GigaMedia Ltd (GIGM) 2010 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 GigaMedia's strategic partnership with Blizzard Entertainment and the Company's quarterly 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, May 27, 2010.

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

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia's strategic partnership with Blizzard Entertainment, as well as our first quarter 2010 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 20-F, filed with the US Securities and Exchange Commission in June 2009.

This presentation is being made on May 27, 2010. 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 Arthur Wang, our CEO.

Thanks, Brad, and thank you all for joining us. Today, we announced a watershed deal for GigaMedia, a partnership with Blizzard Entertainment through our South East Asian Games operation, IAHGames, under which we are going to bring both Blizzard's existing game library, Diablo, StarCraft, Warcraft to South East Asia, and also the most anticipated game of the year StarCraft II, Wings of Liberty. We could not be more excited, more committed, more confident about this partnership and the market potential in the fast growing South East Asia.

Before discussing our Asian Game business further, I'd like to turn first to look at our Gambling Software business. Over the last six years, our Gambling Software Unit has been our largest and fastest growing division. Beginning with our acquisition of the business in April 2004 for a grand total of $32 million, we have enjoyed a strong double digit growth nearly every quarter until the European slowdown in 2009.

Our average poker product grew to be the fourth largest poker site in the world, where it remains today; and Everest Poker was awarded best poker operated for two consecutive years by the independent industry journal, E-Gaming Review.

Last year, we saw the opportunity and the need to take our business to the next level by finding a European partner. After much research, analysis, evaluation and soul searching, we decided to take this major step by joining in a strategic alliance with Mangas Gaming, one of the leaders in European online gambling, whose operations include BetClic, Expekt and Bet-at-Home, together offering sports betting, poker and casino services to over 4 million registered users in over 25 countries.

Mangas Gaming is jointly owned by the Lov Group of famed media executive Stephane Courbit; and SBM, the Societe des Bains de Mer de Monaco, controlled by the Principality of Monaco. SBM is the owner of the world-renowned Monte Carlo Casino in Monaco, the Casino Royale in operation for over 100 years, and featured in three James Bond movies.

By joining our Everest Poker business with Mangas Gaming, we have created one of Europe's largest and best gaming platforms with the size and scale to claim dominant market positions in Europe. Moreover, Mangas Gaming also brings the unmatched credibility, reputation and trust of the famed Monte Carlo Casino, backed by the Government of Monaco itself.

And now in France, we are seeing an exciting development, which we believe will be validation of our strategic partnership. France has adopted a new and liberalized regulatory structure for online poker and sports betting, with the scheduled opening by mid-June, in just two or three weeks.

The poker market is expected to grow dramatically, with some analysts estimating a market size for poker alone of over $400 million in 2011. Everest and Mangas are best positioned to capitalize on this development, with Everest Poker one of the top poker brands in France, and BetClic number one in French sports betting. We expect to enjoy the largest user numbers and the largest liquidity pool from the outset, and to capitalize upon the local expertise of our media and land-based casino partners to grow this initial leadership position to one of market dominance.

I note that with even a 25% market share, and we will be expecting more than this, we may be looking at an over $100 million revenue business from France alone, and with high operating margins due to the economies of scale and higher ARPUs.

Again, together with Mangas we believe our Everest Poker business has an opportunity to win dominant market share positions in Europe, thereby delivering the strongest of financial results. In short, we believe Everest Poker will continue to be a highly important and valuable growth driver for GigaMedia shareholders for many years to come.

Turning now to the Asian Games business. Today, we announced two major developments relating to our Asian games business; first, our new partnership with Blizzard; and second, our significant expansion into South East Asia through IAHGames. We have spoken about Blizzard, so I'll say a few words about IAHGames and the South East Asian opportunity.

We've been a 20% shareholder of IAHGames for a couple of years now, and have come to know them in the South East Asian market during this time. Today, we are excited to announce that GigaMedia will increase its stake to an 80% equity position in IAHGames. By way of background, IAHGames is a leading publisher, operator and distributor based in Singapore, with over 35 million registered users in South East Asia. Led by a team of game industry veterans with a track record of delivering mega hits in Asia, IAHGames operates several award winning titles, including FIFA Online 2, Granado Espada, and Dragonica.

We are especially enthusiastic about this move, because we believe South East Asia is a huge and fast-growing market opportunity similar to China's online game market several years ago. With EA's FIFA Online game addressing the soccer football lovers, and now Blizzard's current games and soon to be released StarCraft II, we believe IAHGames is best positioned to capture the hearts, minds and, yes, dollars of the South East Asian gamers.

Led by IAHGames, South East Asia will be a major area of growth and expansion for GigaMedia, and combined with our game operations in North Asia, we see the additional benefit of operating synergies as we build out an online entertainment platform to address the valuable 15 to 35 year old MTV generation across Asia in the most relevant of channels.

In conclusion, we are very excited that this new year brings with it new partners and new prospects for both our European gambling, and our Asian games business. While 2010 will still be a year of building, a year of transition, we believe our strategic position is strong, and that our many investments in games and game studios will soon begin to bear fruit. We remain committed to building a stronger GigaMedia, with growing shareholder value as its cornerstone.

We thank you for your interest and continued support. I will now turn the call over to Thomas, our President and COO.

Thanks, Arthur, and thank you all for joining us. We have quite a few new business and operational updates to share with you today. Let me now highlight some of these in a brief review of our gaming software and our Asian online game businesses.

First, in the Gaming Software business, as Arthur mentioned, we completed a sale to Mangas in Q2 of this year. The year 2010 and beyond now looks very bright for the business. Everest is now part of one of the largest online gaming groups in Europe, and its enhanced size and skill, we also benefit from a large and successful sports book offering, especially in France.

The deal positions Everest to capture potential growth from the soon to be opened and regulated French market, one of the largest in Europe, and following that, to be a strong Italian presence. In addition, as a business that has never operated in the United States, Everest is very well positioned for the expected future opening of the giant US market.

During 4Q 2009 and 1Q 2010, the Gaming Software business made significant progress on a number of major operational initiatives. Everest completed the player wallet front end for its entire casino portfolio. The team also finished an enhancement of its SEO program, which resulted in a strong (inaudible) in search traffic.

In another major project, Everest also began backend architecture upgrades that will be critical for major 2010 technology initiatives, including full migration to Malta, French and Italian licenses, as well as cross-marketing to other Mangas platform.

In sum, 4Q 2009 and 1Q 2009 were transition periods for the business. Focuses have been on closing the Mangas transaction and maintaining Everest's strong brand position in Europe in a very challenging environment.

In addition to the burdens of the Mangas deal, the economic downturn in Europe, and strong competition from US (technical difficulty) sites in particular, present us strong challenges. Looking ahead, the business will face a traditional industry slowdown during the summer seasons. However, for the year, we expect growing business momentum driven by the alliance with Mangas and licensing in the French market.

In our Asian Online Game business, we are also enthusiastic about our strategic positioning. As Arthur mentioned, we announced today a major growth initiative, acquiring majority control of our affiliate IAHGames, and pondering with Blizzard Entertainment to exclusively distribute and operate in South East Asia markets several of Blizzard's blockbuster titles.

Regional distribution and operations of Blizzard's games begins with the launch of StarCraft II. Currently, it's scheduled for the end of July. The games retail box will be available in Indonesia, Malaysia, the Philippines, Singapore and Thailand, with purchase enabling players to play online through the new South East Asia version of Battle.net, the premier online gaming destination for Blizzard games.

The South East Asia version of Battle.net will have service in the same region, lowering latency for players, and will also offer special community events and tournaments, and fully localized customer services available only to gamers who have purchased the South East Asian game box.

New game initiatives in our Greater China operations were disappointing in 2009. Launches of Holic, Warhammer and Luna Online were hurt by content issues, illegal player activities, software bugs, and other technical and operational issues, but we have taken appropriate steps to review our pipeline cautiously and strengthen all aspects of operations.

In China, we are currently doing a limited testing of Freestyle Manager, a new version of the popular Freestyle franchise. In Taiwan, FunTown has secured exclusive Taiwan rights to AVA, an exciting first person shooter game distributed by Neowiz from Korea. We expect AVA to begin commercial services in the third quarter of 2010.

Looking ahead, we're committed to building a leading, Asian online game business. We expect to drive growth both organically and via acquisitions, and we have the resources and financial flexibility necessarily to expand our business regionally in Asia and strengthening our pipeline.

Thank you.

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

Thank you, Thomas. I would like to take the next few minutes to review our Q4 and Q1 consolidated financial results, and then I will review highlights in the Gaming Software business and our Asian Online Game business.

Financial results in both quarters largely reflect trends in the Gaming Software business, which were [shaped] by seasonality, the global economic downturn, and strong competition. In addition, financial results in the fourth quarter reflect write-offs of several non-performing games and games investments, which had an aggregate non-cash impact on fourth quarter net income of approximately $49 million.

Total fourth quarter revenue were $40.3 million, down 10% year-over-year on lower contribution from the Gambling Software business, which was expected and in line with business trends. The fourth quarter revenues grew 8% quarter-over-quarter on favorable seasonality in the Gambling Software business.

Total first quarter revenues were $37.1 million, down 8% quarter-over-quarter, due to mainly business transition and integration issues related to the sale of Gambling Software business.

Gross margin has improved slightly over the past few quarters, growing from 74.5% in Q3 to 77.8% in Q4, and then 78.9% in Q1. These improvements were attributable to the following. Gross margins in the Gambling Software business increased in Q4 under traditional seasonal revenue boost. Gross margin of the Asian Online Game business grew significantly in Q1, mainly due to improved performance in both T2CN and FunTown.

Consolidated income from operation in Q4 was a loss of $42 million due mainly to non-cash write-offs totaling approximately $38.3 million. These write-offs were largely composed of the following; impairment loss totaling approximately $14.1 million related to goodwill on investments in China; and impairments totaling approximately $23 million, primarily related to capitalized software and licensed game costs on online games, as detailed in our press release.

In the first quarter of 2010, our consolidated income from operation grew positive quarter to $3.6 million. Operating margin was 9.6%.

During the quarter, our sales and marketing expenses decreased by 37% quarter-over-quarter as both Gaming Software business and Asian Online Game business decreased advertising and promotional activities.

Next let's take a look at each business unit's performance. The results of Gambling Software business were largely in line with expectations and consistent with industry trends, both in Q4 and Q1. Q4 2009 revenue grew 16% quarter-over-quarter, reflecting traditional winter season growth, with Poker increasing 20% and Casino up 10%.

Q1 2010 revenues decreased 12% quarter-over-quarter, reflecting decreased player activities on seasonal factors, global economic downturn, and business transition and integration issues.

Q4 income from operations decreased to a loss of $941,000, largely due to increase in sales and marketing activities in that quarter. Q1 income from operations grew to $3.7 million.

Sales and marketing expenses were 38% quarter-to-quarter decrease, which outpaced revenue decrease during the period and result in an operating margin of 14.4%.

The results of Asian Online Game business were solid in Q4 and Q1. In Q4, revenue decreased by 9% to $10.8 million quarter-over-quarter, related to decreased promotional activities in both FunTown and T2CN following the summer student promotion campaigns and lower player activity.

Helping to offset the quarterly sequential decrease in players and revenue were ARPU increases. Spend per player grew 9% in FunTown, and increased 40% in T2CN on a quarterly basis.

In Q1, revenue grew 5% quarter-over-quarter to $11.3 million driving the growth with successful promotion by T2CN of FreeStyle during the Chinese New Year holiday.

FunTown revenue remained steady quarter-over-quarter basis. As mentioned, operating income in Q4 was largely impact by the large non-cash write-down. Excluding this write-down, Q4 operating income was $938,000.

Q1 operating income grew quarter-to-quarter to $2.1 million, driven by higher gross margin and a [12%] decrease in selling and marketing expenses resulting in an operating margin of about 18%.

Looking ahead, in April, we complete the sale of 60% interest in the Gambling Software business and expect to report a substantial one-time gain in Q2 2010 of approximately $60 million to $70 million. From Q2 onwards, we will deconsolidate Gambling Software business, and accounts for our remaining 40% interesting under equity accounting.

From cash position perspective, we have a net cash position of approximately $115 million, having taken into account the payment of about $100 million from the Mangas deal, the transaction cost, and net of the short term borrowing that the Company has.

In Q2, the management also expects to write-off about $7 million to $8 million in relation to certain legacy games, games intangibles, and under-performing games.

In Q3, we expect to close the acquisition of IAH Games and begin consolidating this result. We expect this acquisition to begin drive revenue growth at the year-end.

Taking into account the investment [cost], consolidation of IAHGames cash and IAHGames' obligation under the business agreements, we expect to have a net cash position of $95 million after the closing of these transactions.

In addition, we have about [$30] million available working capital line with our bank debt available for our future operation use. In sum, we are well positioned for growth and expansion, and have sufficient financial resources to grow our Asian Online Games business through M&A initiatives on top of our organic growth initiatives.

Thank you.

Thanks, Quincy. Operator, we would now like to move into a question and answer session. So please, at this point, we'd like to open up the call with any questions out there.

Thanks.

(Operator Instructions). And your first question comes from the line of Phil Varga with ThinkEquity. Please proceed, Mr. Varga.

Yes, this is Atul from ThinkEquity.

Hi, Atul.

So congratulations on the Blizzard deal. It seems pretty impressive. Just to clarify, you are going to operate Battle.net in South East Asia, or this is only for the box deals?

Also for Battle.net.

Okay. And Battle.net you'll be operating -- can you remind us again, which countries you'll be operating in? Is it only for IAH, or does it also include FunTown?

It will extend from Hong Kong, Philippines, Thailand, Malaysia, Singapore, Indonesia; so seven countries. I don't know if I got all seven there.

Got you. And what will be the business model for StarCraft II?

StarCraft II will have two business models. There will be a -- like a luxury box that goes out. That will include the right to play on Battle.net as well as some alternative online payment modalities which we have not announced yet to the market.

Got you. So if you were to look at revenues coming from these two streams, online payment and -- or ongoing payment versus the one-time box fee, where do you expect most of your revenue coming from on StarCraft?

For a number of market reasons, Atul, we're not able to speak to the alternative payment mechanisms, alternative subscription and online payment mechanisms at this time, so it will be -- it's probably not acceptable for us to then speak to the relative contributions yet.

Fair enough. Can you give us some -- can you talk about what is the current size of IAH? How big that business is?

IAH is a relatively small company at present. It has a large user base that it's developed from its launch of a couple of very significant games in the last year, probably the most significant of which is FIFA, the branded FIFA soccer, football game, which is very, very popular in South East Asia and has been a big hit. So user number is large. Revenue number is increasing, but not too big at this time.

Got you. Is it comparable to FunTown or T2CN, or is it -- can you talk --? I don't know if you can give us some indication to the scale of the business or the modeling.

Sure, it is right now based on that suite of products that Arthur discussed doing about $5 million or so revenue a quarter, and -- but obviously this does not include the future potential of the StarCraft II and also all the other [bits of] products. So we expect this to be a significant revenue driver for the Asian Online Games business for the second half, and more so into 2011.

Got you. And regard to T2CN, can you guys talk about the pipeline of games that you have for 2010 and then maybe for 2011?

Is this for South East Asia still, Atul?

No, I was asking about T2CN and FunTown.

Sorry, can you repeat that question, please?

Sorry about that. So my question was, can you talk about the pipeline of games for T2CN, and maybe for FunTown also for 2010 and 2011?

Right. Right now what we have told the market, the press release and in my prepared remarks is we are testing FreeStyle Manager, which is basically the mixed version of FreeStyle in China. We're still working with the developer to fix on that date, but most likely, it will be launched some time this year in the second half.

And for Taiwan, we are planning to launch AVA, which is a first person shooter game developed by Redduck, distributed by Neowiz. And in China, this is a game operated by Tencent. We are operating that in Taiwan and we plan to launch it in Q3 2010, this year. And that's what we are communicating to the market at this stage.

We have a number of initiatives that are underway but, as I've mentioned, we are building our pipeline cautiously, and so right now, these are the only two we are prepared to tell the market.

Right. And these new initiatives that you're talking about, are these mostly the licensing deals, and if so, are these games mostly from the Chinese developer, from overseas? Now that --

We have a -- Atul, you will remember, we have a -- in terms of game sourcing, we have a three pronged strategy; licensing from foreign developers, investing in early stage studios, and also self-development. The games are coming from all three areas.

Okay, perfect. I'll get back in the queue now. Thank you.

(Operator Instructions). And your next question comes from the line of [Phil Libjitz] with [OpCo].

How are you doing, Arthur?

Good, Phil. Nice to speak to you.

Good. Really more philosophical questions. I've been with you since the beginning during the good times and the bad times, and if anything, I think the great times are ahead of us. But the philosophical question would be is, somehow, you guys have taken an arrogant position that you speak whenever you want to speak.

In today's world, transparency's the only thing that matters. How do we know -- in other words, all of a sudden, let's say within the last month, we rolled off everything but the kitchen sink, the things that were supposed to go well for the last year, two years or whatever. How do we get it out of you guys that you're going to decide that you're not Warren Buffett and you're going to be in communications with Wall Street? I'd love to say once a day, but that's not believable; once a month, once every other month; so when you tell us something's going to start in July, if it isn't starting in July, you guys at least have the manhood to tell us why.

For the last year, 1.5 years, you've been hiding, dodging, and I'm sure you could come up with 100 legal reasons why you didn't tell us whatever was going on, but I'm still a believer, but I'd like to know how do I know you guys are going to keep us informed what's going on month-to-month at least?

Okay. Phil, first of all, it's a fair point you raise, and we must apologize. We have until last year an unbroken record of reporting our financials in a timely fashion, and actually, according to due guidance which are stricter than those required -- that we were required to file in and be in regular communication.

What happened last year and, again, this may sound like mumbo jumbo, but it is actually a complex legal question is, we were in a highly material negotiation transaction involving our Gambling Software business which, for a variety of reasons, good and bad, continued for months, and at different stages, there were different outlooks and different players and different outcomes, and we were basically in a situation where we felt that there were highly material, price-sensitive, non-public information which we were attempting to be very cautious about releasing to the market. And I apologize very much for not being able to shed more light on our business and our situation at that time.

We like talking about our business. We're excited about where we are now and what we're doing with it, and all I can is that it was a particularly unusual situation where -- again, this is all water under the bridge now, but there were offers to buy, or acquisition attempts to buy the entire Company, things of this sort, which were of such a material nature we felt that we needed to be very strict in our observance of the rules of non-disclosure of inside information.

So my apologies for our performance last year and our communication of that performance. We are again committed to being a fully transparent and regular communicator with the market, and I hope that our conduct and our performance this year will establish that beyond question.

As I say, only the future will tell, but even in the past, as I say is during good times it was wonderful that you reported on time and everything, but even now that you're saying you were in negotiation with Mangas, whatever, your write-downs have eight games, 10 studios. These are all announcements -- I would have liked to have seen each studio being written down one-by-one, each game being written down one-by-one.

You didn't wake up one morning and find out Holic war game and every other one went bad. You decided to announce it at one time, but you had these news -- these all-important news releases that leak out to the market places, and yet you let them leak out month-by-month-by-month, and you hid behind the cloud.

And I'm as large a shareholder as ever, and I'm a believer. And I'm a believer only because I think you and Arthur and Tom are winners, but in order to stay winners, as I say, during bad times is when winners come out, and the only thing I'm looking for is the future.

You could still use the same excuse again where there's important things so I can't announce to you. I would like to hear a more emphatic response from you that on a month-to-month basis, we're going to hear today you announce that in July '10 that whatever the name of that game is starting. If that game doesn't start on July 11, I'd like to see a news release why it didn't start on July 11, not a release saying we can't talk to you. That's the only promise I want to hear.

Well, I'm happy to give that promise to you, Phil.

Okay. Then thank God and let's move on to greater future.

Thank you.

Thanks.

(Operator Instructions). And your next question comes from the line of Bruce Fixelle with Genesis.

Hi, gentlemen. Thank you for taking my call. I'm interested in talking just a little bit about Everest Poker. My understanding, and I've been a large investor for the past several years, my understanding is that GigaMedia was driven primarily by revenues generated by Everest Poker. And even in the opening comments, the excitement seems to circle around the future of poker growth in France as well as the potential enormous markets and the US market. But the question is with the sale to Mangas of 60% which has already been completed, and the upcoming sale of the remaining 40%, how does GigaMedia expect to benefit by the increases that we all expect when these markets open up?

Thanks, Bruce. We're glad you ask the question. Everest Poker is still a very, very important driver for GigaMedia's growth and GigaMedia's financial position. We do not control and operate the business any more. This was a very tough decision, but we believe the right decision to join together with Mangas to form a much bigger, more powerful combined entity.

There are a couple of reasons why we think that it's still significant. First of all, the payment, actually the valuation of the 60% has a final -- the final valuation is actually not calculated now but instead in 2012, in May of 2012, based upon the fair market value of the business at that time.

So we continue to be deeply interested in how Everest Poker does now and next year, all the way until the calculation date in May of 2012. That will be the determination of how much we get paid for the 60%.

We've taken an initial $100 million upfront payment. Naturally, we believe that there is more coming, especially if developments go as we expect in France and elsewhere in Europe.

Now that leaves us with a 40% position for which we have the option, and it is merely a put option, to sell beginning in 2013 for the next several years. So for the next three to five years, we believe that the results of Everest operation in Europe will be an important part of our -- important contributor to GigaMedia.

We intend to book the 40% minority interest on an equity accounting basis, and so it will be a quarterly line item in our financials.

Okay. I see. So it actually extends beyond 2012, because the opening of the US markets, although it's --we're all anxiously anticipating it, we all know that these things take time and could easily take us into the 2012 or beyond time before it becomes a meaningful market to be considered. I'd like to know that Everest Poker and GigaMedia in particular got an active interest retained in that market beyond the 2012 period.

Yes. In fact, the very earliest are -- we can begin to sell our 40% position is I believe in the middle of 2013.

And just one last question would be about the outstanding -- remaining cash which is net of short-term borrowings. What portion of those funds are actually player funds which are held in GigaMedia in player accounts? And what portion of those funds are actually net cash positions retained exclusively by GigaMedia?

100% is held solely by GigaMedia. There are no player funds there, there are no monies owed to others.

Fair enough. Thank you for taking this time. I also echo Mr. Libjitz's opinion about greater transparency and communication with Wall Street. Obviously, that'll be the driving force for capital appreciation of stock which has been hopefully underperforming in the markets over the past several years. And we have confidence in your ability to deliver.

Thank you.

Thank you.

And we have a follow-up question from the line of Phil Varga with ThinkEquity.

Hi, my name is Atul Bagga. Anyway, so on the Everest Poker business, can you just talk about --? I think in your prepared remarks, you highlighted increased competition, the economy. Can you talk about how that is evolving now? Are you seeing any respite in the competition from -- especially from the illegal sites any more?

Atul, I'm sorry, the connection's not so good, but were you asking about in the poker market the competitive environment?

Yes, please. Thank you.

Yes. Competition continues to be very strong in Europe. The competitive situation will change with the trend towards single country regulation; so single country liberalization followed by regulation. So what is happening in France is France adopted a complete set of regulations, and then will require a strict compliance with those regulations and a special license to be granted if you want to operate in France.

Applications submissions were opened; the regulator opened up for submissions last week, and four parties, four firms, submitted applications, including us. Our application was a 3,000 page filing. It was both operational, technical, and quite complex, and we have every expectation that we'll be recipient of a license when the regulatory review process finishes. And that will mean we have as competitors others who have successfully crossed this regulatory threshold.

So I guess the changes we see happening in Europe, again in some countries, some of the larger marketplaces, where they will attempt to liberalize and open the market, but at the same time impose a regulatory barrier to protect their citizenry and to protect their own market interests. And I believe that will affect competition.

Makes sense. The four firms that applied for license in France, do any of these firms include the sites that are accepting wagers from the US players also?

Yes, I believe one of the players in the United States has also filed.

Got you. So in this changing environment, hypothetically for the bigger markets and bigger countries in Europe, if they are going for their own regulations, so how does that impact operations and how scalable is the business in that case when you are operating businesses which are kind of more tailored or customized for each country's regulation?

Oddly enough, we actually believe that we will enjoy greater economies and be able to have less margin pressure. The reasoning is as follows. The individual marketplaces are not -- is not purely an individual regulated market. It's not just regulation without liberalization. It's regulation and liberalization.

So in France, where previously it was prohibited to advertise, and online gambling and betting was something of a gray area in the law, now it becomes a huge social phenomenon. And again, analysts are predicting that the market size will grow dramatically. In Italy, for example, the market place, when they did the limited liberalization and regulation, marketplace doubled in size.

So first of all, we anticipate having a much, much larger market to play in. The second factor is that because all the players are within the same liquidity pool, they're all within the same fence, so to speak. If you win or I win, the money stays within the same liquidity circle. So the money, we believe, will have a greater circulation, a greater multiplier, so to speak. So every dollar bet won or lost at poker table then gets put back on the poker table, and then circles and continues to circle through the system, so we actually believe we're going to be seeing higher ARPUs from the same player numbers.

So again, I think it will depend, Atul, upon market-by-market, and the nature of the regulations, and the nature of the size of the market, and the nature of the liberalization. But in France, we are looking for -- looking actually at a big market win there in terms of economies and in terms of ARPU.

Excellent. And in France, is there an indication of how many licenses there are going to issue, and when are they going to announce the results?

There is indication -- there is no announced total number or maximum number of licenses to be issued. We believe that licenses, the first licenses may be handed out as early as the first or second week of June.

Okay, perfect. Last quick question for you. On the Asian Online business, can you talk about what is the steady state operating margin we expect from there? And the second question, what is the kind of capital investment CapEx you are expecting for Battle.net operations in South East Asia?

Thank you.

At this point in time, before we're permitted to speak as to the actual pricing models of StarCraft, we're probably not going to be able to talk about much about operating margins yet.

Oh, so you were talking operating margins --?

We're looking for the StarCraft, and those are due -- [billed] to be a good contributor this year, but next year to really be a big contributor.

Maybe I can just speak qualitatively, and speaks in those terms.

Sure. And operating margins from T2CN, steady state, where do you expect that to be ahead?

I think, Atul, I think for the Asian side of the business, because there is now the new initiatives from South East Asia from the box sell part, which obviously carry slightly different dynamics from an operating margin or the cost components prospective. So -- and depending on the contribution of that part to our overall business, that will have overall impact on the overall operating margin for our Asian Online Game business, that's why at this stage, before we can provide a little bit more clearer picture, we're unable to speak to the business as a whole. Now but for T2CN and FunTown, we have been operating at a 20%/25% operating margin in the past, and we don't see significant reason that should differ.

But again, in these two entities, we will have to obviously qualify this statement by the future products that mix. Obviously, if it's a self-developed product, you may carry higher operating margin; licensed product carry a lower one. So that will be something that we can continue to update you as we shape our pipeline and disclose our pipeline in the next few quarters.

Right now, with the existing products and AVA and FreeStyle Manager, we don't see the operating margin changing very significantly from historical level.

Thank you.

Your next question comes from the line of Andy Schopick with Nutmeg Securities.

Yes, I'd just like to confirm at this time whether you will be reinitiating regular quarterly conference calls going forward for this year.

Yes. (Inaudible).

Thank you.

And your next question comes from the line of Stephen Grocco, with Oppenheimer.

I'm just curious; with the $95 million that we have left, are we totally committed to the Gaming business, or is it possible that we could go in a different direction? Because for me personally, it's just scary that you guys wrote off around $60 million last year, and if we're going to listen to the conference calls from last year, whether it was MahJong, or NBA Basketball, or Luna, or Warhammer, you were just as optimistic on all those games, forget about the Chinese studios that we have no idea what they were.

Your track record leaves a lot to be desired, which is obviously reflected in the stock price, which is at the low of the year even though the market rallied 80%. What confidence can you give us that you guys really know what you're doing as far as the Gaming business is concerned?

I agree with you as far as the Everest is concerned. I have no complaints, and I think Mangas hopefully will do a good job. But as far as the Gaming and the Software businesses are concerned, other than FreeStyle Basketball, you're like one for 10, which is like a 100 batting average which I would agree that everybody would say if you have a 100 batting average, you're going to be sent to the minors.

So why should we all of a sudden feel that you guys all of a sudden know what you're doing as far as the Software Gaming business is concerned?

It's a fair question, and we don't have any magic answer. We have had some bad luck; we have made some mistakes. We think we've learned from both of them. We continue to believe that the strategic imperative to provide the best quality entertainment to our gamers in the course of a -- as part of a Pan Asian platform of online entertainment is a sound strategy.

Execution and content risk will remain, but we will constantly strive to improve our ability to both select content and to operate it. We have taken advantage of the difficult times to write off everything and clean up the balance sheet. We think we have made some good choices, certainly with our partnership with Blizzard, which has the best, if not an unbroken track record of successes, as well as some of the other games we are looking at.

There are other investments we have made, which again will be bearing fruit soon, and it's maybe a little bit early to talk about those, but we're also excited about some of the off-take from those investments which we think will actually more than cover the games which have not been successful.

So --

Listen, the only thing I could say to you is talk is cheap. Hopefully, it'll be reflected in your earnings and then it will be reflected in the stock price, because as a major shareholder and as clients who have -- a lot of people have the stock. We've been through major, major, major pain in the last year, more so than I would say 98% of the stocks were stood on the New York Stock Exchange and over the counter and your stock is basically at the low of the year, even after the market going up 75%.

So I think a lot of people are just tired of hearing you guys talk a good game, and then when the earnings come out, you have to write off, and you have to this, and you have to that. So I just hope you guys learned from your mistakes, and we'll see. But to me, talking about it is really meaningless. Hopefully, we'll see it in the results.

We'll take your comments to heart, and we are working very hard to build the Company. Again, this year will be a bit of a transition year, a bit of a building year, but we think the steps we're taking, the strategic position we are establishing, is the right strategy, and the steps are the right steps, and they will deliver the financial results. And again, we will look to the numbers to establish that.

And that concludes the Q&A portion of today's conference. I would now like to turn the presentation back over to Mr. Brad Miller for closing remarks.

He's already called it off.

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

Thank you.

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