GigaMedia Ltd (GIGM) 2010 Q3 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 2011 and recent 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, January 26, 2011. 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 2011 and recent 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 2010.

This presentation is being made on January 26, 2011. 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, we will go into a question and answer session.

And with that, I'd like to turn the call over to Arthur, our CEO.

Thank you all for joining us. Before continuing, allow me to begin by wishing all of you in the United States and Europe a happy New Year and all of you in Asia, a happy Lunar New Year, which we will celebrate next week on February 3.

As we are beginning a new year, today I'd like to focus on providing a strategic level overview of our business; where we have come from in 2010; and where we are going in 2011 and onward.

Let's begin with our Asian Games business. Beginning in 2006, we have embarked on building up pan-Asian Online entertainment platform comprised of two key parts; one, in operating a delivery platform; and two, a content creation and development capability.

In 2010, we took major steps to bring the strategic goal to reality. Most importantly, we took the majority control position in Infocomm Asia Holdings, a leading Southeast Asian game platform with over 35 million registered users. We believe Southeast 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 software football lovers, and Blizzard StarCraft II for strategy gamers, we believe Infocomm Asia is best positioned to capture the minds, hearts and dollars of Southeast Asian gamers.

In addition, in 2010, we green lit several game development projects which, when completed, will be exciting and accretive additions to our game portfolio.

But 2010 was also a year of restructuring, retooling to improve our Game business by enhancing operating efficiencies and improving our game sourcing and game development departments. We have also worked hard to improve our management capabilities, increasing efficiency and accountability.

So now, as we begin 2011, we are excited about our Asian Game business and our long-term growth prospects. Our pan-Asian game platform has a breadth and a depth unmatched by any competitor, delivering top online entertainment in China, Taiwan, Hong Kong, Vietnam, Thailand, Malaysia, Singapore, Indonesia and the Philippines.

Far more than merely pointing a server in a new direction, we now have local distribution, local marketing, local payment channels and local customer services across Asia.

We are excited by the scope of our Asian Game business for three reasons; one, the enormous market size comprising hundreds of millions of gamers; two, the fast growth of this market, especially Southeast Asia; and three, the potential operating synergies available to us.

In addition to and in service of our pan-Asian platform, we have a powerful and valuable content pipeline comprised of three prongs; licensing for major game developers; investments in game developers; and self-development of games. Let us look at each category.

Major game developers; we are proud to be partners with many of the top games studios in the world, including Activision Blizzard, Electronic Arts and Take-Two from overseas and JCE, Neowiz and others here in Asia. We believe the breadth and the depth of our partnerships is unique and will be an important differentiator.

Next, our strategic investments in game studios and game projects. We now have equity investments in nine game studios and projects. These investments offer us special access and game operation rights and an opportunity to help shape games for our target marketplace.

Let me point to just two examples of the exciting output we are getting from these investments; first, XL Games. XL Games is the game development studio of Jake Song, the legendary developer of the Lineage 1 and Lineage 2 games. XL Games has been hard at work on a major MMORPG titled Arche Age and the early buzz among gamers worldwide is tremendous.

Second, Spongeob SquarePants; we have joined in partnership with MTV International to produce an online SpongeBob SquarePants game and, together with MTV, we are excited to bring this game to the worldwide market in late 2011 or early 2012.

Finally, self-development; we have continued to expand our internal development capability to form the third leg of our content pipeline. Our new flash-based MahJong game is the product of our in-house team and early player response has been great.

Overall, we believe our three legged content pipeline will allow us to bring best of breed content to our pan-Asian game platform and the millions of gamers across Asia.

Our investments in both platform and pipeline will allow us to have high quality content tailored to our operating markets, responsive to the continuing changes in our markets and in player preferences. We are confident that 2011 will see our return to operating profitability and return to growth.

Let us turn now to look at our Gambling Software business. 2010 was a major transition year for this business. In May, we formed a strategic partnership with the Mangas Gaming Group by selling them a 60% stake in our Gambling Software business.

By joining our Everest Poker with Mangas Gaming, one of the leaders in European Online gaming, we have created one of Europe's largest and best gambling platforms with the size and skill to claim leading market positions in Europe. Moreover, Mangas Gaming is half-owned by SBM, the hotel and casino operation of the Government of Monaco itself, bringing unmatched prestige and unmatched credibility to our Everest Poker platform.

In 2010, we also faced many operational challenges. Much time and energy was spent on the merger and integration of Everest and Mangas. Many additional resources were committed to meet the requirements of the new French regulators, and all of this against a backdrop of the continuing economic slowdown in Europe, creating a particularly challenging environment.

Despite these difficulties, we continued to advance our brand and build market awareness. Our special partnership with French TV network, M6, the best network for our target demographic, has started with two programs airing several times a week, including one hosted by Estelle Denis, a most famous TV hostess.

We also continue as the jersey sponsor of the Lyon Football Club, one of the most popular and successful in France.

Outside of France, we continue to integrate Everest with the Mangas Group and will bring the BetClic, Expekt and Bet-at-Home player base onto the Everest platform.

And now, as the European macroeconomic situation improves, and as our marketing campaigns gather momentum, we look forward to growing our market position in France and throughout Europe in 2011.

In addition, we continue to prepare for new market openings, especially the United States, which has seen a flurry of activity recently. Most notably, the New Jersey state legislature has just adopted a landmark measure legalizing online poker and casino gaming in New Jersey. The bill has moved to Governor Christie's desk and now awaits his signature, his veto or neither, in which case the bill will become law within 45 days. If the measure becomes law, we believe many more states will follow [improving] a large part of a dire financial condition faced by so many States.

As we have outlined before, we believe we have special advantages in the United States marketplace. Our Everest team is all based in Boston. Our software [written] in the US of A. Everest is audited according to US GAAP and is complied with the strictest SEC rules and regulations, including the Sarbanes-Oxley requirements. Moreover, we have the cleanest legal record, never having operated in the United States, nor ever run afoul of US law.

In short, we are pleased with the continuing momentum in the United States towards a legalized and regulated online poker market and excited, very excited about the enormous market opportunity which awaits.

In summary, we believe our Everest Poker business, now joined with Mangas, will continue to be a highly important and valuable growth driver for GigaMedia's shareholders for many years to come.

In conclusion, in 2010 we extended our Asian games platform into Southeast Asia through the acquisition of Infocomm Asia and reworked, restructured our Asian Game business to sharpen our operations and execution as we build a platform and content pipeline of unmatched quality.

In 2010, we also successfully completed a major strategic transition for our Gambling Software business that we believe positions us strongly for strong growth in Europe and the United States upon legalization.

We believe our strategic position today is solid and there are many investments, and our game pipeline and platform will drive an exciting 2011. We look forward with confidence to a return to growth and 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. Today, I will focus on current and future operational initiatives and then turn the call over to Quincy for a look at financial details.

During the third quarter and into the fourth quarter, we focused on strengthening our Asian Online Game business. New game launches in the third and fourth quarters demonstrated steady progress.

Let me now highlight some of the progress we made and what we are focused on going forward. First, let's discuss Southeast Asia. As we note in our press release today, for the first time, we report results from our Online Game operations in Southeast Asia.

We have been very busy in the region during the second half of 2010. One of the keys to future success will be building on our strategic relationship with Blizzard Entertainment. In June -- in late July, we launched [boxed] sales of Blizzard's hit game, StarCraft II.

Following this, in late October, we launched a time-based subscription model for StarCraft II providing an additional flexible payment option alongside the existing boxed version of the game for players in Thailand, Malaysia, the Philippines, Singapore, Hong Kong, Macau and Indonesia.

Our agreement with Blizzard prevents us from disclosing regional specifics on the game sales. However, we emphasize that together with Blizzard, we have a long-term commitment in creating the region's premier online gaming destination.

Complementing the Blizzard initiatives and equally significant was a new promotion in Q3 for FIFA Online 2, showcasing professional football stars in Singapore and Malaysia. FIFA Online 2 is IAHGames' leading offering with nearly 11 million registered players in Southeast Asia, primarily in Vietnam, China and Singapore. The game continues to perform well, with average monthly active paying accounts of approximately 266,000 in the third quarter and PCCUs in the region of nearly 110,000.

Next, let's turn to Taiwan and Hong Kong. In Taiwan in the third quarter, we continued testing of our new first person shooter MMO game, AVA. In December, we began commercial operation of the game. The launch of AVA has been successful. The game is currently one of the top three in its genre in Taiwan. PCCUs of AVA is currently at approximately 10,000 and we see further upside potential. We believe AVA will be an important contributor to the FunTown platform and our financial results going forward.

During Q3 and into Q4, we continued to work hard on building our game pipeline on the casual game platform. We took a significant step forward in strengthening our board and chess offerings by developing a flash-based version of our leading module offering, which was launched in January 2011.

This product allows FunTown members to access our MahJong game via either their Facebook accounts or Yahoo! accounts with no direct client downloads required. Initial results of this product launch have been very encouraging.

An important product direction of our board and chess casual platform for 2011 will be to convert additional existing games on our casual platform from a client download version to a flash-based version.

Finally, a few words with regard to our Gambling Software business. As expected, Q3 results were down Q-on-Q reflecting traditional seasonality in the business, limited marketing, difficult operating condition and strong competition.

Overall, the market in France has not developed as rapidly as the industry expected, largely due to high taxes. All operators have been impacted by this, with the common denominator being reduced player yields. However, we remain one of the top three operators in France with a large player base and a top gaming brand. We are only beginning to leverage our media savvy and land-based casino shareholders.

As part of our plans to drive growth in an important partnership with French TV network M6, Mangas Everest is producing two weekly poker programs. The first, 100% Poker, began October 17 and the second Men versus Women begins at the end of March. Qualification tournaments to participate in this top show began on January 24.

In sum, we are focused on launching and growing new products in our Asian Online Game business, creating a strong foundation for improved financial performance. We expect to drive growth both organically and the acquisition, and we have the resources and financial flexibility necessary to expand our business regionally in Asia.

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

Thanks, Thomas. I would like to turn now to focus on Q3 financial results. Overall, the consolidation of our China Online Games operation and the consolidation of IAHGames in the third quarter significantly impacted financial results.

On the revenue side, total Q3 revenues declined to $7.8 million resulting from the deconsolidation of China operation, partially offset by consolidation of IAHGames. Total revenues were composed entirely of revenues in our Online Games business. Revenue in the Asian Online Games business decreased 34% year-over-year and 28% compared with the second quarter.

We generate approximately 67% of our revenue from Online Games operation in Taiwan and Hong Kong, with the remaining 33% in Southeast Asia.

Revenues from Online Games in Taiwan and Hong Kong decreased both year-over-year and quarter-over-quarter. The decreases were caused by a decline in contribution from MahJong and other casual games. These declines reflect the disruption of highly popular social networking game operations on the casual game genre.

Our play numbers in Taiwan and Hong Kong decreased in Q3 due to competition, but we achieved a 5% increase in ARPU through successful (inaudible) game promotions in Hong Kong.

Partially offsetting the revenue declines in Taiwan and Hong Kong were new contributions from operations in South East Asia.

Revenues from IAHGames in the first quarter was $2.5 million. The largest contribution came from FIFA Online 2, Dragonica Online, and Granado Espada.

Gross profit was $4.3 million in Q3, all from Asian Online Games business.

The gross profit margin in Q3 decreased to 54% from 60% in 2009, and 67% in the second quarter. The gross profit margin declines were due to the deconsolidation of the China Online Games operations and the new contribution from operations in South East Asia where margins are currently low.

On the operating expense side, as a result of the deconsolidation of the Gambling Software business operating expenses decreased by 70% year over year to $9.2 million.

Operating expenses were also decreased sharply quarter over quarter, down 52%, reflecting the deconsolidation of GigaMedia's China operations in Q3. This quarterly sequential variation was also attributable to several one-off items totaling $10.1 million in Q2.

We incurred operating expenses in the Gambling Software business in Q3 amounting to $0.5 million, mainly related to G&A expenses, reflecting management involvement in the ongoing development of Mangas Everest as a 40% minority shareholders.

Operating expenses for the Asian Online Games business were $4.8 million, down from $8.5 million (sic - see press release) a year ago, and from $10.3 million last quarter. The year period decline was due to deconsolidation of GigaMedia's China operation. The quarterly sequential variation reflected same factor, as well as the previously mentioned write-downs and contract termination costs of about $2.7 million, and from those expenses related to the development of the SpongeBob SquarePants game title of $1.6 million in Q2.

Corporate operating expenses decreased approximately $3.8 million in the third quarter. Corporate expenses were [too] last quarter by additional compensation caused of around $5.8 million related to the sale of Gambling Software business in Q2.

As a whole we record an operating loss of $4.9 million in Q3.

In Q2, if we excluded one-off items totaling approximately $10.1 million, the adjusted operating loss was about $1.7 million.

The quarterly sequential increase operating losses between Q2 and Q3 reflected the consolidation of GigaMedia's China operation, and continued build up of Online Games operations, particularly in South East Asia.

Upfront costs and expenses at this point are ahead of revenues, resulting in decreased gross profit margin and larger operating losses.

Looking ahead; we are closely focused on controlling costs and driving improved operational efficiencies. Consolidated non-operating income during the third quarter decreased to a loss of $4.8 million from income of $204,000 in the third quarter 2009, and income of $70.6 million in the second quarter.

Third quarter non-operating loss include losses on equity method investments of $5.7 million related to Gambling Software business, which more than offset income on equity investments of $1.2 million related to Asian Online Games business. The huge quarterly sequential variation was due to the gain in Q2 of approximately $75.8 million (sic - see press release) from the deconsolidation of the Gambling Software business. As a result of the above we record a net loss of $10 million in Q2.

Finally, let's close with a look at our balance sheet and what's ahead.

Our net cash position decreased by $23 million to about $80 million as a result of the deconsolidation of GigaMedia's China operation and negative operating cash flow during the quarter.

Looking ahead we remain focused on managing our cost structure while building new initiatives to drive revenue and profitability. We are well positioned for growth and expansion, and have sufficient financial resources to fund our business initiatives. Thank you.

Thank you Quincy. Operator, we'll now move into a question and answer session please. Thank you.

(Operator Instructions). Atul Bagga of ThinkEquity.

Hi guys, thanks for taking my questions; a couple of questions for you. For IAH, $2.5 million of revenue; can you talk about -- you mentioned three big games, the FIFA Online, Dragonica and GE. Can you talk about these three games combined; how much revenue they contributed?

And also, if you can talk about the [boxed] sale of StarCraft II; how big was that contribution for the third quarter?

Okay, the revenue for the top three games outside of the Blizzard products, we mentioned, is roughly about 60% or so of the revenue of IAH as of Q3.

We, unfortunately, are unable to provide more details regarding the StarCraft II's product because of our agreement with Blizzard. What we can say is the initial box sales have been in line with our expectation, the progress of which.

The subscription model is ticking up at a slower pace than we had anticipated, but that is something that we are in active discussion with Blizzard, and we remain confident that Blizzard's product will be eventually picked up by the target audience in the region.

And Quincy, can you just talk about the reason why the subscription for StarCraft II is lower please than your expectation? Is it because of the migration from StarCraft to StarCraft II, or is it just acceptance of the product?

Okay, there -- obviously there are a whole host of reasons here, we are -- many of which, including the regional specific adoptions and payment gateways, adoption at the [ITRs] and all that. Again, because of our specific agreement with Blizzard we probably cannot disclose too much at this stage, especially we can't even comment on the results of the operation. So we will come back to you with more information in this regard when the product has been launched for a longer time and we can observe a more steady trend.

Got you. And moving onto FunTown, so you guys mentioned in January you launched the flash version of Mahjong. Can you talk about what is the monetization model for this game on Facebook and Yahoo!?

The [targeting] model is exactly the same as the current version of the Mahjong, of the current download version. The only difference here is the technology and the delivery channel.

So the technology is a flash-based technology, requiring no client download, which means it open up two target segments which are traditionally not the major user of FunTown's product. These are, one, the light user of the younger generation which are used to the Facebook and the Yahoo! channels where they don't require downloads.

And second is office workers; obviously accessing the computer -- accessing the games via flash-base without download is now made possible to the office user who typically had restrictions on what they can or cannot install on their computers at the office environment.

So what we have seen as a result of the launch is a significant pick-up in terms of new users, and also daily log-in. And the product I mentioned in my remarks was only launched very recently in January. We have spent a lot of time preparing that in Q3 and Q4 of last year. So far the user numbers, they've been very encouraging, and obviously we expect that will translate into financial results in the months and quarters to come.

So, I understand the launch was very recent, but can you share your opinion what kind of monetization you expect? What kind of ARPU you expect on Facebook, what sales on the download version? And also, do you expect the Facebook version to cannibalize the download version, and how much cannibalization you expect, the download version?

Sure. We really don't see -- again, as I mentioned, we see a significant pick-up in terms of new user and total user log-in, which suggests to us that our initial thinking in designing this is correct, is this will open up the product, the FunTown Mahjong product, to a wider audience base, which we were not addressing using the old version of client download product.

Again, this -- so we don't see a cannibalization per se, because this is the same product in the sense that they have to share the same liquidity. So everyone that gets into the product that is flash-based or client download based, they all go into the same liquidity pool of the FunTown Mahjong product. It's just different accessing channel and different, in a way, user the interface.

So this cannibalization doesn't exist here I don't think. Even if there's a switch, this is not going to change the economics of the FunTown Mahjong. But, more importantly, we think this is an avenue that opens up to a broader audience that we were not able to address as effectively in the past.

I'm sorry, Quincy, I'm not clear. I thought you had said in the comments that the numbers for Mahjong is down because of Facebook gains.

Yes, I think, again, the results that I think Quincy mentioned, and in the press release, were as of Q3 last year, so you saw good user numbers and revenue there is a decline, due to the competition from basically other games offered on social networks. It has only been our strategy to counter that trend. We develop -- we modify our existing Mahjong offering to have a flash-based version that is available also on the social network, which is what I have been addressing.

So we launched that earlier this year, so we have been seeing encouraging results. And we think with this product we can effectively and successfully counter some of these trends.

Okay. [Then Thom], maybe just a step back; can you help us understand what was the target segment for download based games and what is the target -- the new users that are coming from Facebook? What is the typical download version profile you see for (inaudible)?

Again, to be more specific -- I thought I generally answered that question already, but let me try again.

Our original download version was targeted to probably the 25 to 35 years old, high income power, who has been with FunTown for a long time. And the new version that we have developed, we are targeting lower than 25 years old, 15 to 25 years, so younger generation. And also those who probably already are players but, more importantly, those workers -- office workers, who can access it during lunchtime or during a time of the day when they have a free moment at the office.

One last question for you. When can we expect to see the fourth quarter results?

Sorry, can you repeat that question; I can't hear you very clearly?

Sure. When can we expect to see the fourth quarter results?

Quincy?

The fourth quarter results, I think, we're expecting at the end of -- closer to the end of the first quarter.

And can you talk about what is holding you back on releasing fourth quarter at this time?

A few things; first of all, obviously the ongoing dispute in China has led to -- obviously we have actually, in the past couple of months, issued a couple of press releases, 6-Ks. We have to deconsolidate the T2CN investment in Q2 -- Q3. And we have to -- in the process of evaluating any potential impairment charges that we need to take against this investment as a result of the ongoing legal disputes. So that is one item that is outstanding.

And the March timetable that Quincy just mentioned is not atypical of our regular -- other previous years' announcement. Chinese New Year is around early to mid February. Typically it is at a time when we like to -- we're closing our books, and talk to our auditors and finalize on all the accounts before we decide to release. So the March timetable is actually quite typical, and this year the big complication is the T2CN impairment evaluation.

Okay, perfect. Thank you. I'll get back in the queue for further questions.

Thank you.

(Operator Instructions). Mr. Atul Bagga.

Perfect. I just want to see, can you guys talk about the fourth quarter? What are the trends you are seeing in Europe for the gambling business?

I think at this point in time all I can say is it was -- I would say basically in line with our expectations. We don't have specific numbers for you yet though.

Okay. I'm not sure -- are you guys guiding for fourth quarter? I'm sure by this time you have a good handle of fourth quarter [net sales figures]. Can you give us some understanding -- can you help us understand how fourth quarter could be looking like as a -- for a model perspective?

I think at this point in time, think of it as a -- maybe a little different from Q3, overall. Different metrics will move differently, but fundamentally not too different from the third quarter.

Okay. And last question, can you tell us, what was the cash flow in third quarter -- (inaudible) quarter?

Sorry Atul, could you repeat your question please?

What was the cash flow from operations in third quarter?

The operating cash outflow is in the region of $8 million outflow.

Okay, perfect. Thank you.

Thanks Atul.

(Operator Instructions). And ladies and gentlemen that concludes the Q&A session. I would now like to turn the call back over to Mr. Brad Miller.

Thank you. That concludes the call today. For additional information on GigaMedia and details on how to contact the Company please visit our website at www.gigamedia.com.

Thank you for joining us.

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.