GigaMedia Ltd (GIGM) 2007 Q1 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 first quarter 2007 financial results. At this time all participants are in 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, May 22, 2007. 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 first quarter 2007 results conference call for GigaMedia Limited. Here again, 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 2006.

This presentation is being made on May 22, 2007. 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 revealing or updating the material that is contained therein.

The agenda for today's call includes, first, a review by Arthur Wang of 1Q business activities and financial performance. Thomas Hui will then provide details on our financial results during the period. After the speaker presentations we will go into a question and answer session. With that, I'd like to turn the call over to Arthur, our CEO.

Thanks Brad, and thank you all for joining us today. We are very pleased to report our strong first quarter results today, with revenue climbing 95% year over year, to $36.1m and net income soaring 176% over last year to reach $8.5m. In our Gaming Software business, we've continued to hit new Company records with Everest Poker. And in Asia our Casual Game platform continues to deliver solid results, in the context of heavy investments which should drive strong ongoing results. Overall, an outstanding quarter.

Thomas will go through our financial results in more detail. Please allow me to highlight a few points of particular note concerning our first quarter. First, our Poker and traditional Gaming Software business.

Once again, we had a very strong quarter driven by Everest Poker. Top line revenues grew by nearly 50% from the fourth quarter, a remarkable sixth straight quarter of 50% q-over-q growth. Active room money player numbers followed suit with a 54% increase over Q4. Today, Everest Poker is the fourth largest poker site in the world and the second largest in the world, if you exclude sites that continue to accept United States players, despite the U.S. prohibition.

And we are working hard to do better. In this second quarter we have signed a deal with ESPN in Europe to air the Everest Poker Minute, a as series of one minute poker shows, offering poker chips, interviews with top players and the like. Next week will unveil a new Everest Poker lobby and release Everest Poker in a fully localized Greek language product, our fifteenth language offering; more than any other site.

In addition, the 2007 Everest Poker European Championship has kicked off with the initial events in Holland and Sweden. This month will see the Everest Poker Austrian Open Championship and, in something totally new, the Everest Poker Japan Cup, the first online/offline poker tournament in Japan. We are also launching a new affiliate management system to continue to drive our affiliate marketing efforts.

Our product offering has also broadened with our release of real money MahJong software in the first quarter. MahJong is a traditional Asian game, often called the poker of Asia. We have taken our market leading, play-for-fun MahJong software and licensed it out on a real money basis and expect our initial licensee to launch commercial operations very shortly.

This summer, our MahJong software will be joined by a suite of Japanese specific gaming products, such as Pachinko, Pachislo and Japanese variants of poker. I am tremendously excited about the potential for Asian games, especially in the large Japanese market.

Overall, we have built a well-known and well-respected online brand, a pan-European online entertainment brand and platform, serving the 350m consumers in the European Community and soon to be joined by Asia with a localized offering of 15 languages. We plan to continue to invest, building this brand and platform, to enhance our entertainment offerings. And, by doing so, to increase our ability to monetize on the platform as revenue and operating leverage increase.

Next, our Asian Casual Games business. We had a very good first quarter and an even better quarter, in context of the serious investments we made in the business. In Q1 we increased our equity stake in China Casual Game platform, T2CN, taking for the first time a control position in the Company.

T2CN is the operator of the largest online sports game in China, and we are excited about the opportunity to build T2 into a major player in China online entertainment. In Q1 we also kicked off the initial marketing for the red, red, hot, hot Hellgate:London game, which has been the runaway star of industry game shows. We are very much looking forward to the launch of Hellgate:London later this year.

More recently we have licensed Phantasy Star Universe, PSU, from industry titan Sega Games. PSU is the long-awaited sequel to Sega's award-winning Phantasy Star online series of role-playing games. We are also very much looking forward to launching PSU later this year.

All told, today we have an online game platform that spans greater China with large user numbers; over 65m registered users, over 8m users active in a given month. And on top of this, in South East Asia, we are the largest shareholder of Infocomm Asia Holdings, with about a 30% equity interest.

We believe the market opportunity in South East Asia is similar to that of China three or four years ago. And Infocomm Asia has secured three big titles for the region; Hellgate:London, [a new prodigal online] and Granado Espadar from the developer of the previous South East Asia favorite, [Roganoff] online.

All told, we're building an Online Game platform with an enormous footprint, providing the ability to deliver entertainment to users on a scale and with the efficiency of broadcast television. I emphasize that this platform, which we initially monetize with online games, will provide us with the opportunity to deliver a wide variety of entertainment for ourselves and our future partners.

In sum, we finished the first quarter with a strong strategic position and excellent operational momentum. Today's results reflect, but the early returns from our investment into building a dominant, online entertainment platform. We are building a new GigaMedia with growing shareholder value as its cornerstone. We thank you for your interest and continued support.

Well, thanks Arthur. Let's now look in more detail at the financial performance of our business in the first quarter. I will start with our consolidated results and then review each business unit.

Overall, we delivered a strong performance in the first quarter of 2007. We've continued to drive strong organic growth with our world-leading Poker Software business. At the same time, we acquired T2CN to further expand the platform reach of our Asian Online Game business. We also began the initial promotion of our triple A title, Hellgate:London.

Let me quickly summarize our consolidated results in Q1. Consolidated revenues grew 95% year over year, or 20% quarter over quarter to $36.1m. The driver of our sequential revenue growth was record performance in our Poker Software business. Consolidate gross profit increased 118% to $28.8m from the same period last year, and increased 22% sequentially. Our consolidated gross profit margins grew to 79.7% in Q1, from 78.3% in the previous quarter.

Operating income rose 164% year over year and 8% sequentially to $8.7m. The quarter-over-quarter increase in our consolidated operating income was due to the growth in consolidated revenue and gross profit, as mentioned before, which more than offset the sequential decline in our consolidated operating margin, from 26.7% in Q4 in 2006 to 24% in Q1 2007.

This sequential decrease in our operating margin was the result of margin decreases in our Asian Online Game business, and our Legacy Broadband ISP business and an increase in non-cash share based compensation expense, which together, more than offset the increase in operating margin of our Gaming Software business during the quarter.

Net income climbed 167% year over year to $8.5m, resulting in fully-diluted earnings per share of $0.14. Non-GAAP net income, excluding share-based compensation expense, was $8.7m or $0.15 per dilute -- fully diluted share. Quarter-over-quarter net income declined to 14% but this comparison is distorted by the impact in the fourth quarter of a one-time, after-tax gain of approximately $1.9m, related to the sale of certain marketable securities.

We continued to maintain our financial strength during the first quarter. Quarter over quarter, our cash, cash equivalents and current marketable securities increased from $36.2m to $48m. Operating cash flow for the period increased to $11m from $9.1m last quarter. Cash payments during Q1, related to our strategic investment in T2CN, amounted to $9.4m. Capital expenditure was $1.2m for the quarter and we recorded total debt of $21.1m at the end of the first quarter.

Let's now look at our business unit performance; the Gaming Software business, [See Saw]. The business unit once again delivered all-time highs in revenue and net income. During the first quarter the business unit generated $26.3m in revenue, representing 198% growth year over year, and 33% growth sequentially. Gross profit grew 34% from last quarter. Operating income increased 45% sequentially.

Operating income margin increased to 33.1% from 30.3% in the previous quarter, as revenue growth exceeded increases in our selling and marketing expenses. Net income grew to $8.3m, a 246% improvement year over year, or 41% growth sequentially. Let me quickly break this down further into results for our Poker Software business and our Casino Software business.

Our Poker business again achieved a record result, remained the major force behind our Gaming Software business. Revenues from our Poker Software products were $19.1m; up 47% sequentially. Poker revenues represented 73% of See Saw's total revenues. This growth was largely driven by increases in new players sign ups on Everest Poker.

Approximately 138,000 active depositing, real-money customers played Everest Poker during the first quarter; up 53% sequentially. And during the quarter approximately 68,000 new depositing, real-money players were added.

Key factors driving Everest Poker user and revenue growth were the efficient online and offline marketing and brand-yielding initiatives. During the first quarter, Everest Poker continued a high profile $1m tournament called Avalanche. Everest also launched television commercial and held weekly $100,000 tournaments. To support continued growth, during the quarter we launched three new languages and several new player-facing features as well as continuing to upgrade and improve our systems to enhance overall gaming experience for customers.

Our Casino Software business also delivered strong results. First quarter revenues from the Casino Software business were $7.2m. This represented a 39% increase year over year and 5% sequential growth driven, in large part, by cross-selling of casino games on Everest Poker. In sum, our Gaming Software business is continuing to [scout] up and benefit from the growing strength of the Everest brand.

Moving on the Asian Online Game business; FunTown and T2CN. FunTown continued to deliver solid revenue growth in the first quarter, despite the effect of the Chinese New Year holiday and a short month of February during the quarter. Our strategy of expanding our game offerings and increasing our selection of in-game virtual items on our platform has been successful in driving continued revenue growth.

During the quarter the increased operating expense, primarily related to certain long-term growth initiatives, resulted in a lower operating and net income margin. These initiatives include the promotion of Hellgate:London and the increased marketing campaign for FunTown during the Chinese New Year holiday period and the integration of T2CN, our China Online Game platform. I'll talk more about these initiatives in a moment.

Revenues in the period increased 19% year over year and 4% sequentially. Gross profit margin declined to 77.7% from 78.7% last quarter, due largely to an increased revenue mix from licensed games. Operating margin decreased to 15% from 35.1% in the previous quarter due to the Hellgate:London promotion, FunTown marketing and T2CN integration I mentioned before. As a result, net income declined 15% year over year and 43% sequentially.

Despite the immediate negative financial impact, we believe these initiatives will drive long-term growth for our Asian Online Game business. Let me now go over these initiatives with more details.

First, regarding our current portfolio of online games on the FunTown platform, as I mentioned, during the first quarter we continued strong mass media marketing initiatives, which include television commercial in Taiwan. We also continued to drive in the event -- to drive growth in the advanced casual game, Tales Runner. Revenues from Tales Runner were up 75% quarter over quarter.

As result, both the total active paying accounts and the monthly revenue per active paying account increased by 2% sequentially, to approximately 107,000 accounts and $17 in ARPU respectively in the first quarter. Second, we began to promote the highly anticipated game, Hellgate:London, which is scheduled for launch in late 2007.

In February we took advantage of the highly popular Taipei game show, a five-day event which was attended by tens of thousands of visitors this year and showcased Hellgate:London with an elaborate game display, the largest at the game conference. We received very positive feedback and expect the game will significantly increase our revenues and profitability when launched.

Third, we acquired an additional 39.9% equity stake in China's online casual game leader, T2CN, in the middle of the first quarter. We have also begun the integration of T2CN with GigaMedia and expect such integration will continue in the second quarter. As expected, financial contribution from T2CN in the first quarter were modest. In Q1, T2CN generated revenues of $3.5m and net income of $361,000.

However, since we accounted for our T2CNinvestment under the equity method, neither our revenue nor operating income benefited from T2CN's results in the first quarter. During the quarter we recognized an equity investment income of approximately $58,000, which represent our interest in T2CN's net income from mid-February through end of March. We expect to consolidate the result of T2CN in the second quarter of 2007 and we believe that contribution from T2CN will continue to grow going forward.

Finally, a quick review of our Broadband ISP business. Revenues, operating income and net income in our Legacy Broadband ISP business declined quarter over quarter, in line with our expectation. The decline was largely due to decreases in payment we receive for bandwidth, consulting and support services, related to the sale of our ADSL business in 2006. A decrease in our cable modem subscriber revenues also contributed to this decline.

Looking ahead, we expect the contribution from our ISP business to continue to decline, both in absolute terms and relative to our consolidated financials. This is in line with our ongoing strategy of shifting resources away from this Legacy business.

Well, to summarize, in Q1 we made great progress in our goal of building a powerful, leading online entertainment platform. We delivered tremendous growth in our Gaming Software business, particularly in the Poker business, and strengthened the long-term growth prospect of our Asian Online Game business, by adding T2CN in China and beginning promotional work for Hellgate:London.

We are well-positioned, executing strongly, and excited about our opportunities and growth prospects in 2007. We're confident in our ability to continue driving growth and building 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 up the call up to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Your first question comes from the line of Traci Mangini with ThinkEquity Partners. Please proceed.

Thank you, hello. I had a couple of question, first, with respect to Hellgate:London. Can you give us a sense of what type of marketing we should expect going forward? Would it be similar levels to Q2 -- excuse me, as to Q1 until you launch? And then also, why is it a little bit later launching than maybe we would have originally expected?

Regarding the marketing budget for Hellgate:London, we expect in Q2 we would not be spending as much as we have spent in Q1. However, in Q3, when we are close to the commercial launch, especially right before the commercial launch, there will likely be a lot more marketing expenses to be incurred. And Q3 is probably where most of the marketing expense will be spent. And then Q4 is where we see the commercial launch and, therefore, the revenue impact will come in, most likely in Q4.

Okay, thank you. And then, on the See Saw side of the business, some of your competitors out there have been seeing some weakening trends, at least in their first quarter, with respect to poker, particularly for the high-ranked players and going after them. Do you -- and I know that's an area you guys have been focusing on, on becoming more competitive in. Do you view this as a concern for Everest or more of an opportunity?

Well, we naturally would love to have as high a value player as we can get. However, that's just part of a broader matrix of players. So we don't have a particular strategy to target only one sector. We did not see the kind of margin deterioration or the kind of competitive pressure in Q1 that some of our competitors did.

Great. And would you expect, like some of them have been announcing, that they're going to ratchet up some marketing, that you guys might also follow suit just to maintain your leadership here, going forward?

Yes, I think in Q1, as you'll see our numbers, we had a bit higher operating margin than we normally run. And I think perhaps we were a little bit -- maybe a little bit conservative with our marketing spend. We'll look to play that effectively throughout the rest of the year. We believe that our market opportunity is still enormous.

Okay. Is there any --

Traci, just to -- Tracy, just go back to you -- you'd also asked as part of your first question whether we -- why Hellgate:London was perhaps launching later than was to be expected. We've not received a final launch date yet from developers. It is going to be some time this summer in the United States and we'll launch shortly thereafter. We understand that Hellgate:London is going to be distributed by EA, Electronic Arts, in Europe and in North America. And I think they're putting together a very big marketing campaign.

Great. Is there any way you can quantify how big you think the Sega Phantasy Star could be? Should we look at something, I would assume not on the same level as Hellgate:London but what's your sense of how big that could be?

Sure, Traci. The real strategic significance of PSU is yet another proof of our ability to license a game with a success history from a [well-renowned] developer, Sega. So after Hellgate:London we are able to score this title, which has proven our ability to continue to adopt this strategy of license [gamed].

Now, in terms of numerical impact, this is actually how [inaudible - technical difficulty] of our strategy [inaudible - technical difficulty] as we laid out before in various contexts to the investor community that we expect the FunTown business there to continue to grow, with a two-prong strategy. One is to increase the contributions from license game. This is outside of Hellgate:London, because Hellgate:London is such an order of magnitude and should be a separate class on its own.

So li -- computer -- FunTown computer license game and increase player monetizations through selling of more virtual items. Now, PSU fall into the first bucket of increased revenue through the license -- increased number of license game. And we have a couple more of these in the pipeline which we expect to close later on this year.

Now, we did also tell the market that we expect -- with this two-prong strategy FunTown's revenue should grow, hopefully, a -- we have an internal target of 20% to 30% comparing to last year from a revenue basis. And PSU will fit into that growth strategy.

Okay, thank you. And then just lastly, Arthur, could you comment? I know we talked about this before but, just with Electronic Arts and the investment in The9, just how do you view that changing, if at all, the competitive landscape for you guys in Mainland China?

We're not at all concerned about EA teaming up with The9. EA has made clear that they are not going to be a one-house operator, in particular in China. And we believe that there are going to be strong opportunities to operate sports games from both EA and from other operators.

Great. Thank you very much, you guys.

Your next question comes from the line of Todd Eilers with Roth Capital Partners. Please proceed.

Hello Arthur, Hello Thomas. How are you?

Hello, Todd.

Hello, Todd.

Just a couple -- a handful of questions here, and first, just to follow up on Traci's question earlier on marketing. It sounds like it might -- the third quarter might be a little bit higher than the second quarter. But I saw that, as a percent of revenue, it was roughly, I think, 37.5% and I know we have talked previously that you expected that to be maybe in the 30% to 35% of revenue range. But, obviously, if there are opportunities to maybe grow revenue, you might pursue some additional marketing.

What can we expect for the rest of the year? Should we be looking in maybe the 35% to 40% of revenue range? Or should we maybe expect that to drop back into the previous 30% to 35% range? Just trying to get a feel for, as a percent of revenue going forward.

Sure, Todd. Our earlier response to -- or my earlier response to Traci's question was specifically regarding the marketing spend directed toward the Hellgate product. So, in the first quarter we incurred about $480,000 of marketing expense and that number we expect to come down in the Q -- in Q2, but will probably increase quite significantly in Q3.

So, that is outside of what we have previously been talking about, a 30% to 35% range, because Hellgate [also] in itself is a very big project for us and a very big opportunity. Now, outside of Hellgate I think the rest of the business are still -- we pretty much stick to our original estimates, about 30% to 35% being the target range that we are shooting for.

Okay. And then could you possibly break out how much of the sales and marketing was from the real-money business versus the casual online business, in a dollar amount?

Yes. Of the $30m we don't -- I mean we -- from a public disclosure perspective, we don't break them out on a specific dollar amount basis. But as we've indicated before, most of actually -- most of the selling and marketing actually, an overwhelming majority of the selling and marketing are incurred at the Online Gaming Software business. So, of the $13.5m we did in the first quarter, [if] we spend in the first quarter a significant amount of more than half, overwhelming majority at the See Saw unit.

And the rest, primarily at the FunTown unit and Hellgate in the first quarter, the ISP business was very little as we ship resources away from it.

Okay. And, I guess moving onto the Poker side of the business, you guys recently made an upgrade to the software product there and I was wondering -- I know it's fairly early, but I was wondering if you can maybe comment on how the transition to higher stakes tables, how that transition's going at this point? Can you give us maybe any color on that?

I think we -- it's still -- Todd, it's still a little early for us to give any real trends, because I think we've just did [this] less than a month ago and there's a one month grace period. And it's just coming about towards the end of that period. And we do expect this will improve monetization but we will have to see once the results come out.

Okay. And then, following on that, it looked like your average revenue per active player dipped a little bit sequentially in the first quarter. I am assuming, with the migration you are expecting here to higher stakes payables, you should start to expect to see that trend upward throughout the rest of '07. Is that a good way to look at that?

Yes, that is certainly our plan. It was a little lower comparing to the Q4 number, but it was higher than any other quarters in 2006, so [this] was higher than 2006 Q1, Q2 or Q3. So it's still not low and it's within our normal fluctuation band. And, obviously, we hope that some of these initiatives we took would gradually increase that number.

Okay. And then, looking at the second quarter in terms of overall growth on the Poker business, obviously seasonably we should be looking at that as a little bit lighter than your fourth quarter and the first quarters. But should we still expect to see positive sequential growth in the Poker side of the business?

Certainly, certainly. We expect the revenue growth to continue to be robust but, because the seasonality, the rate might not as high as what we had achieved in the first quarter. But, certainly, we would very much expect positive sequential growth.

Okay. And then, I wanted to ask a question on the Legacy ISP business. Obviously, you guys have indicated that you expect revenue to decline going forward there. But it looks like your gross margins are still, or have been, fairly strong there. Should we expect to see that continuing forward in that 50% gross margin range?

I think the -- as revenue continues to come down, the operating margin will actually come down together with it, just because we are losing scale on the business. And some of these consulting and supporting bandwidth services were actually the high margin business that are -- [is] terminating.

So, the operating margin decreased from 26% in Q4 to about 15%. And comparing to last year, 2006 Q1, the operating margin was about 10%. So, as revenue continues to come down, we think the 15% operating margin will actually continue to come -- have downward pressure and will continue to come down, together with the revenue.

Okay, I got it.

Todd, I just add that we mentioned previously that we are in some discussions with potential buyers and that may be the ultimate decision.

Okay, fair enough. And then, last question, your strategy with regards to -- you mentioned that real-money game offerings for the Japanese market. Can you maybe provide some additional commentary on that, maybe some timing, maybe how you plan to offer those types of games? Would you look to do that through UIM or possibly another third-party licensing partner like what you've done with MahJong? Can you maybe just talk a little bit about that?

Sure. First, let me say that Japan, 125m people, the world's second-largest economy, and a huge traditional Asian gaming business, mostly Pachinko, Pachislo, as well as MahJong and some Japanese-specific games. So we see an enormous market opportunity there.

We are extremely excited to be releasing a whole suite of Japanese products, including Pachinko and Pachislo and Japanese variants of poker, together with our MahJong game, both the single and multi-player basis. We expect to launch this summer. And our plan is to utilize our current primary licensee UIM to be the sole licensee of these games.

Okay, great. I will look forward to seeing that. I think its a great opportunity as well. Thanks a lot, Arthur, Thomas. Take care.

Thanks, Todd.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question will come from the line of Andy Schopick with Nutmeg Securities. Please proceed.

Thank you, and good morning. I have a couple of specific financial questions and a couple of which are accounting related. I want to be sure I have the share-based comp expense right. I am just totaling some numbers quickly. It looks to me like it was about $291,000 versus $48,000 a year ago in the first quarter. Can you confirm that? And can you give us any kind of general guidance on what you expect share-based comp to be for the full year?

Yes, I can confirm that share-based comp for the first quarter of 2007 was $291,000. And for the previous quarter December -- the quarter ended December 31, 2006 was $169,000. And a year ago it was $47,000.

And -- yes, go ahead.

And so we don't expect this -- well, we expect the share-based comp to gradually increase, but not in any significant order of magnitude in the next few quarters.

So something slightly in excess of $1m for the year?

Yes.

Okay. I'd like to ask a question about the debt, the current short-term debt that's on the balance sheet. What are your plans for either reducing or paying down that debt over the course of the year? Certainly, you seem to have the cash flow to be able to do that.

Sure. A few things. I think taking down such a -- the short-term debt is part of our treasury decision. We do have access to actually fairly cheap capital from a debt perspective, given our operations here in the Taiwan context, which is flood with liquidity. That's point number one.

Point number two is the various business units we operate in the various geographical locations, we try to operate them separately and try to have the capital and funding needs separately. So that's part of treasury management.

Obviously, we have total flexibility in moving funds across the business unit. But at this stage we think, at this level of debt, given our cash flow, given our capital level, and also given the interest rate we are paying on this debt is actually quite healthy. So we don't have any short-term view of significantly reducing or increasing this position unless certain strategic things come up.

Okay. And the other question I really want to ask is about T2CN and my understanding of the accounting going forward. Had this been accounted for under the equity method in the first quarter, effectively, you would have captured about -- I'm just looking for these numbers here. I think it was about $3.5m of revenue.

And then you would have had, I assume, a minority interest line deducting out the minority interest of the $361,000. So, effectively, you would have captured about $180,000 of net income and, of course, the equity investment income would just go away.

So, going forward, is that what we are going to see? Are we going to see the revenue associated with T2CN fully captured at the top line, and then a minority interest line deduction, if you will, for the net income of that operation?

Sure. In the first quarter, as we have mentioned, we accounted for the T2CN investment under the equity method. And that means we only capture the [hour] pro rata share of the net income at the equity investment line. So there is no impact on revenue, no impact on operating profit.

You are absolutely right, had we accounted for it on a consolidation basis, then we would have had $3.5m more in revenue and we would have somewhere around $300,000 more in operating profit. But then, we would also have -- we would not have the $58,000 investment income. But we would have a minority interest [at] around half of the net income, depending on [our] percentage -- our converted percentage would be around 15%. So it would be about $180,000 [net] minority interest. So our net income, net net, would increase about $130,000.

Yes. So, can you give us any guidance on the T2CN outlook for the year, in terms of what we can anticipate in terms of revenue and potential net income margin? Do you wish to comment at all on that, because it is going to have an effect on your quarters going forward?

Absolutely. We've increased our position in T2CN and actually taken a control position, because we very much believe in what we can do at T2CN. By themselves, they've got a lot of good things going. So we are not in a position to give quantitative forecast. But I think T2 is going to have a much better rest of year than it did first quarter and it's going to be a good contributor.

Can you tell us what T2CN revenues were in 2006?

2006 was not a good benchmark, because the main revenue contributor, Freestyle, was only launched, in full functionality, in the first quarter of 2006, and it suffered from some [hack] issue during the summer. And if we look at the fourth quarter it's roughly a similar level as what we had achieved in Q1.

Okay, thank you.

Your next question comes from the line of [Craig Watner] with [Elmrich Capital]. Please proceed.

Hello, good afternoon. I just had a quick question on your balance sheet. I was trying to determine what GigaMedia owns versus what's UIM's balance sheet. Is there a way of looking at the assets and the liabilities, and dividing them up between what you own, or what GigaMedia shareholders own and what UIM shareholders own?

No, not on a balance sheet items by items basis, no. But if you look at -- we only have basically -- if you look at just on our balance sheet, then we have a minority interest line.

Yes.

And that would be composed of -- well, before this quarter they will all be UIM, the minority interest will basically be UIM's equity that we don't own, because we own zero percent of UIM, so that would be their equity base.

But this quarter, the 1.3m minority interest, include both the UIM equity and also the 30% [Dragongate], which is the entity that hold the Hellgate:London license and is going to operate Hellgate:London. So that number is the combination of the both. And if you want me to break it down again, do that for you, that is -- 715 is UIM and 600,000 is Dragongate.

Okay, but UIM is doing something like $14m a quarter or so in revenue. Is that right?

If you take their revenue minus the licensing fee they need to pay to us I believe -- I have to look at their numbers, but I think the order of magnitude it sounds about right.

Right, so you have them -- is this minority income or loss line that you report under your income statement, is that essentially a record of their loss in the quarter?

No. The income statement line, again, is because it is composed of two line items. So UIM make about 130 games in the quarter. And then the Hellgate:London operation incurred a loss of about $0.5m because of the marketing expense. And the minority interest pro rata share, 30% of that 500,000 is about 150,000. So, net net, that's why you have the negative minority interest line. So UIM make a loss -- make a gain of 130,000 in the quarter.

On $14m of sales or so?

Yes.

Okay. And is that sustainable in your relationship with them; run a $14m revenue base and earnings basically break even?

We have a very strong relationship with them and a long-term binding contract.

Thanks very much.

[OPERATOR INSTRUCTIONS]. Your next question will come from the line of Bill Garrison with Ironworks Capital, please proceed.

Yes, thank you. I wondered if there was any additional detail that you could provide, just with respect to the rollout with your first licensee on the real-money MahJong. I know we talked about it last quarter, and I know you said you expect a launch shortly. But, just trying to understand a little bit of the dynamics there, I am wondering if you could provide any additional details.

Sure. The -- our additional licensee is an independent third party. And when we deliver the software, that is all we are allowed to do or know. But we do have regular communication and my understanding is that they are doing some more preparations. We've got a big marketing blitz prepared. And they are launching later than we had originally hoped, but maybe they are launching better. And so that's as far as -- as much visibility as we have.

We will be expanding our range of licensees after an initial period, which we've -- an initial period of exclusivity which we've offered to them.

Okay. And I believe, I think I've heard for that, it's just like a 30-day exclusivity. Is that correct?

No, the exclusivity period is longer and I believe it is three months.

Okay. And would that period apply to other regions, for example, in Japan?

No, it doesn't apply to Japan whatsoever.

Okay. And, secondly, just looking at your 8m active users per month on your casual game site, could you break that down at all in terms of FunTown and other, T2CN and just what the composition of that looks like?

I believe the larger, what, 60, 70% or so, from memory, is in China, maybe 80%, with the T2 platform. The rest is with FunTown.

Okay. And it looks like you, as well, had a pretty significant step up in the number of registered users. I think I saw a $50m number in your last quarterly release. Is that -- are those trends as robust as it would appear?

Yes. We have [seem to be in sizing this] scale and very popular mass market games. Again, this is our target to be a broad-based casual game operator rather than to be a specialist in running smaller sized, but highly intensive MMO type of games. We look to have a very, very large user base, player base from which to build our platform on.

Okay. And, lastly, I am familiar with the Pachinko market in Japan. I am learning quickly here on Pachislo. Could you at all describe that kind of market as it exists in Japan today?

Sure. Pachislo appears to me, and I have to tell you it's -- there is tremendous subtly in what superficially is a very simple game. But Pachislo is, I would say, a cross between a slot machine and a Pachinko machine. And it includes elements of Pachinko like the balls moving round, but also wheels that spin in the middle, as well as some visual story lines that give clues, and have different aspects on a video screen up above. So it would be like modern generation slot machines, but with the traditional Pachinko elements also.

Okay, and is that a relatively new market?

It is relatively new compared to Pachinko, and its becoming an important segment in Pachinko parlor, say, in Japan.

Okay, thank you very much.

Thank you.

Your next question is a follow up from the line of Andy Schopick with Nutmeg Securities. Please proceed.

Thank you, once again. I just want to come back to T2CN, and just anticipating what I think might be some confusion going forward that, you will basically include the consolidated performance of T2CN as part of your Asian Online Gaming business segment. When we see the future earnings releases it will be included in that area. I just want to be sure that I understand how you are going to be reporting this, or where we should be looking for it going forward.

And whether or not you just care to give any type of objectives, or goals that you have for an operating margin associated with T2CN in the future, what you think this business can achieve.

Right. To your first question, yes, [inaudible - technical difficulty]. The answer is, yes, the T2CN the investment income actually in the first quarter has already been classified under the online -- Asian Online Game business segment. And upon consolidation the revenue and the entire P&L would also go under this business segment. And that is in accordance with U.S. GAAP, because that's how we manage the business.

On your second question, as Arthur earlier mentioned, at this stage we are unwilling to give numerical guidance. But just if you look at the Q1 numbers, directionally, the Q1 numbers has about a 10% net income margin. And that, compared to other operators, we really think has room for upward improvement.

Thank you again.

Your next question is a follow up from the line of Craig Watner with Elmrich Capital. Please proceed.

Okay, thanks very much. I just wanted to ask quickly, who owns UIM?

UIM [was] owned by a corporation, and it is I think it has some beneficial shareholders based in Hong Kong.

But is there a way you can put a name on that partner of yours?

The exact holding company, I think, is [GB Online Experiences], something of that sort.

Who are the owners of that holding company?

We have met them and the like.

Okay. Are the UIM results audited?

Yes, as part of our consolidated financial statements, UIM numbers are audited, and consolidated in. The main reason for this is because of new accounting laws that were released, accounting rules are released after -- in the wake up, sort of the Enron and WorldCOM situation, where the SEC and the financial supervisory bodies were trying to make sure that closely related off-balance sheet third parties, that investors got a chance to take a look at their financial also, that the entire financial picture might be better represented by an overall inclusion.

As an unintended consequence of that certain businesses, such as UIM, are required to be consolidated in. And, naturally, we are in compliance with that. And in one way it just shows -- it gives a better picture of the overall business; more visibility into our operations.

At this time there are no more questions in the queue. I would like to turn the call back over to Mr. Brad Miller for closing remarks.

Well, thank you again everyone 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, as in Taiwan. Thank you.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.