GigaMedia Ltd (GIGM) 2005 Q3 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 third-quarter 2005 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 17th of November 2005. I would now like to turn the presentation over to Mr. Brad Miller.

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our third-quarter 2005 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 reports on form 20-F filed with the U.S. Securities and Exchange Commission in June, 2005. This presentation is being made on September 17, 2005.

The contents of this presentation contain 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 2005 Q3 business activities and financial performance as well as our outlook by Arthur Wang. Thomas Hui will then follow with details on our financial results during the third quarter and further insight into our expectations for 2005.

After the speaker presentations, we will go into a question-and-answer session and with that, I would like to turn the call over now to Arthur, our CEO.

Thanks, Brad and thank you all for joining us. We are very pleased to announce today our third-quarter 2005 results with a net income of U.S. $1.7 million, a growth of 150% from Q3 of last year and a 41% increase from Q2 of this year. Our third-quarter earnings are the highest in the Company's history. Please allow me to highlight certain developments and aspects of our third-quarter results.

First, early investment returns. In the third quarter, we are seeing the early returns from our investments in our entertainment software business. Since acquiring our Cambridge Entertainment software unit in April 2004, we have committed substantial resources to building a world-class gaming platform with a robust and scalable architecture and to introducing new and exciting games onto this platform. In the third quarter, traditionally our softest, we began to see the results of this investment as adoption of our new products and gaming solutions ramped up. We expect further acceleration and growth in the fourth quarter and into 2006 both in terms of marketshare and in revenue. We are committed to build on our position as one of the leading, non-English language gaming solutions.

Second, European opportunity. The rapid growth of our poker software, Everestpoker.com, has been almost entirely in Europe, considered by most industry analysts to be the next big market for online poker. Our entertainment software unit has been operating for over six years in Europe and is experienced in delivering end-to-end native language gaming solutions in 16 languages. In addition, exciting new marketing initiatives are underway. For example, Everestpoker is sponsoring the 2005-2006 French Poker Tour, a series of live and online tournaments culminating in the championship at the Aviation Club in Paris in January 2006. With our strong starting position, we see an opportunity to capture a leading or top tier market position in Europe capitalizing on the trust and branding built over our many year in country history the strength from our multi-language offerings and the excitement surrounding our new marketing initiatives.

Third, commitment to high-growth business. In the third quarter, GigaMedia disposed of a major legacy business, our land-based music distribution unit. Since joining in 2004, the new management team at Giga has worked hard to restructure our legacy businesses delivering profitability across every division despite tremendous operating challenges. Nonetheless, management remains determined to shed noncore businesses to allow focus on high-growth, high margin opportunities.

Fourth, strategic acquisitions. The management team is currently conducting due diligence in respect of a very interesting acquisition opportunity in the online entertainment sector. If successful, management believes the acquisition will accelerate top and bottom-line growth in the short-term and create significant long-term opportunities. We are excited about the opportunity and hope to announce a definitive deal within a few weeks.

In sum, we are enthusiastic and very pleased with our business momentum. We have now recorded six consecutive quarters of net profit and we're only beginning to see the returns on our restructuring and the investments made at our growth platform. We are building a new GigaMedia and we look forward to growing shareholder value with your continued support. Thank you very much. Let me now turn the call over to Thomas Hui, our CFO.

Thanks, Arthur. Let me now go over certain financial details of our business units in the quarter an end with a few additional comments on our outlook. The entertainment software business. The entertainment software business had an excellent quarter with strong year-over-year revenue and net income growth. As noted in our press release today, solid execution of traditional and new products initiatives in this business more than offset the negative impact of seasonality. During the third quarter, the business unit generated $5.5 million revenue, a 6% growth from the second quarter.

Let me now briefly go over the two verticals in the entertainment software business; traditional gaming software and poker software. In the traditional gaming software business, third-quarter revenues grew strongly, up 31% from the year-ago period like-for-like consolidating UIM's revenue. This performance was driven by the release of new games, new language offerings and software enhancements designed to improve the overall player experience.

Online gaming traditionally declines in summer with the third quarter being the weakest period of the year. However, we did not see the degree of softness in sales typical for the period. Revenues in the traditional gaming vertical were down only 4% Q on Q. Continued roll out and growth of our new poker software vertical also helped offset the effects of seasonality on total revenues for our entertainment software business.

In poker, both the number of new players and the number of recurring existing players increased significantly during the quarter. Revenues from poker were up 74% from the previous quarter. As Arthur mentioned, we believe there are significant opportunities for continued expansion of poker in the non-English-speaking European countries, which are our principal markets. And we have the ability to readily scale the platform to appropriate levels as the market expands.

Looking ahead, we expect strong revenue growth in the fourth quarter resulting from both a seasonal increase in the traditional gaming vertical and continued growth of the poker vertical. We are also confident that our rapid top-line growth in poker will translate into solid net income growth in the entertainment software business going forward.

The broadband ISP business. Turning now to our broadband ISP business. In the third quarter, we continue to focus on growing our corporate ISP business. Demand for corporate broadband services remains healthy. However, revenue growth was offset by two factors in the quarter; an approximate 3% depreciation of the NT dollar and competition in certain bandwidth reselling products. As a result of these factors, our corporate ISP revenues declined 3% quarter-on-quarter. We do not believe this is indicative of any trend. We believe competition in this business has subsided. We are confident that our corporate ISP business will continue to deliver top-line growth beginning in Q1 driven by consumer IT spending in the new year.

On the consumer side of the business, we continue to see overall market growth slowing and strong competition, particularly in the ADSL segment. As a result of the mature market conditions and strong competition for subscribers, of subscribers in the consumer broadband ISP business declined 5% in the third quarter. Our brand ARPU decreased approximately 6% compared to the second quarter. Both the subscriber and ARPU declines were largely related to the decrease in the metrics of our ADSL business, which is the most competitive, lowest margin segment of our broadband operations.

Overall, revenues from our consumer ISP business were down 7% quarter-on-quarter. Again, our focus going forward with the broadband ISP business is to continue to grow the corporate side of the business, which now represents approximately 32% of total revenue in the unit. And we intend to continue to develop this business going forward to offset the decline we are seeing in our consumer broadband operation.

Lastly, there were a few non-operating items in the period. Third-quarter financials benefited from treasury activities, which generated an investment income of approximately $358,000. Results also benefited from the disposal of G-Music, which generated a net gain of $168,000.

To conclude, we have now a track record of six consecutive quarters of net profit. Our entertainment software business delivered very strong results in the weakest period of the year and is positioned to benefit strongly from a seasonal up cycle in online gaming. We have a solid balance sheet with approximately $56 million in cash, cash equivalents and current marketable securities.

Finally, we also see a number of attractive strategic opportunities that could be accretive to our financials. We are on track, executing well and growing stronger. We are entering an exciting season and look forward to continuing to grow in the quarters ahead. 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 please.

(OPERATOR INSTRUCTIONS). Mike Nearly (ph), Nearly Asset Management.

Hi. It's Mike Narey (ph) at Narey Asset Management. I just had a few questions. If you add up the operating profits of your divisions, you get to about a 1.7 million and your reported company operating profit was 1.1 million. What is that difference from?

The difference is primarily coming from the headquarter expenses, which is not allocated specifically into either of the divisions.

Okay. So it's corporate.

Yes.

The seasonality of the entertainment software business, last year, the fourth quarter saw a 1.8 million increase in operating profit versus the third quarter. Can you just talk about the seasonality there and how we should think about that business going into the fourth quarter?

Traditionally, the seasonality in terms of top-line is about 20, 25% between the peak season and the trough season. So between Q4 and Q3, you can see 20, 25 or 30%. Now last year, the financials, if you look at some of our filings in the Q4 numbers as a result of the consolidation of UIM because of FIN 46, the 1.8 million numbers was especially exaggerated because there were certain adjustments that were part of the year-end adjustment because of FIN 46. So the 20, 25% is the magnitude of the seasonality we have seen in the past.

And that would be on the piece exclusive of the UIM, right?

That's right.

And just going forward for that business, how should we think about the incremental margins that type of business will generate in future years with the type of growth you're talking about and hoping to get? I would assume their costs are pretty much fixed except for development on new product.

In terms of the costs in that business, most of the costs are quite variable basis. The only one area -- therefore, we don't actually see the margin contracting much because of the increase or decrease in the volume too much. Obviously, the one big area that is discretionary is the marketing spend and our licensee UIM have a lot of control of that. We have been obviously in discussion with them as they build up the marketshare into some of the markets we're developing. The marketing spends obviously will increase. But in terms of our bottom-line margin, we don't expect that to fluctuate a lot. Arthur, I don't know if you want to add to that?

I would just say that we are seeing -- it's early days still for the poker software in particular in Europe. But we are seeing the kind of rapid -- you'd call it geometric growth where the total number of users, total number of players and the like is doubling quite rapidly. So it is difficult for us to say how far it goes and how much it will contribute next year. But we're very excited about the ramp up. It is again ahead of our expectations and we are again very excited about what this portends for 4Q and for next year.

Do you capitalize the software development expenses for that business?

We do.

How much were those in the quarter and this year?

The total CapEx for the entertainment software business, including -- because we don't fully disclose the UIM numbers and our numbers on a consolidated basis. For the quarter, it is about 350 to $400,000. Most of which are software capitalization.

And that is just -- what about for the whole Company?

CapEx is about $600,000.

Total company. And this year should I just multiply that by four, about 2.5 million in CapEx is then what we will do?

We think the CapEx level is going to increase a bit in Q4 comparing to Q3. And so it's probably going to be slightly higher than a strict multiple of four.

So your depreciation expense is pretty much offset by CapEx. You might need to spend a little more than depreciation, right?

Depreciation for the quarter should be close to $1 million.

I know you have talked about this in previous calls but the tax rates on the business and specifically software profits, how should we think about that?

A question about the tax rates on the software product.

Basically we have a pretty tax efficient structure in place. We basically pay minimal tax on that based on offshore, IP rights and so on and so forth.

Great. Thank you very much. You guys are doing a great job.

Chang Qui, Forun Technology Research.

Congratulations, with the very good results.

Thanks very much.

I have a few questions. First one, for the poker, can you disclose any -- some (indiscernible) players number?

Well, as I mentioned, we consider it very early days for the software product. So we are not releasing many of the metrics at this point in time. But we're seeing them scale up very rapidly and it is our intention beginning in 2006 to release some of those comparables, which we think we will be very proud of at that time.

Yes, I think some of your peers are reporting that the poker side is growing but the growth rate is moderating. On the other hand, it looks like you are experiencing still quite healthy or actually quite a faster growth. So my question here is are you (indiscernible) from some of your competitors or what do you see right now?

I would just say a couple of things there. First of all, some of our competitors are dramatically larger than us and so in percentage terms, their slowdowns or their growth rates suffer the effect from being so large. But there is also the effect that many of the public companies, which you guys will follow, are U.S.-based or overwhelmingly North American-based. So our experience in the European marketplace is also going to be different for that reason.

I see. Okay. Tom, -- I'm sorry.

What I was going to say is that in the United States, one could argue that the market, while not completely saturated, has large penetration already. Where what we see the European marketplace is that it is a very young market. It is very -- it is very open -- it's a very developing marketplace, put it that way. And we see special opportunities in such a marketplace for us to grow with the market and to claim a large share of the market.

That's great. Tom, a question for you. In the third quarter, have you guys changed the revenue hearing or cost sharing with the UIM? The reason I am asking this, it looks like you have grown the revenue side quite nicely from second quarter but the earnings side, the net earning side, looks like it is about flat.

Chang, no, we have not changed the revenue sharing percentages and arrangement with UIM during this quarter.

So can you explain why the earnings side is flat?

Well, first of all, the casino vertical and the poker vertical carry different levels of percentage sharing in terms of revenue and the growth in the third quarter is primarily coming from the poker side and that basically grows the entire revenue side. But proportionally, did not grow as much in terms of the software royalty revenue because they carry a different revenue sharing percentage. But the percentage has not changed since the beginning of the year.

Okay. On the ISP side, I just want to know what is your plan there? You commit to grow that business or you also are looking maybe to sell that business?

We believe that the corporate ISP business continues to enjoy good growth opportunities and good margins. The retail ISP is not so optimistic. We are taking a hard look at that business and would consider exploring a disposition. But we are not particularly -- we see no urgency about that. We think our subscribers still have value and the businesses run efficiently. We're open to the possibility but we are not particularly -- we are not in any rush to do anything there.

Okay. Thanks a lot.

Thanks very much.

At this time, you have no further questions. I do apologize. You do have a follow up with Mike Narey from Narey Asset Management. You may go ahead, Mike.

Just a quick question here. The entertainment software business, you've seen what the revenues are, excluding the UIM contribution. How does that affect the operating income line?

It doesn't affect the operating income. It only affects the net income line.

And how --?

Because -- the minority -- we don't own any of UIM and UIM's profits from the quarter will be backed out of the minority interest line.

Got you. Thank you.

At this time, sir, you have no further questions.

Okay. Operator, thank you very much and thank you all again for your interest and for joining us today. We look forward to speaking with you on our next conference call for our fourth-quarter results. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.