GigaMedia Ltd (GIGM) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for holding. Welcome to the GigaMedia third-quarter results conference call. At this time all participants are in a listen-only mode. After the 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.

This is Brad Miller, Investor Relations director of GigaMedia. Welcome to or third-quarter results conference call for GigaMedia Limited. Here to speak with you and answer your questions today are Arthur Wang, our CEO, and Thomas Hui, our CFO.

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 U.S. Securities and Exchange Commission in June 2004.

This presentation is being made on December 2, 2004. The content of 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 speaker presentations we will go into a question-and-answer session. And with that I would like to turn the call over to Arthur, our CEO.

Thanks, Brad, and thanks to all of you for joining us today. We are very pleased to announce that for the third quarter of 2004 GigaMedia recorded its second consecutive quarter of profitability with a quarter-on-quarter increase in consolidated net profit of 23 percent over the second quarter of 2004. The Q3 numbers are a clear demonstration that our plans to restructure, to revitalize GigaMedia are beginning to deliver results.

To put our current situation in context -- when I joined GigaMedia in the beginning of the year we had a 16 quarter history of underperformance and loss making. We have now delivered, ahead of schedule, two consecutive quarters of growing profitability. The rapid transformation at GigaMedia has been the direct result of a lot of hard work and strong execution by our new management team. We are especially pleased with the third-quarter results because they provide some empirical validation that, one, our restructuring plans are (indiscernible), and too, that we are executing effectively on these plans.

I feel it is important, however, to emphasize that the reshaping of a company culture is not an overnight process. We have taken some important first steps but much hard work remains. As a management team we are committed to building a world-class organization focused on delivering strong results to our shareholders, but we are going to need a bit more time.

I'd like now to turn to larger strategy level questions and talk a bit about how we see our market position and our strategy for going forward.

With respect to our music distribution business we are very aware of the challenges facing the local and global music industry and we have and will continue to aggressively manage for the industry downturn. We note, however, that the international music chains are showing improved results this year due to an increase in anti piracy activity and a shift in product mix towards more video products such as DVDs which (technical difficulty) higher margins and which are not easily downloaded due to the large size.

We also believe that there will always be a role for physical retail channels to satisfy essential pleasure in going shopping. We remain the dominant music distribution channel in Taiwan with 46 stores, very high walk in traffic and high brand recognition. In view of this we are exploring and experimenting with some different retail models including combined stores -- for example, music and arcade games or music and fitness centers and specialty stores -- for example, classical music annexes. All of this to try to capitalize upon the brand, the location and the high walk-in traffic we currently enjoy. We are continuing to do some deep thinking about this business and are committed to make the appropriate decision on the basis of ongoing developments.

In our broadband access business we find ourselves in a highly competitive retail marketplace which means both subscriber growth and ARPU growth are difficult. Though the retail business is challenging, our corporate access business continues to offer good margins especially for higher service level products and we plan to continue to shift resources to capitalize on this situation.

At a macro level we also see real opportunity for consolidation in the ISP market and, as a public company with cash in the bank; we feel we are well positioned to be a consolidator in this process with consolidation on economies of scale and improved operating margins. We are currently looking at a number of consolidation and acquisition opportunities including both other ISP businesses and cable television networks with opportunities for rollout of broadband cable modem service. But at this time it is too early to report anything.

We are very excited about the growth possibilities in the entertainment software area. There has been a lot of attention paid to the U.S. and English language market, but we believe tremendous opportunities exist in the Asian online entertainment sector which we believe is both expanding rapidly and currently underserved. We are very enthusiastic about growing in this area both organically and by acquisition. At present we are in discussions with -- about (indiscernible) opportunities in this sector and hope to get back to you in the next quarter or two with some good news.

With that I'll turn it over to Thomas Hui, our CFO.

Thanks, Arthur. Let me now take a few minutes to go through each of our business units to highlight some additional details. The music distribution business, as noted in our release, our music distribution business, G-Music, recorded a small net loss. This was largely due to the ongoing market downturn in Taiwan's music distribution industry as well as the delayed release by record companies of albums from certain top Taiwan artists.

The (indiscernible) were unfavorable macro factors that were beyond our control, we are nevertheless not satisfied with this level of performance. As Arthur outlined, we are broadly reviewing this business unit and taking strong steps to improve its financial results. Current focus is on reducing our fixed cost and increasing efficiencies. During the quarter we closed four underperforming stores and continues to roll out a new point-of-sale or POS system. We believe the POS system will help us to collect and better analyze sales data and improve the inventory management. We expect to finish implementation of the POS system at the end of 2004.

The (indiscernible) ISP business -- despite a highly competitive market we achieved improved profitability largely due to straight cost and expense control measures. In this quarter we managed to reduce costs and expense in this business unit by over 9 percent compared to the second quarter.

During the third quarter we also expanded our capabilities and offerings with the launch of (indiscernible) which is a connectivity service targeting (indiscernible) customers in the greater China region. This product provides the foundation for additional value added offerings in the future and targets a new customer segment to us in a market with high demand for telecom services. The (indiscernible) side of our broadband ISP business continues to show more favorable growth potential.

We will continue to execute our existing strategy of offering differentiated products and value added services going forward. We feel CapEx requirements ahead of us now, we expect our broadband ISP business to deliver continues profitability. While we are pleased with the overall performance of this business in the third quarter, looking ahead here we are reviewing strategic options to enhance our market position and competitiveness for a strategic consolidation as Arthur mentioned earlier.

The entertainment software business -- our entertainment software business continued to make positive contributions to the Company's financial results. In the third quarter we increased our investment level in product development and marketing. We launched our first multi-player poker product and we'll soon follow with another. We believe we are the only major providers currently offering an online poker product supported in eight different languages. We also launched two new slot games for online casino as part of a new marketing campaign that guarantees a new game every month. Finally, during the period we also continued to invest in processing, back office and CRM systems all of which will allow us to scale up in 2005.

In sum, we are now taking what was a good acquisition and making it even better. We believe our entertainment software business will deliver even better results going forward as we begin to realize the benefits of the investment made today and as we enter into the most profitable season of the year for the business.

Complementing the improvement in the operating performance of our business units in the third quarter was our strong balance sheet. We finished the quarter with $45 million in cash and short-term investments and no debt. As mentioned, we intend to use our significant financial flexibility to pursue acquisitions that will provide both top line and bottom-line growth and we are actively reviewing opportunities at this time.

In conclusion, strong execution of our internal restructuring plan is continuing to yield results in our financial performance. We are on track, ahead of schedule and see room for additional improvement in our operating efficiencies. We are still in the early stages of transforming GigaMedia and there remains a lot of work to be done. But we remain excited of our prospects going forward. Thank you.

Thanks, Thomas. We will now move into a question-and-answer session. Operator, at this point we'd like to open up the call to questions.

(OPERATOR INSTRUCTIONS) Tan Qu (ph), Ram (ph) Technology Research.

Ram Technology Research. One question is Tom and Arthur; can you tell us what is the potential for the (indiscernible)? So far what do you see?

This is Thomas here. We've launched the business in 3Q; so far we see positive reception from our customer base. We're still discussing with a lot of (indiscernible) potential interest at customers. We have already signed up quite a few customers. And in the -- (indiscernible) involves a discussion with the fixed line operators to have the circuit tied up and that is one of the things that we're working through to get through and we do not see any problems with any -- the implementation of this business. But right now we (indiscernible) give out a lot of information as (indiscernible) if you follow the market once we launch this business all of the (indiscernible) fixed line operators also launched a similar product and we do have a competitive issue at hand right now.

I might add that the sales cycle on this corporate access business is a little bit longer than normal. It involves oftentimes transforming people -- shifting people, migrating them from their existing service providers and the like. We feel we have a very attractive value proposition for this corporate customer -- for our target corporate customers and I think we are optimistic about this, but I don't think that the results will start showing until I would say Q1 of next year.

Okay. I think kind of think initially you may even have more cost than revenues, right?

The structure of the arrangement with Hutchison Global Crossing is on the basis of our revenues share with both Hutchison and GigaMedia contributing their existing metropolitan area network and (indiscernible) and Hutchison Global Crossing paying for the link between Taiwan and China. Well, first to Hong Kong. So CapEx commitment is relatively negligible at our level.

I see, okay. On the (indiscernible) software side, how will you charge your licensees? Will they give you a monthly report and you take a percentage of their revenue or what's the way?

There are a number of different licensing models that we utilize, but yes, that is one of the models of revenues share off the monthly revenue.

What are the other models?

We also make available software on a flat fee licensing basis. It is probably not our preferred manner of licensing the software, but we try to remain flexible to satisfy different licensees' requirements and different approaches.

How many licensees do you have right now?

There are a large number of licensees and then there is a smaller (indiscernible) active licensees or highly production licensees. I believe the number of -- total number of licensees is actually quite large and we're looking for that number now. Maybe if you'd like to start with another question.

Okay. Other question, maybe you can comment a little bit about the (indiscernible) software business. The fourth quarter is strong; what about the March quarter and then June quarter? I mean, June quarter you already reported. On a quarter to quarter basis over the year how does the seasonality look?

The seasonality if we go business by business -- the music distribution business, first of all, the peak season traditionally is around the Chinese new year period which is going to be first quarter for us. And that traditionally has a 20 or 30 percent more sales comparing to other quarters. So after the fourth quarter the first quarter we are expecting a pickup in terms of sales volume just because of the seasonality effect of the music business. The ISP business is not seasonal at all. And lastly on the online entertainment business the winter months are the strong months where people tend to stay indoors and they play games online. And we do expect fourth quarter being the strongest season again, the magnitude is probably about a 20 to 30 percent pickup in terms of sales.

I see, okay. So do you have the number of licensees now?

I'm going to say north of 2,000 and if we can get you a more exact number at a later date.

Okay, thanks a lot. Good results.

Thank you very much and thanks for signing on.

Operator, any further questions?

No further questions at this time. Please go ahead with any further comments you wish to make.

If there are no further questions I'd just like to thank everyone for joining us today. For further or additional information about the Company please visit our website at http:\\IR.data.net.TW for Taiwan. Thank you very much for joining us.

This concludes the GigaMedia third-quarter 2004 results. Thank you for participating. You may now disconnect.