GigaMedia Ltd (GIGM) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the GigaMedia Ltd conference call to fourth quarter and full year 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, March 23, 2006. 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 2005 results conference call for GigaMedia Ltd. Here again to speak with you and answer your questions today are Arthur Wang, our Chief Executive Officer, and Thomas Hui, our Chief Financial Officer.

Before I turn 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 2005.

This presentation is being made on March 23, 2006. 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 by Arthur Wang of 2005 Q4 and full year 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 fourth quarter and for the full year period. After the speaker presentations, we will go into a question and answer session.

And with that, I’d like to turn the call over to Arthur, our CEO.

Thanks, Brad. Thank you all for joining us today. We are very pleased to report today our fourth quarter 2005 and full year 2005 results, the best ever for GigaMedia. For the full year 2005, our net profit climbed 277% to a record $6.3m. Consolidated EBITDA for the year grew 73% to $12m, also an all-time high.

Throughout 2005 we delivered consistent improvements on our financial performance quarter-over-quarter and ended with a strong increase in our business momentum and profitability.

Fourth quarter 2005 consolidated net profit jumped 37% from third quarter to an all-time high of $2.4m. Fourth quarter consolidated EBITDA climbed 24% over Q3 to a record $3.8m.

I want to spend most of my time with you today talking about the exciting plans and growth we see immediately ahead of us. But before going on, let’s take a moment to put 2005 into context, to review what we’ve achieved, to understand today why we are both confident and enthusiastic.

First, 2005 was an important internal restructuring year. When the new management team came into Giga in 2004, we inherited a broken company with an unbroken record of loss making. We worked hard to rework, to rebuild the old Giga, delivering first-ever profitability within two quarters. In 2005 we continued this hard but important work, culminating with the sale of our loss-making music distribution business in the third quarter, and at a small profit.

This move reflects our commitment to focus on high-growth, high-margin businesses with large addressable markets. We remain determined to shed non-core businesses and are currently evaluating our long-term future in the Broadband ISP business which, while profitable, is our only remaining legacy business.

Second, 2005 was a key internal investment year. Beginning in 2004 and continuing on in 2005, we invested heavily in our online entertainment business, building a world-class gaming platform with a robust and scalable architecture and introducing new and exciting games onto this platform. In late 2004, we released the single table Everest Poker product, followed in April 2005 with the full functionality multi-table tournament poker product.

The dramatic improvement in our financial performance in 2005 represents the early returns from these investments, with more and stronger growth yet to come.

Looking ahead, we are very excited by our prospects in 2006 and beyond. Let me discuss our primary drivers in turn.

First, our traditional poker and gaming software business. In the fourth quarter 2005 and into this, the first quarter of 2006, we are seeing a very rapid ramp-up of our Everest Poker and Everest Casino business. Our strategy has been to bypass the crowded North American market and concentrate on the rest of the world, the giant non-English language marketplace, by offering our Everest Poker and Everest Casino software in end-to-end native solutions in 11 languages. By leveraging the experience gained from operating in the European and Asian markets for over seven years, we’ve enjoyed dramatic growth, with more to come.

In the fourth quarter, active real-money players increased 58% from the previous three months. This strong growth trend continues in the first quarter of this year, where we are seeing another over 40% Q-on-Q growth, lifting peak concurrent players on Everest Poker to an expected 8,000 players.

Everest Poker user and revenue growth has been driven by marketing and brand-building initiatives. Everest Poker was the exclusive sponsor of the 2005/2006 French Poker Tour, the 2005 German Poker Tour and the Japanese Poker Players Association. Everest Poker also offers, as prizes, seats to major land-based events during the year, such as the World Series of Poker and the World Poker Tour. Our Everest Poker European Championship is now underway. The German leg of the championship, which is being conducted in partnership with the German Poker Players Association, has been a sell-out with poker players being turned away at every event.

We are committed to capitalizing upon our position as one of the leading non-English language gaming solutions. Our poker software remains the only solution on the market available in 11 languages.

Our second major driver is our FunTown casual game portal. On January 1 we acquired the computer game division of Acer Computers, FunTown, in a highly strategic, highly accretive transaction. With FunTown, GigaMedia enters the rapidly growing casual game business in Asia as the market leader, with FunTown’s base of 4m registered users as our foundation.

Market projections for growth in online games are exciting. According to the PWC report entitled “Global Entertainment and Media Outlook 2005 to 2009”, the online games market in the Asia-Pacific region is expected to grow by 45% on a compound annual rate to the year 2009, increasing from $1.1b in 2004 to $7b in 2009, as online gaming subscribers grow from 10m in 2004 to an expected 75m in 2009.

In this, first quarter of 2006, the post-acquisition period generally considered the most sensitive in an M&A deal, we are happy to report that FunTown is running ahead of budget, exceeding our internal revenue and net income targets, while at the same time releasing new games and a new 3D virtual community called FunTown Village, where players can chat, shop, trade items, give gifts and even get married. Peak concurrent players on FunTown Village have already exceeded 25,000. We are very excited about the prospects for the FunTown casual game portal.

Our third major driver of new business is the real money Mahjong and Asian games. Mahjong is the traditional game of choice for over 1b people. We intend to leverage FunTown’s number one Mahjong position by bringing real money Mahjong to this market. One avenue will be to offer FunTown’s leading Mahjong and other Asian games to online gaming operators around the world, allowing them to target the highly valued Asian punter. We are happy to report that we are currently in discussions with the premier names in global online gaming, who have all expressed a strong interest in Asian games.

Real money online Mahjong is a huge untapped market and a huge opportunity for GigaMedia. We begin with market leadership and are committed to obtain market dominance, capitalizing on the natural advantage offered by superior starting position.

Overall, by way of outlook, we see a very strong first quarter 2006 with the top line expected to grow over 40% over the prior quarter, Q4 2005, all the while holding operating margins essentially stable.

We are very excited about our prospects for the rest of the year, both organically from our current business drivers and from our new real money Mahjong and Asian game offerings as they begin to contribute in the second half.

We also continue to examine and evaluate strategic acquisition and partnership opportunities, which we believe may accelerate our growth and market penetration.

In sum, 2005 was a watershed year for GigaMedia as we successfully restructured our legacy business, focused on strong execution of a solid growth plan and invested heavily into our growth drivers for 2006 and beyond, all resulting in record growth and net earnings. We have built a new GigaMedia with growing shareholder value as its cornerstone. We thank you for your interest and continued support.

Let me now turn the call over to Thomas Hui, our CFO.

Thanks, Arthur. Let me turn now to look at our financial performance, both full year 2005 and for the fourth quarter. I will begin by taking you through consolidated results and follow that with a look at the details for each business unit.

Starting with the income statement, GigaMedia delivered the Company’s best ever results in 2005. Consolidated revenue grew 34% year-over-year to $44.2m. As noted in our press release today, full year 2004 revenues incorporate the results of CESL, our entertainment business unit, only for the nine months following the acquisition of the business in April 2004. Adjusting for this to compare like-for-like relevant nine-month 2005 and 2004 periods, consolidated revenue grew approximately 21% year-over-year.

Operating income for 2005 rose 76% to $4.4m, with an operating margin -– operating income margin expanding to 9.9% from 7.5% a year ago. Our best operating result ever. Driving these improvements was strong revenue growth and significant operating margin expansion in our entertainment software business, CESL.

We also recorded approximately $2.7m in non-operating income during the year. This included treasury gains of approximately $1.3m, gains from the sale of our Gigigaga website, and reversal of certain legal contingent liability provisions. The end result, net income jumped 277% year-over-year to a record $6.3m.

Turning to look briefly now at our balance sheet, we ended 2005 with a strong financial position. At year end we had cash, cash equivalent and short-term investments of approximately $62m with no debt. This represented an increase of approximately $6.4m from the third quarter of 2005. The increase was mainly due to strong operating cash flow and the reclassification of one of our equity investments from non-current to current.

Overall then, we successfully executed our strategic growth plans and delivered steady improvement in our financial result in 2005. With our high margin entertainment software business CESL driving rapid growth in our revenues, we were able to enhance overall operating margin and significantly increase bottom line.

This trend was also demonstrated in the fourth quarter of 2005. Consolidated revenues from continuing operations for the period increased 6% to $11.8m, driving a 56% quarter-on-quarter growth in consolidated operating income. As a result, GigaMedia delivered best ever consolidated quarterly net income of $2.4m, up 37% from the previous quarter.

To break down this result in more detail now, let’s look at our business unit results.

The entertainment software business. The entertainment software business delivered outstanding growth in 2005. The poker software products drove all-time highs in revenue and profitability. For the full year, the business unit generated $22.5m in revenue. As I mentioned earlier, 2004 results include results of CESL only for the nine months following the acquisition of the business. Adjusting for this to compare like-for-like relevant nine-month periods in 2005 and 2004, revenues grew approximately 55% year-over-year. Operating income increased 133% year-over-year and net income grew 102% over the same period.

As the scale of CESL’s operation increased during the year, operating margin for the business grew as well. Comparing like-for-like relevant nine-month 2005 and 2004 periods, operating margin increased to 28% from 19%.

We ended the year on a very positive note with best ever quarterly results from the entertainment software business in the fourth quarter. Fourth quarter revenues in the entertainment software business increased 22% quarter-over-quarter to $7m. Operating income grew 56% to $2.4m. Net income grew -- rose 42% to $1.9m.

We also continued to invest in scaling up and developing new products in the business. During the quarter –- the fourth quarter, capital expenditure amounted to approximately $400,000, of which 51% was related to software capitalization.

Let me now briefly go over the two products in the entertainment software business, poker software and traditional gaming software. During the fourth quarter, the poker software business achieved dramatically increased financial performance on the back of investment made throughout the year to enhance and expand the business.

Revenues from the poker software products were $2.2m, up 102% from the previous quarter. Approximately 19,000 active real money customers played Everest Poker during the fourth quarter, up 58% from approximately 12,000 in the previous quarter.

We continue to see strong growth potential for our poker software business in non-English, Western European countries, which are our principal markets. We continue to offer poker software products in 11 languages. Our licensee has increased its marketing spending on building the Everest Poker brand through sponsorship of events such as the French Poker Tour and the German Poker Tour.

As a result, we’re seeing growing customer trust and excitement over the Everest Poker products. Hence, we are very excited about the prospects for our poker software products and expect continued strong growth in 2006.

While poker is driving growth in the entertainment software business, the traditional gaming software business is continuing to deliver strong profitability. Fourth quarter revenues from the traditional gaming software business were $4.8m. This represented a 20% increase from the same period in 2004 and an increase of 3% from the previous quarter.

The year-over-year increase in revenues was related to the launch of new games, enhanced lobby and manual interfaces, and our licensee’s launch of Everest Casino.

The broadband ISP business. Turning now to our broadband ISP business, we achieved improved profitability in this business unit in 2005. This was the result of continued strict cost and expense control measures and a shift in focus to our corporate broadband business.

Full year 2005 revenues declined slightly to $21.7m versus $22m in 2004, with increased contribution from the corporate broadband business offsetting decreased contributions from the consumer side of the business. Operating income increased by approximately 47% to $2.2m in 2005. The year-over-year variance in operating income was primarily due to reduced general and administrative expenses, reductions in sales and marketing expenses, and lowered operating costs in 2005.

Net income for 2005 grew 110% to $3.2m, due mainly to the improved operating result, treasury investment income, and the impairment loss -- and a one-time disposal gain recorded in the second quarter of 2005.

In the fourth quarter, revenues in the corporate broadband ISP business were $1.5m, representing 31% of total revenue in the Company’s broadband ISP business. Competitive pressures in this business are increasing. Revenue during the period declined 16% quarter-on-quarter, due to an increase in competition in certain bandwidth reselling products and the depreciation of NT dollar.

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 our strategic decision to shift resources away from the mature and highly competitive consumer ISP market, our subscribers in the consumer broadband ISP business declined 6% quarter over quarter. Our blended ARPU decreased approximately 4% compared to the third quarter.

Both the subscriber and ARPU declines were largely related to decreases 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 6% quarter over quarter.

In short, the broadband ISP business is facing challenging operating conditions, but delivering healthy cash flow. Nevertheless, given the increasingly competitive nature of the industry, the long-term value of this business unit, especially the retail side of the business, is something we are looking at very closely.

To conclude, we continued to successfully execute a strategic restructuring of our business in 2005 and deliver growth for new business development. We have now put in place solid improvements in our organizational structure that are necessary to achieve high growth.

As Arthur mentioned, we expect our consolidated revenues in the first quarter of 2006 to increase over 40% compared to those in the fourth quarter of 2005, while maintaining similar operating margins.

Finally, we ended the year with a solid balance sheet with approximately $62m in cash, cash equivalent and current marketable securities. Even after adjusting for the FunTown acquisition cash payment of about $30m in the first quarter of 2006, we still have considerable financial flexibility. We intend to use this flexibility to pursue acquisitions that are strategic, synergistic and will provide both top line and bottom line growth.

In sum, we are executing well and growing stronger. We are excited and bullish about our prospects for growth in 2006, which will be driven by our poker software and our casual game businesses. With a strong balance sheet and excellent position in high margin, high growth markets, we look forward to continuing to grow in the quarters ahead and increasing shareholder 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.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Our first question is from the line of [Mike Neary] with [Neary Asset Management].

Hello. Excellent results once again. I just had a few questions. For the FunTown acquisition, have you decided whether that last $15m, is that going to be as a convert or are you going to pay that out with cash?

Thanks, Mike. It’s Arthur Wang here. The terms of the $15m convert are -- were essentially an accommodation to us by a very, very friendly seller. We have the right to call that. But in addition to the right to call it, we have the right to place it with a third party. It -- as the convert is priced at -- the strike is $3.13, it is deeply in the money now. So, we see no need to allow a conversion at such a low price. We therefore most likely look to essentially call the convert and probably place it at a closer to market price.

Okay. And also, to the FunTown acquisition, I believe you mentioned in a previous call, do you have deferred tax assets that you can use against profits from that division in the future?

Yes. We believe, based on our internal projections for the next two years to three years, combining the earnings power from the FunTown operation and our ISP operation, which are now under one single legal entity in Taiwan, our deferred tax asset should be enough to cover that.

But, as we have mentioned in previous calls, the tax regime in Taiwan, other than the income tax there’s also something called the retained earning tax. So, that is basically all profit that is undistributed profit, subject to a 10% tax obviously with a tax deduction there. So, we might be subject to a certain level of tax, but definitely not the income -- full income tax based on the earnings.

Okay. And what is your deferred tax position for that? I thought you said -- is it $37m?

Yes, yes. 30-odd millions, yes.

$37m, okay. And then -- and thanks for providing all the data on CapEx and capitalized software in the year. What’s going to be your total CapEx number next year, do you think?

It’s going to increase quite a bit because of the FunTown acquisition. And we see that the increase is going to be proportionate to the amount of earnings they’re going to bring in. So, we still focus on cash quite a lot. So, this last year was about $3.4m. The -- next year it won’t double, but it will be quite a bit higher than the $3.4m numbers.

Okay. Double, do you think it will be --?

It won’t be double but it will be quite a bit higher.

Okay. And then you talked about the first quarter a little bit, being up 40% in revenue and then with similar operating margins. So, that includes FunTown. I would assume FunTown’s operating margins are higher than the rest of your Company. Wouldn’t your operating margins go up in the first quarter or is that because of the seasonality in the traditional business?

Yes. A few factors could come in here. There’s first the seasonality of the business. If you see our CESL business for the fourth quarter, the operating margin there is actually quite high -- quite a bit higher than the overall margin. And so we expect that to maybe come down a little bit, and that will be compensated by the high margin from the FunTown business. And overall, we expect the margin to be roughly similar.

Okay. And then last question on FunTown. What kind of timeline are you looking for this? How do you foresee things playing out over the next year? What goalposts are you looking towards?

Okay. Mike, this is Arthur. We think of FunTown in two ways. First, the casual game portal. Casual game portal we continue to grow. It’s running ahead of budget. We are benefited both from the rising water level, so to speak, as interest in online games increases overall, but also from FunTown’s market leadership. So, as the market leader, we expect to be able to take more and more market share.

We also have a number of new games and a new 3D platform that I’ve mentioned, which are bringing more interest and expanding the addressable marketplace -- the traditional addressable marketplace for FunTown. So, first of all is the casual game portal itself.

The second area where we look for growth is in the real money operations taking FunTown’s Mahjong game and other Asian games which are traditionally played for money, and then offering them worldwide on a real money basis.

We have not released any specific goalposts, so to speak. But we’re very excited by opportunities on both fronts.

Okay. That’s good enough for me. I would just like to say that you guys have done an excellent job for your shareholders, of whom I’m one, and thank you very much.

Well, thanks for your support, Mike.

And, sir, we have a question from the line of Chang Qiu with Forun Technology Research.

Yes. Good evening, Arthur and Tom, and congratulations.

Well, thanks, Chang.

Thanks, Chang.

Yes. I have a few questions. For your FunTown business, can you give us some idea regarding your seasonality, and also whether the management accounting, how that is different from U.S. GAAP accounting?

The FunTown business, unlike the seasonal business, doesn’t have too much of a seasonality as we see it from a historical perspective. And we don’t expect it to have too much of a seasonality going forward.

And Chang, to your second question, I assume what you are asking is basically the 5 -- roughly about $5.1m net income we disclosed last year by way of management account, how does that differ from financial accounting. Is that your question?

That’s correct.

Okay. So, we think -- yes, there’s actually quite a bit of a treatment difference there, but net-net the amount is not going to be too different.

The -- in thinking about the profitability of the business going forward, we did talk to the market. We still think, I believe, that there’s a 20 to 30% growth in the business itself, organically. But, as we also discussed with the market, that we -- as part of the acquisition we would incur a certain level of intangibles, which would need to be amortized over the course of the period of the intangibles.

And we are still in the process of finalizing such numbers, and we will be disclosing to the markets once those numbers are finalized. But we do see a certain -- a level of synergies that can compensate such a -- such intangibles amortization.

So, all in, Chang, this is Arthur, we’re still looking for very, very strong internal growth on a net profit line deliverable at the GigaMedia level, along the lines of the guidance we’ve given before, or higher.

Right, Arthur. For FunTown business, [a company that] has a whole Group. They also look likely in the real money Mahjong. So, for them, do you see them more a partner or a competitor?

Well, it’s interesting you mention this. We’ve actually been invited to meet with them in two days, in fact. But, at this point in time, we’re -- to be totally honest, we’re not at all concerned about this one other competitor. It’s very much like a situation where you have a start-up company and comparing that with an established market leader. The start-up company has a first-generation product. And that product, I would have to say, is very immature. It actually is -- they only offer one style of Mahjong and not even the style that is commonly played in China.

And I think that the response we’re hearing from the marketplace is that our product -- well, put it this way, people are anxiously waiting for the release of our real money product.

Okay. Okay. And in terms of regulatory front, do you see any [ease in] or any new market from your side?

Well, the regulatory environment will continue to be a challenge throughout Asia, and actually around the world. This will require operators to be thoughtful and to be clever, as well as to be prudent, to stay within the boundaries of the law.

But I think, as we have seen in the United States with PartyPoker’s emergence there and their skill in staying within the letter of the law and at the same time exploiting the tremendous market interest and market demand, we think there are a lot of lessons to be learned there. And there are certainly opportunities for similar types of actions elsewhere in the world.

Okay. The next question, in terms of poker and also the online casino business, it looks like your poker growth is tremendous. But on the other hand, it looks like your casino growth is much slower. So, my question for you is do you have -- is [it likely] -- is resource limited, or do you have enough resource really also to push the casino side of the business?

From a focus perspective -- Chang, this is Thomas here. Obviously we are channeling most of our resources to develop and expand and improve our poker product. But at the same time, we’re not forgetting the casino product, as we have mentioned in previous calls. And we still continue the program of one new game a month at least.

So, we’re still continuing launching new games to give the players a reason to come back to play our software. That is continuing. But what we have seen there, as we have indicated in the release and our remarks, is while the growth is coming from poker, the casino products are actually still delivering very strong profitability but with a more steady contained growth. So, we’re not -- definitely not shifting resources away from there.

Are we resource constrained? I would say we have been scaling up very, very quickly and our software has been built with a big scaling up in mind. So, we have not been facing a lot of scaling problems, and we think that we can continue to have the resources to support the growth we are experiencing.

Okay. Thank you.

Thanks, Chang.

[OPERATOR INSTRUCTIONS]. Sir, we have a question from the line of Jillian McIntyre with [Pete Clark] Capital.

Hi. Yes. Good morning. Congratulations on a great quarter. I had a more generic question. I wondered if you could give me a sense as to how your business will be broken down in fiscal year ’06, just to get an understanding of how you think the mix of business will evolve.

And secondly, on the retail ISP, have you got some kind of timeline as far as the strategic options that you’re considering for that part of the business?

Okay. Perhaps -- maybe I’ll give a try first. My name is -- this is Arthur here.

With respect to the second question, we are currently in discussions with respect to our -- one aspect of our ISP business, and that is in particular our ADSL retail business. And depending upon our -- the outcome of those discussions, we may be coming back to you with some news relatively shortly.

Again, the business -- all aspects of the ISP business now are profitable and running very efficiently. But our interest is not in merely satisfactory businesses, but to shift resources towards high growth, high margin businesses. So, we will, if we have attractive opportunities to exit these lower growth, lower margin businesses, probably do so.

Okay. And can I just follow on with that?

Sure.

Have you disclosed either the book value or the number of actual subscribers in the retail ISP business?

Yes. Both should be part of our regular releases and at minimum in our Annual Report filed on what we call Form 20-F.

Yes. The -- just to supplement on that, the number of subscribers, as we have -- I guess it was in my remarks, maybe you didn’t catch it. It was about 80,000 subscribers.

Okay. Sorry, I missed that.

In end of ’04. Right. And so the book value of the ISP business, it will be a little higher. We don’t break it down. We don’t break our balance sheet by business unit. But I -- it’s safe to say that we built out the infrastructure for the retail ISP business ever since we started -- we did our IPO, which is about five, six years ago. So -- but all of the assets have been basically amortized and depreciated.

Right. Sure.

And so it was -- it’s carrying a fairly low value on our book, as you can see if you look at our property, plant and equipment.

Okay.

Those are the typical -- the key assets, anyway.

Okay. Thank you. And just --

Back to your first question, I think the breakout between our businesses pretty much falls along the lines of the revenue or income expectations that we’ve let out. But the one unknown will be the real money Mahjong and Asian game software business. And we are most excited about this business but, at this point in time, we would hesitate to provide a percentage or estimate annual results.

Okay. Understood. Thank you. Congratulations again.

Thank you very much.

And, sir, we have no further questions at this time.

Okay. Thank you very much. Thank you all again for joining us today. For further information about GigaMedia, or if you have questions and would like to contact the Company, please visit our website at www.gigamedia.com.tw. Thank you.

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