GigaMedia Ltd (GIGM) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GigaMedia Limited conference call to discuss fourth-quarter and full-year 2004 financial results. At this time, all participants are in a listen-only mode. Following the formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, the 8th of June, 2005. I would now like to turn the conference over to Mr. Brad Miller. Please go ahead, Mr. Miller.

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our fourth-quarter and full-year 2004 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 20F filed with the U.S. Securities and Exchange Commission in June 2004.

This presentation is being made on June 8, 2005. 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.

The agenda for today's call includes first, a review of 2004 business activities and financial performance, as well as a look at what we expect going forward by Arthur Wang. Thomas Hui will then follow with a review of each of our business units and further insight into our expectations for 2005. After the speaker presentations, we will go into a question-and-answer session.

With that, I would like to turn the call over to Arthur, our CEO.

Thanks, Brad, and thank you all for joining us. I'm happy to report that GigaMedia has today announced its best-ever financial performance and our first-ever profitable year. For 2003, GigaMedia -- that is, the old GigaMedia -- reported a net loss of $14.1 million. Just one year later, thanks to the hard work and discipline of the new management team and the entire GigaMedia family, we report today a consolidated net profit of $1.7 million for 2004, representing a $15.8 million year-on-year increase. Consolidated EBITDA for 2004 was 9.1 million, up year-on-year over 19 million from a $10.1 million deficit in 2003.

This clearly represents a significant turnaround from 2003 and the old Giga. In just one year, GigaMedia has climbed out of a $14 million hole and into the light of the day. We stand above ground now, confident in our future, excited about our prospects. We are building a new GigaMedia with growing shareholder value as its cornerstone.

For those of you unfamiliar with our story, please allow me to provide a high-level review of the past year. We began to assemble our new management team in early 2004. For over five years, Giga had always been a loss-making Company, so it was clear what our prime directive needed to be -- to stop the bleeding.

So we began a comprehensive internal restructuring to reinvigorate the Company and overcome a history of underperformance. We set an aggressive and demanding agenda for change, raised the bar on operational excellence and ramped up our internal targets for all aspects of our business.

Reshaping our corporate culture and building better systems is a major undertaking. But we accomplished a lot in this area in 2004. We were able to deliver results first in Q2, when GigaMedia reported its first-ever profitable quarter. With more hard work, we then grew net profit by 23% Q-on-Q in Q3, and then more in Q4, increasing net income a further 76% Q-on-Q.

We also took advantage of opportunities to grow our business by acquisition. In April of 2004, we acquired Cambridge Entertainment Software, a very successful developer of online entertainment software based outside of Boston in Cambridge, Massachusetts. CES, formerly known as Grand Virtual, has strengthened our entertainment product portfolio and revenue base and provided GigaMedia with an outstanding platform for growth.

We have also taken major steps to adopt new systems and international best practices into GigaMedia, including beginning the full implementation of the Sarbanes-Oxley 404 internal control procedures one year ahead of our required adoption. We have strengthened our financial legal teams and established an internal audit department reporting directly to the Independent Audit Committee of the Board.

Within this context, let us look at our business units. We are very encouraged about our online entertainment subsidiary, Cambridge Entertainment Software, or CES. In the past year, CES has invested heavily in new gaming products, including both new variations of our traditional gaming offerings, as well as new product lines, such as multiparty poker, under the brand Everest Poker. I think most of you are familiar with the amazing success of online poker in North America. Our strategy is to become a first mover and market leader in Europe and Asia.

We are happy to announce that Everest Poker is now available in native language offerings in 16 languages. While we're not releasing numbers at this time, we are very encouraged by the numbers growth, which has exceeded our internal forecast. We are very bullish on this business unit and are strongly focused on further penetrating the online gaming market through organic growth and the acquisition to drive our financial performance.

Our ISP business continues to improve its performance, despite difficult operating conditions for our consumer ISP division. Our residential ADSL service faces some limited pricing pressure, but this is offset by improvements in our cable modem service, resulting in essentially no ARPU decline. Our corporate ISP business is showing good growth. We believe we are well-positioned here to offer valuable, in-demand data transit services, as well as other value-added services for businesses.

As a result of our positive experiences in Taiwan, we are now exploring opportunities in this sector in China, but it is too early to speak of this at present.

Music retail remains a challenging business. On the one hand, we have completed a thorough overhaul of the entire business, installing an all-store point-of-sale and inventory system, negotiating new consignment terms with our suppliers, enforcing strict inventory controls, subletting or sharing of store space to retailers interested in capitalizing on our high foot traffic, increasing the proportion of video products such as DVDs, and numerous other in-store improvements. Our music business is almost unrecognizable from a year ago.

On the other hand, secular declines in the sales of recorded music have continued and will continue. And we are unable to predict with certainty the implementation of strong anti-piracy legislation and the adoption of anti-copying digital rights management coding, although there has been progress on both fronts.

As a result, we continue to manage defensively, with strict inventory and purchasing controls. At the same time, we continue to think deeply about larger strategic issues, including our own long-term future in this business.

Overall, then, we as a management team are pleased with the results we announced today, but by no means complacent or satisfied. Our turnaround and restructuring is still but at midstream. But the results we report today are strong evidence that our direction is correct and that our methods are sound.

In addition to improving our current businesses, we're also very focused on strategic acquisitions, targeting profitable companies with strong growth potential in transactions that are accretive to our shareholders. We expect continued quarterly profitability and continued growth, in particular from our online entertainment software subsidiary.

In conclusion, GigaMedia is today a Company undergoing a profound transformation while we are building a much improved Company poised to deliver another record year in 2005. We are confident in our future, excited about our prospects. We are building a new GigaMedia with growing shareholder value as its cornerstone. Thank you very much.

I will now turn the call over to Thomas Hui, our CFO.

Thanks, Arthur. Let me now take a few minutes to highlight certain details in each of our business unit and end with a few additional comments on our outlook. First, the entertainment software business, as stated in our press release, we believe that the online gaming industry continues to offer significant growth potential. Our entertainment software unit is well-positioned to capitalize on the rapid growth of this market. Our online casino game software is one of the only end-to-end solutions that offers localization in up to 16 languages, and our poker product remains the only poker software available in up to 11 languages.

During 2004, we devoted a great deal of resources to improving back-end, back-office functions, software cleanup and upgrading customer relationship management tools to enable more efficient marketing campaigns. We also invested in upgrading the attractiveness of our casino products and developing our new poker product. We believe these investments will further enhance the competitiveness of this unit going forward.

The entertainment software unit made strong contributions to our 2004 financial results. During the fourth quarter, results of this unit were also favorably impacted by a few factors. First, a quarter-on-quarter decrease in restructuring charges related to the integration of this business unit; second, seasonality inherent in this business, as the winter months are the peak period of play; and third, reclassification of certain intangible assets during the year-end of the process, which lowered amortization expense.

In sum, with upgraded back-end functionality, more attractive casino game software and newly launched poker software, we're excited about the long-term growth prospects of the entertainment software business. We expect strong topline and bottom-line performance from this unit in 2005.

The broadband ISP business. As Arthur has alluded to, our broadband ISP units face strong challenges with market leaders continuing to undercut prices. We expect the environment to remain very competitive. Let me now take a moment to briefly go through each part of our broadband ISP business. In our consumer broadband ISP operations, our goal is to maintain our subscriber base and revenue streams in Taiwan's highly penetrated market. We continued to upgrade our ADSL subscribers through sales of packaged bundles that highlight our large e-mail and web storage space. During the quarter, our subscriber base dropped slightly from 97,000 to 95,000. However, we were able to increase our ARPU from $12 in the previous quarter to $12.40 in the fourth quarter.

In our corporate broadband ISP operation, we believe there is room for more topline growth. We will continue to leverage our domestic peering (ph) advantage to increase transit and call location revenue. We're able to achieve better margins in this business, as the market is less mature compared to the retail ISP business. There's less price competition and services tend to be more customized. During the fourth quarter, we were able to grow both the number of service lines and the bandwidth provided per line in this business. The corporate ISP business represented approximately 24% of our overall broadband ISP revenue in the fourth quarter and we expect that to grow in 2005.

By continuing to focus on the corporate side of the business, where margins are more attractive, and tightly controlling costs, we expect our broadband ISP unit to deliver continued profitability in 2005.

Lastly, our music distribution business -- as Arthur has mentioned, our legacy music distribution business, G-Music, continues to face the clear challenge of a secular downtrend in Taiwan's music distribution market. Fourth-quarter revenues in this unit declined 25% year-on-year, in line with the overall market decline. We are aggressively managed for this market downturn, and as a result, we recorded a net profit of $1.3 million during the quarter versus a net loss of $4.6 million during the same period of 2003.

Our strong focus in 2004 on improving inventory management was the key reason for the turnaround in performance. We were able to obtain more flexible product distribution terms featuring larger percentages of returnable inventory, which led to a reduction in overall provisioning needs.

Our results also benefited from lower fixed costs. We closed 10 stores in 2004, two during the fourth quarter. We also converted three into combined stores, sharing retail space with other stores and reducing rental costs.

Going forward, inventory management will remain a top priority, supported by our new point-of-sale system, which is now fully functional. We will also continue to focus on reducing costs in an attempt to protect margins, as we expect the market to continue to deteriorate. Given the speed of the industry downturn, though, the long-term viability of this business unit is something we are looking at very closely.

To conclude, in 2004, we made rapid progress in improving our financial performance. We are now delivering healthy quarterly earnings, with three consecutive quarters of net profit growth. In addition, we are actively reviewing opportunities in strategic acquisition that would provide us with revenue growth and be accretive to our earnings. With positive cash flow from operations, a solid balance sheet and a strong management team, we are well-positioned to deliver attractive long-term growth in shareholder's value. Thank you.

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

(Operator Instructions). Tan Qu, Ram Technology Research.

Good evening, Arthur and Tom, and congratulations. For the -- looks like you have a very good quarter for the online game software business. You mentioned that seasonality. Can you discuss this in more detail -- what we should expect going forward in the next few quarters?

Yes, as we have mentioned in previous calls, the winter months are typically the peak months for the entertainment software business. And the seasonality in terms of a topline ranges from about 25 to 30% differences between the winter months, which are the peak months, and the bottom months, which are the summer months. So Q4-Q1 typically are the peak months -- peak quarters for us in this business, and Q2 and Q3, where we see some softness in terms of topline. And this just generally gets filtered down into the financials as you move down the P&L.

Maybe I might add something here. That is the number of new games and new product offerings that CES has put out there -- we think this year will -- may soften the seasonality effect, and we're looking very much forward to a good Q2 and Q3.

That's great. On the other hand, will you sell your entertainment or software -- my understanding is you charge your people or the customers just one time when you sell that software. Do you have other charging economies (ph) and kind of like share the ongoing revenue in that sense?

Yes, in fact, actually, the revenue model there is actually a revenue-sharing model, whereby we will share the ongoing revenue at a fixed percentage with the partners.

So this $6 million in Q4, that's mostly revenue sharing with the customers?

Yes, actually, our subsidiaries here, CES, basically has revenue-sharing agreement with our partners, and here, as you see -- as we've indicated in our press release, because of the FIN 46, we were asked to consolidate, actually, our customers right in here. So there is actually some intercompany elimination or point consolidation. So a large part of this 4.8 is the revenue sharing, and there is a certain part of these is not eliminated out at the minority interest level, because we actually don't own this subsidiary or this company that we were asked to consolidate because of FIN 46.

I see, because you mentioned the minority interest -- maybe I cancel that question right away. Looks like on the balance sheet, the minority interest is only a few million dollars, and then in the fourth quarter looks like they shared 720,000 of the income. So can you give us some more color why it's that way?

Yes, the breakdown -- the minority interest come in two parts. One is on our music business, whereby we own 58.58 of our music business, so there's a 40.41% of minority interest. So if you look at our segmental breakdown of the music business, the music business earned about 1.3 million in the fourth quarter, so 41% of which, probably around 500,000. Okay? And then the remaining will be basically the minority interest in the entertainment software business, as I just mentioned.

Okay, okay. That's great. And also, with the impairment charge of certain financial -- is that a one-time or do you see anymore impairment in the future?

The impairment is obviously reflect the crudeness and conservatism we -- as management look at our balance sheet and managing our financials. So this is -- if you look at our financials from previous years in our long-term investment, we had this investment in a company called Gamania, which is a listed company in Taiwan doing online MM or RPG games, being the market leader here. This is an investment we had held since 2001, at the point of IPO. Over the years, we have actually divested and make a bit of money through this investment.

And beginning from, I believe, March and April of last year, the share price of Gamania on the Taiwan stock exchange has been trading below our costs. And so, that situation has continued for nine months. We sit on the board of Gamania. We treat this investment as having long-term strategic value to us, having some synergies with our ISP business. But as a matter of prudence, after discussing with our auditor, we decided to write down the loss difference between our costs and the December 31 year-end market price of Gamania. That reflects that.

So in the sense or in the case Gamania's stock price coming back, or they ran some other online games licensing, your fixed charge can reverse?

Only -- under U.S. GAAP, we can only reverse those income or we can only book that as an income if we choose to dispose our stake. So if the share price go about the December 31 level, what we could do is, or obviously what we would try to do is actually book the difference in our shareholders' equity so we cannot realize that gain until we actually dispose of our stake.

(Operator Instructions). Gentlemen, we have no further questions at this time.

Okay. Thank you again for joining us today. We would like to -- we look forward to speaking with you on our next conference call for GigaMedia's first-quarter 2005 financial results, which we anticipate will be announced in July. For further information about GigaMedia or if you have questions and would like to contact the Company, please see our website at http://www.giga.net.tw for Taiwan. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.