GigaMedia Ltd (GIGM) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for holding. Welcome to the second quarter financial results. At this time, all participants are in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant requires assistance, waiting for the conference, please press star followed by zero 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 Arthur Wang, our CEO and Thomas , our new CFO, who has just joined the company from Goldman Sachs in Hong Kong. Before I turn it over to today's speakers, I would like to remind you that a number of forward-looking statements will be made during this conference call. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of GigaMedia and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, GigaMedia's actual results could differ materially from these statements. Information about factors that could cause and in some cases, have caused such differences can be found in GigaMedia's Annual Report on Form 20-F filed with the US Securities and Exchange Commission in June 2004. This presentation is being made on September 22, 2004. The content on this presentation contains time-sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted, or redistributed at a later date, GigaMedia will not be reviewing or updating the material that is contained therein. After the speakers' presentations, we will go into the question and answer session. With that, I would like to hand the call over to Arthur, our CEO.

Thanks Brad and thanks everyone for joining us today. We are very, very pleased to announce that for the second quarter of 2004, GigaMedia has recorded its first ever profit, both on a consolidated basis and from each of our business units. These are the best operating results in the history of the company and are the first quarterly results that reflect the efforts of our new management team. This is an important milestone for GigaMedia and a clear indication that our restructuring plan is working and ahead of schedule. I joined GigaMedia at the end of last year. At that time, we were a company beset by challenges, weighed down by a 16-quarter history of underperformance and loss making. My original commitment to the Board was to deliver a profitable GigaMedia within four quarters. We've done it in two. Thanks to a lot of hard work. Our first step was to start believing, second step, start making some money. So, from the beginning of this year, we've embarked on an internal restructuring design to raise the bar of operational excellence and ramp up our internal targets for all aspects of our business. Our agenda has been aggressive and demanding. But we are getting better and growing strongly as a result. We've delivered improved performance ahead of schedule, a key milestone towards our goal of building a new GigaMedia. Let me summarize the results in financial terms.

For the second quarter of 2004, consolidated revenues, $24m, up 15% from the same period of 2003. Consolidated EBITDA, and this is a key number that we are very happy with, coming in at nearly $2.9m, an increase of $3.8m from the same period in 2003 and consolidated net income, up $2.7m from a year ago to reach a positive $559,000. We are clearly off to a good start. Going forward, we are focused on two areas. First, organic growth. Realizing the potential of our existing business lines through good management and implementation of strong systems will be important to building a strong base for the new GigaMedia. We will continue to aggressively drive out cost, enhance efficiencies, and manage profitability. Second, strategic acquisitions. We will also continue to concentrate on strategic mergers and acquisitions as a way to catapult our growth forward. With a healthy cash balance, no debt, the strong backing of our principal shareholders at Koos Group, we feel our prospects are very good. Our emphasis is on strategic acquisitions that are both synergistic with our existing businesses and accretive to our financials.

In sum, we have a lot more hard work ahead, but we are very excited and very enthusiastic about our prospects. The more the team gets into this company, the more we see how much can be done, how much can be achieved at the bottom line level through the implementation of good systems, processes, and management. We've aligned our focus around an effective restructuring and growth plan. There are many opportunities to improve and strengthen our business as we move forward and we are confident that our restructuring and growth initiatives will generate steady improvements over the long term. With that, I will now turn the call over to our CFO, Thomas Woye.

Thank you. As Arthur said, we are excited to announce our first quarter of profits and pleased with the initial progress we have made in improving our financial performance. Particularly encouraging was achieving profits in all business units during the second quarter. We will remain focused on operational excellence, enhancing efficiency, and financial discipline, which we believe will drive steady improvements going forward across our businesses. Looking at our business unit, our music distribution business showed improvement in the second quarter despite a challenging operating environment. Initial restructuring efforts, which included the closure of a number of unprofitable stores and it means pricing strategy on selected merchandise led to the profit net income for the quarter. As stated in our second quarter press release, revenue declined by 25% quarter-on-quarter for this business. This was largely due to the general market downturn in the business and the seasonality in the music distribution business, as music sales are strongest during Chinese New Year in the first quarter. G-Music is currently implementing a new point-of-sale system, which we believe will help us to collect and better analyze sales thereby improving inventory management. The point-of-sale system is part of the larger centralized procurement. We believe by centralizing procurement, we will strengthen our negotiating position with music record companies, which could improve our margins. G-Music continues to face difficult market conditions on piracy and the general market downturn in the music distribution business in Taiwan. Our broadband ISP business unit also delivered profitable results during the second quarter. We've effectively chalked out a niche position based on the quality of our connectivity. There are no folks providing fast, differentiated, and value-added broadband products and services. During the second quarter, we saw a slight decrease in subscribers. So, we were able to maintain our outlook even in the phase of strong price cutting by the market leader. During the second quarter, we also implemented strict cost control measures, which result in a significant reduction in our operating expenses in this business comparing to the first quarter.

In order to support our ISP brand and keeping in demand, we are upgrading our infrastructure. During the second quarter, we upgraded our island-wide backbone, expanded our international connectivity, and include our ADSL ATM trunk capacity. The infrastructure upgrade provided us with the opportunity to high-tech products to provide more value-added services to our customers such as personal photo albums and to grow our operating customer base.

Our new entertainment software business also delivered strong operating performance during the period. This business unit performed well, such that we believe we can do even better after the initial integration with the rest of the company if completed. The second half of the year is traditionally the slowest season for the entertainment software business, but we expect this business unit to continue to make positive contribution to the financial of the company going forward.

And then quickly to our balance sheet. We ended the quarter in a very strong financial position. We have in excess of US dollar $37m in cash and short term investments with no debt. This provides us with significant financial flexibility going forward to generate positive returns to our shareholders. To maximize the returns of this excess cash balance, we are also continuing to strengthen our strategic capability.

In summ, we are expanding our operating margin, generating positive cash flow, and strengthening our balance sheet. We are focused on running our business unit more efficiently and increasing margins to drive earnings growth across the company. We are confident that we will be able to build on this success we have now established. Thank you very much.

Okay, thanks Thomas. Before we open the call up to questions, let me quickly summarize then what we believe are the key takeaways for investors from the second quarter. One, strong execution of restructuring is delivering improvements across all business units. Two, we expect sustained profitability, and three, we have a healthy balance sheet and growing operational cash flow help strengthen our company and support growth going forward.

We will now move into a question-and-answer session, but before we do, we wish to express to all our investors our regret for not providing more advanced notice of today's conference call. We ran into a number of scheduling conflicts in setting up this call, but we will be sure to announce future conference calls well in advance of the event. Operator, at this point I would like to open the call up to questions.

Thank you Mr. Miller. Ladies and gentlemen, at this time, we will now begin the question and answer session. If you would like to ask a question, please press the star followed by the one on your telephone. If you are using a loudspeaking 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. Thank you, our first question is from Mr. Tong . Please go ahead with your question, sir. Thank you.

Brad, good morning and congratulations.

Thank you.

Yes, can you give me -- give us some more color regarding your entertainment software business. How is the dynamic going forward?

By dynamics going forward, why don't we try this, we are very excited to be able to add entertainment software, both gaming and social networking, and our whole array of related products to our entertainment platform. At present, there is primarily a European and North American focus, but we believe that there are tremendous opportunities here in Asia for us to expand in those areas. We look to develop these further and bring you some good news in the future on this.

Brad, is that a business growing or is that a just seasonal or how should we see it?

The business does suffer from some seasonality summer time, when the weather is good, there is generally less people sort of indoors playing using entertainment software. So, we do normally see a bit of a dip during summer, but we also have a number of new products under development and those should be rolling out towards the end of this year. We expect some good contribution from those in 2005.

Okay. Can I follow-up with some other questions?

Please.

Brad, in the other lines of business, it looks like you reduced the cost by some extent, and going forward in the next few quarters, what would be the spend, will you keep cost down or do you see a seasonal up .

Actually, I'll ask Thomas Woye, our CFO, to take this one.

Okay, I see the following. Yes, in the second quarter, we have been very successful in continuing our cost, especially the operating expenses given that we've seen a lot of competition in the ISP business, and the music business is facing general market downturn, and with the improving financial performance delivering shareholders' return as a key objective of the new management, we were very cautious in our sticking to cost control. So, that will remain to be the focus, and we will continue to monitor the potential for revenue growth in those two businesses in designing our cost strategy going forward. But the profitability is the number one key here. That being said, as Wang had remarked as we are not underinvesting, we are in fact upgrading our infrastructure in the ISP business to take advantage of some of the price drop in relation to the infrastructure cost to make sure we enhance our product capabilities and services to our customers.

Okay, another question is that, you know, in the US right now, like the Apple or many other firms are doing the music download business. I just wonder, are you guys considering any offering like that?

The operating environment, the jurisdictions we operate in are challenging for the online space. As you are probably aware, there is history of considerable piracy and not the same traditions of respect for intellectual property. Some of those issues present challenges to the major music companies and distributors. Some of those challenges are yet to be worked out. So, it's an area we continue to study, continue to look out. We believe that with Taiwan's dominant offline music retail chain and with our ISP, we are well positioned to be a strong player should the conditions prove right. But, at this point in time, we have no plans to initiate such a service.

Okay. The other question is, you know, in the last few quarters it looks like you changed directors, changed management. So going forward, should we see this as more or less stabilized in terms of the directorship, in terms of the management?

The shareholders -- the directors serve at the pleasure of the shareholders of course, and so, that'd probably be not an area that we can comment upon. I would say that our principal shareholders, the Koos Group, the Koo family has been tremendously supportive and we continue to count upon the synergies, the very large Koos Group can help us attain, help us bring about and help us realize to be an important part of our strategic planning. I guess, our role, as a management team and our continued tenure will depend upon our performance. We certainly would look forward to stay in office and doing good job at that.

Okay, that is great. And Tom, I think I will ask you two number-questions. Why is the tax rate -- now at where you are, profitable, I know you have some loss carry-forward too. So, going forward, how should we model the tax payment?

You are absolutely right. One of the hidden aspects of the company if you might call it then, that is our tax loss carry-forwards, which are very, very sizeable. At this point in time, the quantum of our tax loss carry-forwards are considerably larger than our earnings. So, the impact is limited, I think, more by our operating performance than by the size of our tax savings or tax carry-forwards. We are studying this quite closely, but at this point in time, I wouldn't describe too much about it to to that.

The other one is, when the firms become profitable, what would be the number of diluted shares, total number of diluted shares?

There are a little over 50m plus some shares outstanding now. The exact number is our 20-F filing, which was made in the end of June. At the annual general meeting of the shareholders also at the end of June, the company's position is -- company's first employee stock option plan, and also employee stock purchase plan were both adopted. The total quantum for the employee stock option plan is 10m shares, which would represent 16.66% in the large shareholder base. Employee stock purchase plan, I believe, has a maximum amount of 2m additional shares. So,

So, in total, say if you exercise the stock options, so the total would be 60m shares?

Yes. And if the employee stock purchase plan is fully subscribed then additional 2m, but again there are stringent vesting conditions upon those options. The program was designed very much to align interest and to incentivize senior management and staff to drive shareholder value.

Okay. All right thank you and good luck.

Thank you very much.

Thank you. Once again, if you would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, just press the star followed by the two.

Operator?

Mr. Miller, Mr. Miller, there are no further questions at this time, please go ahead with any further comments you wish to make.

Okay, thank you. Since there are no further questions at this moment from callers, we would like to take this opportunity to respond to a question that's been e-mailed in by a number of investors. Many of you have asked for an update on the Microsoft warrant issue. So, I will hand this over to Arthur.

Microsoft and GigaMedia began with a different view on this matter, but after discussions there is no longer any difference. The matter is now settled. The warrant has been canceled and there is no financial impact on the company.

Operator?

Yes sir.

Any further calls?

No sir. Not at this point.

Okay. Well, thank you again for your interest in GigaMedia. For further information, please view our IR Web site at http://ir.giga.net.tw for Taiwan. And with that, we will conclude today's conference call.

Thank you. This concludes the second quarter results conference call. Thank you for participating. You may now disconnect.