GigaMedia Ltd (GIGM) 2003 Q3 法說會逐字稿

Good morning, good evening, ladies and gentlemen. Thank you for holding. Welcome to the GigaMedia third-quarter 2003 financial results conference. At this time, all participants are in a listen-only mode. After this presentation, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS). 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 third-quarter results conference call for GigaMedia Ltd. Here to speak with you and ask your questions today are Raymond Chang, our CEO, who will give you an overview of the third quarter, and Winston Hsia, our CFO, who will give you 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 the 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 presentations, we will go into a question-and-answer session.

With that, I would like to just hand the call over to Raymond, our CEO.

Thanks, Brad. And thanks, everyone, for participating in today's conference call. I will begin today's call by reviewing a few of our financial results for the third quarter. Following that, I will go over some of our online business unit results, and then turn the call over to Winston, who will provide some additional insights into our off-line results and discuss a few of our expectations going forward.

Total revenue in the third quarter grew by 10 percent quarter-over-quarter to NT$800.9 million as sales in our off-line music distribution business rebounded from the impact of SARS. Net loss increased. But it is very important to note that this increase was due to non-cash and non-operating items, not the weakness in our operations. Net results were negatively impact by three items during the quarter. First, the professional consulting fees of approximately NT$15.8 million related to strategic initiatives previously proposed to the Company by the management. Second, a re-evaluation of our cable modems of approximately 9.7 million. And third, foreign exchange losses of approximately NT$22.4 million.

On the operating side, GigaMedia's financial performance continued to improve. We managed to grow our gross margin in our off-line business to more than 17 percent. And in our online this (indiscernible) IT units, we reduced cash burn by 29 percent and produced positive EBITDA of approximately NT$13.8 million.

Let's us take a moment now to describe the progress we have made in our ISP operations, and why we are optimistic about the business unit's future performance. In our online operations, we have successfully implemented a strategy of migrating subscribers to higher specification (ph) products to sustain ARPUs. We have demonstrated continued success with this approach. And as we have mentioned in the past, we continue to enjoy the lowest acquisition cost per subscriber in the industry in Taiwan. Our confidence in achieving sequential improvement in our online operations is based on the following. First, we have consistently demonstrated an ability to control our costs.

Secondly, our network gives us a competitive advantage that we can leverage. According to the Taiwan Network Information Center, GigaMedia has the best aggregate peering (ph) bandwidth among all the nonstate owned carriers in Taiwan. This allows us to route most of our traffic over the less congested private peering networks, enhancing the efficiency of our network and allowing us to provide better and faster access service to our subscribers.

Third, our online operations are scaleable. We can add approximately another 100,000 subscribers going forward without major CapEx or hardware upgrades. We expect we will need to make only minor investments to maintain and improve our network in 2004.

Fourthly, international bandwidth costs continue to decline, and we find only short-term contracts with these carriers to take advantage of the declining bandwidth prices. And we will continue that strategy going forward.

Fifth, Taiwan's profit (ph) market is large and growing, with total subscribers now at approximately 2.7 million, an increase of approximately 10 percent this quarter. We believe achieving incremental subscriber growth in such a market to be reasonable, even with strong market competition.

As mentioned in our press release, our focus going forward will be on growth. Our Board of Directors has significant experience in the telecom industry, and we are currently reviewing initiatives with them to grow revenues in our online operations. We expect to be able to share with you some of our plans by next quarter, which will include subscriber targets and revenue goals.

In sum, our online ISP (ph) units is continuing to show improved financial performance and promise as an efficient online distribution platform that we can expect to be able to leverage for growth going forward.

Let me turn the call over to our CFO, Winston, who will give further details on the financial results.

Thank you, Raymond. I will review results in G-Music, our off-line music distribution business, and then go over some other business development items during the third quarter.

Our off-line operation showed some improvement in the third quarter. Gross margins improved to 17 percent from 14 percent in the second quarter, as we began to realize some efficiencies from the consolidation of the Rose Records and Tachung Records music store chains. As Raymond mentioned, revenue also picked up, as shopping returned after SARS, as well as due to the have release schedule, which was a result of SARS, as the record labels pushed back some of the releases.

Yet, the overall music market remains under pressure from rampant online and off-line piracy. Same-store sales in the third quarter were down approximately 14 percent versus Q3 last year. We continue to make (ph) pressure (ph) on this front as well as the arrival (ph) of legitimate downloads will continue to add to competition.

On the cost and back-office side of the business, we continue to work on streamlining processes and operations. Over the long-term, we will move methodically to improve inventory management. We will continue to work with our vendors to obtain favorable pricing and payment terms. Gross margin expansion through this quarter shows that we are headed in the right direction. But much remains to be done.

On the revenue side, as Raymond mentioned, we are currently exploring growth initiatives with our Board. We expect to be able to share with you growth plans for maximizing revenues in our off-line revenues by the end of the fourth quarter. Management and the board continue to see value in our off-line business unit, G-Music. G-Music gives us a strong market position with 51 stores located throughout Taiwan for distribution of entertainment items. We remain optimistic in our ability to both drive costs out of the business, and leverage chain (ph) as an off-line distribution platform, for entertainment items beyond just music.

In sum, we continue to report improved financial performance in the third quarter. We also exited the quarter -- we remain in a strong financial position with approximately 2.1 billion in cash and short-term investments. This financial strength gives us an ability to meet market challenges and adapt to market changes. Given the consistent improvement in our performance and our financial position, our outlook is optimistic, and we expect to deliver improved financial results going forward. At this point, I would like to open up the call for any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Excuse me, Mr. Miller, we have no questions registered at this point in time, if you would like to go ahead with any further comments.

Okay. Thank you, very much, for joining us today. If you have any questions, please feel free to contact us by phone or e-mail, and we will get back to you as soon as possible. Thank you for joining us, and we look forward to speaking with you again in the fourth quarter. Thank you.

Thank you. This concludes the GigaMedia third-quarter 2003 financial results conference. Thank you for participating. You may now disconnect.