compensate employees with equity, we take some dilution. The question is is not the share count. The question is whether we're creating value at the at the same time because, obviously, if our behavior is accretive, no one's concerned about the share count.
So when we did the last convert, it was our goal that it would be accretive in the way that we spent that money. So far that money resides on our balance sheet. The good news is it's rather low cost money.
Okay. And last one, do
you think the market is a difficult software market so far year to date? How receptive do you plan it to be for your tiles? And what do you think will make your titles kind of stand out in what's looking to be a pretty competitive second half?
I agree with you. I think second half is competitive. You know, we we are putting out titles that are anxiously anticipated by the market, and we've already discussed the lineup, but you know, it it includes spec ops, which is coming up, ex Com enemy unknown borderlands too, and they NBA 2k13 in BioShock infinite and other titles that we haven't announced yet. So these are immensely high quality titles, and and we feel great about them. Again, the strategy that we pursued for 5 years has proven to be a sound 1, which is a limited number of the highest quality releases.
There is no question that the market is not accepting lower quality releases. There's just no question about that. But our strategy is only to put out high quality releases. We're seeing the benefit of that, not just in our front line. We're seeing the benefit in catalog and as our as the digitally distributed business grows, we're seeing that our catalog has a great deal of value there.
Most recently, with the profitable launch of Grand Theft Auto the 10th anniversary edition for mobile iOS and Android, extraordinarily successful release for us. And that, that intellectual property is ten years old.
Alright. Thank you.
Thank you. Our next question comes from the line of Daniel Ernst with Hudson Square Research. Please go ahead.
Yes. Good evening. Thanks for taking my call. Two questions if I The first, a version of which, I asked on the last call, but given the relative success that you've had with the GTA on on mobile, and noting that it was one of the highest selling games and a profitable game for you. Are we kind of getting to the point where, you know, the iPad and other platforms are starting to offer you the ability to create, and so that's where I would consider AAA mobile experience from the ground up rather than taking a game you've had out before and repurposing it for Ipad, are there now opportunities given the size of the platform to create, take 2 level games, rockstar level games, you know, exclusively for or explicitly for the iPad and some more platforms?
And then secondly, also kind of on digital, looking at the, the formidable, lineup of games you have for digital DLC you have for Max Payne know in the past, you talked about how that type of content was equally successful, if not more successful, when bundled in with with retail, with why, where are your clients, so your customers are used to buying also considering retail versions of that DLC for Max Payne? Thanks.
Yeah, in terms of tablets, we are incredibly bullish on tablets because we believe tablets will ubiquitous in the coming years. We've been saying that for several years, pretty loudly. And tablets, once they, they're processing power storage power is equivalent to a PC. And if you believe in Moore's Law, as I do, release currently do, that will be the case, in relatively short order. So it should be a great gaming platform.
It's highly portable, very high quality, great display, and you know, at a, at a controller and a pair of headphones and you're all set. The business model remains to be seen, and there's a lot of work that needs to be done on the model because it is somewhat hard to discover content for the platforms, and it has to become seamless. And you don't want to count out the, the consoles because you know, consoles relied on their success, you know, couple of decades ago for the fact on the fact that they were much better game platforms than PCs. Today, PC is a terrifically good paint game platform, yet the lion's share of high end AAA content is made of able and sold through the consoles. So I don't mean to count them out at all.
The tablets, I think, will give us a terrific opportunity. Will they be available for will they be a great opportunity for frontline product? Again, when when the processing power is there and when the storage is there, I see no reason why not. However, do have to work on the business model and how we get that product in the hands of consumers. And in terms of Max Payne 3, you know, we have a terrifically, robust line up of down mobile content coming.
You know, we our aim at this company is to make, make our product available to consumers. However, they want it to be very flexible how we do it, but I'm not gonna announce any particular, skews right now.
Great. Thanks for the color.
Thank you. Our next question comes from the line of Mike Hickey with National Alliance Securities. Please go ahead.
Hey guys, thank you for taking my questions. Strauss, just curious on Max, it looks like your initial sell in came down from what you're thinking originally Obviously, the market's been difficult. But can you give us any color as to if that is the case and why you think it is and maybe some insight into inventory level I have a follow-up.
Mike, you know, we've announced where we've sold in roughly 3,000,000 units. That is a terrific number by any standard including our own. So no. Nothing nothing came down, and we're we're really pleased with the way that's rolling out.
Okay. Fair enough. And then, Rockstar experimented with adding some narrative elements to multi player experiments on Max Payne. Just curious if you can give us any feedback on consumer response in terms of engagement and how important that might be in future releases. And I have one more question, if that's possible.
Hey, Mike, it's Carl. The the multiplayer component of Max Payne is is simply just fantastic. And the, obviously, there's been you can you can follow the buzz yourself when you look at chat rooms and what people are saying about it. And I think that the Rockstar guys have done an, or taken multi player to a different kind of level. It's a very different kind of multiplayer than they than they tackled before and let alone anybody in the industry.
So we're really pleased with how it's rolling out at this point. And frankly, we think it's going to be a, a very important component this game, on
a go forward basis.
And one of the reasons why people continue to buy and continue to play it.
Okay. Thank you. And last question is, I'm just curious how you guys are kind of and you've mentioned this a little bit strong, but philosophically, how you're approaching the next gen opportunity, maybe more on Sony and Microsoft. I know you said challenge opportunities. And I think it balances more as an opportunity for you.
And certainly, you still seem kind of bullish on Confuls, a few people think they may be dead. But thinking about how less development capacity is in the market today than when the cycle started, and the potential maybe that the installed base to grow faster if they change the sales model. Just curious how that impacts your thoughts on IP creation maybe building dev capacity or potential M and A opportunities into the next gen systems for Microsoft and Sony.
Hey, Mike, it's Carl. So just speaking to development capacity, it's sort of it's interesting the way you position it as development as he's decreasing in the industry. I'm not sure that that's how I would characterize it. They may be empirically the case, but I think what you're really seeing is fewer titles, but they're bigger types. And that doesn't necessarily translate to decreased development capacity.
You're just talking about bigger projects, just fewer releases. And I think you will see that. You're seeing it now. I think you're going to see it going forward further into this general, in this generation and to the next generation whenever that comes. And I think that's, that that's something that we're experiencing.
And we've actually been strategic pursuing that strategy for, you know, the better part of the last 4 or 5 years, and you see the rest of the industry coming along. So I don't think that's really changed for us. So if it's a change for other folks, I think they're going to have to change very quickly because, look, that, that ship has sailed. The number of titles that are out there in the market going to be reduced. There's no question about that.
But I still think there's an awful lot of development capacity out there and a lot of opportunity for us to continue to make great games, not only with existing franchises that we carry over into the next generation, but also with new IP. And as we've always said before, we need to invest in both. And we always feel strongly that we have to, we have to always be investing in both, new and existing IP because that's how we think that we keep the pipeline fresh and create the most value we can. So I hope that answers your question. I'm not sure if it did or didn't, but I think, that's how we look at the next gen Thanks,
Carl. Appreciate it.
Thank you. Our next question is from the line of Doug Crutz with Cowen and Company. Please go ahead.
Yeah. Thanks. You guys have clearly the the broadest and deepest lineup that you've ever had this year. And I guess the question is, and I think at the Sysco 14 and especially in the context of a potential console transition, do you feel like you have enough in the pipeline to to extend profitability out into 14 15, and then you haven't sort of used up a lot of a lot of franchises this year. Thanks.
Yeah. I mean, we feel we feel pretty good. It's not very good about the upcoming years, although obviously, we're not we're not providing any guidance or any insight into them, but we do feel good about it. The the time of transition you know, we'll we'll create challenges for for everyone whenever that occurs because as you know, the the tie ratios begin to decline meaningfully at the end of the cycle when announcements are being and the installed base is low at the launch of the new console. But I think all of the players in the industry would give some thoughts on what that means.
Historically, this business has had a time curve element, and the end of a cycle in the beginning of a new one has been a time when people see their revenues reduce and depending on what their fixed costs are could dip into losses, which is why challenges are created for the weaker companies. It is very important that we be strong enough to withstand any of the challenges that we find. Obviously, you know, we think we're being very thoughtful about the future, whatever it might bring. And we see primarily opportunity. As I said earlier, there are 4 elements that really matter in a transition, technology, talent, owned intellectual property and your balance sheet.
And, you know, we think we tick off all the boxes. So now I'm a big believer that arrogance is the enemy of continued success. We're taking this very seriously. There are gonna be challenges, but we feel like we're well positioned.
Yeah. And then, and again, And as we said before, it's Carl, we also are making investments in certain things that really have nothing to do with console cycles at all, which, for example, the 3 we've got going on in Asia and our online initiatives. If, yes, they are successful, they we do expect that they could become meaningful contributors to us and and smooth out that process. Out that earnings curve.
Okay. Thank you.
And our next question comes from the line of Ben Schachter with Macquarie Group. Go ahead.
Hey guys, a few questions. First one housekeeping. Can you just remind us what that $15,000,000 charge is for in 1Q? And then when you think about big AAA titles going forward, how does digital really change the revenue opportunity for those in terms of what's incremental, what can potentially you to drive the life of some of those titles? How big can those be as a percentage of the overall sales?
And then, Strauss, if you have any thoughts, just in general, we talk a lot about tablets and mobile devices. Seems clear that the next phase is going to be internet connectivity for more and more television screens. Any thoughts on how that impacts your business? Thanks.
Thanks, Ben. Yeah, the one time payment relates to a provision of a contract that's expected to be triggered in June. That was entered into several years ago. We have confidentiality agreement, around it, so we, we can't give any more detail, but we have no other obligation under that contract after the one time payment. So we're not happy about it, but it is what it is.
In terms of digital revenue, look, if you posit a time when the whole world becomes ephemeral and physical distribution goes away, then obviously not all that revenue is going to be incremental. A good deal of it will be replacement revenue. Right now, though, for us, a great deal of it is incremental revenue because it's affecting our catalog that may not be on the any longer, and obviously downloadable content has a physical element for us, many, many occasions, but also a digitally distributed element. So I think the answer is, you know, all of the above. It's a good thing, bringing content to people where they want it, how they want it, on on economic terms that they find appealing, increases the size of the business and it is a big win for us.
Ultimately, we're ecumenical about how we get content into our consumers' hands. We don't care whether it's physical or digital. However, remember, physical goods are still 87% of our business in the 4th It is the lion's share of our business. Retail is our partner in this business, and that's not changing so very rapidly. And, on on tablets, I'm sorry.
Could you just repeat your question on tablets?
It was actually more on television screens. It seems like we spent a lot of time on tablets and then smartphones Internet now is going to be coming to television screens in a more meaningful way. How does that impact your business?
Well, you could imagine a situation where If you have a cloud gaming service and you you have an internet enabled television that's easy to use, then it'd be somebody easier for a consumer to to play a game on a big screen without the intermediation of a of another device, but I'm not sure that's a difference that makes a broader distribution is always a good thing for us. And if that occurs, you know, look, we were a launch partner with OnLive, you know, we're, you know, we're business with a guy, Kai, we we intend to be in business with anyone who speaks to consumers in the way they wanna be addressed. Thank you.
Our next question
is from the line of with MKM Partners. Please go ahead.
Yes. Thanks for taking my question. So let me ask, I guess, what appears to me is an obvious question. When I look at your guidance for the year, you're losing money in the first quarter. And then that means you're going to earn about $2.80 looking at the midpoints for the remaining 3 quarters of the year.
I can't get there unless I assume there's Grant Theft Auto Five. Am I thinking about this incorrectly or is there something else there that allows you to get to these numbers without Grand Theft Auto?
Yes. We've announced that Grand Theft Auto V is in full development. We haven't announced release that yet. What we have said about the year is that we have some titles that we expect to release that are not announced yet, and we have a terrific slate coming up. And that's the guidance that we want to give you as of now.
Okay. And then as a quick follow-up, when you look at your guidance for the year, how would you assume your free cash flow outlook shakes out from that EPS guidance? Is it a similar to EPS or are there other factors too?
We expect a strong, from our strong slate of fiscal 2003 releases, we expect to generate a significant amount of cash. But today, we're not gonna provide a fiscal year end cash forecast, right now.
Thank you.
Is from the line of Edward Williams with BMO Capital Markets. Please go ahead.
Hi, everybody. This is Tom Andrews standing in for Edward. Can you talk a little bit more about your, initiatives in Asia, specifically, you know, how much has been, how much you guys are investing over there? And, when, you know, timing of when we might see these products begin to launch and maybe what the business models are like. And then also with the, DLC content, for Max Payne.
What kind of an attach rate are you expecting, for that?
Yeah. We we've we set up our Asia projects so that, you know, we worked with really capable partners in Asia for a couple of reasons. The the the primary reason was you know, we we have a healthy respect for things that we don't know. And these are where when we entered into these projects, markets, we didn't know that well in some formats. We didn't have a great deal experiencing.
And we were fortunate in that we're working with the very best in the business Tencent, China, Exxon and XL games in Korea. And these are very robust that have enormous appetite for many games. So one of the reasons we chose not to, for example, invest huge money in the U. S. Market is because the exceedingly challenging from an MMO point of view.
You know, it's, it is a market that really has only accepted 2 MMOs and the the business here in a big way, you know, one that's obviously exceedingly robust now, one that was very robust until relatively recently. And apart from that, there been a lot of consumer acceptance. You can juxtapose that against China, where at any given time, 10 to 20 MMOs are generating a lot of revenue and a lot of profitability in the market. That's pretty compelling to us, and that's why we chose to pursue those markets first. And because we worked with partners, we were all also able to mitigate meaningfully our exposure, in the case that things don't work out as planned.
So we don't have a meaningful financial exposure. We do, however, have a very meaningful opportunity to make money in the market if things go well. We happen to announce launch dates, we do expect to be able to share some progress in the relatively near future. On Max, you know, we don't project tie ratios. And I guess it's, you know, goes without saying, but I'll say it anyhow.
It's our aim to delight consumers. If we give consumers what they want, they show up for it. I have, I think, Max is an amazing game. The multiplayer is amazing. The reviews reflect that.
Then you times review is just extraordinary and Guardian review is extraordinary. IGN review is extraordinary, and the word-of-mouth is extraordinary. I think the downloadable dental be incredible. It certainly was on Red Dead. You know, I'm not sure you can look forward to any zombies but you never know.
And, you know, I think it's going to be phenomenally successful. We don't project high ratios.
Thank you. Our next question
comes from the line of Mike Olson with Piper Jaffray.
Please go ahead. Hi there.
This Andrew Connor speaking on behalf of Mike. So far, it seems you all have been somewhat conservative in terms of expanding into mobile and social gaming. And as you guys look out into the new console transition period with lower installed bases, is it possible you will get more aggressive on those fronts to sort of fill the gap? Thanks.
Well, as Carl said earlier, one of the reasons that we're excited about these, projects that are ongoing is if they're successful, they have the opportunity to diversify and smooth our revenues and profits. So that would be a good thing in the case of a dip related to a console transition. But that's not our primary mode of because in order for that to happen, we still have to deliver great titles that consumers love. And 1st and foremost, our mission is to serve consumers, is bring them in incredibly great interactive entertainment, where they want it, when they want it, how they want it. You know, have we been conservative?
I think we've been mindful of where we came from and where expertise lies and we've we've bet on our intellectual property and we've bet on our own expertise and then we've worked with A plus partners where we can learn something from them where they're also willing to share the risk with us. As we get more confident, as we have some success, which I feel strongly that we will, I assume, will also be willing to move out along the risk spectrum.
Yes. I mean, I also think it's important that when you put when you group mobile and social together, I think it's important to make a distinction because, the enormous part of the market for mobile and social to this point has been a very casual consumer. And while we do do some casual games, that has not been our focus. So I wouldn't necessarily consider us being less aggressive you take into consideration that we know who we are, we know who we're not. I think we've been very aggressive in terms of using those platforms in the context of the type of games that we do.
But from a for for the most part, those platforms have been more casual.
Thank you. Our next question is from the line of Joel Velakowski with Weintraub Capital Management. Please go ahead.
Yes, thanks. I have a question about your digital revenue growth and that is, seems to be
an important part the future of
the company. And I'm wondering if,
the 5% growth that
you exhibited this year is something you're happy with?
And do you have any thoughts about
further growth in the upcoming years?
Yes. Again, there's no distinction between digitally delivered revenue and physical revenue. And we don't manage to a number there. We make our products available on whatever platforms we think will resonate with consumers is the cost to making products available on platforms. So we have to be mindful of the investment we make to to bring a product to a different platform and make sure that we project profitability.
We're being as aggressive as we can possibly be in terms of being ubiquitous, while still being mindful that there's a cost to that ubiquity. But we're not managing to a particular number and digitally distributed content is the identical content. Consumers don't care about, you know, how they get stuff. Consumers care about quality, convenience, and We need to be focused on how do you serve consumers? What are the cost to con to serve them?
How much money can we make? What are the price points? What are the marketing costs? What are the margins, you know, what other costs are there. And our goal and our strategy is to have ubiquitous distribution And if we had to deliver our products by carrier pigeon and we could make a profit doing it, we'd do that too.
There's no magic digitally distributed content equally, all digital is not created all the same. We have 0 interest in negative margin businesses.
Thank you. We have no further questions in queue at this time. Let's turn the floor back over to management any closing remarks?
Well, we'd like to thank you very much for joining us today. We have, we're awfully proud of the progress we've made. We have, an extraordinary for this year. I think we're guiding to $1,750,000,000 to $1,850,000,000 in revenue, a very big number for our company, $2.25 a share in non GAAP. Our profit are expected.
We have an awful lot of work to do to deliver that and we are bound and determined to do so. We thank you for your support and thank you joining us today.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. You for your participation