GigaMedia Ltd (GIGM) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the GigaMedia Limited conference call to discuss the fourth quarter and full year 2007 financial results. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, March 11, 2008. 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 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, President and COO.

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. Forwarding-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 of all 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 US Securities and Exchange Commission in June 2007.

This presentation is being made on March 11, 2008. The contents 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 4Q and full year 2007 business activities and financial performance. Thomas Hui will then provide details on our financial results during the periods. 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. We are very pleased to announce today our 2007 full year and fourth quarter financial results. In numeric terms, 2007 was an outstanding year. As a company, we grew dramatically, with revenue climbing 77%, operating income up 73%, and net income rising 68%, excluding non-cash share based compensation.

But even more important, I would like to emphasize that 2007 was a watershed strategic year, a year of significant investment and building to forge the foundation for more dramatic, more exciting growth in upcoming years.

As our president and COO, Thomas Hui, will share with you details about operating and financial performance, I will concentrate on our strategic position, plans and outlook, and why we are so excited about our position today.

First, our poker casino software business. In 2007, we enjoyed strong success in building out the Everest online entertainment brand. Numerous marketing initiatives, combined with strong operations, have solidified our position as the fourth largest poker site in the world. Our poker and casino software was consistently improved and broadened, with the addition of the Omaha Poker game, over 15 casino games and two new language geographic offerings.

Our offerings have gained recognition not only among our players but also our competitors. Everest Poker was awarded Poker Operation of the Year for 2007 by industry journal E-gaming Review.

In 2008, we plan to continue to build the Everest brand as a leading poker casino brand, with strong market visibility, market recognition, market acceptance and trust among the 350 million consumers of the European Union and around the world, in South America, in Asia and ultimately the United States. We have many plans to bring this about. Let me highlight a few.

First, the World Series of Poker. We recently announced that Everest Poker had secured a key multi-year sponsorship of the legendary World Series of Poker, the world's oldest, largest, richest and most famous poker tournament. Last year, over 50,000 players physically attended the World Series of Poker to play for a prize pool in excess of $150 million.

Under the terms of the sponsorship, Everest Poker will be featured on the felt at every table in the World Series; and more, on the televised championship table, on the inner rung that surrounds the inside of the table, most visible when players check their pocket cards.

Everest Poker will also have significant visibility at the event, with signage, player sponsorships, and special parties and functions. The World Series of Poker has a viewership of over 350 million homes worldwide, from over 2,700 hours of broadcast. In short, the World Series of Poker is the greatest gaming event on the planet, and we look to it to help drive Everest to the next level.

Second, sports betting. This year, we plan to acquire, merge or form a strong strategic alliance with a major European sports book. Sports are an enormous segment of the online entertainment and betting space. But until recently, our view was that regulations were too restrictive for us to be involved. As a result, we have been leaving a lot of money on the table.

The good news is that last year, we have seen several moves towards licensing and liberalization in certain of our target markets, and we have concluded that now is a good time for us to enter. By having a sports offering to pair with Everest, we will be able to expand our offering from poker casino -- and casino to poker, casino and sports, and to offer our highly popular Everest Poker casino games to sports betters by sharing players and traffic. Essentially, making our entertainment offering more broad and more deep, we are highly confident we can increase per player values, allowing us to further invest into our brand and into player acquisition.

Third, poker casino integration. We also plan to strengthen the connection between our poker and casino offerings, opening a window in the poker client to allow players to play blackjack and other games while waiting for others in a poker game, and improving cross selling between our products.

Fourth, launching Everest into the United States. As you are all aware, though the poker business in the United States was outlawed in November of 2006, interest in and demand for poker has remained very strong. In response, legislators have begun to reconsider the prohibition, a process most observers believe will result in the adoption of a new system whereby poker offerings by licensed regulated companies will be allowed.

It is our intention to be first in line for such a license and our belief that we are well positioned to be one of the first recipients. In our favor is the fact that we have never offered poker or any gaming in the United States before and, therefore, never run afoul of US laws in the past.

In addition, our status as the only US listed poker firm, as the only poker firm subject to and compliant with US corporate and securities laws, and the only poker firm preparing financials in the United States GAAP, and the only poker firm compliant with Sarbanes-Oxley and other corporate governance measures in the United States. All of this suggesting that we will be better positioned than our competitors to obtain an early license in the United States.

The United States is an enormous poker market, one which we are very excited to enter as a fully licensed and fully legal offering, once the new regulations are adopted. We plan to begin preparations this year, and are considering initially offering play for fun, tournament or subscription play for the interim. Moreover, we believe our multi-year sponsorship of the World Series of Poker will set the stage for our full launch into the United States upon legalization.

Overall, in 2007 we have invested strongly into making Everest a well recognized, well accepted and trusted brand for online poker and casino. We believe these investments will provide further growth, in Europe initially, but before long, also into the giant United States market.

Our Asian online games business. In Asia, we have taken major steps to build the first and only Pan Asian online games and entertainment platform, extending from our traditional base in Taiwan, Hong Kong and Macau into the Chinese mainland, with our acquisition of T2CN, and across the ten countries of South East Asia, with our investment into Infocomm Asia Holdings, for which we are the largest shareholder.

Today, we have over 68 million registered users, with over 9 million users active in the last 30 days. We look to double these numbers and then double again as we grow our Pan Asian platform.

Let's look at some of our plans for this business. First, top games from top partners. To fuel our growth in this large and rapidly growing market, we've been fortunate to partner with top game and entertainment firms from around the world, including Flagship Studios, creators of the Diablo and Warcraft games, and Electronic Arts, a true global leader in digital entertainment, with over 200 popular titles.

In 2008, we'll be launching the exciting NBA Street Online game from EA Sports, and the epic MMORPG WarHammer Online from the EA Mythic Studio, as well as Hellgate: London from Flagship Studios.

In addition, our South East Asian affiliate Infocomm Asia, has just signed the tremendous title FIFA Online 2 from Electronic Arts, the sequel to the blockbuster FIFA's football or soccer to Americans game that had over 2 million -- 5 million users, and was the number one mid session sports game in Korea.

Second, top relations with top studios. In 2007, we made equity investments into three top game development studios; SoftStar, one of Asia's oldest and most famous game companies, XL Games, founded by gaming legend Jake Song, the creator of Lineage, the most popular online game franchise in history, and Neostorm, a game development powerhouse with creative talent from NCsoft, Nexon and [NHN] corporations. Together, our self-development projects -- with our self-development projects and our licensing from top global partners like EA, our investment in talented studios forms the third prong of our content investments, a three-prong investment plan to ensure we have a strong pipeline of online entertainment and games to drive growth for the years ahead.

Turning now to our real money Asian games. 2007 also saw the launch of our first real money MahJong product, and the development and release in open beta of our suite of Japanese products, including Pachinko, Pachislo, and MahJong. As I've reported before, the results from the initial launch of real money MahJong have been lower than planned, due primarily, we believe, to certain marketing and platform deficiencies by our initial licensee. These problems have since been corrected, and we are told that several new marketing initiatives are underway, including the use of online marketing affiliates, strategic partnerships with land-based channels, banner advertisements, and event marketing. We believe we will see positive results from these efforts, and will report more as data becomes available.

We also continue discussions with several other potential licensees, and expect to finalize terms soon. We believe these will help expand the market significantly when these licensees launch in 2008. Our suite of Japanese products was launched in open beta on a play for fun basis at the end of 2007. The purpose of the open beta was primarily to give our affiliate partners a sneak preview of the new product offerings, and to begin to solicit new affiliate networks in Japan.

In the two months since open beta, the initial feedback has been overwhelmingly positive. Both our existing and new affiliate partners are very excited and very positive. In addition, with no promotion and no marketing, we have hundreds of software downloads every day, and the upward trend continues.

We've also sought detailed feedback from focus groups and selected partners. Their opinions have been highly valuable, highly informative, and as a result, we've decided to make certain modifications of the products in the area of the pachi games themselves, lobby and parlor functionality, art and graphics, as well as back-end business management tools. We now expect to launch commercially in the second quarter.

We hope and expect that our product will be able to replicate as much as possible the gaming features of existing pachi machines and the ambiance of the land-based pachinko parlors, as well as introducing elements that are commonly offered in the online environment, such as avatars, player rankings, and community features. Despite the launch delays, we continue to see an enormous market opportunity for Asian real money and play for prizes games. We look forward with enthusiasm to a strong ramp-up for 2008.

Overall, we are very excited about 2008, and expect strong growth in both top and bottom line terms, and in our strategic position in Europe and Asia. In the short term, we expect a strong first quarter, driven by continued outstanding performance in every business unit. In the medium to long term, we believe our strong investments in 2007 have laid the foundation for more dramatic, more exciting growth in the upcoming years. We are indeed building a new GigaMedia, with growing shareholder value as its cornerstone. We thank you for your interest and continued support.

Thanks, Arthur, and thank you all for joining us. As Arthur mentioned, 2007 was quite simply a great year for our business. I would like to start today's discussion with a brief overview of the full year 2007 results, and then move to look at our fourth quarter performance.

We had a very strong 2007, with record revenues, operating income and net income driven by strong execution in our core businesses. Revenues grew 77%, and operating income increased 73%, resulting in record net income of $38.9 million. In 2006, we recorded a significant non-operating gain of approximately $7 million after tax related to the sale of our legacy ADSL business. Excluding this gain, to get a better apples-to-apples comparison, net income grew 63% year-over-year in 2007.

Both of our core businesses, i.e. our gaming software business and Asian online game business, had stellar performance in 2007. Let's take a quick look now at these two, starting with results of our gaming software business.

Gaming software revenues were $119 million in 2007, an increase of 116% from 2006. Growth was largely due to our poker software product, which sold 190% year-over-year. Operating income from the gaming software business units grew 125%, to $37.7 million. The Asian online game business also had a very solid 2007. Full year revenues jumped 75% to $32.8 million. Operating income grew 21% over 2006 to $6.7 million.

Let's now turn our discussion to our fourth quarter 2007 results. In the fourth quarter, our consolidated revenue was up 59% year-over-year, or 11% sequentially, to $47.7 million. Our poker software business continued to be the main driver of our revenue growth. Increases in revenue from our Asian online game business also contribute to our revenue growth year-over-year.

Consolidated gross profit was $37.6 million in the fourth quarter, a 16% improvement year-over-year, and 13% growth sequentially. Gross margins increased slightly to 78.8%. Consolidated operating income reached $9.3 million in the fourth quarter, which represented a 16% increase year-over-year, and a 7% decline sequentially. Operating margin was 19.5% in Q4 2007.

The year-over-year increase in operating income was due to strong growth in our consolidated revenue and gross profit, which was partially offset by an operating margin decline due to increases in selling and marketing expenses across all of our core business units, growth in product development, and engineering expenses in our gaming software business, and finally the consolidation and ongoing integration of T2CN, which increased general and administrative expenses.

Quarter-over-quarter, our operating income declined due to higher operating expenses. Selling and marketing expenses grew 34% to $20 million, mainly due to increases in advertising and marketing activities in our poker and casino software business, which was implemented to take advantage of the seasonally strong winter months in Q4.

Product development and engineering expenses also increased by 92% sequentially to $2.8 million from last quarter, reflecting increases in R&D related expenses in our gaming software business, and an increase in product development expenses at T2CN due to a one-off event in Q3. General and administrative expenses decreased 19% sequentially from Q3 to $5.4 million, primarily due to lower staff-related compensation expenses and lower professional service fees.

Non-operating income for the fourth quarter was $354,000, compared to $1.5 million in Q3 and $2.2 million in the same period in 2006. The sequential decline reflects a one-time gain as a result of the cancellation of preferred-share warrants, and determination of a licensing agreement both at T2CN in Q3. And the year-over-year decline reflects a certain gain from the disposal of marketable securities in Q4 2006.

Finally, as a result of all these factors, our net income in the fourth quarter grew 8% year-over-year, and 10% sequentially, to $10.7 million. Our fourth quarter consolidated net income also benefited from a minority interest loss and income tax benefit during the period.

Turning now to our balance sheet, we ended 2007 with a very strong financial position. Cash, cash equivalent, and current marketable securities at the end of Q4 were $79.9 million, and total debt was $33.3 million. In Q4, we generated $13.3 million in operating cash flow.

Let's now look at our business units' performance; the gaming software business. During the fourth quarter, the business unit generated $34.2 million in revenue, up 73% over last year, and 17% growth over the previous quarter. Revenue from our poker software product was $26.8 million, an increase of 107% year-over-year, and 21% sequentially.

Driving this was our award-winning Everest Poker offering. Everest Poker is continuing to attract growing numbers of real money players, and to strengthen as a leading international gaming brand. Approximately 182,000 active depositing real money customers play Everest Poker during the fourth quarter, up 102% year-over-year, and 12% sequentially. And during the quarter, Everest Poker adds approximately 57,000 new depositing real money players.

Our casino software business also delivered solid results. Fourth quarter revenue from the casino software business was $7.4 million. This represented a 7% increase year-over-year, and 2% increase sequentially, driven in large part by the launch of new games and cross-selling of casino games to Everest Poker players.

Operating income from our gaming software business increased 3% sequentially to $9.8 million in the fourth quarter as a result of significant revenue growth. Operating income growth was partially offset by increases in operating expenses in the area of selling and marketing expense, commensurate with consistently strong winter months, as well as product development and engineering expenses designed to expand our platform functionality and product offerings. As a result of these factors, net income from the business unit in the fourth quarter increased 19% sequentially to $10.9 million.

In sum, our gaming software business is continuing to deliver and drive growth, and as note in our press release today, in the first two months of 2008, we have experienced an exciting pick-up in revenues. For January and February combined, average net daily revenue was up approximately 12% over that achieved in the fourth quarter of 2007.

The Asian online gaming business, FunTown and T2CN -- total revenues from the Asian online game business in the period increased an impressive 92% year-over-year to $10.1 million, driven by strong contributions from FunTown, and consolidation of our China game platform, T2CN. Quarter-over-quarter, revenues were flat.

Breaking revenues down further, fourth quarter revenues from FunTown grew 16% year-over-year, and declined 1% sequentially to $6.1 million. Strong contributions from Tales Runner were the main drivers for FunTown's year-over-year results.

Turning to T2CN; total fourth quarter revenues were $4 million, up 2% sequentially, primarily due to an increase in revenues from our basketball game FreeStyle. This pick-up in performance is related to the addition of new content to the game, and new promotional activities during the period.

For the Asian online game business as a whole, gross profit was $6.8 million, roughly flat quarter-over-quarter. Gross profit margin was 68% during the fourth quarter. As mentioned earlier, the Asian online game business also recorded an operating income decline in the fourth quarter at $1.2 million in Q4, down from $2.3 million in Q3. The quarter-over-quarter decline primarily reflected an increase in product development and engineering expense as a result of the termination of a licensing agreement at T2CN in Q3.

As a result of these factors, combined with the decline in non-operating income at T2CN I spoke about earlier, net income from the business unit in the fourth quarter declined 15% sequentially to $1.3 million.

Looking ahead, the competitive advantages of our unique pan-regional platform and our strong portfolio of top game titles will be the key drivers for our Asian online game business. To date, we have licensed a very strong set of exciting games, including NBA Street Online, Holic, WarHammer, and Hellgate - London, partnering with some of the world's leading games developers, such as Electronic Arts. We have also complemented this by investing in leading games studios, giving us the ability to source hot titles at favorable terms. We fully expect both top and bottom line results to accelerate strongly in 2008 as we launch new titles, drive subscriber numbers, and expand our reach.

To summarize, in Q4 we again made excellent progress in our core businesses. Thus, we continue driving very strong growth in our gaming software business, while at the same time building our platform and enhancing our offerings. Again, we continue strengthening our Asian online game business, deepening our game pipeline, and adding key strategic partnerships. Both our gaming software business, and our Asian online game business, are on track for a very exciting 2008.

Thank you.

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

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Alicia Yap with Citigroup. Please proceed.

Hi, good morning, Arthur and Thomas. I have three questions. First of all, you highlighted that both the gaming software and the Asian online games business, you've seen daily revenues and player activities for the first few months up significantly over the fourth quarter. Can you guys help us understand whether this is because of the benefit that you saw from your aggressive marketing promotion during the fourth quarter, and can you help us understand the reason why you decided to spend more heavily? Is it because of a change in the competitive landscape, or there's any other reasons that influenced you to spend more?

And then what should we expect going forward? And then I am lumping a little bit, but then will you see the benefit of this marketing campaign actually to contribute positively to your second quarter '08, or you have to continue to spend in the first quarter in order to drive the future growth?

Sure, Alicia. This is Thomas here. Thank you for your question. I think it's a combination of all the factors you talk about. Perhaps we can go through this business unit by business unit.

On the gaming software side, as you know, traditionally Q4, the winter months, is the peak season for us as players return from the summer months. And we took advantage of the winter month seasons and launched quite aggressively a series of mass marketing campaigns, online, off-line included, and you will notice in our Q4 financials, selling and marketing expense increased quite significantly, and that is the key reason for that.

We saw some impact in Q4, but a lot of this campaign will run throughout the entire duration of Q4, and undoubtedly across, over the year-end as well. And what we've noticed is a lot of the results from those campaigns, i.e., the increase in players, are coming through in the month of January and February. So that, I think, would be the largest reason contributing for the increase in player activity and also revenue contribution from the gaming software business.

As to the Asian online game business, it is also a combination of factors. First, we have some content update towards -- I think it's December last year for the FreeStyle game, which has significantly increased the peak concurrent] user, and also user spending, both for the end of last year, and more importantly, for the first two months of this year. And what we've noticed is actually during the Chinese New Year holiday, there is also a significant pick-up in terms of user activity for our FreeStyle gaming in particular, and we obviously target that particular timing with some very festive Chinese New Year related marketing campaigns.

And we also ran a campaign with a movie by a famous star, Jay Chou here, and the movie's name is Kung Fu Dunk. So all this actually contributed to the pick-up in user activities that we have seen so far in the first two months of the year.

And as to outlook, we certainly believe, with the right amount and timing of marketing, and our product here both currently in the offering and also to be launched, would be the right product to address the market space, and we certainly think that the growth potential is there.

Should we expect the same absolute amount of the marketing expenses in the first quarter?

You will notice the Q4 selling and marketing as a percentage of our revenue was higher, both actually in percentage terms and in absolute dollar terms comparing to some of our previous quarters.

As we have talked about before, on a quarter-over-quarter basis, it is hard to have a very smooth trend because of the launching of a particular campaign and game products, but if you look at a more longer term, let's say a full-year basis, we think you would not see the same level, which is, I think, over 40% of the revenue was spent in selling and marketing in Q4; you would see more like in the mid-thirties as we have talked about before. So over time, you should come down.

I see. Okay, and my second question is on last week you announced that you have secured a multi-year sponsorship for the World Series of Poker. And can you help us understand the estimated marketing cost you expect to commit over the next two years? It seems to us that you probably are sacrificing the short term margin expansion for more long term growth potentially, and the market share gain. Is that what you are aiming for?

Alicia, hi. This is Arthur. When we look at every marketing opportunity, we look on both a tactical basis, as well as a strategic basis. A tactical basis, we look for every marketing initiative to have a positive ROI in terms of direct dollar contributions.

The World Series of Poker was no exception, and both in terms of short, medium, and long term benefits, we're very excited about the deal. We are not releasing the exact financial terms, however. It is not by any means a -- something out of line with our normal marketing spend. So we think it's a very positive deal, a win-win deal, and also a situation where we're going to be able to bring a lot of our European, South American and Asian user base to the World Series of Poker in Las Vegas, and we're going to be contributing a lot to making that event an even greater worldwide event.

Okay. And then my third question is, in light of the overall conference on the slowing down of the global economy, can you help us understand how sensitive is the online poker business or the online MahJong to a soft economy? What is your expectation in terms of your poker traffic?

Well, Alicia, at this point, we don't have empirical data to point to any firm conclusions. There have been anecdotal references in the past about how movie attendership and maybe gambling is counter-cyclical, but we're not sure in the new Internet era, so we'll be watching that closely and adjusting, of course, our marketing and our target demographics to -- well, as we see appropriate.

Okay, thank you. I'll get back to the queue. Thank you.

Your next question comes from the line of James Rhee, with Bear Stearns. Please proceed.

Hi, thank you. Thanks guys, and congratulations on your solid recent performance, and especially on, as you mentioned, the strategic efforts that you've taken and executed upon last year.

Just a few questions, all similar, related to timing. In terms of various things, such as Sportsbook, secondly, I know it's a guess, but US market liberalization, and finally in terms of perhaps the game output from the three studio investments, can you just give me a better idea, even in rough terms, on timing issues for those three efforts?

Did you want to ask specific questions on these or would you like just some more color on these points?

More color is fine. I understand there's limitations.

Okay. At this point in time, we're not ready to announce any specific terms or any specific deal with respect to a deal with the Sportsbook. We think this is, I cannot emphasize how large and how important a step this will be for us. It's a matter that I'm attending to personally, and we are fortunate to have built a very attractive brand, to have a lot of momentum, to have a very strong consumer response, and so we are enjoying a situation where we have some good possibilities, good opportunities, good choices for us, and we're exploring those very carefully. And I think it will be a while still before we're able to announce anything, but we're making good progress.

With respect to the US market liberalization, this in some ways is anyone's guess as to exactly when the United States repeals the prohibition and adopts a licensed, regulated regime. Most people think within a couple years or so, but again, this is subject to the vagaries of the US political process. There is as you know in the United States a general acceptance of poker as very different from other hardcore gambling products and other matters. Poker is on television nearly every night, on channels ranging from the Travel Channel to Discovery Leisure to National Geographic, as well as ESPN and some of the traditional ones. So it is certainly a widespread, popular phenomenon; one I think that enjoys a kind of public support which will ultimately see this again as a legalized, regulated operating environment, and we're very excited about that.

We have to -- we bear a significant burden by being a United States listed company, by complying with Sarbanes-Oxley and all of the strict United States government's measures. One benefit of this, we believe, will be that when the United States authorities come around to granting license, that it will be most easy for them to understand a United States listed company, a company that is filing in US GAAP, a company that is already compliant with the strictest corporate governance and corporate transparency regulations. And we look forward to that day and plan to be very aggressive in our launch into the United States. We think the World Series of Poker sponsorship will tie in very nicely with that, and we're very optimistic about this opportunity.

Finally, in terms of game output, maybe I can ask Thomas to speak to some of the pipeline and the expected game timeline.

Sure. More important than financial implications of investing in those two studios is what Arthur had mentioned in his prepared remarks. We're looking at this as an important source of ongoing content for our Asian online game business. So for the three investments we have made, we have no horizon in terms of when to exit because we're treating it as strategic.

Now in terms of games to be produced by each of these studios, New Storm will have game that would be ready as early as the second half of this year and you would have a continuation of game pipeline throughout most of next year. XL would be slightly longer, probably not until 2009, second half at the earliest, but as we -- as Arthur has mentioned, these are long term, important sources of our games, and we will continue to work with them in either a commission basis, license basis, or joint development basis to develop games for our target markets and operations.

Okay, thank you. One quick follow-up question on marketing costs. I guess for Q4, the big spike was related to the seasonally strong winter quarter for the online software or the gaming software business overall. Would you consider Q1, the March quarter, to be equally seasonally strong relative to winter quarter?

That's a very good question, James. As I've mentioned, if you look at it on a percentage basis, we spent about, over 40% in Q4, and that is in addition to the reason that Q4 is a strong month, it's also a strong month coming out of a weak quarter. You remember that when we talked about Q3, which was that Q3 was seasonally weak because of the summer holidays, and we have actually held back in Q3 and, in fact largely for Q2 some of the marketing spend, and we basically spent most of that and probably more than what we had originally planned in Q4.

Now Q1, we do not have this, in a way, accumulation effect of marketing spend that we would have spent otherwise, so we're looking at Q1, the opportunity that it has, and spend accordingly.

As I was answering earlier Alicia's questions, I think on a percentage of revenue basis, the marketing -- selling and marketing spend is going to come down from the over 40% level we saw in Q4, but it is better to look at this on a more longer term basis as opposed to quarter-to-quarter because we do not want to miss opportunity as we see them if they happened in a particular quarter.

Okay. Thank you very much.

Thank you.

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

Hi Arthur, hi Thomas. How are you?

Great Todd.

Just a couple of quick questions. First, with regards to real money MahJong, I believe you mentioned some interest from third parties. Can you tell us when your expectations are for when you might launch that product with your poker and casino licensing partner, UIM?

The -- we've been in discussions with a number of very strong partners for our real money MahJong product, and we think that we will be coming to terms very soon and would look forward to a launch as soon as the software gets integrated. So I would say launching maybe by second -- to the beginning of second half would be the normal timeframe.

Second half; so third quarter; second half of the year or the second half of next quarter?

Oh no, I would think in -- sometime around the summer.

Okay. Okay my next question is with regards to the US; again just a follow-up. I believe in your comments, you mentioned possibly entering the US on a play for fun/subscription effort. Can you give us an indication of maybe what the timing might be on something like that?

At this point in time, we have not finalized our plans. We will naturally be seeking to take advantage of our sponsorship of the World Series of Poker and the strength of our, both play for fun offerings in Asia, and all that we've learned about operating tournaments and creating community, and building entertainment value when there's no real money for stake, as well as our core poker platform, the Everest product itself.

Okay. And then you guys also in your comments, you mentioned the creation of a common integrated platform for your real money gaming business. Has that already launched or -- and if not, can you give a timing on when that technology should be ready?

Sure. It has not been launched. We're looking at mid this year around summertime to launch this product. As you see, actually we did mention in our prepared remarks in Q4 that the increase in product development and engineering expense, there's a big push to increase the level of cross selling between the poker side and the casino side, and that is what the expenses are all about. So we do look to this as big initiative in terms of instant results on the revenue side once we launch it towards the middle part of this year.

Okay. And then, I'm looking at your ARPU for the December quarter and, obviously, you guys spent some heavy marketing in the quarter. Is there anything else that might have drove that number? It looks like it was $49 for -- and this is for poker, $49 for the quarter. Is there anything else that might be driving that strong increase there sequentially?

I think again, seasonality is one and our marketing campaign in all fronts is another. And we feel that we are really having a lot of momentum with the brand. As we talked about before, from a demographic perspective, our ARPU, because of the target markets we address, are relatively lower comparing to the more mature markets of the US before the ban or the UK, if you will, now. And we feel that over time, there should be actually upside potential on the ARPU side for our gaming software business.

But that's not our focus, as we have talked about in the short to medium term. Our short to medium term focus is really to build up the brand, attract the user, beyond the platform. And we believe the ARPU will come when the market becomes more mature.

Okay. And then just one final question. There's been a lot of chatter regarding your Canadian jurisdiction Kanawauke -- Internet gaming jurisdiction regards to the government looking to possibly shut that jurisdiction down. Can you maybe address this? Do you think that that's a possibility, and if so, I'm sure you guys have contingency plans? Can you maybe just help us understand what's going on there, and what you might do if something like that did happen?

Sure Todd. First of all, we see no possibility of that happening in the near term. It's a rumor that's been circulated around that we just see no basis for. Second of all, we are in the final phases of obtaining another gaming license in Malta, and so we will have both redundant licensing and redundant operating facilities.

Okay, perfect. Thanks guys.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Terry Babe with ThinkEquity Partners. Please proceed.

Hi. Thanks for taking my question. Just a couple of questions. First, I guess the -- in terms of the Japanese commercial launch, I guess it's been delayed as of recently. I just wanted to get an update maybe how you were thinking about the revenue and margin ramp there as we move throughout '08 and maybe into '09, if you're expecting any material contribution.

Sure Terry. I'm afraid that it's our policy for new products and new businesses, not to provide a numeric -- any numeric guidance. We just don't feel we have the analytic basis to justify such. We do believe that the market opportunity is very, very large, and we're very, very excited about the positive response we received to our beta launch.

It is a play for fun launch and that has -- there's a lot you can learn from that. And on the basis of this, I'm going to go out on a limb and say I think that this could be a good contributor, the exact timing of which we will have to see the rate of ramp up, the rate of launch and the like. But we'll be building this business as we built for the Everest business in a step-by-step methodical basis to capture large market share and to be a long term winner.

Okay thanks. And then just, could you comment on the regulatory issues in Europe, and maybe specifically Germany, what's going on there and I guess any thoughts around that you have?

Sure. Europe, of course, when we speak of Europe it's a [giant] generalization because there are some 27 nations in the European Union, and each at any one moment may be heading in its own direction. But the most important thing in our minds is that these 27 nations have joined together to form a common market, with as its number one principle the creation of a single customs jurisdiction with no barriers to the movement of goods and services between member nations.

They have underscored this by aligning their currency, by aligning their macro and microeconomic policy, their fiscal policy, and subjecting themselves all to a super national government; that is the European Commission based in Brussels. This European Commission has been very active and very straightforward about its view that online gaming is one of the services which should be, by the principles of the European Union, an open and free, free flowing, free moving service.

As such, we believe that ultimately, and again the pace will depend upon the decisions on every individual country, ultimately we see that Europe will be an open and free market for the provision of online gaming.

Okay, thanks.

Thanks Terry.

Your next question comes from the line of Edward Hemmelgarn with Shakers Investments. Please proceed.

Yes, just a couple of questions. Maybe you did clarify this, but you talked about a significant increase in Asian online gaming business for the first two months of this quarter. Could you give a little bit more of a range for that?

It's a policy we do not give numerical guidance and -- but we can safe to say that we, in the past two months January and February, we see a significant increase in players' activities, which include people who are logging in and also people who spend time and spend money playing our games. And that is above and beyond what we had internally budgeted for, even counting the seasonality of Chinese New Year.

So that is actually a very good indication of our marketing effort and game content update working. So, we look forward to reporting good results in this business unit and others and when we report our first quarter results.

Well, you just, you gave a number for the European poker and casino business of 12%. When you talk about significant increase you -- just trying to get some feel for that, is it -- you don't have to give an exact number but is it --? Do you consider 12% to be significant or is it --? Just trying to get some idea of a ball park range?

I'm afraid that that's probably the most we can comment in terms of the Asian online game business at this stage but, as we said, we look forward to reporting some good results in a couple of months time.

Okay, thanks.

Thanks.

(OPERATOR INSTRUCTIONS). It appears we have no more questions in queue at this time. I would like to turn the call over to Mr. Brad Miller for closing remarks.

Thank you. 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 all for joining us. Thanks.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.