GigaMedia Ltd (GIGM) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GigaMedia Limited conference call to discuss the first quarter 2009 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, June 9, 2009.

I would now like to turn the call over to Mr. Brad Miller. Please go ahead, sir.

Thank you, Operator. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our first quarter 2009 results conference call for GigaMedia Limited. Before I turn it over to today's speakers, I would like to remind you that a number of forward-looking statements will be made during this conference call. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of GigaMedia, and there can be no assurance that such expectations will prove to be correct.

Because forward-looking statements involve risks and uncertainties, GigaMedia's actual results could differ materially from these statements. Information about factors that could cause, and in some cases have caused such differences, can be found in GigaMedia's annual report on Form 20-F filed with the US Securities and Exchange Commission in June 2008.

This presentation is being made on June 9, 2009. The content of this presentation contains time-sensitive information that is accurate only as of the time hereof. If any portion of this presentation is re-broadcast, re-transmitted, or redistributed at a later date, GigaMedia will not be reviewing or updating the material that is contained therein.

After the speaker presentations today, we will go into a question and answer session. And with that, I'd like to turn the call over to Arthur, our CEO.

Thanks, Brad. Thank you all for joining us. Today, we have Thomas Hui, our President and COO, and Quincy Tang, our CFO with me. I will begin with the strategic overview of our business, followed by Thomas, who will discuss operational highlights. And finally, Quincy will take us through the numbers in more detail.

In the first quarter, global economic downturn caused consumer confidence in spending to fall dramatically, especially in our key markets in Continental Europe. The resulting drop in per player spending and betting in our European business was greater than we expected, and frankly, outpaced our ability to realign our cost structure. As a result, top line softness has led to disproportionally soft bottom line results.

Despite this near-term weakness, our businesses remain healthy, our long term outlook remains strong, and we are taking the right steps to drive improved performance. And in Asia, we have one of the strongest game pipelines in the region, and expect 2009 to be a record year, our best ever; strong growth on the top and bottom lines.

Let me turn now to the specific business units and highlight what we are doing to strengthen our business and sustain our momentum; first, our Poker and Casino Software business. We believe our Q1 financial performance for this division was directly related to the global economic downturn, which drove a sharp drop in consumer spending on online entertainment such as our Everest Poker and Casino offerings.

Behind the black clouds, however, the silver lining is that key player metrics in Q1, including active player days, daily average players, and in particular, new player sign-ups, all remain solid, being comparable or slightly better than Q4, demonstrating the continued appeal and entertainment value of the Everest gaming platform. Players continue to come, but as a result of the recession in Europe and a weaker euro, they are betting less.

We are entirely confident that when macroeconomic conditions return to normal, that player spending will also return to historical levels. In the meantime, we have taken strong steps to rationalize our cost structure without affecting the long term strength of the platform. Let me review a few of the larger steps.

First, staff reductions. In late March, we initiated a staff layoff of about 8% of our Everest team, yielding approximately $2.1 million in annual savings, or about $500,000 per quarter. Additional savings will come from a reduction in non-cash, stock option compensation expenses. We do not expect this cut to materially impact execution of our 2009 plan.

Second, partner program improvements. We anticipate that cost savings of approximately $500,000 per quarter will come from CPA cost containment functionality within our affiliate software, which will be employed this month, and renegotiated CPA and revenue sharing agreements with top partners, emphasizing the acquisition of higher value players.

Third, payment processing costs. We've identified new payment processing channels with more competitive rates, which should yield significant savings. This initiative has been implemented in Q2; anticipate approximately $200,000 to $400,000 in quarterly savings once migration is complete.

Fourth, our mass media marketing. We have taken a hard look at our direct marketing expenses, given the decrease in player spends during this economic downturn. For example, we have slowed our mass media campaigns in Germany, which though effective in driving acquisition, is now less profitable than other marketing programs.

Q1 was a busy quarter for us, despite the difficult macroeconomic pressures. In the first quarter, we began operation under our new European Community license based in Malta, and launched a VIP store, which allows players to use VIP loyalty points to purchase merchandise, a cost effective way to extend player lifetime.

We also released a suite of new flash based Casino games, and launched teaser flash games running on websites with no download to improve conversion. We held the Everest Poker European Championship Finale in Portugal, sponsored the Spanish Poker Tour, began promotional build-ups to the 2009 World Series of Poker, where we'll be sending over 50 players to the main events.

While the challenging operating environment continues, the good news is that we believe we have hit bottom in the cyclical downturn. Our player metrics are stabilizing, and consumer sentiment appears to be improving.

Everest Poker remains the fourth largest site in the world. Everest remains one of the most popular and well known poker rooms in Continental Europe, awarded Poker Operation of the Year the past two years in a row by independent industry journal, eGaming Review. Despite the economic downturn, Everest Poker continues to perform as well or better than almost all of our competitors.

For the rest of 2009, we will continue to drive the business hard as a leaner and more efficient operation. Moreover, we invested heavily in numerous initiatives in 2008. We're now excited to begin to see the yield on these investments in 2009. Let me highlight some examples.

Cross-marketing. We'll be launching the next phase of our common wallet technology in Q2, a major step in our next generation platform. This will allow us to more effectively cross register players seamlessly between our existing two verticals, as well as our new Everest Sports Bets and future products. We anticipate that this phase will materially improve the rate of cross registrations from Poker to Casino. Despite some initial steps, our monetization between Poker and Casino is still but a fraction of our competitors', which suggests we have considerable additional monetization available here.

Second, Local Marketing partnerships. In 2009, we look to expand our brand and our market presence by entering into marketing partnerships with strong local media groups and entertainment firms. We are currently in discussions with leading media groups and other potential partners in Italy, France, Germany and Spain, and look to finalize deals soon.

The next generation Everest Poker client. We are very excited about new Everest Poker front end client to be released this quarter. Our customer tests show an 18% lift in downloads and conversions from this new front end client.

Sports betting. This remains a young initiative, which began at the end of 2008, but we are working with our partner, Victor Chandler, and are bullish about the future. We believe the key driver in 2009 will be a more timely integrated solution where players remain on a common wallet, and are able to easily move chips and funds between the verticals, obtaining utilized loyalty points throughout the Everest portfolio.

Next, the US poker market. We are optimistic about the eventual opening of the US market to online poker. The emerging success of regulation in Europe, the Everest WTO ruling, a more liberal administration in Congress, and both state and federal governments desperate for new revenue sources during a deep recession, are all strong positives for market opening.

We note that recently, three pro-gaming bills were submitted to Congress in April and May, backed by a growing number of politicians. As the only NASDAQ listed poker firm with poker software 100% developed in Boston, Massachusetts, we believe we are best positioned to obtain the license when first available.

Next, the World Series of Poker. While TV broadcasts of the 2008 World Series of Poker continue to air in Europe, we are very optimistic about the 2009 event, which will be of special and improved benefit to Everest. Greater visibility for, and participation by Everest in European broadcasts, will also allow us to optimize the timing and spend of our marketing, and dramatically increase the value of this key partnership. And, naturally, we believe our exclusive poker sponsorship of the World Series of Poker, and branding on the felt of every table, will continue to help us prepare for the eventual reopening of the giant US poker market.

Traditional Asian games. Our unique platform of Pachinko, Pachislo, and other Asian games launched in the fall of last year, and has grown by double digits, and in some cases triple digits month-on-month since that time. Player retention has been solid. We have recently added a new Pachi game to the lineup, and three more games are scheduled for launch over the next four months. We continue to believe that traditional Asian games are a huge market opportunity, and are building this business methodically to become a major contributor, wrapping up from this year to 2010. As with our build-out of Everest Poker, we plan to release more operational metrics as our business develops.

Before concluding on this division, I know many of you are interested in the status of our potential, or any potential strategic transactions, so let me give you a brief update.

Currently, we are in a final round of discussions with two parties to turning a potential strategic partnership or sale of our Poker [into] Software Casino business. Whether or not we proceed with the deal, and if so, on what nature and on what terms, cannot be determined at present. Naturally, because discussions are continuing, I cannot comment further at this time, but we will be back to you soon.

Turning briefly to our Asian Online Games business, we are happy to note that in these difficult times, that the Q1 performance of our Asian Online Game business was strong, with little impact from the global economic downturn.

In Asia, we are building a powerful platform for the delivery of online entertainment to the MTV generation, the highly valued 15 to 35 year-old age cohort. Our progress to date has been delayed by developmental delays in our new lineup of games. Fortunately, the waiting is over. We look forward this year to the launch of several exciting new games, including Warhammer, Luna, NBA Street Online, Holic and others, with more to come in 2010. Thomas will provide a fuller discussion of this in a few minutes.

In summary, we are very confident that the strong games in our lineup in 2009 will make this a record year, our best ever, with strong top and bottom line growth for 2009 and beyond.

In conclusion, despite difficult operating conditions, we remain confident in the strength of our business and the value of the online entertainment platform we are building. For 2009, our accelerated growth in Asia, and careful management in Europe, point to another good year for 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 business and operational highlights now, starting with our Gaming Software business and following with our Asian Online Game business.

In our Gaming Software business, we are undertaking a series of restructuring efforts in response to the global economic downturn. While monetizing in the current environment is challenging, overall, the Everest brand and our market position remain strong. Key metrics point to a sound user base and a business with viable long term growth potential. While we expect the steps we are taking will improve performance as we move ahead, our first quarter results do not reflect the benefit from our restructuring effort today.

As I mentioned, even during this downturn, we are continuing to attract a healthy number of users. During the first quarter, our Poker platform had approximately 183,000 active real money customers, virtually unchanged from the previous quarter. During the quarter, we added approximately 45,000 new real money poker players, up 3% quarter-over-quarter.

As expected, Poker revenue declined, both year-on-year and Q-on-Q. This was largely attributable to a lower yield per active player as a result of the economic conditions and currency fluctuation in our core European markets.

Average revenue per active account in the first quarter decreased approximately 10% sequentially. Our player base held steady. The number of active real money customers decreased less than 1% sequentially.

Turning to Casino, revenues grew 18% year-over-year, driven by enhancement to the Poker software that enabled cross-selling of Casino games. Quarter-over-quarter, revenues declined 8%, reflecting again the impact of economic conditions on player spending.

In sum, while our Gaming Software business faced these challenges, we remain confident about long term future of the business. Everest Poker remains one of the most favorite sites of European players. We expect Everest Poker to continue to hold its leading position in Continental Europe going forward.

Let me know turn to our Asian Online Game business. Our pan-Asian platform had an outstanding quarter, with very strong growth in key metrics. Moreover, this strong performance was mainly driven by organic growth of existing games. We look forward to launching several new major titles this year to further accelerate our growth, and I will reveal them in a moment.

In China, T2CN's average monthly active paying accounts were approximately 404,000 in Q1, up 20% from Q4, an average monthly revenue per active account was $4.08 during the period; 18% quarter-over-quarter. Peak concurrent users of FreeStyle were approximately 119,000, an increase of 7% from the fourth quarter. Growth in T2CN's metrics were related to improved performance of FreeStyle following a hacking incident that we resolved at year-end last year.

In Taiwan and Hong Kong, FunTown's average monthly active paying accounts were approximately 105,000 during the first quarter, up 2% from the fourth quarter. Average monthly revenue per active paying account increased to $24.4 during the period, up 25% quarter-over-quarter. Peak concurrent users were approximately 50,000, a 32% increase from the fourth quarter, driven by the growth in casual games, and the launch of Holic.

Looking ahead, we are very excited about the prospect of our game pipeline. Let me now go over the key developments with regards to several of our new game titles, including Warhammer Online, Luna Online, and NBA Street Online.

We have successfully completed closed beta testings of Warhammer Online, and are now in open beta. Open beta began on May 28 in Taiwan. So far, the game has been very well received. We look forward to an exciting commercial launch in the end of June after this final testing phase.

Next, the launch of another major title, Luna Online. We have conducted some early pre-closed beta testing of this game in China, and expect open beta in early [Q3]. Initial results have been excellent. Luna has been a major hit in several Asian markets. We have exclusive license rights for the major China market, and look forward to launching Luna in China in Q3 2009.

Finally, NBA Street Online. As we demonstrated with our basketball game, FreeStyle, sports games are an under-served niche in Asia, and there is strong demand for online basketball games. Given the high appeal of EA Sports brand, the excitement of NBA Stars, and enthusiasm for basketball in China, we expect NBA Street Online to be a major hit in both China and Taiwan.

EA is taking great care to finalize refinements to the game for Asian market. We continue to expect that EA will be ready for commercial launch in China and Taiwan by second half of this year.

In summary, we remain confident about the long term potential of our Gaming Software business, and are very excited about the growth of our Asian Online Game business.

Thank you. That concludes my remarks, and I will now turn the floor over to Quincy for a review of our financial performance.

Thanks, Thomas. Let me now take a few minutes to review our Q1 consolidated financial results. Following that, I will highlight some key factors affecting Q1 results in each of our four business units. Then, there will be an opportunity for you to ask questions.

The results of our Online Entertainment business were mixed in first quarter of 2009. Our Gaming Software business continued to face challenging operation conditions as the global economic downturn is [dramatically] impacting player behavior. Balanced against this, our Asian Online Games business delivered excellent results, and this has contributed to the growth in player metrics, despite economic crisis. Consolidated result reflects this. (Technical difficulty) and increased efficiencies in our Gaming Software business, and major new product launches (inaudible) and efficiencies in our Asian Online Games business will together drive improved performance going forward. However, we did not realize these benefits these initiated in the first quarter of 2009.

Consolidated revenues decreased [13%] year-over-year due to the slowdown of our gaming software business. (Inaudible) reported a strong growth in Asian Online Game revenue after a quarterly [substantial] decline in our Gaming Software (inaudible).

Gross profit margin in Q1 declined to 79.1% from 82.3% a year ago, and from 80.7% in Q4 2008 due to decreases in the proportion of contributions from the higher margin Gaming Software business during the period and the effect of revenue decline outpacing the increase in (inaudible).

Q1 2009 consolidated operating income decreased to $5.4 million from 12.7 million a year ago, and decreased from $7.9 million in the previous quarter.

The year-over-year decrease results from the decrease in sales and a lower gross profit margin. This was largely related to the impact of the global downturn on our Gaming Software Business, and increased expense in our Asian Online Game business as we begin scaling up [in] business to support future growth.

Quarter-over-quarter, our consolidated operating margin decreased to 12.2% from 17.7% due to seasonal factors and certain one-off events. We are expecting operating margin to improve (inaudible) as a result of two factors. One, we have continued to implement cost control, and secondly, we are on track with new game launches in our Asian Online Games business.

Let me now highlight the quarter-over-quarter variations in the new -- in the [few line] items.

Project development and engineering expenses. Project development expenses grew to $3.9 million in the first quarter from $2.6 million last quarter, largely due to increase in our Gaming Software business. The variation was related to write-back of compensation-related expenses in the previous quarter and severance payments incurred in our Gaming Software business n Q1 with a view to reducing headcount and controlling costs.

Selling and marketing expenses increased to $18.1 million from $21 million -- from $20.8 million in the fourth quarter of 2008 due to decreases in our Gaming Software business as marketing in the Gaming Software business traditionally peaks in Q4 and begins declining in Q1. This decrease offset increased selling and marketing expenses in our Asian Online Games business surrounding Chinese New Year holidays.

General administrative expenses. These increased to $7.5 million from $4.4 million in the previous quarter. The increase reflects the write-back of compensation-related expenses in Q4 2008 in light of the challenging business environment, as well as severance payments in Q1 following the workforce reduction we just mentioned.

We continued to maintain strong balance sheet in the first quarter. Cash, cash equivalents and marketable securities at end of Q1 were $97.5 million.

Now let's look at the performance of the individual business units.

Gaming Software business. In first quarter, revenue decreased 17% year-over-year as [account] revenue was down [19%] from the fourth quarter. In Poker, revenue declined 27% year-over-year, and 10% [quarter-over-quarter].

Casino revenues grew (technical difficulty) quarter-over-quarter. Selling and marketing expenses trend down both year-over-year and quarter-over-quarter. The 20% quarterly sequential decrease was mainly related to market initiatives taken in Q4, decreased [affiliate] marketing expenses in line with revenue trends in Q1, and tightening of spending in Q1 following a tough Q4 last year.

The quarterly sequential decrease in selling and marketing expenses more than offset gross profit decline, as well as increase in product and development expenses. As a result, the gross profit margin increased to 15.3% from 40.7% in last quarter. As I mentioned, that's because of an increased [initiative], and our Gaming Software business has yet to (inaudible) the effect. And we are working hard to improve performance going forward.

Asian Online Game business. We expect to deliver excellent result with record result in FunTown and near record performance in T2CN, despite the global economic crisis. Quarter-over-quarter, revenue jumped 33%, driven by strong organic growth in both FunTown and T2CN. FunTown revenues grew 27% quarter-over-quarter from strong promotions during the Chinese New Year holiday of new and existing games. FunTown's ARPU hit a record of $24.4 during the first quarter. T2CN revenues [were] up 43% quarter-over-quarter from strong performance from the online FreeStyle following the resolution of the hacking issue in Q4 last year.

While these are strong results, the Asian Online Game business is only beginning to deliver on our investment. We are committed to greatly expanding the business and having an exciting lineup of major new titles [here] to -- for launch over the next several quarters, as Thomas outlined. To support addition of these products to our platform, during the first quarter, we [continuously] scaled up [performance].

Related increase in G&A expenses, as well as above-mentioned increase in selling and marketing expenses, outpaced revenue growth in the first quarter, resulting in a quarter-over-quarter decline in operating margin.

Looking ahead, we expect revenues to grow significantly and operating margin to expand 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 Warhammer, Luna Online, and NBA Street Online.

In conclusion, in Q1, we face strong operating challenges, but we have in place the right initiatives to build and strengthen our business. We are excited to launch these new initiatives, and with [executing well] and despite economic [challenge], we are very positive of our [prospects] in 2009. Thank you. Brad?

Yes, thank you very much, Quincy. Operator, at this point, we'd like to move into a question and answer session, so please open the call up to questions.

(Operator Instructions).

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

Hi, yes, good evening. I have a few questions. My first question is, in terms of your outlook for the second quarter, do you expect your European business to experience another sequential decline in revenues? And for Casino business do you expect to have a sequentially down quarter as well?

Alicia, this is Arthur. Let me respond first generally speaking. We're looking for a much better second half than first half. Again, we think we've hit the bottom, and we have normally a seasonal downturn, of course, due to the summer months when Europeans are on holiday. But generally speaking, we're looking for a better second half.

Okay. And so just to help me understand, so you see a stabilizing in your user base, right? And then what about the spending behavior? Do they still continue to impact by the economic downturn?

Yes. To-date, per player spend, ARPU is down, but we've --again, I think we've hit bottom with that, and we have a couple of signs, early signs for optimism. So we are -- I guess what we'd like to say is that we don't believe things get worse. We think we have signs for optimism. Certainly, we think we've hit the bottom and we're looking for a better second half, thank goodness.

Right. So if I understand you correctly, so that means your $31 million/$32 million revenue in the Software business is the bottom for 2009, right? So we should expect a sequentially -- or at least flat quarter in the summer months.

Okay, we're trying to avoid giving specific numerical guidance at this time, but rather point to the larger phenomenon which we feel we can speak to a little bit more, even though it's more generally a little bit more accurately.

Okay, fair enough. My second question is, given your continued effort in cutting your operating expenses, and with lower revenues growth rate, at least for the first half, what should we be expecting for your operating margin for the full year 2009? And is your long term target of 20% to 25% still achievable this year?

Hi, it's Thomas here, Alicia. Yes, our goal is still for 2009 to get to a consolidated basis of 20% to 25%. Now the first quarter number, obviously, was much lower than that, as we have expected, and communicated in our previous earnings call.

Now what we've seen walking into second quarter, now we're sitting in beginning of June, we see April and May for the Europeans have just begun to stabilize. So for the first half, it will be difficult for us to achieve the 25%, but we believe with a stabilization of the European side of the business and the launch of the new games in the Asian side of the business which will drive up revenue and also operating lines, with those two, then we still remain hopeful that we can get back to the 20% to 25% ranges we had set for ourselves. But it's fair to say that a big part of this will be back-end loaded in Q3 and Q4.

I see. Thank you. And my last question is about your potential sale of your European business. So can you help us understand what is the future growth initiative for your Asian Online Games business after you're successfully selling your Poker and Casino business? How do we view your -- I mean, how do you view yourself among other major online games players in China? Do you plan to do like partner with them or merge with other Chinese operator?

Well, first of Alicia, if I might request that we delay this conversation until a later date. First of all, we want to emphasize that we are in no way, shape or form definite about going forward with the transaction. As fiduciaries, we feel obligated to consider any serious proposal, but the proposals may come in different forms, sale, partnership, or other types of combinations.

So at this point in time, I think it would be premature for us to speculate or discuss too much about this, even on the Asian side. So perhaps we might look to a time when we have a little bit more information to talk.

Sure, thank you. I will wait for the good news then. Thank you.

Thank you.

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

Hi, guys. How are you?

Thanks, Todd.

Just a couple of questions. First, I don't know if you guys broke it out, but you mentioned the severance charges and a couple line items in the P&L. Can you maybe give us the total severance or non-recurring I guess charges maybe in the first quarter?

I think because the first round of the lay-off is at the end of Q1, the severance payment that we are talking about is in the region of slightly less than $0.5 million, and the more impact is on the Q4 compensation-related adjustment that we made because in light of the difficult period in Q4. So that amount is the region of -- in the high -- in the region of $2.5 million to $3 million.

Okay. And then with respect to the real money business, saw some news out recently regarding some of the private or US-facing operators having some problems with the US payment processors. Can you maybe comment on what impact that has had or might have on your business currently and going forward?

Sure, as a NASDAQ-listed law abiding corporate citizen, we are always happy to see the laws of the United States enforced, in particular, when they created an unfair competition situation for us, such as is ongoing presently. So we were heartened to see the actions that you mention; the fact that several of the payment processing channels are finally being shipped out, or it appears that they're being challenged in New York and some other places. So we're hopeful that this will lead to what we think of a more level playing field.

We naturally would like to go back into the United States, but as a fully licensed operator on the basis of our strength as a fully law abiding operator.

Okay, great. And then just one final question with regards to some of the new initiatives you guys have launched over the last couple of quarters, sports betting and your Japanese gaming site. Can you maybe give some additional color on those? How are they performing, tracking? I know you probably don't want to give specific metrics because the businesses are still ramping up, but any additional thoughts on that would be helpful.

Sure. First on sports betting, this is still very much what we call in the test and roll phase. There's only been partial integration. The initial tests are very positive, as we suspected. Again, we are definitely leaving money on the table by not having a tight integration with the sports partner, so that is definitely a priority, and pending probably the outcome of some of these strategic discussions, will be an important factor in our future.

Our Pachinko, MahJong software continues to be an exciting part of our business. Dollar amounts are not significant in the context of our overall business yet. However, again, when we see double digits, sometimes triple digit month-on-month growth, we see the kind of player response and player activity, we believe we've got a winner on our hands.

As with Everest in the beginning, we try to roll out to build a substantial business, a business which will have long term branding and long term market penetration and market position. This has taken a little longer in Japan than we had originally hoped, but we believe that this will be a significant contributor over the course of, say, the next year.

Okay, great. Thanks, guys.

Thanks.

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

Yes, thank you. I guess first of all, Arthur, when you talk about stronger back half of the year in the Poker and Casino business, now, obviously, seasonality is working against you [by] probably August here given the European vacation schedule. Historically, we see a pressure on ARPU and on basically on the churn rates between -- in Q2 and Q3. Do you expect that to be the case this year? And then when you talk about the strength in Q4 is really when we're going to see the rebound?

Well, in some ways, there's less -- given how much trouble Q1 was to us, and some of that continuing into Q2, some of my statement is less grandiose than it might otherwise be. What we're looking for, at minimum, a return to some of our historical levels. And at this point in time, I don't think we have enough visibility that speaks specifically to ARPUs and exactly when they return to what levels.

So we directionally feel that we've hit bottom. We're optimistic about the second half. We're glad to be out of the worse patch of things. We're heading out, and we'll try to give some more refined or granular ARPU forecast when we get closer.

Okay. Now from a year-on-year comparison, when I look at the operating margin, obviously, this year, within your sales and marketing line, we have an additional expense of the World Series of Poker, like [some] amortization. And can you --? Order of magnitude, can you give us some sense how much of a penalty it is to your operating margin?

Thomas or Quincy, do you have a sense of this?

Quincy, I'll leave Quincy to talk about exact numbers, but we began amortizing the World Series of Poker as you know in Q4 last year, and we will continue to amortize that on an every quarter basis.

Now I can say that the Q4 amortization is higher than the Q1 amortization, but in the ranges of a couple million to a few million dollars. I'll ask Quincy to be more specific about this.

Yes, we will be at the [annual] World Poker at [$12] million, and (technical difficulty) on the operating margin it really [slides] on the metrics of the other marketing expenses that we will spend, either together with World Series Poker, or we will spend less because the impact we think. And also the other very important is how well the revenue side because this year, with the economic downturn, and we cannot see the full benefit of the World Series of Poker as at this moment. So it's really difficult to do a very [constrict] impact on the World Series of Poker on the operating margin in this year.

And I guess lastly, you guys talked about optimizing the sales and marketing spend in certain countries. Are you doing that on a comparable basis across all the territories where you guys are playing, or are there actually countries where right now you seek to -- maybe potentially outspend some of the competition and actually gain market share?

Oh, very much so, Andrey. We look country-by-country at specific market opportunities. So without revealing any market-sensitive data, we try to be competitive, even avaricious on an opportunistic basis.

Okay, thank you.

Your next question comes from the line of Atul Bagga from ThinkEquity. Please proceed.

Yes, thanks for taking my call; a couple of questions for you guys. I just wanted to touch on the (technical difficulty). The foreign exchange headwinds kind of easing a little bit now and, as you mentioned, consumer sentiment is improving, but it seems to me that Q2, again, we could see a slight decline in ARPU. Is it more of a seasonal thing, or is it more -- is it anything beyond that; I think increased competition? I'm just trying to understand the dynamics that are happening in Q2 on your online gaming business.

Yes, to -- thanks for the question. This is Thomas here. The stabilization of the euro against the dollar is certainly one of the contributing factors to our remarks that, yes, we think we have hit the bottom in terms of the European business, as Arthur mentioned earlier. And as we have explained before, there's almost direct correlation between the exchange rate and our revenue level in terms of user deposit and user ARPU because of the player base primarily concentrated in continental Europe. And our reporting currency and the playing currency of Everest Poker are in US dollar.

So that in April and May, we certainly see a stabilization of those metrics as a result of that, but some of the effects have spilled over to Q2, and we remain sanguine about the future outlook, both on an economic front and currency fronts given what we have seen in April and May. But, again, obviously, the results will have to play itself out in the general macroeconomic front.

That makes sense. And in terms of the costs, restructuring costs alignment that you guys talk about, so just to make sure I got it right, I think when Arthur was making comments on savings that you are going to realize, I think he highlighted three savings in total; total support $1.2 million. And then Quincy talked about I think $0.5 million one-time severance in Q1. So that leads to $1.7 million savings from the Q1 operating actions. Is my math right on that? Is this --?

And second, can we start to see this $1.7 million savings from Q2, are there any more savings and more restructuring that you guys have in the plan?

We think we're looking at all told, there's some smaller things added in, around $2 million, and this will flow through quarter-by-quarter. But some of these are only being implemented this quarter, second quarter, so look at them more second half impacts.

Got you. So that will imply that most of this -- your target of 20%/25% operating margin, it has to come from the top line improvement, not so much from the operating expenses, restructuring. Is that right?

There is one area too that we spoke about before that we have a focus on today, was again, depending on how the top line will trend, which is obviously a function of how the economy will go, a part of a function of at least.

And then we will -- in addition to the initiatives that Arthur has mentioned, we are also looking at other potential, more strategic in nature initiatives, which will potentially, could potentially yield significant improvement in the cost and expense side. And some of these initiatives may or may not come into play depending on how the user activities trend along in the next few months, which will further improve the margins, even in the absence of a significant rebound of the top line.

Got you. And moving on to your Asian Online Gaming business, so it seems like in second quarter, most of the growth is still going to be organic. There is nothing in the second quarter which has been out yet. So do you expect --? Can you talk about where the growth is going to come from? Is it mostly from growing ARPU even further, or is more about the metrics improvements?

We -- the Asians have their business, as we've mentioned, we are very excited about the growth, and we look at it more for a 2009 year-over-year over 2008 basis. And in the first half, you're absolutely correct that most of the growth are coming from organic side of the business.

And in the second half, obviously, the Warhammer commercialization and the launch of Luna in China will contribute further to that elevated base. So the -- we hope to maintain a high level of monetization of the user from ARPU funds in Q2 versus Q1, but Q1 will get the benefit, obviously, of the Chinese New Year holidays surrounding both markets, which we did not have in Q2. So it is unlikely that we will have significant growth over Q1, but on a year-on-year basis is how we're looking at the business.

And the last one, can you talk about some internal targets that you have from these new games, Luna Online and Warhammer; how big? And we've heard that Warhammer seems to be doing well in the open beta stage. Can you share any metrics around PCU numbers or the long term targets; what kind of revenue you'd expect to come from Luna and Warhammer? Thank you.

Thank you, Atul. Consistent with our general policy about forecasting games, we do not give our numerical targets on a game-by-game basis. But as a business as a whole, we think there are a lot of growth potential, fairly significant growth potential for the entire business.

And the way we look at it, in terms of target, for example for Warhammer, we'll be targeting a not insignificant percentage of a market potential of the most similar type of game, in our mind World of Warcraft. Now as we all know World of Warcraft globally is the number one game, and in Taiwan, it's also one of the top three games depending on which month you look at it. And we're, obviously, looking at a significant percentage of market share as compared to World of Warcraft.

Thank you, guys.

(Operator Instructions). Your next question comes from the line of Scott Kessler of Standard & Poor Equity. Please proceed.

Thank you. I know that you've been asked about this a little bit to some extent, but I was wondering what gives you confidence to suggest that, like a lot of companies have already I think in this environment, that you've reached the bottom in terms of demand, in terms of revenue, in terms of ARPU? Can you share with us, for example, any related metrics associated with the past month that's just ended? Maybe some details underscoring your comments or confidence would be appreciated.

Sure, a very fair question. Unfortunately, it's not our policy to release data that we find operating and tracking down on a month-by-month or week-by-week basis. The reason why is that we like to make sure the data's in context and we make sure that we have the right explanatory power for it. Suffice to say we track about 100 metrics on a daily basis about our business, and on a 24/7 basis, that gives us a lot of information.

And over the years, we've come to understand pretty well what's going on, and we have a lot of local market sensibilities, I suppose, developed over this time.

So without going into specifics, we are looking at a May which reflects better than we had -- better than we'd hoped, and reflects a -- what we think of as a bottoming-out of the downturn, with maybe even some reasons for optimism looking forward. And with my apologies, I probably should leave it at that.

Okay, that's fair enough. And is that comment consistent across, say, the European and Asian geographies?

Okay, well, Asia has been remarkably immune from the -- this segment of the business has been remarkably immune from the global economic downturn, and it could be because our player base is younger and more optimistic about the future. It also could be that the downturn is less -- is felt -- the impact of the downturn was less in Asia than a lot of government reaction, which has helped support the economies during this period of time.

But suffice to say, in Asia, we have not felt the same downturn effect; in fact, quite the opposite. We're looking for a record year. So when we speak about this, we're primarily speaking about hitting the bottom and looking at a stronger second half for the European business.

Okay, fair enough. And the second question I had relates to your Asia focused Online Games business. Obviously, there have been references to a number of game launches in various geographies. Could you maybe just walk us through what you think the major launches are and the specific --? I know the date is difficult, but a month perhaps you expect to launch so we can essentially track the progress against those assessments?

Thomas, do you want to review what -- your comments on this?

Sure. I will highlight three games. First, it's Warhammer Online in the geography of Taiwan and Hong Kong. Warhammer Online right now is in open beta. We have been conducting closed beta in April and May. And the game is now currently in open beta, and it will most likely go into commercialization by the end of this month.

Okay, so commercialization this month? Okay.

That's right. And then the second game I will highlight is Luna Online for the geography of China. We have conducted, in the past month or two, conducted a series of small-scale pre-closed beta tests. Now we do expect to go into closed beta testing and open beta testing in the beginning of Q3, so June/July timeframe.

Now the exact timing of this will be harder to pinpoint because we're still, obviously, testing the game on the technical side, and also going through the relevant regulatory process, but that is our expectation.

So if I can just interject, so if you're saying the beta is going to be in, I don't know, within the next month or so, is it reasonable to expect that this -- I don't know typically how much time, say, the testing and beta processes last, but is it fair to say a handful of months? So this is anticipated to be fully launched by, say, the beginning of Q4?

Yes, I would even say end of Q3.

Okay. Okay, and then you referenced one additional game?

Yes, the last game being NBA Online; NBA Street Online. This is the EA game. Now this game, as we mentioned, right now we are not -- we are conducting small-scale testing, but there is quite a bit of refinement that between us and EA are trying to put into the game to make the game features more rich and everything.

So this one -- because of that, you will be even harder to pinpoint exact date at this moment, but we do believe it's going to be this year, second half of this year, but probably towards closer to the Q4 than Q3.

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

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

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