GigaMedia Ltd (GIGM) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GigaMedia, Ltd, conference call to discuss third quarter 2008 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, November 18, 2008. I would now like to turn the conference over to Mr. Brad Miller.

Thank you, this is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our third quarter 2008 results conference call for GigaMedia Ltd. Here to speak with you and answer your questions today are Arthur Wang, our CEO, Thomas Hui, our President and COO, and Quincy Tang, our CFO.

Before I turn it over to today's speakers, I'd 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 US Securities and Exchange Commission in June, 2008.

This presentation is being made on November 18, 2008. The content of this presentation contains time sensitive information, and 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 Q3 2008 business activities and financial performance. Thomas Hui will then discuss some of our latest operational developments and results, and Quincy Tang will conclude with details on our financial results during the third quarter. 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, and thank you all for joining us today. Thomas and Quincy will take us through the operational and financial highlights of the quarter, while I will focus on our overall business outlook and new initiatives.

Before continuing, a word on the stock market. As we are all aware, the crisis in the financial markets has created a tremendous loss of confidence throughout the entire capital markets. Along with so many others, GigaMedia stock has been hit hard by the turmoil, but I would like to emphasize that for GigaMedia, nothing fundamental has changed. We continue to operate a high growth business with outstanding prospects. We continue to generate very high free cash flow, with every business unit profitable, and we continue to have a strong balance sheet and report today a cash position of over $100 million, with no net debt.

Let me turn now to the specific business units and highlight why we are so excited about our progress in building a leading online entertainment firm.

First, our Everest Poker and Casino business. First, to review the latest good news, we are very pleased that Everest Poker has been awarded the Poker Operation of the Year for the second straight year, by the independent industry journal, eGaming Review. We believe that this is further recognition of the strong Everest Poker offering, which in just three years has grown to be one of the most popular poker sites in the world, currently ranked fourth in terms of player activity, and this ranking including sites that still operate in the large United States market illegally.

We especially appreciate this recognition, now for the second consecutive year, because it validates and underscores the fundamental mission statement at GigaMedia, to provide the highest quality software services to our players. We look to continue to drive our growth and business expansion on this principle, cheered by this external recognition.

Coming out of our traditional slow quarter, more challenging this year due to the strong competition from the Olympics, we are pleased to see a ramp up of player activity in October and in November. Let me highlight a few of the additional initiatives, which we believe will fuel our continued growth.

First, the sponsorship of the World Series of Poker. The final event of the 2008 World Series of Poker has just concluded, but for us, it is actually the beginning. In our key markets in Continental Europe, television broadcasts of the World Series of Poker tournament and the World Series of Poker finals is only just beginning. From now and through 2009, ESPN will be airing thousands of hours of the World Series of Poker, all with Everest Poker on the center felt and on the inside row, most visible as players check their pocket cards. Ultimately, the WSOP will reach an estimated 300 million households. We are very proud to be the multi-year sponsor of the WSOP, which this year was the largest and richest ever, with over 58,000 players from 118 countries, all playing for a prize pool of over $180 million. We believe the broad syndication of WSOP broadcasts across our markets in the fourth quarter and in 2009 will give us a strong boost throughout the entire year.

Second, sports betting. Later this quarter, we will be launching our Everest Sports Betting product, representing one of our most significant product expansions since the launch of Everest Poker. By having a sports betting product to join with Everest Poker and Everest Casino, we provide a broader and more complete entertainment offering to our players, while at the same time begin to monetize from the largest and richest segment of the online entertainment market. Our entry into this market will be in partnership with one of the leading brands in the business, a partnership which will enable us to have the best of sports offerings from the start, as well as other potential cooperations in the future. We believe we will see improved per player revenues driving even greater growth in 2009.

Third, branded casino games. We are also excited to welcome The Incredible Hulk, X-Men, and Spider-Man to the GigaMedia team. These new branded casino games will increase visibility and further the attractiveness of the entire gaming platform. We are certain that adding the muscle of the superheroes will surely strengthen our offering.

Turning now to our Asian real money games business. Together with sports betting, our Asian real money games business is our largest and most significant expansion since the launch of Everest Poker three years ago. We are pleased to report strong progress and growth from an admittedly small base.

Our products - pachinko, pachislo, mah jongg - are the first of their kind in the market, and our initial concern was whether we could deliver the quality of product and virtual experience necessary to meet the high standards of the Japanese consumer. The good news is that since our launch this summer, the market's response has been enthusiastic, with strong positive reviews of our products driving player activity that is steadily increasing. To support this nascent growth, in early October, we released two new pachi games, modeled on the most popular real world pachinko and pachislo machines, which I'm happy to report led to another spike in software downloads and player registrations. An additional six games are in the development pipeline, and set to launch in Q4 and Q1.

We continue to believe that this is an enormous market opportunity, and are building a foundation for this to be a large business and serious contributor to GigaMedia's operational results in 2009 and on.

Now our Asian online game platform. The unfortunate truth about our Asian business is that several of the games originally scheduled for launch in 2008 have been delayed. Certain other games, inherited when we acquired the Asian businesses, have failed to meet our internal standards and were therefore canceled. As a result, our game offering this year has been thin, with our platform supported by old games, still popular, but unable to drive further growth. While we have made good progress under the circumstances, the best is yet to come.

I believe we stand at the start of the steep part of the curve, with very large and very exciting growth over the next four quarters. Later this year, and into 2009, we are rolling out a number of games with potential to be mega hits in the marketplace, and explosive growth drivers for GigaMedia.

Let me highlight a few. First, NBA Street Online from EA Sports, the undisputed leaders in sports games. We are excited to be bringing this hot arcade style game to the greater China marketplace, including China, Hong Kong, Taiwan and Macau where, frankly speaking, basketball is king. We are preparing for closed beta now, with open beta and commercial launch scheduled for late first quarter.

Second, Warhammer Online; Age of Reckoning. We are very excited by the market response to Warhammer in the US and in Europe, both markets which launched late last month. Warhammer is a great game, loved by game reviewers and game players alike. It looks like EA Mythic Studios produced another mega hit, and we are proud to be partners in Asia. We're looking to launch in the first half of 2009.

Third, FIFA Online, also from EA Sports, is preparing for commercial launch in South East Asia this month through our affiliate, Infocom Asia. This game, already a proven hit in Korea, has great promise in Southeast Asia, where soccer is the undisputed number one sport. We currently hold a 28% stake in Infocom Asia, and are in discussions to increase our position in the Southeast Asian game leader.

Finally, in this quarter we will be launching Holic, a (inaudible) style MMO developed by Endgames, author of a previous top ten game in China. We believe that Holic will fill the market niche previously filled by RO, Ragnarok Online, one of the most popular online games in Asia. We are pleased to be releasing Holic in all of greater China - China, Taiwan, Hong Kong and Macau.

In addition to third party licensed games, we continue to strengthen our pipeline of new games through our investments in outside game studios and in in-house game development. One example is our training style MMO called The House of Flying Daggers, tied to the movie of the same name by China's top director, Zhang Yimou. This martial arts adventure game is set in the fascinating and breathtaking world of ancient China. We are looking forward to its release next year.

And, we will soon be announcing an exciting new partnership with MTV International. MTV and GigaMedia together will co-develop and then operate a new online game based on one of the world's most popular IPs. We look forward to providing more information in a formal announcement within the next two weeks.

In Asia, we are well on our way to building an unrivaled gateway to online entertainment in the region, a one stop shop for game developers and entertainment providers, addressing the Pan-Asian market. Today, we have over 90 million registered users, with over 8 million active over the last 30 days, and we look to double these numbers, then double again as we grow our Pan-Asian platform.

In conclusion, in this past quarter, we disposed of our final legacy business, thereby completing our transition, our transformation to the new GigaMedia. Over the last four years, we have shed our loss-making past as an ISP and music retailer, and built a leading online entertainment firm. In the third and now fourth quarter, we continue to make strong progress on our top strategic initiatives, putting in place exciting drivers of accelerated growth and market position, building a dominant online entertainment business. We are, indeed, building a new GigaMedia, with growing shareholder value as its cornerstone.

We thank you for your interest and continued support.

With that, I'd like to hand the call over to Thomas.

Thanks, Arthur, and thank you all for joining us. Let me take you through our third quarter business and operational highlights now, starting with our gaming software business, and following with our Asian online game business. Revenue from our gaming software business grew 18% year-on-year, as we continued to leverage our investment in the Everest brand. Poker revenues increased 7% year-on-year, driven by expansion of the average poker player base. Casino revenue grew 51% from last year, fueled by strong cross-selling to Everest Poker players as we continue to integrate our poker and casino offerings.

As expected, revenues in the gaming software business in the third quarter were lower than that in the second quarter, reflecting normal seasonality. Poker metrics also reflected this. During the third quarter, our poker platform had approximately 176,000 active real-money customers, down 8% from the previous quarter. During the quarter, we added approximately 38,000 new real-money poker players, down 17% quarter-over-quarter. While seasonality negatively impacts user activities in both the poker and casino verticals, our efforts to drive casino revenues through cross-selling were able to overcome the impact of seasonality, and resulted in quarterly sequential growth in our casino vertical.

Casino results were also boosted by the launch of three new games during the quarter. During the quarter, we continued to make good progress in developing our common wallet initiative. Approximately half of our total new real-money casino players for the quarter were also our poker players. During the third quarter, we saw our cross-selling conversion ratio continue to increase, and expect it to continue to do so in the next few quarters. Most of the remaining work here is database programming-oriented, and will not have player-facing features.

During the quarter, we also continued to develop our new VIP program, and I'm happy to say that, with much of the back-end work complete, poker players in November are now being awarded points on a monthly basis, with different VIP categories conferring unique benefits, such as exclusive tournaments, free [rows], etc. Players can convert chips for real-money play into cash. Our overall objective here is to build a compelling retention program that we can use across the Everest gaming platform, and we are very pleased with progress to date.

On the marketing side, we continue to organize various online tournaments and offline activities to strengthen the Everest brand and enhance the overall player experience. We also ran television commercials in Sweden, Germany, and the Netherlands. A big marketing event for Everest, of course, was the World Series of Poker, where we had great media coverage, with over 80 journalists filming and interviewing in the Everest lounge. We expect broadcasts of the World Series of Poker in Europe to begin in Q4 in Germany and the Netherlands, and then continue throughout next year across our European markets. Overall, given the relatively low level of online user activity in the third quarter, we did not aggressively market during the period.

Looking into the fourth quarter, we are already seeing an increase in poker player activity, and we will roll out three new casino games as well as certain flash-based games featuring some of the Marvel characters as aforementioned. We will also continue to expand our VIP program, and make certain incremental steps toward delivering our common wallet initiative.

With regard to other gaming growth initiatives, as aforementioned, we continue to add to our Japanese game offerings, and we expect our licensing of the Japanese game products to significantly ramp up marketing activities in December. On top of this, we also expect to add a complementary sports betting offering before year-end.

Turning now to our Asian online game business. Revenues increased 11% year-on-year, driven by continued growth of our China platform T2CN. Revenues were down 7% from the previous quarter, primarily reflecting the impact from Beijing Olympics on T2CN, and decreased revenues from FunTown. As expected, we experienced sharply decreased player activity in T2CN's game FreeStyle during television broadcasts of the Beijing Olympics in the third quarter. This was particularly acute during the opening ceremonies, during which concurrent users dropped by as much as 50%.

T2CN's average monthly active paying accounts were approximately 398,000 during the third quarter, down 11% from the second quarter, and average monthly revenue per active paying account was $4.06 during the third quarter, up 2% quarter-over-quarter. Peak concurrent users of FreeStyle were approximately 118,000, a decrease of 15% from the second quarter.

FunTown's revenue decreased on a sequential basis due to a drop-off in revenue from the licensed game Tales Runner, and decreased sales of virtual items in the third quarter. During the period, we began to sell virtual items with limited, rather than unlimited, lifetimes, which resulted in a lower volume of virtual items sales. However, we expect this negative impact to be only transitional and temporary.

FunTown's average monthly active paying accounts were approximately 109,000 during the third quarter, down 6% from the second quarter, and average monthly revenue per active paying account was $19.11 during the period, steady over quarter to quarter. Peak concurrent users were approximately 46,000, a 4% increase from the second quarter.

As Arthur mentioned, we continue to be very excited about the prospect of our new game pipeline, which we believe will provide significant growth to our Asian online game business. Let me know walk you through the key developments with regard to our new game titles, namely Holic, Warhammer Online, and NBA STREET Online.

The development of Holic has made great progress in 2008. The game is now in pre-open beta in Korea, and there is a full open beta with complete marketing schedule in Korea for the end of November. In Taiwan, we have now completed two small-scale beta tests, and a third is currently ongoing. The game is now on track for a larger open beta test and commercial launch in Taiwan in January 2009, and we expect launch in China soon after.

Turning to Warhammer Online. EA's new game has been an enormous hit with gamers in the US. The game has sold over 1.2 million copies, and has over 800,000 registered users already. We are now in the process of localizing the game for the Taiwan market. We expect to launch Warhammer Online for closed beta testing in Taiwan in Q1 2009, and open beta by Q2 next year.

Finally, we also plan to launch another game title from EA next year, NBA Street Online. As we have stated in the past, sports games are an underserved niche in Asia, and basketball is one of the most popular sports in the region. Given this, the built-in brand appeal on the NBA sports brand, and the excitement of playing with or against NBA stars in this game, we expect NBA Street Online to be a major hit in China and Taiwan. The game was in open beta in Korea in late July, and is now undergoing additional development. Our expectation is that it will be ready for commercial launch in Korea near year end 2008, and that we will start closed beta testing in China and Taiwan by Q2/Q3 next year.

In summary, we continue to be very excited about our gaming software and Asian online game businesses. In Europe, our strategy is to broaden the gaming software platform and leverage the average brand positions as to drive continued long-term growth. And in Asia, our multi-pronged game sourcing approach, solid pipeline, and massive reach give us powerful assets to accelerate our growth strongly.

Thank you. That concludes my remarks, and I will now turn the call over to Quincy for review of our financial performance in the third quarter.

Thank you, Thomas. Let me now take a few minutes to review our Q3 consolidated financial results. Following that, I will highlight some key factors affecting Q3 results in each of our core business units. There will be then an opportunity for you to ask questions. One quick reminder; following the sale of our non-core legacy ISP business, to allow for meaningful comparisons, all current results are presented on a continued operations basis unless otherwise noted.

Overall, third quarter results were in line with our expectations, despite the challenging operating environment. Beginning with revenues, year-over-year, we grow consolidated revenues from continued operation 16% to $25.7 million. Growth was led by our games software business, which increased 80% year-over-year, and remains our largest business segment. From (inaudible) this was continued growth in our Asian online game business, up 11% year-over-year. On a sequential basis, our revenues decreased by 7%. This was largely due to two factors. One, the traditional downturn in online gaming activities in Europe during the summer months, which impacts our gaming software business. And secondly, a significant decrease in online game activities in Asia during the Beijing Olympic Games, which affects our Asian online game business. Our gross profit margin in Q3 was 81%, which remains steady year-over-year and quarter-over-quarter.

Turning to consolidating operating income. As noted in our release today, operating results were affected by the results from discontinued operations and several non-cash items, relating to our Asian online game business. These items include the following. First, income from discontinued operations in the first quarter of approximately $8 million. Second, a write-off of approximately $2.6 million relating to loan receivables from Flagship Studios, the developer of Hellgate London. Thirdly, impairments totaling approximately $1.3 million related to capitalized costs for certain games, the impact of which at the minority interest was approximately $1.1 million. And fourthly, a write-off related to certain investments recorded in T2CN, the impact of which was approximately $2.1 million after minority interest.

Third quarter 2008 operating income and net income on GAAP basis include these results from discontinued operations and non-cash items. GAAP consolidated net income, which includes the aforementioned items, grew 24% to $12 million from the third quarter of 2007, increased by 7% from the second quarter of 2008.

Looking at the key expense line items details, general and administrative expenses decreased year-over-year by approximately $588,000, or 9.4%. This has offset a year-over-year increase of $2.8 million, or 220% in product development and engineering expenses attributable mainly to the hiring of more engineers for our gaming software business, as well as a year-over-year increase of approximately $3.1 million, or 22%, in selling and marketing expenses related to growth in television advertising and other initiatives surrounding our online [book of] products.

On a quarter-over-quarter comparison, general and administrative expenses decreased by $1.7 million, or 23%. This has more than offset a quarter-over-quarter increase in approximately $488,000, or 40%, in product development and engineering expenses relating to our gaming software business, a net increase of approximately $255,000, or 2% in selling and marketing expenses relating to increased initiatives in our Asian online games business.

Non-GAAP figures, excluding these non-cash items are provided in addition to GAAP results in our Q3 results, as we believe that these items recorded in the third quarter are not indicative of our core operating results, and that our non-GAAP measures allow more meaningful comparison. Let's look at non-GAAP results now, as we believe this will be more meaningful in understanding our core operating result and trend.

Third quarter non-GAAP operating income increased 12% year-over-year to $10.7 million from the same period in 2007. Growth was primarily attributable to strong operating income growth in our China online games platform, combined with the effect of cost controls over our general and administrative expense in the gaming software business. Quarter-over-quarter, non-GAAP operating income decreased in line with expectation, down 15% compared with our Q2 results, reflecting the impact of seasonality. As a result, non-GAAP consolidating operating margin declined slightly quarter-over-quarter to 23.5% in Q3 2008 from 25.8% in Q2.

Turning to net income. Non-GAAP consolidated net income in third quarter grew 22% year-over-year to $10.7 million, and decreased 10% sequentially. The sequential decrease in net income was primarily due to low Q3 net income from Asian online game business. We continue to maintain a strong balance sheet in the third quarter. Cash, cash equivalent and current market (inaudible) created at the end of Q3 was $103.7 million, and total debt decreased to $29.5 million. In Q3, our net cash position improved by $24.9 million, which was attributable mainly from the proceeds from sales of our legacy ISP business.

Next, let's look at the details and performance of our core business units. The gaming software business enters into seasonality in the summer months, when many Europeans have long vacations, generally spend less time online, are always a challenge for gaming software business, which targets the European market. The third quarter is traditionally the weakest quarter of the business. Within this context of a challenging operating environment, revenue for the gaming software business grew 18% year-over-year, but declined 6% sequentially. This was in line with our expectations, given the challenges we faced.

In Poker, revenue grew 7% year-over-year, and decreased 14% sequentially. Looking to the fourth quarter, as mentioned, the poker metrics are trending up. In Casino, cross-selling efforts targeting Everest Poker players continued at a record high level of success. Casino revenues were a record high of $11 million in the third quarter, up 51% year-over-year, and a strong 15% up quarter-over-quarter. We expect ongoing cross-selling initiatives to continue to drive the users and revenue growth.

Gross profit margin in Q3 was 84%, a decrease of approximately 2% year-over-year and steady quarter-over-quarter, with a year-over-year decrease reflecting a more competitive operating environment during the year. Operating income in our gaming software business decreased 2% to $9.3 million year-over-year, and decreased 10% sequentially. The quarter-over-quarter decrease reflects reduced revenue from business units as well as increased product and engineering expenses in Q3. In sum, we delivered a solid quarter despite a challenging operating environment in Q3, and we are confident we are on track for good growth in Q4 in this sector.

Let me now turn to our Asian online game business. We have continued to scale up and build our Asian platform, and are pleased with our progress. Total third quarter revenues from the Asian online games business grew 11% year-over-year to $11.2 million. As expected, third quarter revenues were below second quarter results due largely to the effect of the Beijing Olympic Games.

Let's break down the revenue by business unit. Revenues from T2CN, our China platform, climbed 27% year-over-year to $4.9 million. This was driven by growth of basketball game FreeStyle. On a sequential basis, revenue decreased 9% in Q3 2008 from Q2, reflecting a decrease in revenues from FreeStyle during the period. As Thomas mentioned, metrics of FreeStyle dropped during the Beijing Olympic Games.

Revenues from FunTown, our Taiwan and Hong Kong online game platform, were steady year-over-year at $6.2 million, and decreased 6% sequentially on lower revenues from Tales Runner and a decrease in sales of virtual items. Gross profit margin in Q3 was 73%, up from 69% in the first quarter last year, and remained steady quarter-over-quarter.

Turning to operating income. Again, I want to emphasize that result and period comparison were distorted by several non-cash items in the third quarter this year and last year. Excluding such items, operating income for Asian online game business was $1.6 million, and operating margin was 14.6% for the third quarter 2008.

Quarter-over-quarter, excluding the unforeseen items, Q3 operating income decreased 48% quarter-over-quarter to $1.6 million from $3.2 million. This is mainly due to lower gross profit, and increased selling and marketing expenses in the quarter, related to the new patch for FreeStyle 2008, and MahJong 3.0.

Looking ahead, we expect revenue to grow in the fourth quarter and (inaudible) in 2009, as we begin to more fully leverage our unique regional platform, and launch the outstanding set of new game titles Thomas mentioned earlier, including Holic, Warhammer, and NBA SO Online. And in conclusion, in Q3, we faced strong operating challenges, but we again delivered solid results. We continue to build and strengthen our business, and we are on track for very exciting end to 2008 and beyond.

Thank you.

Thanks, Quincy. We will now move into a question-and-answer session. Operator, could you please open the call up for questions?

(Operator Instructions).

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

Hi, yes, good evening and good morning, I have a couple of questions. First of all, can you actually tell us the trend in October and November for your online gambling business? Have you seen any slowdown in the user traffics, given the external macro environment and do you think the global recessions will have an impact to your poker and casino traffics in revenue?

Thank you, Alicia, this is Thomas here. Thank you very much for the question. In terms of user activity in Q4 for the month of October and, I guess, about 20 days of November we've been in now, we did see a seasonal rebound of both the Poker and the Casino activities.

So at this stage, it is probably too early to tell whether or not the macro environment we have a -- or the degree of the impact of the macro environment have on both our Poker and Casino products but directionally we did see a rebound in activities.

The degree of the rebound has not been as high as the previous seasonal rebound we have seen but that -- we cannot be sure at this stage whether that is due to the macro environment or due to the changing competitive dynamics in the market. But we did see a smaller rebound than previous years, but nonetheless there is a significant rebound.

I see. And then -- thank you. And then the second question is regarding the Casino market. I understand that it's actually -- it's even more competitive in this market. So what is your strategy to actually differentiate yourself with other bigger competitors? And do you think by licensing some of the slot machine games from CryptoLogic will help to expand your user base?

I think -- again, it's Thomas here. The way we think about our business is really creating a online [ad team] and brand surrounding the Everest properties that we have. Starting obviously from the very successful Everest Poker product in the continental European market, whereby it's a recognized brand that is catered for Europeans, built for the Europeans in the local languages.

So the brand association and the brand value created around that give us a lot of comfort in our ability to cross-sell that both Casino product into the existing Poker customers, as we have discussed in our prepared remarks that we have been seeing the commercial ratio to be increasing since the beginning of the year, when we rolled out the common wallet initiatives. The ratio is still low comparing to what we believe is the achievable ratio but nonetheless it is -- the direction is certainly moving in the right manner.

And on top of that, we believe as we broaden out our product offering for the Everest brand, we will actually increase the brand appeal in such a way that we can attract new customers onto our platform for both the Poker and the Casino products surrounding the Everest brand.

Now as Arthur mentioned, we also will be rolling out -- maybe we can ask Arthur some more about it, the sports betting product before year-end, which we're going to further complete the brand offering as a online gaming entertainment brand, which we believe would not only fertilize cross-selling among the existing customers, but also provide more reasons why new customers want to come onto our platform.

I see, thank you. And then my third question is can you actually tell us on the competitive environment for the poker business? I think previously you mentioned that it was 5%. Is -- I think on this press release, you actually mentioned that there was some increased competitive or intense -- a little bit more intense over there.

Okay. The competition we are referring to obviously are primarily the PokerStars (inaudible), some of these poker rooms that are still US facing, they remain active. Their level of intensity has not increased but we believe, as we have mentioned in previous call, in previous discussion, they will continue to be here and what we need to do is as a Company is need to be -- continue to be competing against them effectively through various manners such as assets that we have, they don't have. For example, utilizing the World Series of Poker sponsorship, which is going to give us the reach and the association that PokerStars (inaudible) or even some of our other competitors would not be able to have.

So we would need to be more nimble in some of the other online or offline marketing campaigns instead of just throwing dollars on TV commercials. We will probably need to be more creative otherwise the return on investment for such initiatives would not be as attractive as it used to be.

So you would have some impact but again we have been competing long before the time of PokerStars and (inaudible) coming to our market, we have been competing with some of the other competitors in our market. Now we just have to continue to do so effectively with all these newcomers.

I see. And lastly, can you give us some color in terms of the trend in October and November for your Asian online games business on your MahJong and the T2CN unit?

Yes we expect the business to be flat. We have not launched any new patches or games for neither the FunTown platform in Taiwan or the FreeStyle game in China Q4 year-to-date. So there hasn't been any increase in user activity.

We -- therefore, we expect Q4 revenue in that unit to hold steady for Q4 until obviously -- until Q1, which is why we feel very excited about the new set of titles that we have in the pipeline, which includes Holic in January and then Warhammer towards the end of Q1, Q2. So those will significantly propel our revenue and profitability for that business unit in the next year.

I see. I thought I actually saw some new content upgrade for FreeStyle recently --

Yes, there was a new patch of FreeStyle 2008 right before -- we did that right before the Olympics, actually. So that was -- unfortunately the effect of that was negated -- more than negated actually by the competition for viewers playtime, if you will, or watch time because of the Olympic Games. And in Q4, we haven't -- we currently do not have any major plans for game patches for the FreeStyle game.

I see. But was that an increased marketing effort for FreeStyle, actually? It's to have like another promotion for the patch that you already launched?

Yes, we increased slightly a bit of the marketing. Again, towards the Olympic time it was quite difficult for us to gain the viewership's mindshare. Therefore we did not increase the marketing activities then, but towards the beginning of Q3, we did increase a bit of the marketing activities there. But since we don't have any -- the important thing is since we don't have any big patches coming up in Q4, we may choose or continue to be quite inactive on the marketing front. (inaudible).

I see. And then can you just tell us what are some of the main reasons why the games launches have been delayed? I understand that it's always -- delays happens all the time but what are some of the main reasons --

Sure. I think for Holic, it was basically -- it was almost like a conscious decision because if we were to launch it too near -- too much -- because we could launch the game in Q4 this year, but we think that because of the way accountings, and also the market potential works, if we were to launch it in January, our marketing dollar would be more effective in generating revenue for financial reasons. So the game is quite ready and we're just basically timing it for a January launch.

Warhammer has always been a '09 launch but -- and the game, as you know, the game is quite -- has been very well received in the US. We are just in the process of localizing the game, we are probably about 50% done in terms of localizing the game. We're just trying to time it in the right timing now, giving that we're launching Holic in first quarter -- sorry in January, and then end of January is the Chinese New Year holiday. We think towards the end of Q1 is a better time for that game.

I see. Okay, thank you so much.

Thank you, Alicia.

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

Hi guys, thanks for taking my question. Arthur, I think I heard you in your opening remarks mention that you might take an increased ownership or look to increase your ownership in Infocom Asia Holdings. Would you guys look to take a majority stake there or just could you talk a little bit more about that and what the timing might be?

Sure. Yes, we would be interested in taking a 51% position at minimum. Basically we've worked very closely with IAH as an affiliate company, we are in essence partners, and have looked at games together and evaluated market position opportunities together.

We have always encouraged IAH to grow and to expand as well as they can and always held ourselves out as one possible future for them, and that looks like the way that we are going. The timing is likely to be either -- most likely to be the very beginning of 2009.

Okay.

We're bringing a game such as FIFA Online into our stable of sports games. So we're excited about the potential there and when we have some final terms negotiated, we'll make an announcement to the marketplace.

Okay, that's helpful. Thomas, with regard to the sales and marketing in the fourth quarter. I think I heard you mention that the Japanese site was starting to ramp up, and that you've got some new games that are going to launch and that -- I thought I heard you say you might look to add some marketing there. Can you maybe just talk about sales and marketing in general in the fourth quarter, what your expectations are, and then also how that's impacted by, I guess, the success with the Japanese site?

I think overall sales and marketing will increase in absolute dollar terms. That is a combination of factors. First is, as you mentioned, there is the Japanese side, second is there will be the World Series of Poker part of the sales and marketing, as some of these TV commercials start to air in our target European markets, and also taking advantage of the seasonal upturn we may choose to increase both online and offline marketing for that side of the business.

However on the Asian side as we have talked about, there aren't any plans for new game launches, so they'll probably remain a similar or if not lower level. But on an overall basis, sales and marketing will increase on an absolute dollar terms basis.

Okay. How about on a percent of revenue? Should we still expect 35% to 40%? Is that still the range?

I think we still -- on that, I think we still go by our policy of looking at a target of 20% to 25% operating margin or [even] on an annualized basis, full year basis. There will be a quarter-on-quarter variation, as we have talked about, and so far for the first three quarters, we have remained within the 20%, 25% guidelines we have talked about and on a full year 2008 basis, we expect to be within that guideline too.

Okay. And then last question. With regards to the Casino-Poker integration, when exactly do you expect the bulk of the integration to be complete? I know you would obviously have some -- maybe some smaller things to complete but when will the bulk of that be complete, if it hasn't already? And then also, what's the exact timing or date for the launch of the Crypto games on the Casino product?

In terms of the cross-selling, yes, the way we would like to think about is the following. If it is really a incremental asset as opposed to a, build it for six months or nine months and then flip on the switch, as we have talked about in the past few conference call, we have different milestones where we gradually rolled out the initiative to gradually increase the ease for our customer to cross register, to cross transfer their funds, and eventually to basically play it almost as one wallet. But then, the one wallet concept is composed of many features we have gradually rolled out.

So at this stage I would tell you that we have rolled out most of the features we want. As I've mentioned in my prepared remarks that the remaining assets, or the modules, are primarily database and back-end related, although we would also create some ease on the customer experience part. But most of the customer features are already rolled out.

And what we have seen is actually a gradual increase in terms of cross-selling ratios. So basically, a percentage of our existing Poker player base become our Casino players. And that ratio has been gradually going up. Right now it's [due] single digit. We think that the growth rate is a healthy one, and we think it can grow to a healthy double-digit.

Okay. And then the timing on the Crypto games?

Arthur, do you want to comment on that?

I'm sorry, I missed the question.

Just the exact date of when you're expecting the launch of the CryptoLogic games on the Casino product?

I think the schedule is in early 2009, if memory serves.

Okay. Okay, thanks, guys.

Your next question comes from the line of Andrey Glukhov from Brean Murray. Please proceed.

Yes, thanks for taking the question. A couple of things. Thomas, I guess to the extent that the new content both on the gambling side, so the CryptoLogic, as well as on the Asian game sites, so some of the likes of MMO, is probably coming at a lower margin because it has either revenue share or royalty component to it. Maybe can you give us a little more color why do you think you're not going to see some pressure on operating margin next year? What are some of the offsets that you have on the business model that you can leverage that share?

On the Asian side we are [happy] what we are doing -- if you look at our [runway] basis, we're doing $45 million to $50 million revenue this year. And that is for the geography we cover, it doesn't reached the critical scale yet, which is covering obviously a very big China market and the not too small Taiwan market, plus the smaller Hong Kong markets. And that is primarily on Taiwan just on one platform, the whole suite of games -- casual games, MahJong and others. And in China, it's premier leagues, just one game FreeStyle.

The incremental revenue we're going to generate from the new games does not require that much more headcount and infrastructure costs in order for us to run. You're absolutely right, Andrey, that we will have to incur a higher licensing cost, therefore royalty and ongoing revenue share and royalty payment. But give that we are only on a -- Quincy mentioned he is preparing the remarks on Q3 running at a 14% on an adjusted basis, operating margin, we think that is not a number we are going to be looking to dilute as we increase the game offerings. In fact, quite to the contrary, the scale effect on the people and the infrastructure, and the platform maintenance and all that, we think there is some more room there.

Now on the European side, again the licensed casino games, the Marvel product, it's just one of the many initiatives. First of all there is the inherent costs if we were to build our own product. We have not obviously disclosed the licensing terms with CryptoLogic, but we believe the incremental we get out of those products, given that they are specific IP-related products with obviously Marvel characters behind them, will give us very good margin. We -- at this stage we're not sure if that's necessarily going to be dilutive in and of itself. But even with -- this has become slightly dilutive in terms of our margin, or the other initiatives cross-selling from the other Casino games to an existing Poker player, which obviously is very high margin in the sense that we do not need to invest our biggest variable cost, which is marketing expense to acquire those customers, again, what it basically means that we should be able to maintain the 20-25% overall margin.

So those are on the high level how we think about it, Andrey.

Okay. And looking on the Poker side, I guess cost of customer acquisition continues to go up fairly noticeably. Do you guys think that as we enter into next year that number will start to flatten out as maybe some of the ankle biters fall off? And do you think that World Series of Poker broadcast will help you moderate that number in any way?

Yes, Andrey, this is basically almost tied to Alicia's question about the competition [world]. I think the way we look at it is twofold, right. First, in terms of directly acquiring new customers, competing against some of these poker rooms, whether it is the US facing one or not, we would basically continue to have to use the asset that we have and others don't have, such as the World Series of Poker and also being more down to the -- more local as a Company because we have been operating longest in the Continental Europe and been more nimble instead of just throwing dollars at acquiring customers. So that's point number one.

Point number two is our cross-selling, that's why we have been working very hard this year, whether it's the Casino-Poker vertical cross-selling or the introduction of the sports betting, all these will help us basically generate additional revenue dollars that we need to acquire that customers. Now even if we did the second part as we need to prepare in the worst case situation that if customer acquisition costs continue to rise next year, then we'll have enough revenue to justify for such acquisition. So we're quite sanguine that with this two part strategy we will continue to have to compete but we believe that our business model could be quite -- and the profitability could be intact.

Okay. And last question. On the pachinko side of the business, when do you expect to become profitable in that effort?

I think, Andrey, this is Arthur, I think we're looking -- we continue to ramp up the business and I think when our numbers become significant or meaningful we'll begin to release them, as we did with Everest Poker. So my hope is that we begin to release some operating metrics or financial metrics in Q1.

Thank you.

Okay, your next question comes from the line of Atul Bagai from ThinkEquity. Please proceed.

Hi guys, thank you for taking my question. Can you talk a little bit about Q3, how the Poker business performed month-over-month? Was the weakness mostly in the month of July or September? Can you talk a little bit on that?

Sorry, Atul, you broke up a bit. Can you repeat your question?

Sure. My question was, can you talk a little bit on month-over-month performance of Poker in Q3? Was the weakness mostly in July, August, September, when did you see the weakness? Is it --?

Yes, we don't specifically provide month-over-month data, but I can tell you that August was the weakest of the three months in Q3. And August was really the month that we see an exceptional amount of weakness comparing to previous years. So August was definitely the weakest month.

And if you were to break out this weakness in two parts, the seasonality and competition, where do you think most of the weakness is coming from? Is it competition, is it mostly -- or is it more seasonality?

We believe it's a combination of both. Probably with seasonality taking most of the blame for the seasonal downturn. The seasonal downturn is -- yes, it's worse than previous years but then it was not out by a huge margin. So we believe the seasonality is the key reason for the weak August.

And is there any reason for us to believe that competition from the US facing site will not intense over the next quarter, next year?

They are certainly here, as we have mentioned in our prepared remarks and some of our responses, they're certainly here. And would they have an impact? They will definitely have an impact but as a Company we believe we can, even with the competition, we can continue to deliver growth that is acceptable by way of a target for us and profitable by way of our financials.

And on World Series of Poker broadcast, can you share some anecdotal evidence or maybe in terms of your expectation or what you might have seen with the previous sponsors in the past? What kind of uplift you can reasonably expect from this sponsorship?

PartyGaming became a $10 billion company overnight when they listed themselves in 2006. And if you talk to most industry participants, they would say that one of the key reasons why they became number one is because of their sponsorship of World Series of Poker. So we certainly have a lot of confidence in the association with World Series of Poker because this is the premier event in the world insofar as physical poker goes.

And the anecdotal evidence is abundant, but again, this is our first year, we do not want to put out numerical guidance until we have empirical data and then, as we get [air], as we collect more data, we can share more with you.

Thank you. And lastly, can you talk a little bit on your expectations from CryptoLogic games that you're launching next year?

it's one of the many growth initiatives of ours and we think the Marvel IP certainly has appeal to our existing customers. And more importantly, as we've talked about, help us run our brand in terms of product offerings to customers and help that would basically, the way we look at it, it's not just the incremental revenue you generate off these games, but the increasing customer stickiness and satisfaction and association or understanding of our brand. And so we think that this is a very good add to our platform.

Thank you.

(Operator Instructions).

Your next question comes from the line of [Alan Rosting] from Hedge Capital Partners. Please proceed.

Hi, thank you for taking my question. Most of the questions have been answered. I wanted to ask you about any thoughts on a stock buyback, with the price of the stock being so low?

Okay, I'll take a stab at it and, Arthur, please chime in if you wish. We as management here continue to look at obviously the value returned back to shareholders, so buyback, dividend payments, all included and we evaluate all of this on a constant basis. And at this stage we think, given the market we are in and the opportunities we have seen, there are probably higher returns way for us to utilize the cash we have on hand than a strict return back to the shareholders. So at this stage we don't have definitive plans for a share buyback or a dividend payment, but then, that is something that we're constantly evaluating.

Okay, thank you.

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

Thank you very much, operator. That concludes today's call. On behalf of GigaMedia, thank you very much for joining us. For further information on GigaMedia or to contact the Company please visit our website at www.gigamedia.com.tw, as in Taiwan. Thank you.

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