Greetings. Welcome to Take-Two Interactive's fiscal fourth quarter 2012 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications for Take-Two Interactive. Thank you, Mr. Diamond. You may begin.
Good afternoon. Welcome. Thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2012, ended March 31, 2012. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer, Karl Slatoff, our Chief Operating Officer, and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. 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 under federal securities laws. These forward-looking statements are based on the beliefs 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 the SEC, including the company's annual report on Form 10-K for the fiscal year ended March 31, 2011. These documents may be obtained from our website at www.take2games.com. Now I'll turn the call over to Strauss.
Thanks, Hank. Good afternoon, everyone. Thanks for joining us. Take-Two's strategy is to develop the highest quality, most 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 for online and mobile platforms. During fiscal 2012, we made significant progress in our creative, operational, and strategic objectives. 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. We believe that this unwavering commitment to quality is the right approach for maximizing shareholder value, 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, L.A. Noire and NBA 2K12 were creative and commercial highlights. L.A. Noire reinvented interactive storytelling. This groundbreaking title from Rockstar Games received excellent reviews and according to NPD data for the U.S., was the highest-selling new intellectual property in our industry during 2011, with over 5 million units sold to date. The first video game ever selected for inclusion in the prestigious Tribeca Film Festival, L.A. Noire transcends the boundary between 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 2K Sports and was the first in our basketball series to offer downloadable add-on content and a mobile version for iOS. Despite the challenge of the NBA lockout, for the second year in a row, the title both sold in over 5 million units and enabled 2K Sports to achieve profitability. Operationally, we took several measures to bolster our already sound foundation for growth and efficiency. In November, we raised $250 million through a convertible notes offering on very attractive terms. Together with our improved, renewed credit facility, Take-Two 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 2K. These destinations enable consumers to discover and purchase games directly from our labels.
Additionally, they offer branded merchandise that further immerses consumers in our franchises and promotes loyalty. Strategically, our continued investment in digitally delivered content and emerging platforms both enhanced our fiscal 2012 results and informed our business decisions for the future. Specifically, we released three new titles for iOS, as well as our first offering for Android. Rockstar Games' Grand Theft Auto III: 10 Anniversary 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 deep catalog of titles as well as select new titles to mobile platforms.
2K Games launched our first social game, CivWorld, 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 drives 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 GameFly and cloud gaming services including OnLive and Gaikai. We continued to make substantial progress on our three 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 to complement our core business.
As a result of the success of our add-on content, mobile, and other downloadable offerings, we grew our revenue from digitally delivered content to a record $107 million, 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 our products available wherever and however consumers want them, we're maximizing our audiences, expanding our business, and creating value over time. Fiscal 2013 kicked off with last week's launch of "Max Payne 3." The title is already proving to be a success, with initial sell-in of approximately 3 million 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." G4 TV delivered a perfect score, stating, quote, "Max Payne 3 is a technological tour de force." These are just two examples of the many outstanding reviews that the title has received to date. I'd like to congratulate the team at Rockstar for delivering what is shaping up to be another groundbreaking hit. Building upon our momentum to date, we have a terrific pipeline of titles in development for launch during the balance of the year and beyond, which Karl will discuss. Today, as a result of the progress we've made over the past five years, Take-Two 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 to Karl.
Thanks, Strauss. Take-Two 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 content. 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, and on PC platforms. Consumers can pre-order all of this upcoming content at a discount by purchasing the "Max Payne 3" Rockstar Pass.
For the first time, members of the Rockstar Games Social Club can create "Max Payne 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 making multiplayer gaming deeper, richer, and easily accessible to newcomers and hardcore gamers. On June 19th, Firaxis Games will release "Sid Meier's Civilization V: Gods & Kings," a massive expansion pack for the award-winning strategy title. Spanning the breadth of human civilization, this quintessential add-on will make the "Civilization V" experience even more addictive. On June 26th, 2K 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, 2K released a demo for the game on Xbox Live and PlayStation Network. Be sure to watch the launch of our television ad campaign during the upcoming NBA Finals. On September 18th, 2K Games will launch "Borderlands 2," the next installment in the critically acclaimed franchise that has sold in nearly six million units worldwide. Developed by Gearbox Software, the eagerly anticipated return of this shooter-looter will feature an environment, characters, and storyline 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 Game Informer. On October 2nd, 2K Sports will release "NBA 2K13," the next installment in our number one rated and number one selling basketball franchise. 2K Sports has broken the sports gaming mold 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 and entering uncharted territory as it leads a new era of basketball video gaming.
On October 9th, 2K Games will bring one of gaming's most beloved franchises back to fans with "XCOM: Enemy Unknown." The team at Firaxis Games will build upon the core 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 of new weapons and abilities. Our three 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 game and expect to have some exciting news to share regarding its upcoming commercial beta in the very near future. In addition, our projects to develop an online baseball game with Nexon Corporation and an MMOG with XL Games are both making great strides and building momentum. With E3 two 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 this year and beyond. Thanks, I'd now like to turn the call over to Lainie.
Thanks, Karl, good afternoon, everyone. Today, I'll review our results for the fourth quarter and full year fiscal 2012, then provide some details around our outlook for the first quarter and 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 $825.8 million, 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 L.A. Noire.
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 $106.6 million, 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's 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. Non-GAAP net loss was $59.4 million, or $0.71 per share, as compared to non-GAAP net income of $94.3 million or $1.02 per share in fiscal 2011.
GAAP net loss from continuing operations was $107.7 million or $1.30 per share. Moving on to the fourth quarter, our results were within the outlook range we provided in our third quarter earnings release. We delivered net revenue of $148.1 million, down 19% year-over-year, primarily due to the strong post-launch performance of "Red Dead Redemption" in fiscal fourth quarter 2011. The strongest contributors to revenue were the releases of "NBA 2K12," "Major League Baseball 2K12," and "The Darkness II." Catalog sales accounted for approximately 39% of our revenue during the fourth quarter, led by the "Grand Theft Auto" franchise, "Red Dead Redemption," and the "Sid Meier's Civilization" franchise.
Digitally delivered content accounted for $27.6 million, or 19% of our net revenue, led by the "Grand Theft Auto" franchise, the "Sid Meier's Civilization" franchise, and "Red Dead Redemption." Gross margin for the fourth 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 $83.5 million, up about $6 million versus the prior year's fourth quarter, driven by higher selling and marketing to support the launch of "The Darkness II." Interest in other expense increased primarily due to the convertible notes that we issued in November. Non-GAAP net loss was $50.9 million, or $0.60 per share, as compared to $14.4 million, or $0.18 per share in fiscal fourth quarter 2011.
GAAP net loss from continuing operations was $66 million or $0.78 per share. Turning to some key items from our balance sheet on March 31, 2012 as compared to December 31, 2011. Our cash balance decreased to $420 million. Our accounts receivable balance decreased to $45 million, primarily reflecting lower sales during the fourth quarter. Inventory remained flat at approximately $22 million, and software development costs and licenses increased to $316 million, reflecting the significant development efforts around our pipeline of upcoming releases. Now I will review our financial outlook for the full year and 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 $1.75 billion-$1.85 billion, and non-GAAP net income to range from $2 per share-$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 three quarters of the year. Our fiscal 2013 earnings outlook includes the negative impact from a one-time payment of $15 million, which is expected to be recorded in June in G&A expense. Because our earnings per share for the first quarter and full fiscal year are calculated using different share counts, the impact of this one-time payment on non-GAAP net income per share is $0.18 for the first quarter and $0.13 for the full year. Turning to the details of our full-year outlook, our expected revenue range assumes the on-time release of the titles we have announced to date, as well as other titles yet to be announced for release during fiscal 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% U.S. and 50% international. We expect gross margins in the low 40s, 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 million in fiscal 2012, and approximately 60% of this loss will go away this year and the entire amount next year. Total operating expenses are expected to increase by approximately 40% from fiscal 2012, primarily driven by higher marketing expense to support our new releases and the $15 million one-time payment in June recorded in G&A expense.
Selling and marketing expense is expected to be about 16% of net revenue using the midpoint of our outlook range. We project interest and other expense of approximately $13 million, tax expense of about $10 million, and fully diluted shares of approximately 117 million, which includes 5 million of participating shares for our unvested restricted stock grants and 26 million 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, we expect to deliver revenue ranging from $225 million-$275 million and a non-GAAP net loss ranging from $0.75-$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 "Max Payne 3" and "Spec Ops: The Line." We expect first quarter gross profit margins in the mid-30s. Total operating expenses are expected to increase by approximately $17 million or 15% from the prior year's first quarter. This increase is primarily driven by the $15 million one-time payment in G&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 in other expense of approximately $3 million, tax expense of about $2.5 million, and a share count of approximately 85 million. 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.
Coupled with our industry leading IP and world-class creative talent, we believe our organization has a significant competitive advantage in the market. Fiscal 2013 is poised to be one of Take-Two's best years ever. We are diligently focused on delivering growth and profits and driving shareholder value both this year and over the long term. Now I'll turn the call back to Strauss Zelnick.
Thanks, Karl and Lainie. We look 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. Now we'll take your questions. Operator?
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from the line of Arvind Bhatia with Sterne Agee. 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 investments there, and if your fiscal 2013 guidance incorporates any new investments for new technology. That's one. Just wondering if you can 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 partners to discuss that and make announcements when they feel the time is right. I think you're right to ask the question because those transitions can actually create 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. 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 five 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. 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 foot traffic affects catalog. In terms of Europe, we are witnessing some softness in Europe, and we're not immune from that. Hopefully that's something that will turn around. Right now, we are seeing some of that.
Great. I appreciate it.
Thank you. Our next question is from the line of Justin Post with Bank of America Merrill Lynch. Please go ahead.
Great. Thank you. I guess you're saying 60% of your revenue's from Rockstar, which implies about $1.1 billion of revenues this year. Of course, you had issues with title slippage in the past. What gives you confidence that your Rockstar 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? 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, this past year, we've acknowledged that the financial results were meaningfully influenced negatively by slippage. Obviously, titles that slipped last year are farther along in their development cycles. We feel quite confident about our upcoming release schedule, not just Rockstar's release schedule, but 2K's as well. 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. As you know, the share count changes depending on whether you're reporting profits or losses. It can appear to be more of a moving target than it is. We felt that the right way to finance the organization has been the way that we've done it.
We are 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 not the share count. The question is whether we're creating value at the same time. Obviously if our behavior is accretive, no one's concerned about the share count. 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.
Last one, do you think the market, it is a difficult software market so far year to date? How receptive do you plan it to be for your titles, what do you think will make your titles stand out in what's looking to be a pretty competitive second half?
I agree with you. I think the second half is competitive. We are putting out titles that are anxiously anticipated by the market, we've already discussed the lineup. It includes "Spec Ops," which is coming up, "XCOM: Enemy Unknown," "Borderlands 2," "NBA 2K13," and "BioShock Infinite," and other titles that we haven't announced yet. These are immensely high-quality titles, and we feel great about them. Again, the strategy that we pursued for five years has proven to be a sound one, 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. Our strategy is only to put out high-quality releases. We're seeing the benefit of that, not just in our frontline.
We're seeing the benefit in catalog, 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 III: 10 Year Anniversary Edition" for mobile iOS and Android, an extraordinarily successful release for us. That intellectual property is 10 years old.
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 might. The first version of which I asked on the last call, given the relative success that you've had with GTA on mobile, and noting that it was one of the highest selling games and a profitable game for you, are we getting to the point where the iPad and other platforms are starting to offer you the ability to create that's what I would consider a triple-A mobile experience from the ground up, rather than taking a game that you've had out before and repurposing it for iPad? Are there now opportunities, given the size of the platform, to create Take-Two level games, Rockstar level games, exclusively for the iPad and similar platforms?
Secondly, also on digital, looking at the formidable lineup of games for digital DLC you have for "Max Payne." I know in the past you talked about how that type of content was equally successful, if not more successful when bundled in with retail, where a lot of your clients or your customers are used to buying. Are you also considering retail versions of that DLC for "Max Payne?" Thanks.
In terms of tablets, we are incredibly bullish on tablets because we believe tablets will be ubiquitous in the coming years. We've been saying that for several years, pretty loudly. Tablets, once their processing power and storage power is equivalent to a PC, and if you believe in Moore's Law as I do, or at least currently do, that will be the case in relatively short order. It should be a great gaming platform. It's highly portable, very high quality, great display, add 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 business model because it is somewhat hard to discover content for the platforms, and it has to become seamless.
You don't want to count out the consoles because consoles relied on their success a couple of decades ago on the fact that they were much better game platforms than PCs. Today, PC is a terrifically good game platform, yet the lion's share of high-end triple-A content is made available and sold through the consoles. I don't mean to count them out at all. The tablets, I think, will give us a terrific opportunity. Will they be a great opportunity for frontline product? Again, when the processing power is there and when the storage is there, I see no reason why not. However, we do have to work on the business model and how we get that product into the hands of consumers. In terms of "Max Payne 3," we have a terrifically robust lineup of downloadable content coming.
Our aim at this company is to make our product available to consumers however they want it, to be very flexible in how we do it, I'm not going to announce any particular SKUs right now.
Great. Thanks for the call.
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 were thinking originally, and obviously the market's been difficult. 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 levels? I have a follow-up.
Mike, we've announced we've sold in roughly three million units. That is a terrific number by any standard, including our own. No, nothing came down, and we're really pleased with the way that's rolling out.
Okay, fair enough. Rockstar experimented with adding some narrative elements to the multiplayer experience on "Max Payne." Just curious if you can give us any feedback on the consumer response in terms of engagement and how important that might be in future releases? I have one more question if that's possible.
Hey, Mike, it's Karl. The multiplayer component of "Max Payne" is simply just fantastic. Obviously, you can follow the buzz yourself when you look at chat rooms and what people are saying about it. I think that the Rockstar guys have taken multiplayer to a different kind of level. It's a very different kind of multiplayer than they've tackled before, let alone anybody in the industry. We're really pleased with how it's rolling out at this point. Frankly, we think it's going to be a very important component to 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. Last question is, I'm just curious how you guys are-- you've mentioned this a little bit, Strauss, philosophically, how you're approaching the next-gen market opportunity, maybe more on Sony and Microsoft. I know you said challenging opportunities, I think it balances more as an opportunity for you. Certainly, you still seem bullish on consoles, while a few people think they may be dead. Thinking about how less development capacity is in the market today than when this cycle started and the potential maybe that the install base could 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&A opportunities into the next-gen systems from Microsoft and Sony.
Hey, Mike, it's Karl. Just speaking to development capacity, it's interesting the way you position it, as development capacity is decreasing in the industry. I'm not sure that that's how I would characterize it. That may be empirically the case, I think what you're really seeing is fewer titles, but they're bigger titles. That doesn't necessarily translate to decreased development capacity. You're just talking about bigger projects, just fewer releases. I think you will see that. You're seeing it now, I think you're going to see it going further in this generation and to the next generation, whenever that comes. I think that's something that we're experiencing, we've actually been strategically pursuing that strategy for the better part of the last four or five years. You see the rest of the industry coming along.
I don't think that's really a change for us. If it's a change for other folks, I think they're going to have to change very quickly because, look, that ship has sailed. The number of titles that are out there in the market are going to be reduced. There's no question about that. 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. As we've always said before, we need to invest in both, and we always feel strongly that 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.
I hope that answers your question. I'm not sure if it did or didn't. I think that's how we look at the next generation.
Thanks, Karl. Appreciate it.
Thank you. Our next question is from the line of Doug Creutz with Cowen and Company. Please go ahead.
Yeah. Thanks. You guys have clearly the broadest and deepest lineup that you've ever had this year. I guess the question is, I think out to fiscal 2014, especially in the context of a potential console transition, do you feel like you have enough in the pipeline to extend profitability out into 2014 and 2015, that you haven't sort of used up a lot of franchises this year? Thanks.
Yeah, we feel pretty good, if not very good, about the upcoming years, although obviously we're not providing any guidance or any insight into them, but we do feel good about it. The time of transition will create challenges for everyone whenever that occurs because as the tie ratios begin to decline meaningfully at the end of the cycle when announcements are being made and the install base is low at the launch of the new console. I think all of the players in the industry are giving some thought to what that means. Historically, this business has had a time curve element, the end of a cycle and the beginning of a new one has been a time when people see their revenues reduce, 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, 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 four elements that really matter in a transition: technology, talent, owned intellectual property, and your balance sheet. We think we tick off all the boxes. I'm a big believer that arrogance is the enemy of continued success. We're taking this very seriously. There are going to be challenges, we feel like we're well-positioned.
Yeah. Again, as I said before, it's Karl. We also are making investments in certain things that really have nothing to do with console cycles at all, which, for example, the three projects we've got going on in Asia and our online initiatives. If they are successful, we do expect that they could become meaningful contributors to us and smooth out that process or out that earnings curve.
Okay. Thank you.
As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Ben Schachter with Macquarie Group. Please go ahead.
Hey, guys. A few questions. First one, housekeeping. Can you just remind us what that $15 million charge is for in 1Q? 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 continue to drive the life of some of those titles? How big can those be as a percentage of the overall sales? Then, Strauss, if you have any thoughts, just in general, we talk a lot about tablets and mobile devices. It 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 a confidentiality agreement around it, so we can't give any more detail, but we have no other obligations under that contract after the one-time payment. 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 shelves any longer. Obviously downloadable content has a physical element for us in many cases, but also a digitally distributed element. I think the answer is all of the above. It's a good thing. Bringing content to people where they want it, how they want it, on economic terms that they find appealing increases the size of the business. 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. Remember, physical goods are still 87% of our business in the fourth quarter. It is the lion's share of our business. Retail is our partner in this business, and that's not changing so very rapidly.
On tablets, I'm sorry, could you just repeat your question on tablets?
It was actually more on television screens.
Sorry.
It seems like we spend a lot of time on tablets and smartphones, but Internet now is going to be coming to television screens in a more meaningful way. How does that impact your business?
You could imagine a situation where if you have a cloud gaming service and you have an internet-enabled television that's easy to use, it would be so much easier for a consumer to play a game on a big screen without the intermediation of another device. I'm not sure that's a difference that makes a difference. Broader distribution is always a good thing for us. If that occurs, look, we were a launch partner with OnLive. We're in business with Gaikai. We intend to be in business with anyone who speaks to consumers in the way they want to be addressed.
Thank you. Our next question is from the line of Eric Handler with MKM Partners. Please go ahead.
Yes, thanks for taking my question. 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. That means you're going to earn about $2.80 looking at the midpoints for the remaining three quarters of the year. I can't get there unless I assume there's "Grand Theft Auto V." Am I thinking about this incorrectly, or is there something else there that allows you to get to these numbers without "Grand Theft Auto?
Yeah. We've announced that "Grand Theft Auto V" is in full development. We haven't announced a release date yet. What we have said about the year is that we have some titles that we expect to release that are not announced yet. We have a terrific slate coming up. That's the guidance that we want to give you as of now.
Okay, as a quick follow-up, when you look at your EPS guidance for the year, how would you assume your free cash flow outlook shakes out from that EPS guidance? Is it similar to EPS or are there other factors, too?
We expect from our strong slate of fiscal 2013 releases, we expect to generate a significant amount of cash. Today we're not going to provide a fiscal year-end cash forecast right now.
Okay, thank you.
Thank you. Our next question 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, how much you guys are investing over there and timing of when we might see these products begin to launch and maybe what the business models are like. Also with the DLC content for Max Payne, what kind of an attach rate are you expecting for that?
We set up our Asia projects so that we worked with really capable partners in Asia for a couple of reasons. The primary reason was we have a healthy respect for things that we don't know, and these were, when we entered into these projects, markets we didn't know that well. In some formats, we didn't have a great deal of experience in them. We were fortunate in that we're working with the very best in the business, Tencent in China, Nexon and XL Games in Korea, and these are very robust markets that have enormous appetite for many games. One of the reasons we chose not to, for example, invest huge money in the U.S. market is because the U.S. market is exceedingly challenging from an MMO point of view.
It is a market that really has only accepted two MMOs in the history of the business here in a big way. One that's obviously exceedingly robust now, one that was very robust until relatively recently. Apart from that, there hasn't 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. Because we worked with partners, we were also able to mitigate meaningfully our exposure in the case that things don't work out as planned. 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 haven't announced launch dates.
We do expect to be able to share some progress in the relatively near future. On Max, we don't project tie ratios. I guess it 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 think Max is an amazing game. The multiplayer is amazing. The reviews reflect that. The New York Times review is just extraordinary. Guardian review is extraordinary. IGN review is extraordinary. The word of mouth is extraordinary. I think the downloadable content will be incredible. It certainly was on Red Dead. I'm not sure you can look forward to any zombies, but you never know. I think it's going to be phenomenally successful. We don't project tie ratios.
Okay, thank you.
Thank you. Our next question is from the line of Michael Olson with Piper Jaffray. Please go ahead.
Hi there. This is 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. As you guys look out into the new console transition period with lower installed bases, is it possible you'll get more aggressive on those fronts to sort of fill the gap? Thanks.
Well, as Karl 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. That would be a good thing in the case of a dip related to a console transition. That's not our primary motivation because in order for that to happen, we still have to deliver great titles that consumers love. First and foremost, our mission is to serve consumers, is bring them incredibly great interactive entertainment where they want it, when they want it, how they want it. Have we been conservative?
I think we've been mindful of where we came from and where our expertise lies, we've bet on our intellectual property, and we've bet on our own expertise, then we've worked with A-plus partners where we can learn something from them and 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 we'll also be willing to move out along the risk spectrum.
Yeah, I also think it's important that when you group mobile and social together, I think it's important to make a distinction because an enormous part of the market for mobile and social to this point has been a very casual consumer. While we do some casual games, that has not been our focus. I wouldn't necessarily consider us being less aggressive when 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. For the most part, those platforms have been more casual.
Thank you. Our next question is from the line of Joe Vilikowski with Weintraub Capital Management. Please go ahead.
Yeah, thanks. I have a question about your digital revenue growth, and that seems to be an important part of the future of the company. 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?
Yeah. Again, there's no distinction between digitally delivered revenue and physical revenue. We don't manage to a number there. We make our products available on whatever platforms we think will resonate with consumers. There's a cost to making products available on platforms, so we have to be mindful of the investment we make 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. We're not managing to a particular number. Digitally distributed content is the identical content. Consumers don't care about how they get stuff. Consumers care about quality, convenience, and price. The whole notion of digitally delivered content is a red herring in our business.
We need to be focused on how do you serve consumers? What are the costs to serve them? How much money can we make? What are the price points? What are the marketing costs? What are the margins? What other costs are there? Our goal and our strategy is to have ubiquitous distribution. 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 in digitally distributed content. Equally, all digital is not created all the same. We have zero interest in negative margin businesses.
Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to management for any closing remarks.
Well, we'd like to thank you very much for joining us today. We're awfully proud of the progress we've made. We have an extraordinary outlook for this year. I think we're guiding to $1.75 to $1.85 billion in revenue. A very big number for our company, $2 to $2.25 a share in non-GAAP profits are expected. We have an awful lot of work to do to deliver that. We are bound and determined to do so. We thank you for your support. Thank you for joining us today.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.