Take-Two Interactive Software Inc (TTWO) 2012 Q4 法說會逐字稿

Greetings and welcome to Take-Two Interactive's fiscal fourth-quarter 2012 results conference call.

(Operator Instructions).

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 and 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 am 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.

And now I will turn the call over to Strauss.

Thanks, Hank.

Good afternoon, everyone, and 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 is relevant to our audience.

We are 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, but we did not 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 US was the highest selling new intellectual property in our industry during 2011 with over 5 million units sold in 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 videogame 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 - 10th 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 will continue to invest to bring both our 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 will 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.

And 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 are 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, "Max Payne 3 is a taught and compelling action game wrapped in a sumptuous, gritty and delightful production detail that is the Rockstar Hallmark." G4TV delivered a perfect score stating, "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 would 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 have made over the past five years, Take-Two is stronger in every facet of its business and well positioned for growth and profitability.

We are exceedingly optimistic about the outlook for our organization, which has never been more promising.

I will 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 1 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 hard-core gamers.

On June 19, Firaxis Games will release Sid Meier's Civilization V - Gods and 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 26 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 sand storm 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 and be sure to watch the launch of our television ad campaign during the upcoming NBA finals.

On September 18 2K Games will launch Borderlands 2, the next installment in the critically acclaimed franchise that is sold in newly 6 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 @Gamer Magazine.

On October 2, 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 mode by bringing back legends like Michael Jordan, Larry Bird and Magic Johnson.

The NBA 2K12 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 9, 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 book of Booker DeWitt's struggle to escape from Colombia, 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 and 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 XLT Games are both making great strides and building momentum.

With E3 two weeks away, we are 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 yourselves why we are excited about our outlook for this year and beyond.

Thanks and I would now like to turn the call over to Lainie.

Thanks, Karl, and good afternoon, everyone.

Today I will 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 the numbers I will 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 download.

Gross margin was 37%, down approximately 4 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 $59.4 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 onto the fourth quarter, our results are 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, and 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 and other expense increased primarily due to the convertible notes that we issued in November.

A 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 $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 to $1.85 billion 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 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 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 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 cost 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 margin 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.

And 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 to $275 million 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 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 and 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 and 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, and we are diligently focused on delivering growth and profits and driving shareholder value both this year and over the long term.

Now I will turn the call back to Strauss.

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 would 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 will take your questions.

Operator?

(Operator Instructions).

Arvind Bhatia, Sterne, Agee.

I wanted to see if you can shed some more light on how you are looking at the next generation and if you are starting to make some investments there, and if your fiscal 2013 guidance incorporates any new investments for new technology?

That is one.

And I'm just wondering in talking about the retail environment today and particularly in Europe what you are seeing there?

In terms of the next gen, we are going to leave it to our business partners to discuss that and make announcements when they feel the time is right.

But I think you are right to ask the question because those transitions can actually make -- 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 technologies, strong owned intellectual property, top talent and strong balance sheets, and we think that describes us and does not 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 have seen in the US 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 are proud of the track record we have developed in executing against that strategy.

I think what you have seen is just not that many releases, and some of the releases have come out in the last quarter have not been of the same quality as some might have hoped.

It does not just affect the frontline, of course.

It affects catalog because foot traffic affects catalog.

In terms of your -- we are witnessing some softness in Europe, and we are not immune from that, and hopefully that is something that will turn around.

But right now we are seeing some of that.

Justin Post, Bank of America/Merrill Lynch.

I guess you are saying 60% of your revenue is 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?

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?

Thanks for your question.

Look, this past year we have acknowledged that the financial results were meaningful influenced negatively by slippage.

Obviously titles that slipped last year are farther along in their development cycle.

So 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 are reporting profits or losses.

So it can appear to be more of a moving target than it is.

But we felt that the right way to finance the organization has been the way that we have 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 are creating value at the same time.

Because obviously if our behavior is accretive, no one is 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, and so far that money resides on our balance sheet.

Now the good news is it is rather a low cost money.

And the 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, and what do you think will make your titles stand out in what is 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, and we have already discussed the lineup.

But it includes Spec Ops, which is coming up, XCOM Enemy Unknown, Borderlands 2 and the NBA 2K13 and BioShock Infinite and other titles that we have not announced yet.

So these are immensely high quality titles, and we feel great about them.

Again, the strategy that we have 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 is just no question about that.

But our strategy is only to put out higher quality releases.

We are seeing the benefit of that, not just in our frontline.

We are seeing the benefit and catalog, and as the digitally distributed business grows, we are 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, an extraordinary successful release for us, and that intellectual property is 10-years-old.

Daniel Ernst, Hudson Square Research.

Two questions if I might.

The first version of which I asked on the last call, but given the relative success that you have 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 the batch what I would consider a AAA mobile experience from the ground up rather than taking a game you have had out before and repurposing it for iPads.

Are there now opportunities given the size of the platform to create -- Take-Two level games, Rockstar level games exclusively for -- or explicitly for the iPad and some more platforms?

And then 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 have talked about how that type of content was equally successful, if not more successful, when bundled in with retail with what would allow your clients, your customers are used to buying.

Are you also considering retail versions of that DLC for Max Payne?

Yes, in terms of tablets, we are incredibly bullish on tablets because we believe tablets will be ubiquitous in the coming years.

We have been saying that for several years pretty loudly.

And 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.

So it should be a great gaming platform.

It is highly portable, very high quality, great display and out of control or in a pair of headphones and you are all set.

The business model remains to be seen, and there is 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.

And 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 the PC is a terrifically good game platform, yet the lion's share of high-end AAA content is made available 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 -- 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.

And in terms of Max Payne 3, we have a terrifically robust lineup of downloadable content coming.

We are -- our aim at this Company is to make our product available to consumers however they want it and to be very flexible in how we do it, but I'm not going to announce any particular SKUs right now.

Mike Hickey, National Alliance Securities.

I was just curious on Max, it looks like your initial sell-in came down from what you were thinking originally, and obviously the market has been difficult.

But can you give us any color as to if that is the case and why you think it is and may be some insight into inventory levels?

And then I have a follow-up.

Mike, we have announced we have sold in roughly 3 million units.

That is a terrific number by any standard, including our own.

So no, nothing came down, and we are really pleased with the way that is rolling out.

Okay.

Fair enough.

And then Rockstar experimented with adding some new developments in multiplayer experience on Max Payne.

I'm just curious because we see feedback on the consumer responses from an engagement and how important that might be in future releases, and then I have one more question if that is possible.

The loyalty part on Max Payne is simply fantastic, and obviously there has been -- you can follow the buzz yourself when you look at chat rooms and what people are saying about it.

And I think that Rockstar has done -- have taken multiplayer to a different kind of level.

It is a very different kind of multiplayer than they have tackled before and let alone anybody in the industry.

So we are really pleased with how it is rolling out at this point.

And, 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.

Okay.

Thank you.

And the last question is, I'm just curious how you guys -- you have mentioned this a little bit, Strauss, but philosophically how you are approaching the next gen market 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 still seem kind of bullish on consoles.

A few people think they may be dead.

But thinking about how last development capacity is in the market today than when the cycle started and the potential maybe that the installed base could go grow faster if they changed the sales model, I'm just curious how that impacts your thoughts on IP creation, they may be building debt capacity or potential M&A opportunities in to the next gen systems for Microsoft and Sony.

So just speaking to the development capacity, it is interesting the way you position it as development capacity is decreasing in the industry.

I'm not sure that that is how I would characterize it.

That may be empirically the case, but I think what you are really saying is fewer titles, but they are bigger titles.

And that does not necessarily translate to decreased development capacity.

You have been talking about bigger projects, just fewer releases.

I think you will see that.

You are seeing it now, and I think you are going to see it going forward further in this generation and to the next generation whenever that comes.

And I think that is something we are experiencing, and we have actually been pursuing that strategy for the better part of the last four or five years, and you have seen the rest of the industry is coming along.

So I don't think that is really a change for us.

So if it is a change for other folks, I think they are 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 is no question about that.

But I still think there is 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 have always said before, we need to invest in both, and we always feel strongly that we have -- that we will always be investing in both new and existing IP because that is 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 did not, but I think that is how we look at the next generation.

Doug Creutz, Cowen & Co.

You have clearly the broadest and deepest lineup that you have ever had this year.

I guess the question is -- and I think out to fiscal 2014 and especially in the context of a potential conical transition, do you feel like you have enough in the pipeline to extend profitability out into 2014 and 2015 and you have not used up a lot of franchises this year?

Yes, we feel pretty good if not very good about the upcoming years, although obviously we are 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 you know, the tie ratios begin to decline meaningfully at the end of the cycle when announcements are being made, and the installed base is low at the launch of the new console.

But I think all of the players in the industry are giving some thoughts on what that means.

Historically this business has had its time curve element, and the end of the cycle and the beginning of the 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 we think we are 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 -- and we think we tick off all the boxes.

So I'm a big believer that arrogance is the enemy of continued success.

We are taking this very seriously.

There are going to be challenges, but we feel like we are well positioned.

And, again, as I said before, we are also making investments in certain things that really had nothing to do with console cycles at all, which, for example, the three projects we have got going on in Asia in our online initiatives.

If they are successful, we do expect that they could become meaningful contributors to us and smooth out that process -- out that earnings curve.

(Operator Instructions).

Ben Schachter, Macquarie Group.

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 is 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?

And then Strauss, did you have any thoughts just in general, you 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?

Yes, the one-time payment relates to a provision of a contract that is expected to be triggered in June.

That was entered into several years ago.

We have confidentiality agreements around it, so we cannot give any more detail.

But we have no other obligations under that contract after the one-time payment.

So we are not happy about it, but it is what it is.

In terms of digital revenue, if you posit a time when the whole world becomes a femoral and physical distribution goes away, then obviously not all of 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 is affecting our catalog.

They may not be on the shelves any longer, and obviously downloadable content has a physical element for us, on many occasions with also a digitally distributed element.

So I think the answer is all of the above.

It is 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, and it is a big win for us.

Ultimately we are ecumenical about how we get content into our consumers' hands.

We don't care whether it is physical or digital.

However, 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 is not changing so very rapidly.

And on tablets, I'm sorry, could you just repeat your question on tablets?

It was actually more on television screens.

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?

Well, you can imagine a situation where if you have a cloud gaming service and you have an Internet-enabled television that is easy to use, then it would be somewhat easier for a consumer to play a game on a big screen without the intermediation of another device.

But I'm not sure that is a difference that makes a difference.

Broader distribution is always a good thing for us, and if that occurs, we were a launch partner with OnLive.

We are in business with the GaiKai.

We intend to be in business with anyone who speaks to consumers in the way they want to be addressed.

Eric Handler, MKM Partners.

Let me ask, I guess, what appears to me is an obvious question.

When I look at your guidance for the year, you are losing money in the first quarter, and then that means you are going to earn about $2.80 looking at the midpoints for the remaining three quarters of the year.

I cannot get their match unless I assume there is 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?

We have announced that Grand Theft Auto V is in full development.

We have not 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, and we have a terrific slate coming up.

That is the guidance that we want to give you as of now.

Okay.

And then 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?

For our strong slate of fiscal 2013 releases, we expect to generate a significant amount of cash.

But today we are not going to provide a fiscal year-end cash forecast right now.

Edward Williams, BMO Capital Markets.

This is Tom Andrews standing in for Edward.

Can we talk a little bit more about your initiatives in Asia?

Specifically how much you guys are investing over there, 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 attach rate are you expecting for that?

We set up our Asia project 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 are where when we entered into these projects markets that we did not know that well and some formats that we did not have a great deal of experience in.

We were fortunate in that we were working with the very best in the business, Tencent in China and Nexon and XLGAMES in Korea, and these are very robust markets that have enormous appetite for many games.

So one of the reasons we chose not to, for example, invest a huge amount of money in the US market is because the US 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 is obviously exceedingly robust now, one that was very robust until relatively recently.

And apart from that, there has not 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 is pretty compelling to us, and that is 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 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 have not announced launch dates.

We do expect to be able to share some progress in the relatively near future.

And on Max, we don't project tie ratios.

I guess it goes without saying but I will say it anyhow, it is our aim to delight consumers.

And 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.

The Guardian review is extraordinary.

MyGen was extraordinary, and 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, and I think it's going to be phenomenally successful.

We don't project tie ratios.

Mike Olson, Piper Jaffray.

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 that you will get more aggressive on those fronts to sort of fill the gap?

Well, as Karl said earlier, one of the reasons that we are excited about these projects that are ongoing is, if they are 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 is not our primary motivation because in order for that to happen, we still have to deliver great titles that consumers love.

And, first and foremost, our mission is to conserve consumers, is to 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 have been mindful of where we came from and where our expertise lies, and we have bet on our intellectual property, and we bet on our own expertise, and then we have worked with A+ partners where we can learn something from them and where they are 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 will also be willing to move out along the risk spectrum.

Yes, I mean I also think it is important that when you put -- when you group mobile and social together, I think it is 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.

And while we do do some casual games, that has not been our focus.

So I would not necessarily consider us being less aggressive when you think take into consideration that we know who we are, we know who we are not.

And I think we been very aggressive in terms of using those platforms in the context of the type of games that we do.

But for the most part, those platforms have been more casual.

Joe Ziolkowski, Weintraub Capital Management.

I have a question about your digital revenue growth.

That is it seems to be an important part of the future of the Company, and I'm wondering if the 5% growth that you exhibited this year is something you are happy with, and do you have any thoughts about further growth in the oncoming years?

Again, there is 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 is 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 a profitability.

We are being as aggressive as we can possibly be in terms of being ubiquitous.

We will all still be mindful if there is a cost to that ubiquity.

But we are not managing to a particular number, and digitally distributed content is the identical content.

Consumers don't care about how they get stuff.

Consumers care about quality, convenience and price.

And 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?

And our goal and our strategy is to have ubiquitous distribution, and we had to deliver our products by carrier pigeon and we could make a profit doing it, we would do that, too.

There is no magic in digitally distributed content.

Equally all digital is not created all the same.

We have zero interest in negative margin businesses.

We have no further questions in queue at this time.

I would like to turn the floor back over to management for any closing remarks.

Well, we would like to thank you very much for joining us today.

We are awfully proud of the progress we have made.

We have an extraordinary outlook for this year.

I think we are guiding to $1.75 billion to $1.85 billion in revenue, a very big number for our Company.

$2.00 to $2.25 a share in non-GAAP profits 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 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.