GigaMedia Ltd (GIGM) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the GIGM new strategic alliance and quarterly earnings conference call. My name is Jerry and I'll be your coordinator today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Brad Miller. Please proceed sir.

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to today's conference call to discuss our new strategic alliance with Mangas Gaming as well as our financial results.

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 20F filed with the US Securities and Exchange Commission.

This presentation is being made on December 21, 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 rebroadcast, retransmitted 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 our CEO, Arthur Wang.

Thank you all for joining us. Today I will focus on providing a high level overview of GigaMedia, where we are and where we are heading. I shall begin by reviewing the important transaction we signed and announced just last week, discussing the rationale and the benefits to GigaMedia in the near and middle-term. Afterwards I'll look at the rest of GigaMedia and outline our plans going forward.

First, the background for our strategic alliance. Shortly after I joined GigaMedia seeking a new strategic direction for the firm, we decided to enter the online entertainment business. In April 2004 we took our first step and acquired what is now our Everest Poker and Casino Software operation. We paid a grand total of $32.5 million for our 100% stake. Over the past five years, we've worked hard and grown this business aggressively. Needless to say, it has proved to be an outstanding investment.

But about one year ago we began another strategic review of this business unit and evaluation of where the market was moving and where we were positioned in relation to such movements. We determined that despite our rapid growth and position as the fourth largest poker site in the world, a strategic move was necessary. Several factors were and remain in play, all arguing for an increase in business size and scale by way of business combination.

First the trend towards individually regulated country markets in Europe, our primary marketplace and source of 75% of the revenues of this division, meant we needed much greater size and scale to operate efficiently. As England, then Italy and now France each established separate regulatory regimes limiting player pools to single country players and requiring heavy in-country investments in infrastructure and personnel, the ability to run an efficient pan-European operation was challenged.

Second, the need for tightly integrated full product offerings, poker, casino, sports book and other gambling products on the same platform. Though our poker and casino products were competitive and our Everest brand valuable, without our own sports book operation, tightly integrated into our own platform, it is difficult to realize the necessary synergies.

Finally, the continuing challenge from poker competitors operating illegally in the US, making hundreds of millions annually and using these illegal but enormous resources to compete against us in Europe.

Faced with these realities we embarked on a strategic process guided by our financial advisers Goldman Sachs and our legal advisers Skadden Arps. Over the past year we have been busy with the identification, discussion, structuring, negotiation and finally execution of a new strategic alliance. During this process we looked at our full range of options to maximize shareholder value including various acquisition opportunities, partial and complete sale alternatives, partnerships, cooperations and strategic alliances.

In the end we are very pleased to enter into a partnership, a truly strategic alliance, with Mangas Gaming who I believe is the strongest and best partner for GigaMedia. Mangas Gaming is one of the leading online gaming firms in Europe with special strength in sports betting. With the BetClic, Expekt and Bet-at-Home brands, Mangas offers gaming services to over 4 million customers in 25 countries. Mangas Gaming is 50/50 jointly owned by superb shareholders, media powerhouse, Stephane Courbit, and the Monte Carlo Casino owners SBM.

At closing, Mangas Gaming will become the 60% shareholder with GigaMedia an active 40% partner. The valuation of this 60% sale will be determined in early 2012, based on then fair market value, a step designed to reflect the true value of the Everest business, well after the current year macroeconomic blues. Mangas will make an initial payment of $100 million at closing.

The strategic alliance with Mangas offers many benefits to GigaMedia in the short and medium-term.

First, fair and full valuation of the Everest business unit based not on today's troubled valuations but instead on fair market value in early 2012.

Second, operating synergies; combining Everest and the Mangas Gaming platforms together will create one of the largest online gaming players in Europe. GigaMedia expects there are significant cost and revenue synergies from the partnership, including cross-marketing of products between Everest Poker and Mangas Gaming clients as well as marketing and operating synergies.

Third, geographic synergies; importantly Mangas Gaming has particular strength in sports betting in certain key marketplaces such as France, long the top market for our Everest Poker, creating the special opportunity for us together to capture dominant market and brand position and reap the commensurate benefits.

Fourth, shareholder strength; one of the key reasons we are so excited about this partnership is the quality of the partners. With top local knowledge, top local relations and top local reputation, Mangas Gaming brings the best to the table. On the one hand, Stephane Courbit, formally head of France for European media giant Endemol; on the other, the Societe des Bains de Mer -- I must apologize for my pronunciation -- SBM representing the Principality of Monaco itself and owner of the world renowned La Grand Casino Monte Carlo.

After building Everest Poker from its humble roots, we now enjoy the allure, the reputation, the trust of the most famous casino in all of Europe and one of the most famous worldwide. The team is very excited to see where they can grow Everest now. And now armed with the top in European knowledge, relations and reputation, I, too, am very excited by where Everest can grow.

In summary we now feel very confident that our Everest business will continue to grow and realize its position atop the international gaming markets.

Let me turn now to GigaMedia today and our path forward. Overall 2009 has been a tough year for us without question. In Europe the macroeconomic challenges continue to slow our business and create margin pressures. Unfortunately these macro pressures, combined with the larger strategic process we are undergoing, [decreed] special challenges for us.

Our Everest team, one of the best in the business, face both personal uncertainty as we explore different strategic paths and distracting demands from a highly professional but time-consuming due diligence process. Fortunately all this is now finished.

In addition the Everest team were reluctant to cut aggressively or manage the downturn in light of a wide variety of different potential strategic outcomes.

As a result the short-term returns are not pretty but we are confident as a management team that we have made the right call to forge the partnership with Mangas, a highly value-accretive alliance.

In Asia we have also had challenges with some of our new games turning out to be less exciting than promised by the developers. In addition, we must also admit that our execution has not met the high standards we are used to and which we are committed to deliver. Senior management focus on the complex strategic deal in Europe may have also been a distraction.

Looking ahead we are excited about the prospects for 2010 and plan an aggressive year of internal restructuring refinements as well as external M&A activity.

In Europe we plan to be active, value-added minority partners. The entire Everest staff will continue and form the basis of the Poker division for Mangas Gaming. We will work with the Mangas team to realize the synergies, both cost and revenue, offered by the Mangas network. In particular we will work with the key shareholders, Stephane Courbit and the Monte Carlo Casinos, to exploit the relationships, the credibility and the marketing power they bring.

In Asia we will continue to focus and grow on our Asian online entertainment platform. And as a management team, we look forward to the greater focus we will now enjoy, both geographic and business line. We can now concentrate on online entertainment in Asia where we live, where we have the information, the contacts, the relationships, all to drive our target marketplaces.

While in the past year management has been spread a bit thin geographically, working on identifying the best strategic partner, we this year will focus on restructuring and refining and growing our business in Asia.

So our Asian business is still a work in progress, we plan to take major steps in 2010 in particular to expand the breadth and depth of our market penetration in several key markets by M&A activity. We have three very significant moves underway and look forward to announcing these deals when completed.

On balance we are excited about our new strategic alliance and enthusiastic about aggressively growing our business in Asia by strong execution, driving organic growth and M&A. We are committed to building a stronger GigaMedia with growing shareholder value as its cornerstone.

We thank you for your interest and continued support.

Thanks Arthur and thank you all for joining us. This is Thomas, let me now turn to business and operational highlights with a brief review of our gaming software and our Asian Online Games businesses.

As expected the Gaming Software business faced significant operating challenges in the second and third quarters, which are the seasonal low periods in the industry when online gaming activity traditionally decreases. In addition to this seasonal factor the economic downturn in Europe and strong competition also continued to impact player behavior and result in revenue pressure.

The effects of these factors on online poker in particular were observed industry-wide during the summer and fall. Within that context, our quarterly ARPU in poker decreased 11% in Q2 and in Q3 hit bottom declining a further 4% sequentially.

In addition to the decreased player spending, we also experienced sequential decreases in our other player metrics. However, the sequential decreases in active depositing players and new depositing players noted in our release today were for the most part superior to our historical trends on a percentage basis.

Our key poker metrics were also in line with industry standards, industry trends.

To drive growth, as Arthur discussed, we have entered into a strategic alliance with Mangas Gaming by selling a 60% stake in our Gaming Software business. We are confident that this strategic move will significantly increase business momentum and offer substantial upside.

In our Asian Online Games business, we are continuing to build a pan-Asian platform from our existing positions in Greater China and South East Asia.

Some of our new MMORPG game launches in 2009 did not meet our expectations. But currently plans are underway to rebuild our pipeline and our growth momentum and we are confident that we will deliver improved performances as we move ahead.

Overall results in the second and third quarters were mixed in the Asian Online Games business with solid performance in existing offerings and disappointing results in new games.

In China, T2CN's leading sports game offering, FreeStyle, showed a modest decline in user numbers with peak concurrent users of approximately 85,000 in the third quarter. This represented a 10% decrease from the second quarter, in line with the expectation, given that the second quarter benefited from strong marketing during the week longer Labor Day holiday.

To drive growth in 2010 T2CN will launch FreeStyle Manager, a new game in the FreeStyle franchise. We expect this game to be well received in China.

Further to this during the third quarter we made an investment in the developer of FreeStyle, JC Entertainment. GigaMedia and JC Entertainment will increase strategic cooperation to further develop the FreeStyle series of sports games with a focus on capturing growth opportunities in China.

In Taiwan and Hong Kong FunTown's casual game offerings continue to deliver strong performance, driving the unit's 13% year-on-year revenue growth in Q3.

Average monthly revenue per active paying account was $24.7 in the third quarter, reflecting strong monetization of FunTown's leading Mahjong and other casual game offerings.

To drive growth in 2010, we're building our -- we're building on our casual game success by adding many new products to the platform, including a flash version of our popular Mahjong offering and a number of casino style games on a play-for-fun basis.

Turning now from existing core games to new game initiatives in the second and third quarters, which involved Holic, Warhammer Online and Luna Online.

Unfortunately we have faced a number of challenges this year with our new game launches. These challenges included content issues, illegal player activities or hacking issues, software bugs, and other technical and operational issues.

As a result of such challenges, each of the three games currently has a user base much smaller than we anticipated, and contributed to the underperformance of our Asian Online Games business in the second and third quarters. We're carefully monitoring performances of these games and we will continue to adjust our marketing and operating strategies.

Looking ahead, we've been working hard to rebuild our pipeline for 2010 and beyond, maintaining a strong focus on markets in Greater China and Southeast Asia. In addition to the new FreeStyle Manager, and addition of casual games to FunTown I mentioned earlier, we also expect to launch several other game titles this coming year, putting the business back on a solid growth momentum for 2010.

Having taken the decision to put more management focus on winning in Asia, we intend to continue development and expansion of the Asian Online Games business going forward.

More than ever before, we have the resources and financial flexibility necessary to expand our business regionally here in Asia. Geographic and portfolio expansion, combined with a focus on streamlining business processes, leveraging scale and enhancing execution, will all be elements of GigaMedia's long-term growth success.

Thank you. That concludes my remarks. And I will now turn the call over to Quincy, for a review of our financial performances.

Thank you, Thomas. This is Quincy. I would like to take the next few minutes to review our Q2 and Q3 consolidated results. And I will spend some time to highlight each of our core business units, that is Gaming Software business and Asian Online Game business.

The financial results in both quarters were worse than expected. Second and third quarter revenues were $37.7 million and $37.2 million respectively. Second quarter net income was $128,000, whilst third quarter was a net loss of $2.4 million, with fully diluted GAAP EPS of nil in the second quarter and loss per share of $0.04 in the third quarter.

Consolidated revenue for the second quarter and third quarter, as mentioned before, were $37.7 million and $37.2 million respectively. These represent sequential quarterly decrease of 15% and 1%, and also reflect traditionally seasonality factors on both Gaming Software business and Asian Online Game business.

In addition, the Gaming Software business continued to be negatively impacted by the global economic downturn on player spending, and strong competitive pressures, including challenges from US-facing sites.

Gross margin was 79% in Q1, while declined to 76% in Q2 and 75% in Q3. These were attributable to the following reasons.

First, gross profit margin of Gaming Software business decreased slightly as fixed costs did not decrease in line with revenue decline.

Secondly, gross margins in Asian Online Game business decreased more significantly due to the increased cost from newly launched licensed games, [consequently] less than expected revenue generated therefrom. And certainly, revenue contribution from Gaming Software business, which used to enjoy a high gross margin, decreased during the two quarters concerned.

Now, let's take a look into some of the key line items. Product development and engineering expenses; on a quarterly sequential comparison, product development and engineering expenses decreased by $1.1 million to $2.9 million in Q2, and increase by $700,000 to $3.6 million in Q3. The decrease in Q2 was largely due to a reduction in headcount by the end of Q1, while increase in Q3 was due to that amount being capitalized for projects in the third quarter from our Gaming Software business.

Selling and marketing expenses; compared to Q1, Q2 expense level held steadily at $18.2 million. The savings of $1.2 million from affiliated partners' commission in Gaming Software business, as a result of revenue decline, was offset by $1.3 million increase in advertising and promotion campaign, related to new games launched in Asian Online Games business.

Compared to Q2, Q3 selling and marketing expenses grew by $1.4 million, around 8%, to $19.6 million. The increase was mainly due to heavy advertising and promotion expenses incurred in Asian Online Games business for the launches of the new games.

When we look at G&A expenses, it has been held steadily in Q2 and Q3, at around $7.6 million to $7.7 million during the period.

Next, let's take a look at each business unit's performance. Gaming Software business; traditionally, European summer holiday is a low season. Apart from this, both global economic downturn and strong competition have noticeably impacted operating environment. Compared to previous quarter, Q2 revenue declined 18%, and Q3 revenues declined 3% sequentially.

For each vertical, quarter-over-quarter comparisons, poker revenue decreased 19% in Q2 and 9% in Q3, as both active deposit real-money customers and ARPU decreased quarter-over-quarter.

Casino revenues declined 15% in Q2, while increased 11% in Q3. While there was a continuous decrease in player number in both quarters, the average revenue from active paying accounts in Q3 has improved.

To face challenging operating environment, management focused on cost control and efficiency improvements. However, revenue decline [outpaced] the costs and expenses reduction. The operating margin decreased to 9% in Q2, from 15% in Q1, and then further declined to 4.7% in Q3.

Now, let's turn to our Asian Online Games business. Quarter-over-quarter, total revenue declined 8%, compared with Q1. We had a strong result in Q1, due to seasonal promotion during the Chinese New Year holiday, and resolution of a hacking incident for FreeStyle occurred in Q4 2008.

Q3 revenues grew marginally by 1%, primarily attributable to revenue contribution from new games of Warhammer and Luna. As for FunTown, revenue decreased 5% and 3% in Q2 and Q3 respectively. Revenue from new games of Warhammer and Holic offset by seasonal decrease in casual game revenue.

As for T2CN, revenue declined 12% in Q2, while grew 8% in Q3. Increase in Q3 was due to launch of the new game Luna Online. Both monthly active paying users and ARPU grew 1% quarter-over-quarter in Q3.

Regarding operating costs, since most of the license games costs are relatively fixed in nature, for example licensing fee, bandwidth costs, certain depreciation, software amortization and payroll costs, these expenses increased in Q2 and Q3, due to the launch of the new games. Coupled with less than expected revenue return for these new games launched, gross profit margin decreased from 71% in Q1 to 65% in Q2, and 60% in Q3.

Total selling and marketing expenses trend up quarter-over-quarter in Q2 and Q3, mainly reflecting the increase in mass media promotion and advertising expenses in relation to the support launch for Warhammer and Luna. Therefore, operating margin went down in both Q2 and Q3, owing to the above-mentioned reasons.

As to the outlook for Q4, we expect revenues in the Gaming Software business to benefit from a high single digit or low double digit favorable seasonal growth. At the same time, we anticipate a low double digit quarterly sequential revenue decrease from Asian Online Games [side] in the absence of new games in the fourth quarter.

In addition, as part of our annual review and evaluation exercise on intangibles and investments, management expects to record non-cash write-offs in the region of $35 million to $45 million in the fourth quarter, related to certain legacy games, game intangibles, underperforming games, and game investments.

Notwithstanding the challenge that we had in 2009, we are well positioned for further growth and expansion. When the strategic alliance with Mangas is complete, we will not only anticipate a one-time substantial gain on the sale of the 60% interest, but also we'll enjoy the upside on the enlarged business from the remaining 40% interest that we will hold.

With the substantial improvement in cash position after the deal is complete, we also have sufficient financial resources to grow our Asian Online Games business through M&A means, on top of our organic growth initiatives.

Thank you.

Thanks, Quincy. We'll now move into a question and answer session. Operator, at this point, we'd like to open the call up to questions.

Certainly. (Operator Instructions). And your first question comes from the line of Andrey Glukhov from Brean Murray. Please proceed.

Yes. Thank you for taking the question. I guess first of all, on the Asian Online Games business, which obviously will be the key business unit for 2010, right now it's operating at, it looks like negative 10% operating margin and the revenue base you guys are guiding is actually going to be slightly lower in Q4. When do you think it is going to turn profitable?

Hi, Andre. This is Thomas here. Thank you for the question. The negative operating margin, as Quincy outlined, was primarily related to some of the new game launches. Obviously, there are marketing costs associated with those game launches and also there are fixed expenses that are associated with service purchases and other items that Quincy has outlined.

Now, if you look at the underlying businesses, the existing products for both FunTown and T2CN, as we've talked about in our prepared remarks, those businesses are certainly profitable; they have been profitable, they are still profitable.

Now, with respect to these few games that we have launched this year, we will be monitoring their performances as part of our year-end process. We'll be making strategic, financial and operation adjustment to the games, depending on the result and performance of the games. And as such adjustment happens, we believe we can quite quickly turn ourselves -- the whole unit, to be profitable again.

Okay. But to ramp up the revenue base in this unit in 2010 we certainly probably will need additional [IP] launches. So at this point, can you guys talk about what you have on the hopper for next year, and I guess what game for next year are you most excited about?

At this stage, in our prepared remarks and also our press release, we've identified obviously the next generation of the FreeStyle game, FreeStyle Manager, and a series of additional games to our FunTown casual platform. There are a number of games we are in discussion and, at this stage, we're not prepared to disclose the name of those yet.

Okay. And then, real quick on the poker business. So if I understand how it will flow through the P&L correctly, we will book essentially a sizeable minority interest relating to the remaining 40% stake in the unit for 2010. So first, is that correct? And secondly, to the extent it still will impact the P&L, how do you expect the margin in that business to evolve in 2010, after France liberalizes the market and introduces a licensing regime?

Hi, Andrew. This is Quincy. Perhaps I take care of the accounting implication on that. Right now, we anticipate that this deal will be closed some time in Q1. Before the deal is closed, we still need to consolidate 100% as what we have been doing in 2009. But after the deal is complete, then we will hold 40% interest. That remaining 40% interest will be under equity accounting, so we only share the part of the profit before taxation of the whole section and its related taxation.

And the onetime gain will be -- the amount will be determined based on the fair value at the time of the closing and [deduct] our cost [base] and transaction cost. Then we will have a onetime gain in 2010.

Andrey, this is Arthur. With respect to France, naturally we can't predict operating margins at this time but our perspective is as follows.

Market share numbers are hard to come by in this industry, but BetClic is clearly one of the top sports betting forums in France. Everest is one of the top poker firms in France. Both these things are entirely clear. Together it's quite possible that we are number one.

And the benefits we see by being number one, as France opens and regulates, are an opportunity to capture dominant market share. And we're very excited by that possibility, of course, and the margins that would bring.

Thank you.

And your next question comes from the line of Atul Bagga with ThinkEquity. Please proceed.

Hey guys. Thanks for taking my call. A couple of questions for you. So on the European business, can you highlight the synergies that you would be -- that you're expecting from this combination of Mangas and Everest?

I'm sorry, Atul, we couldn't hear you perfectly. Could you repeat again?

Sure. Can you guys explain a little bit the synergies that you're talking about with the combination of Mangas and Everest? Where can we expect to see synergies and how much synergies can we expect to see?

Sure, Atul. This is Thomas here. Now, synergies with Mangas come in a few forms. First of all, as Arthur mentioned, Mangas currently owns and operate the largest, we believe, sports betting firm in France. And even on a regional basis, i.e. continental Europe, it's a pretty large offering.

Now that is highly complementary to our user base. As you know, our user base are primarily poker and casino driven, and we lack a fully integrated sports betting product offering to offer to such customers. So synergies number one will be in increased revenue per customer on a total wallet share basis.

Second, in addition to the poker -- sorry, the sports betting offering, Mangas also, through each of their subsidiaries, has a pretty sizeable, when you add them together, poker player base. So as part of this deal, we'll be combining the poker liquidity of all of Mangas and Everest.

So you will see a significant -- upon completion of the deal and integration, you will see a significant increase in the liquidity of the entire Everest platform. And the synergies there will come obviously in increased player activities, because now we are able to offer much larger and more frequent tournaments, and the like. And also, for servicing the other Mangas players, Everest will also get economics out of it from a backend perspective. So that's on the revenue side.

On the cost front, obviously as we combine these various properties of Mangas, there are a lot of backend functions, including cash management, other admin functions, even, to a certain extent, customer services, we can pull together and achieve scale, and therefore save on costs.

So these are the -- in a nutshell, the key financials are the synergies. And maybe Arthur can talk more to the strategic side of this.

Yes. We believe, Atul, that we have an opportunity here to create a leader in Europe. Certainly, in certain markets, we believe we'll be in the top position. And the family brands, we believe, can only get stronger by cross-marketing and selling opportunities that that offers.

In addition, and these are something we believe very strongly, it's difficult to quantify however, the partner we've chosen in Europe I personally believe is the best possible partner for us. And we're fortunate to be able to have accomplished this deal with them.

For the first time we have, as part of our family, the land-based casino, and not only a land-based casino, the most famous casino in all of Europe. And the credibility, the trust, the reputation that such an institution, essentially backed by the Principality of Monaco itself, is enormous for an online business such as ours.

And the additional marketing advantages, for example, to be able to host our tournaments and hold championships in the Grand Casino and to market along with the Monte Carlo casinos, there are a whole host of opportunities that that can bring to us potentially.

And in addition, we have as a shareholder of Mangas Gaming, a team that is very experienced in European media. Stephane Courbit was the head of Endemol for France and is a well-known figure among the media titans in Europe. That type of knowledge, the relationships, the contacts and the media power that they can bring to bear, we also think will have very strong benefits for our business.

Perfect. Thanks for explaining that. And can you guys quantify what would be the impact of the synergies, Thomas, that you talked about; synergies on the revenue side and synergies on the cost side?

Atul, at this stage, I think we'll be a little hesitant to put out numerical guidance on the dollar amount of the synergies, for the various factors we've talked about. And it's safe to say that we believe the amount of synergies could be very substantial.

As you can see from the structure of the deal, other than the initial $100 million, in a way, down payment, we are tying a lot of our valuation on the future fair market value which obviously is something that we management here believe will have significant upside as a result of both the market turnaround and also the synergies we can create in this process.

Excellent. And can you guys give us any update on the US market, the prospects of legalization of online gambling in the US? Is there any further update, anything that you might have heard?

There continues to be a lot of I would say baby steps taken, no major developments that I'm aware of at all. California is going to be holding hearings on legalized poker in February. There's been talk in Ohio and Pennsylvania, as well as the talks with Barney Frank's office but no significant developments yet.

I should emphasize that the strategic alliance with Mangas also contemplates the future possibility of the United States opening and the team, the Everest team, which is based in Boston, will continue to be at the forefront of that. So it remains a tremendous opportunity for us.

Excellent. And just switching gear to the Asia business, you guys were pretty excited with all the three IPs that you launched this year, Luna, Holic and Warhammer and these games did not turn out as you were expecting these games to. So looking back, in hindsight, do you think your expectation or your optimism was misplaced, or was it more related to the operational execution of these games? Where do you think the mismatch was?

I think Atul that's obviously a very good question. I think each of the factors you identified contribute different degrees to each of the games. There are certain cases that when we sign on the games and we have very high expectation and, in fact, the game has drawn a lot of expectation from the user, and when the games were launched, whether it was in our country of operation or elsewhere in the world, it did not meet expectations that the players had on the games.

So content issue was certainly one of the issues but yes, from an operation perspective and technical perspective, we do also see some challenges as we indicated in our prepared remarks.

As Arthur mentioned, one of the distractions we had was obviously putting together this complex deal for Europe. And that might have also contributed to the spreading of the management attention to a degree that we may not have fully captured some of the opportunities we could have had in Asia.

And so these are events that we will learn lessons from and we believe the platform we have built so far continues to be of a very high strategic value. And we believe based on these values, the strategic position and also the resources and now more focused management attention, we will be able to fully capitalize and build much bigger and more successful Asian online game platform.

Excellent. In your prepared remarks, you guys highlighted that you have -- you're considering a few M&A moves for the Asia business. My question is this, most of the moves, is it related to acquisition of content, or could it also be related to maybe acquiring a team for operational execution?

The three deals that we have mentioned that are underway are all operating platforms. One has an important development studio also, but we're looking to increase market depth and market penetration, market depth and breadth. And we're excited to have these opportunities and we hope to be bringing the first of these to the market with news in the first half of January.

And are these deals in China? Can you talk about what geography you guys are looking to make acquisitions?

Naturally, we're going to -- we're focused on important geographies, so -- but I'd better leave it at that for now, Atul.

Thank you.

Thank you.

(Operator Instructions). And your next question comes from the line of [Warren Lin] with [Martin Currie]. Please proceed.

Hi. Thank you for taking my question. I want to ask you about the -- any policy change or in the regulations that's going to happen in Europe because I think you choose in such times to sell off the 60% stake on your Gaming Software business. And I think that maybe that -- is there any policy that's going to change in Europe to impact your business?

Thank you for the question. This is Arthur. What we see happening in Europe is that country-by-country the major marketplaces in Europe are choosing to establish their own regulatory regime and those regulatory requirements and limitations upon operation in that country were one by -- well at one time we felt we had an entire European community marketplace.

We now find that each individual country is requiring the establishment of operations, infrastructure, personnel to address that marketplace. We therefore feel that size and skill is all the more important, as well as strong local partners.

The question in Europe is no longer one of legality or illegality. I think it's clear that Europe will be an open market, open but regulated market, for online gaming. And this was our original thesis and the original motivation for us to enter Europe as a marketplace five years ago when we first acquired this business unit. We continue to see that being the case, however, we do see the imposition of operating requirements and regulations country-by-country.

We think, however, that this is both -- in addition to being a cost item, it's actually a tremendous opportunity, because along with these regulations often comes the ability to advertise in the mass media, the ability to use the banking and financial system in ways one was previously not allowed to, to create a mass market phenomenon, a mass market business similar to the way poker was in the United States, which previous to this has always been prohibited in Europe.

So along with the additional cost of the additional regulation come additional opportunities. The 350 million people in Europe are a very large and wealthy market without the social stigma against gambling or poker that exists in some countries or in some parts of the United States.

So it's an exciting marketplace still for us, one which we think has enormous potential still, and we're excited to be with Mangas Gaming as our partner to address that opportunity.

So Mangas can help you to get a license if the regulation becomes to -- well, you have to apply the license country-by-country, is that correct?

Yes, we believe -- absolutely correct. One reason we're so happy with Mangas is we believe that they are a group with strong European relations and strong local knowledge. And that can only be of assistance to us in getting the licenses early and then knowing what to do with those licenses.

Okay. And what about the market in the future if the United States decides to open the online games, gaming market, if they really [add in] to that, but you already [sold] your stake on the gaming business? So [does that mean] you have to give up the whole market in the future?

Well again, we remain a 40% shareholder and first of all, I would say the 60%, the valuation of the 60% stake we're selling has yet to be determined and will only be determined in the early part of 2012. And so a lot can happen between now and then, a lot of good things we anticipate. So we're looking at a higher valuation, certainly than the current market opportunity, market conditions would offer us.

Even after that point though, we'll continue to be a 40% shareholder and we think of it as having 40% of a much, much larger pie than 100% of a smaller pie. So we're excited about this partnership and expect very good things from it.

Okay. And I'm curious about the fair valuation. Could you explain me what kind of fair valuation it is? The first down payment is only $100 million and I have no ideas what kind of (technical difficulty) it is going to be.

Sure. It is very much a little bit like predicting the future. None of us can be certain as to what the condition will be in 2012. We do believe that, combined with Mangas, our business, the Everest business, will be a much stronger business in 2012 than it is today and we believe, therefore, that the valuation will reflect that.

The determination of fair market value is, of course, an art and not a science, but our contract has both us and Mangas seeking the assistance of outside professionals, investment banks, to help us conduct such valuation. So it should reflect the current condition of the business at that time, as well as the marketplace in which it operates and market conditions.

But when you sell, when you close the deal, you [sell out] 60% to Mangas, will Mangas manage the business instead of you?

Yes, at closing, Mangas will own 60% and they will be the control shareholder. We will have two seats on a Board of five, and we'll be the 40% shareholder, but as I mentioned, it is our intention to be an active, value-added minority partner.

Okay. And what are you going to do about the $100 million for the first payment? Are you going to pay a cash dividend or you are going to acquire online game business or --?

We do not intend at present to issue a cash dividend. As we mentioned, we have some exciting merger and acquisition opportunities that we are pursuing now and it's possible that some of the $100 million might be used for that.

Okay, but regarding the [growth drivers] because you already sold off your 60% of the gaming business to Mangas and so your online gaming businesses, according to the [patent record] it is not easy to make big money. So I have no idea as to what we are [going to report, really].

It's absolutely true that the online game business is a challenging business. We continue to have very strong platforms, we believe, in Taiwan, Hong Kong, Macao, with the FunTown platform and in China with the T2CN platform. We believe that with the right content and with strong focus on execution, we're going to be able to grow those businesses.

In addition, as you mentioned, we will have plentiful cash resources and an opportunity to expand by acquisition. We are very excited about the opportunities that we are pursuing right now and about some of the games we have in our pipeline, so we look forward to demonstrating to you and the marketplace our ability to grow this business in an exciting way.

And the last question is that could you update the strategic alliance with Victor Chandler, that is the latest you announced, that you are going to have operators with the [full] backing, how is the progress now and what will --?

Unfortunately, the Victor Chandler partnership really came into being just as we were entering into our strategic review and our decision to seek a new strategic approach. And so that has never truly been implemented and that transaction will unfortunately be unwound as part of our strategic partnership with Mangas.

Okay, so you are going to change the partner, right?

Yes, we'll be part of the Mangas gaming family now and that precludes us from being part of the Victor Chandler arrangement.

(Operator Instructions). And we do respectfully request in the interest of time that you do limit your questions to up to two. And your next question is a re-question from Andrey Glukhov from Brean Murray. Please proceed.

Yes guys, thanks for taking the follow-up. I have a couple of questions on actually the mechanics of the deal. So first of all, as you are selling the 60% of the business, does the cash on the balance of Everest Poker, 60% of that cash goes to Mangas or you guys retain all the cash?

The deal is done on a cash free, debt free basis. As you know, [See-Saw], our Everest poker business have an excess cash, has quite a large cash balance on its balance sheet.

Other than the necessary cash for working capital purposes, and also the cash which is a one-for-one match with the liability in the customer deposit side, then all the -- which I think we disclosed that, it was about $33 million or so as of the last quarter, and all the cash goes to GigaMedia 100%.

Okay. And that entity, standalone, is taxed at what rate?

I'm sorry, your question is relating to --?

Well GigaMedia Corporate is essentially a zero tax entity right now. Presumably Everest Poker standalone is a profitable entity and is now becoming a European entity, so what is the standalone tax rate for that entity?

Okay, two things here Andrey; I'm not sure if I understand whether you are asking the ongoing tax arrangement for this entity on an operating basis.

Well basically I'm trying to figure out as I model your minority interest, that entity will be taxed at a certain rate, so I need to flow it through the model.

It will be -- it is a very complicated question Andrey. The reason is because it's related to the regulatory question that Arthur just answered previously. Because the model that is gradually forming a [trend] off in Europe is -- Italy as an example, is individually regulated and individually licensed and individually taxed, the country.

Okay.

So Italy was the first one and we expect France to follow suit with a similar regime with slightly different regulation and probably a slightly different tax rate.

Now we currently hold a [model] license. As to whether we can rely on the model license and enjoy a lot of the tax benefit we currently have will have to depend on the individual country's regulation and limitation on what you can or cannot do by obtaining an onshore license. So -- but we think directionally, you will probably be not as tax efficient as we are now, but to what extent the tax liability will increase, we have to -- it depends on the pending jurisdiction.

Okay. Now as far as the terminal value is concerned, so if we'll look at the put and the call options on the deal, I guess two things; is there a ceiling and a floor on the valuation, and can we end up in a situation if the business degrades that you're going to be forced to give back a portion of the $100 million you're getting now?

$100 million is absolute floor, we will never need to give back any penny of that and there's no ceiling to the fair market valuation.

Okay. And then lastly, the big benefit of this deal, right, is the integration with the sports betting assets that these guys are bringing to the table. How do you separate the net income, since there's going to be presumably a unified entity going forward?

It will be done on a market turn basis. Obviously in the marketplace, there are sports books operators which refer customers to poker operations and the other way round. So in the arrangement here, we would have a certain mechanism to regulate the rates, but the market price is certainly a reference.

Okay. And I guess lastly, I apologize for dragging it on, just so that we're very clear on the cash, at the end of Q1, once the transaction is consummated, what do we expect the cash balance on GigaMedia books to be?

Okay. Right now in Q3 in our balance sheet, we roughly have a cash position of around $96 million. As Thomas mentioned, we have roughly $33 million reserve for players' deposits, so that is the part of the cash as at today we cannot touch. So the free cash that we can move right now is around $63 million.

At closing, before any transaction cost and adjustment, we will have $100 million gross proceeds in; then before any expenses and deductions, you will see $163 million in our balance sheet. But, of course, the net increase in the free cash is close to $100 million before any kind of transaction expenses.

Great, all right. That's all I have. Thank you for taking the follow-up. Thanks.

And you have a follow-up question from Atul Bagga with ThinkEquity. Please proceed.

Hey guys, thanks for taking my follow-up. Very quick on Mangas. Can you give us some sense on the size of this business?

Mangas is a privately held company and we're not therefore able to speak of their size without their authorization. They're, again, one of the leading operators in Europe and together, we believe the Everest business and Mangas will, at least in certain key countries, be number one, if not, close to it.

And just to be clear, so when you say number one, are you talking about number one including the US facing sites, or just the sites that operate in Europe alone?

I mean number one including all competitors.

Got you. And Mangas, do they have any exposure in the US? Have they accepted any wagers in the US in the past?

No, Mangas has always remained outside of the United States and are entirely clear and clean there. We would anticipate if the United States were to open, that Mangas and Everest together would have no trouble satisfying any [probity] requirements or tests.

Perfect. Thank you.

Thank you.

And this concludes the time that we have for questions today. I would now like to turn the conference over to Mr. Brad Miller for closing remarks. Sir, you may proceed.

Thank you operator and thank you all again for joining us today. For further information about the Company, please visit our website at www.gigamedia.com or contact me via email at Brad.miller@gigamedia.com. Thank you.

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