GigaMedia Ltd (GIGM) 2003 Q2 法說會逐字稿

Good evening ladies and gentlemen thank you for holding. Welcome to the GigaMedia Second Quarter 2003 Financial Result Conference Call. At this time all participants are in a listen-only mode. After the presentation there will be an opportunity to ask question. If any participant requires assistance at any time please press "*" followed by the "0" on your telephone. I will now hand the conference over to Mr. Brad Miller. Thank you sir, please go ahead.

Thank you. This is Brad Miller Investor Relations Director of GigaMedia. Welcome to our second quarter results conference call for GigaMedia Limited. Here to speak with you and answer your questions today are Raymond Chang our CEO, who will give an overview of the second quarter and Joseph Shea who is here in place of our CFO Winston Hsia who is unable to join us today. Joseph will give you some additional financial details of the period. Before I turn it over to today's speakers I would like to remind you that some of the comments will contain forward-looking statements. These statements are subject to risks and uncertainties that could cause actual future results to differ from those expressed or implied. These risks and uncertainties are discussed in the Company's filing with the SEC. In addition we will not necessarily revise forward-looking statements made today. After the speaker presentation we will go into question and answer session with that I would like to hand the call over to Raymond our CEO.

Thank you Brad. First of all I should welcome everybody for participating today's conference call. I will begin today's call by reviewing a few of our financial results from the second quarter. Following that I would turn the call over to our Deputy CFO, Joseph who will provide some additional insights into our results and discuss few of our expectations for the third quarter. As expected our financial results were negatively impacted by SARS during the second quarter primarily in our offline music business, G-Music. Sales in our offline music business, G-Music dropped approximately 17% in April and declined an additional 17% in May. However, since then sales have actually rebounded. The overall music market even though remained some decline, we are closely monitoring our cost and continue to look at ways to maximize revenues by leveraging the distribution channels we have in our 52 stores island-wide. Our net loss in the second quarter increased approximately $23.6m. However this metric clearly mapped the underlying improvement occurring at an operating level in our business as most of our net losses due to payments of an insurance deductible was totaled nearly NT$17.3m. I would like to highlight the gains we have made in our online ISP unit and then outline for you our plans to further strengthen the performance our ISP operations going forward.

Our Online ISP recorded positive EBITDA of approximately 19.6m in the second quarter. In spite of competitive environment we actually increased our ARPU and total revenue while lowering operating cost. We have demonstrated a consistent success in the past year in migrating subscribers to higher specification product, which together with tight cost controls is moving us steadily to profitability. Year-over-year we have achieved the following in our online operation. Total costs are down by 29%. Operating costs are down by 21%. Cash burn is down by 96%. On the other hand ARPU has been up by more than 10%. Although these results are positive we believe we can actually do even better. Our network gives us the competitive advantage that we expect to be able to leverage. According to Taiwan Network information Center GigaMedia has the best aggregate [clearing] bandwidth among all the commercial ISPs in Taiwan. This allows us to route most of our traffic over the less congested private clearing network enhancing the efficiency of our network and allowing us to provide better, faster, access service to our subscribers. Going forward we will leverage the investments we have made in our robust network or branching into a different model which we titled OEM business model to enhance our revenues in our ISP business. This is expected to result in some revenue growth going forward. In some we are continuing to emphasize cost control and maintain financial strength while reviewing ways to efficiently maximize revenues. Results today indicate that we're moving in the right direction. Let me now turn over the call to Joseph who will further detail our financial result and provide additional insight.

Raymond, thank you. I will review results in music -- our offline distribution business and then go over other business developments during the second quarter. Raymond mentioned a competitive advantage in our online operations I want to highlight in a way an advantage we have in our offline business market share. Our four offline business units holds a dominant market position in Taiwan with nearly a 50% of the recorded music market. While we are currently focused on driving cost out of the business and realizing efficiency gain, over the long term we will be exploring different initiatives that will enable us to view these music chain stores as an effective platform for growth. During the second quarter, we worked very closely with landlords and key vendors to minimize the impact of SARS on our business. In addition to certain rent concessions achieved related to the SARS, we expect to benefit from renegotiated prices and payment term with key vendors later this year.

As a result, we expect to be able to achieve gains in our gross margin and improve our financial results in our offline business, going forward. Finally, I would like to add a quick update on other developments during the quarter. As many of you know, we have a new chairman of our Board of Directors and several new Board members. These new Board members bring [inaudible] experience and significant business connections in complementary markets strengthening the GigaMedia's team, add a new perspective, and creating new possibilities -- and some I can -- we continue to recall improved financial performance in Q2 despite challenging market conditions, and we protected our balance sheet. We have continued to be a very disciplined with respect to our cost structure in both our online/ offline businesses. We hold a strong financial position giving us flexibility to withstand market challenges and we have solid reason to expect improved financial results going forward. Thank you very much. We can now open up for questions.

Thank you. Ladies and gentlemen at this time, we'll now begin the question and answer session. If you would like to ask the question, please press the "*" followed by the "1' on your telephone. If you wish to cancel this request, please press the "*" followed by the "2". If you are using mouth speaker equipment, please lift your handset before making your selection. Your questions will be polled in the order they are received, one moment for the first question. If you would like to ask the question, please press the "*" followed by the "1" on your telephone. If you wish to cancel the request, please press the "*" followed by the "2" The first question is from the McCarran Chu (ph) of ABN AMRO from Hong Kong.

Hi good morning, I was just wondering if you could give us some idea about the development of the ADSL business, in particular, Chunghwa cut its ADSL access fees in July? Has that had any impact on demand from consumers in terms of price elasticity effects and also can you give us an idea of what your distribution of ADSL alliance is between different speeds? Thanks.

Okay. We have not seen a drop in our new subscriber pick up. We realize that Chunghwa will continue to probably cut prices and to make this -- this market even more competitive, but as we have mentioned in some of our previous conference calls, our approach is to take on a differentiated approach. We have basically created a differentiated ADSL product by giving our subscribers additional features such as 100 megabytes of personal websites, 100 megabytes of email box, and etcetera, and I think, by having these differentiated products, it really allows us to go after the niche markets that really wants to enjoy the additional features on top of the actual speed and this will continue to be our strategy in this competitive environment. Furthermore, as you can see from our releases, one of our goals is to upgrade our subscribers from a lower spec. ADSL products to a higher spec. ADSL product, and we have actually been able to demonstrate successful migration of our subscribers in the past few quarters; and we will continue to do that migrations, and we believe migrating our subscribers from a lower spec. ADSL product and higher spec. ADSL product I mean that's an indication of the loyalty of our customers in our services and I guess, the overall general freezing of our services from our subscribers. Therefore, I think having the differentiated approach will really help us to stay competitive in this market.

Thanks. Actually what I meant was -- actually I was talking about the cut in the circuit price that was managed by the government. So, from 595 to 499 because your customers still have to get the circuit from Chunghwa, right. So, I was actually [wondering] since the circuit price is cheaper has that stimulated any kind of increase in demand for ADSL product?

Well, from the numbers that we have seen in second quarter, I think, the numbers stayed pretty much flat. However, we are seeing a little bit of pickup in July and August and that could be driven by, like you said, drop in circuit price, but it also could be drop off driven by a general pickup in the summer season that has always been sort of a seasonal factor that [inaudible]. So, I am not sure what it's exactly driving that, you know, slight pickup in our ADSL subscriber base, but we are indeed seeing a little bit of pickup.

I see. Thanks. And then when you mention upgrading customers to a higher spec did you mean higher bandwidth or is some different type of value-added services?

Higher bandwidth spec. Basically, I think most of the subscribers we have seen, you know, they start with a price [inaudible] lower bandwidth spec, it's, kind of, you see the overall filling and the quality of ADSL service, and we have been doing a lot of open cost to our subscribers in giving them incentive to migrate to 1.5 Meg ADSL spec. And that migration process has been going pretty well. Additionally, we also tried to see if we can sign up a long-term contract with our subscribers by giving them a little bit of discount by encouraging them to pick on a 6-month or a 12-month prepay program. We have also been quite successful in migrating our subscribers to these two programs as well.

That answers my question. Thank you.

Thank you.

Thank you. The next question is from Mr. Victor Terrain (ph) of Citigroup Asset Management from Singapore.

Hi. Victor from Citigroup. Thank you for --.

Sorry, can you speak up a little bit?

Yes. This is Victor from Citigroup in Singapore.

Okay.

Thank you for the call. I just had two or three questions. One is in your results released you talked about your numbers being on the broadband basis. Your numbers being impacted because of increase competition during the quarter. You said that you did well despite -- can you talk about the outlook a little bit? How do you see competition planning out in the next two quarters? And if you can give us a flavor for that by telling us what your [SACs] have been like in the second quarter and the first quarter? Secondly, I noticed that your ARPU increased slightly sequentially quarter-on-quarter while -- to -- has actually seen this sequential decline in ARPUs over the same period, and I think you have attributed it to migrating subscribers to higher specs. Can you just tell us how you incentives subscribers to move to higher spec and what's the ARPU differential like? And what percentage of subscribers are on higher sectors? And finally do you have any full year subscriber targets for the broadband business? Thank you.

Give us one second here. On your first question in regard to how we have enabled to increase our subscriber overall ARPU. I think the strategy that we have been putting in place is to alert the subscribers, get on the network first, and after few months of experience lets say a lower spec bandwidth environment, that's a 512 K. We would then do an [inaudible] to our subscribers and tell them ahead of time that we will be upgrading their bandwidth to 1.5 Meg for lets say a period of 30-60 days and to listen clearly see the difference between the lower spec product and the higher spec products. And most of our subscribers would then be incentivized to switch on to a higher spec product. We are seeing that both in our cable modem as well as our ADSL product. So far, I think we have been quite successful in migrating our subscribers to higher spec product. I think we are -- the success rate for the [outbound calls] has been generally in the 10%-15% range. So every, you know, 10%-15% of the calls to our subscribers resulted in the positive upgrade of subscribers. So I think that the strategy will continue to be put in place, and we will further try to see if we can switch our subscriber to higher spec products both in our cable modem as well as our ADSL products. And on the competition front, I believe in Q3, Q4 we will continue to see -- experience a pretty competitive environment in Taiwan because of Chunghwa Telecom and also the entrance of fix net companies. However, I think we are very comfortable in maintaining our market position because I think we have, you know, unrestricted [frequentiated] approach and have also build a pretty strong loyal base among our existing subscribers. On top of that, we have also came up with the new business model what we call as an OEM model which is to work with large organizations and providing them with bandwidth support. We have actually done a number of that initiative primarily in the cable modem front by providing them with as way of second support to independent people and with those that we never had relationship with, and as a result of that we have actually been able to build a pretty profitable OEM business, and we will continue to export our opportunity further.

Just a couple of following follow ups. One is on subscriber base. Do you know what percentage of them are on these higher spec products, and what is the differential in ARPU between the lower end products and the higher end products?

[Victor] can you repeat that question again, it was not very clear, sorry.

Do you know what percentage of your subscribers are on these higher spec products? And what is the differential in ARPU between the higher spec and the lower spec products? Do you have that kind of a split up?

We will supply you with that number because I don't want to -- I think the price difference is approximately -- it's 299 and 699 for the 1.5 Meg and 299 for the 512 K.

Okay.

As to the exact percentage -- we'll get that number for you right away.

Okay. And just a couple of questions on the competition front. One is, you talked about the FTNS operators coming in. Have you seen these operators approach your clients and offer price discounts, and secondly you talked about working with large organizations and offering cable modem products? I was just wondering if there have been any issues with cable quality because -- or whether you have to invest more in the network in order to provide these services. Thank you.

On the new entrance side, I think the fixed-net operators have actually been doing quite a bit of television ads, but that's more on brand-building exercise than actually offering any kind of promotions to the subscribers. I think mainly because they have not been able to successfully build out their last mile infrastructure. I think they are probably more aggressive on the corporate side rather than on the consumer side and that really has not been impacting our business too much. It's more of the noise in the market rather than the actual intake into our subscriber base. So for the fixed net operators, I would say that it will probably take them at least another quarter or so before they will actually begin to really roll out any kind of ADSL service to massive consumers.

And on your cable modem product that you are offering the corporate, have there been any issues with cable quality. How do the service compare to with the ADSL products?

We are actually seeing a low return on our cable modem than the ADSL service. I think most of these subscribers are generally quite happy with our cable modem quality. And the infrastructure has been actually quite stable these past few months and we do expect that trend to continue.

Okay. Finally, just do you have any targets in mind for the broadband ISP business, for -- the new subscriber numbers or EBITDA margins?

We expect to have slight increase by the end of this year, but again I think our goal is not to go after a large subscriber base, but to increase the overall profitability of that business. Therefore, you know, the strategy is not to spend a lot of big promotional dollars to try to get new subscribers, but rather to have a stable growth in our subscriber base and also if you try to see if we can further enhance the overall ARPU.

Okay. Just --

[inaudible] also in terms of your earlier question on the lower spec. versus higher spec. product. On the one -- out of the 70 -- approximately 76,000 ADSL subscribers that we had, we have roughly about half of that in the 1.5 plus speed range, and then the rest of it falls in the 512-768 product range. Therefore, we actually still have quite a bit of room to upgrade our existing lower spec. product subscribers. On a cable modem front, this split is also about half and half -- half being under 1.5 and other half on the 1.5 plus speed range.

Right. Just on the FTNS operators, when you said that they have not been able to roll out last mile, I mean, do you see this changing in the next quarter on a regulatory front. Do you see the regulator coming in and forcing Chunghwa open its local loop?

While, you know, I -- my expectation is that they will probably continue to be -- to experience a bit of difficulty -- you see really building up the infrastructure; however, you know, this may change. So, we don't really know at this point, but again I think, you know for most of the fixed net operators, I think, they have been going more after the corporate customers rather than the end users directly because I think the even if they can get the license or get the proper approval from the government to build the infrastructure, the cost is [feel], as you know, relatively high if they really want to go after every households in Taiwan.

Okay. Thank you. It was very useful. Thanks.

Thank you. Ladies and gentlemen once again, if you would like to register for question, please press the "*" followed by the "1" on your telephone. Mr. Miller, we have no further questions at this point in time. Please go ahead with any further comments you wish to make. Thank you.

Okay. Thank you everyone for joining us. If you have any questions please feel free to call me or send an email and we will get back to you as soon as possible. Thank you again.

Thank you. This concludes the GigaMedia conference. Thank you for participating. You may now disconnect.