GigaMedia Ltd (GIGM) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the GigaMedia Limited fourth quarter and full year financial results conference call. My name is Jeremy and I'll be your operator for today. At this time all participants are in a listen only mode. If you need operator assistance at any time during today's conference press star zero and we'll be happy to assist you. Later there will be a question and answer session. I would now like turn the conference over to Mr. Bradley Miller, Investor Relations Director. Please proceed Sir.

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia's fourth quarter and full year 2010 financial results.

Before I turn it over to today's speakers I'd like to remind you that a number of forward looking statements will be made during this conference call. Forward looking statements are any statements that are not historical facts. These forward looking statements are based on the current expectations of GigaMedia and there can be no assurance that such expectations will prove to be correct. Because forward looking statements involve risks and uncertainties, GigaMedia's actual results could differ materially from these statements. Information about factors that could cause and in some cases have caused such differences can be found on GigaMedia's annual report on Form 20F filed with the US Securities and Exchange Commission in June 2010.

This presentation is being made on 5 May 2011. The contents of this presentation contains time sensitive information that is accurate only as of the time hereof. If any portion of this presentation is re-broadcast, re-transmitted or re-distributed at a later date, GigaMedia will not be reviewing or updating the material that is contained therein. After the speaker presentations today we'll go into a question and answer session and with that I'd like to turn the call over to Yichin, our new CEO.

Thank you, thank you Brad. Thank you all for joining us today. First of all, let me say that the results we announced today for Q4 and full year 2010 were very disappointing as our results were hurt by significant write downs. We completely wrote down our investment in one of our China operations T2CN and we also wrote down a big part of our investments in our South-East Asia operations IAHGames.

I'm not very pleased with these results but on the other hand I clearly see that we have ridden through the absolute bottom of this and that our ensuing program and new momentum we have built up will so grow our business and strengthen our shareholders' value that we shall initiate evaluating a stock buyback program immediately. Our net cash at the end of December was approximately $67 million and we are evaluating potential divestitures to help realise some very significant investment gains. We are financially very, very strong.

Other than this unusually strong balance sheet GigaMedia has in place very strong foundations and solid assets. We have strategic partnerships with many of the world's leading game studios. We have a strong pipeline of great games that we uniquely know how to fit into our market. We have local publishing and distribution networks that reach to the very deep end of these hard to reach regions and we have a team that has led the Company to rise from ashes before and will do it again. We'll have a renewed focus on operations, especially on cost cutting and more hands on investment management. We will implement a series of core process reviews in line to reduce our Company's operational complexities. We will devote significant resources into building an operational platform that we can bring to all our subsidiaries, be it old or new ones and help create synergies that we can touch, feel and count. We're determined to better understand and engage our customers and to provide the best services that actually matters to them.

We also need to make sure going forward that we build better communications with our shareholders and investors like yourself. We need to continue delivering timely financial reports and communicate more proactively. For example, we plan to attend an investor conference in New York City in early June, which is an act that we plan to do frequently from now on. We also plan to visit key financial markets later in the year.

While we are still early on this process, initial results in early 2011 have been very encouraging. With the pickup in AVA, a new 3D first person shooting game and promising regional uptake of FIFA Online 2, we expect such new games will drive growth for both our greater China and South-East Asia operations this year. It will be on this kind of solid foundations that we will build momentum and accelerate delivery of our values to our shareholders. We look forward to sharing more details with you as we go forward and thank you very much for your time. I shall now turn the call to Thomas, our President and COO for delivery of (inaudible).

Thank you Yichin and thank you all for joining us. Today I will review 2010 fourth quarter operational initiatives and focus on current 2011 operations and future plans. I will then the call over to Quincy for a look at our financial details. First, let's focus on our online game operations in Taiwan and Hong Kong. In the fourth quarter of 2010 we extended our games offerings beyond the traditional board and chess casual segment by successfully launching AVA. Our new 3D first person shooter MMO game AVA performed well in Taiwan and Hong Kong. We began commercial operations of AVA in December and since then we have continued to see strong user acceptance and growing revenue from the game. (inaudible) for AVA have shipped just over 12,000, making it one of the most popular games in this genre in Taiwan. Looking ahead, we expect continued significant contribution from the game.

With regards to our casual games, our key product focus remains our leading MahJong offering which faced strong competition in 2010 from an explosion of online games offered on social network platforms. We responded by launching our leading MahJong offering from a web based technology with no download required. This was an important step, simplifying user buying procedures and enabling tighter integration with social network platforms, for example allowing users to easily log into our games directly via their Facebook accounts. We also recently launched a single person variation of our MahJong product on the iPad platform as a way of further broadening our platform reach. Looking ahead in 2011, we will continue to invest in our MahJong product to increase our customer reach in Taiwan and Hong Kong, which is now broadened by the advancement of various technology and social network platforms.

Next, let's look at South-East Asia. During 2010 we began to work with our strategic partner Blizzard to create the region's premier online gaming destination. We began distributing in South-East Asia many of Blizzard's top titles. In the fourth quarter we launched a subscription model in the region for Blizzard's hit game, StarCraft II. The results of these first initiatives did not meet our expectations resulting in write downs recorded in Q4 associated with the Blizzard products. We're currently in active discussions with Blizzard to overcome these challenges and improve the future performance of these products.

Looking ahead, we're pushing to achieve operating profitability in South-East Asia this year. This will be driven by focusing resources on proven and already profitable games in markets that offer the highest potentials. Vietnam, Thailand and Indonesia will be the key markets for us in 2011 in South-East Asia. Our first initiative of 2011 is now underway, the launch of a fully localised FIFA Online 2 offering in Indonesia in the local language Bahasa. We expect this to build on FIFA Online's great success in other South-East Asian countries where it is a major hit and top three games. The game is now in beta testing with commercial launch targeted for June. This will be followed by additional new game launches later this year. We look forward to sharing more with you on that as we move into 2011.

Finally, a few words with regard to our gaming software business. Results in 2010 were negatively affected by several factors. First, strong competition. US-facing sites such as PokerStars continued to pose strong challenges. Second, market conditions in France have been unfavorable with high taxes and limitation on international play pressuring margins and lowering the appeal of online poker.

Recently there have been a number of significant developments in the online poker space which are changing the industry landscape in 2011. In the US the Department of Justice indicted the founders of PokerStars and Full Tilt Poker. In France there are discussions ongoing of possible changes to reduce costs for online operators and open up international play. Elsewhere in Europe several countries are expected to regulate in 2011.

Looking ahead, demand with Everest business is well positioned for growth. Mangas Everest has already established a straight strategic position in the French market and is contemplating launches in new European markets. In addition, the US market potential is enormous. Should the US market open up, Mangas Everest's clean record is an important asset in positioning the business to take advantage of any future opportunities in this huge market.

As a result, we continue to see significant financial upside potential from the true-up mechanism for this 60% stake we already sold and (inaudible) arrangement for the remaining 40% stake we retain in Mangas Everest. 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. Today I would like to provide some quick insight into the financial results, focusing on trends as much as possible.

First, on the revenue side, fourth quarter revenues in our Asian online games business increased 40% quarter over quarter to $8.9 million from $7.8 million. The strong result was due to the box sales in South-East Asia. Looking at the breakdown of revenues, we generated approximately 62% of our revenues from our FunTown games operations in Taiwan and Hong Kong with the remaining 38% from IH Games in South-East Asia. In Taiwan and Hong Kong FunTown revenues decreased year over year but were stable quarter over quarter. The decrease was mainly caused by declines in contributions from FunTown's leading MahJong offering, which was the result of strong competition from casual games from Facebook in 2010. While the trend was down year over year our playing numbers in Taiwan and Hong Kong were steady quarter over quarter and we achieved a 5% increase in ARPU quarter over quarter through the platform games (technical difficulty).

In South-East Asia, IH Games' revenue increased sharply quarter over quarter, up 32%. It was the result of online game box sales. Breaking down the revenues composition, revenue from box sales represents 53% while online game revenue were 41% of IH Games' fourth quarter revenues. The largest contribution in online game operations came from FIFA Online 2, Dragonica Online and Granado Espada. As mentioned, IH Games is launching in Indonesia a new fully localised version of FIFA Online 2 and as a result we expect contributions from this game to grow in 2011.

Gross profit decreased to $2.8 million in Q4 and was all from Asian online games business. Gross profit margin in Q4 decreased to 32% from 60% in 2009 and 54% in the third quarter. The gross margin decrease was due to a Q4 loss in IH Games. On the operating expenses side, results were impacted by a number of write downs that altogether totaled $27.7 million. This consisted of a complete write down of our investment in and receivables from T2CN. It also includes the write down of goodwill and prepaid game costs in iEXCHANGE. Excluding these items, Q4 operating expenses were approximately $9.8 million, trending up slightly from the $9.2 million in Q3.

In our Asian online business, excluding the non-cash items, operating expenses were $5.5 million trending up from $4.8 million last quarter. The quarterly sequential increases were mainly attributable to the FunTown's new game launch for AVA. Corporate operating expenses were relatively steady quarter over quarter at $4.1 million in Q4 versus $3.8 million in Q3. Fourth quarter results do not reflect the impact of new cost cutting initiatives. Management expects to achieve reduction in G&A expenses beginning in early 2011 from controlling, legal and other costs. Consolidated loss from operations was $34.7 million in Q4. Results were impacted by the certain write downs I mentioned totaling $27.7 million. Excluding these write downs, Q4 consolidated loss from operations was $7 million compared to a loss of $4.9 million in Q3.

Looking ahead, we are closely focused on controlling costs and driving improved operational efficiencies. Consolidated non-operating results during the fourth quarter was impacted by a number of non-cash items including the following related to IH. An impairment of $13.2 million recorded in equity method investment related to IH Games and online games initiatives with Blizzard, partially offset by a gain of $2.6 million related to a warrant issue in connection with the IH Games initiatives with Blizzard. Results also includes the following related to Everest Gaming. An equity loss of $3.4 million reflects GigaMedia's remaining (inaudible) interest, which more than offset a favorable adjustment to purchase price net of transaction cost of $3.3 million related to the sale of the gambling software business. As a result of the above items we record a net loss of $41.3 million in Q4. Excluding all non-cash and one-time items, we record a net loss of $8.8 million in Q4.

Finally, let's look at the balance sheet and what has happened. Our net cash position decreased by $12.3 million to about $67 million in Q4. This decrease reflects several major cash outlook items, which include (inaudible) $7.8 million related to prepaid games, licensing and royalty costs and a onetime tax payment of $2.5 million related to our sale of the gambling software business. Also in our balance sheet we have very sizeable value for our market growth securities non-recurring plus investments. This consists of GigaMedia's strategic holding in game studios, developers and other related entities and our remaining 40% interest in Everest Gaming. The total values were about $100.2 million in the fourth quarter. Management is evaluating its potential disposal of certain game studio investments to realise gains and crystallize value on the Company's balance sheet. Management is also evaluating using excess cash to buy back our stock.

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

Thank you Quincy. We'll now move into a question and answer session. As is our new practice we are conducting the Q&A today by e-mail. The questions today are based on their popularity and information already provided in our release today and comments that we've just given so let's begin with our first question. Do you expect the cash burn to continue through 2011?

This is Quincy. Let me now remark, our cash burn in Q4 was about $12.3 million, which includes several major one off items like $7.8 million prepaid gaming cost and $2.5 million tax related to the disposal of the software business. Going forward, we see that the cash burn in Q1 has been subsequently reduced, and also looking ahead for Q2 and Q3 onwards we continue to see that the cost cutting measures and also in absence of these one off items a quarterly cash burn will be further reduced and to a level of around $2.3 million per quarter.

Okay. Thanks Quincy. The next question. What is management's philosophy regarding communications with investors?

This is Yichin Lee. Absolutely. Going forward we're going to have a very renewed energy to going into very active proactive communication with our investors. It's not that we are not doing it well in the past. It's just that we're going to be doing it much better going forward. For example, as I have just delivered in my previous short script, as near as June, early June we are going to New York City to attend an investor event to help the investment community, our short term and long term plan and how we plan to re-invigorate our Company's operation. We're going to go face to face with the investment community and talk directly with them and we plan to do it very, very frequently going forward attending such events. At the same time we are picking up communication by the hot lines with several of our strong institutional supporters and we are establishing direct dialogue with them, communicating with them very frequently. So coming back to the question, yes definitely we are very, very committed to make our communications with our investor community a very fluid and non-obstructive one going forward. Thank you.

Thank you. Our next question, what plans do you have on share buybacks?

Thanks Brad. As we have mentioned in our press release and prepared remarks we are actively studying a share buyback plan.

We, as management here, believe that the current share price of GigaMedia does not reflect the intrinsic value of our business. Therefore, as one of the ways of returning value to shareholders we are actively studying the possibility of implementing a share buyback plan using our excess cash on hand, as we believe also we have enough cash and financial resources to execute on our current and future opportunities.

Also mentioned in our press release today that we believe we have several investment in game studios sitting on our balance sheet that have appreciated significantly in value. We're also evaluating the possibility of disposing of some of these investments to realize a gain in crystallized value in conjunction together with the share buyback plan.

Thanks Thomas. Next we have a question about investment. What is the current status of the minority passive investments in the game developers that you have and when would investors expect to see games being released in Asia? What are the carrying values of these investments and do any need to be written down?

The carrying costs of these investments are reflected on our balance sheet in the - in two lines. One, the first one is marketable securities non-current line and the second line is the investment line. These two lines not only include this minority investment in studios and game developers we have, but it also includes the 40% stake in Mangas Everest we continue to hold.

As of December 30, you look at our balance sheet, together these two lines are just over $100 million. Now, first of all, I'd like to emphasize that all these studios and developer investments are strategic in nature. All of these investments are designed to complement our online game business in Asia by either providing us with contents or access, or both.

Somewhat naturally - at the portfolio of investments, some of these are doing better than the others and I would probably not comment individually on each one of them at this juncture. However I can say as a portfolio we are actually doing extremely well and, in fact, there is a significant unrealized gain sitting on our balance sheet as a result of the appreciation in value of some of these investments.

Now, as I mentioned in my prepared remarks and also in the answers to the previous question, we are actively studying the possibility of crystallizing some of these unrealized gains associated with this investment by potentially disposing part of our holdings in the near future.

Thanks Thomas. Next we have a SpongeBob question. What timeframe should investors expect for the release of the SpongeBob game with Viacom?

SpongeBob is still under development and the progress I can report is doing very well, on schedule and both the MTV, and us, and the internal group who have reviewed the current status and build of the product are extremely pleased with the status we are in and the quality of the product we have developed so far.

We are in active discussion with MTV regarding the exact timing and market of the launch and we look forward to announcing something in the very near future around this together with MTV, on the specifics surrounding SpongeBob's launch.

Thanks. Next is a FunTown question. Can you give a little color on FunTown and new games this year and next year?

Sure. As I mentioned in my prepared remarks right, A.V.A which is a game we recently launched has been doing well and we, in 2011, will continue to work on A.V.A and probably one of the key initiatives is to monetize A.V.A now that we have built a very, very healthy user community.

Second focus will be MahJong on the casual side. The MahJong product has faced a lot of challenges, as I've mentioned, last year but we were able to take those challenges and actually turn it on its head and actually start developing our own version, both in terms of a social network platform and also other technology platforms such as the iPad.

We will continue to invest a lot of resources across platform and different functionality and modality for our MahJong product and we believe that this will not only strengthen our community, it actually may bring a further financial upside to us.

For the rest of the year we do look forward to launching one to two new midsize games in Taiwan and Hong Kong through the FunTown operation. But this will not be triple A title that commit a lot of resources. The resources, this year, will still be focused on MahJong.

Beginning from next year we will be working very closely with (inaudible) as we've announced before to think about the launch of IAH which we have already licensed. So that will be the key product pipeline I will outline for the time being.

Thanks Thomas. Next an IAH related question. Can you tell us a little bit more about the significant write downs related to IAH in Q4?

The bulk of the write downs were associated with the Blizzard games. Now, as we have mentioned, the initial results of the Blizzard games was significantly below our original expectation. Now, as a result, we have - we suffer significant write downs in Q4.

However we are in active discussions with Blizzard regarding the future directions of these products and how to improve the performance and satisfy the customer's demands in this region.

Now outside of this write down, I would like to emphasize that IAH continues to remain a very sound and robust platform for our South East Asia operation. Other games that are doing very well, such as FIFA Online 2 which is already doing very well in Thailand, Vietnam and we expect it to do very well once we launch in Indonesia.

You know other games through our investment studios that I mentioned earlier will be gradually coming online later half of this year or next year, and that will be another channel of game sourcing for the IAH operations.

Thanks. Next question is about Everest Gaming now part of BetClic Everest. Can you give us an update on Everest given the recent developments in online poker?

Yes. My comments naturally have to be a little limited here because we currently are only a minority shareholder of Mangas Everest, although we have a sizeable 40% chunk. But we are limited in what we are allowed to say in the public domain.

But, as I have mentioned in my prepared remarks, there are some game changing events in the US and Europe in the recent past, including the indictment by the DOJ in the US and the potential and gradual open up of some of the other European markets to the restructuring of some of the already existing markets that are already opened up like the Italy and the France one.

So I'd like to emphasize here obviously that Mangas Everest already has a very strong strategic position in online poker, sports betting in France and continue to increase its presence elsewhere in Europe. We believe all these events will ultimately mean a bigger opportunity for Mangas Everest and will potentially reduce some of the - alleviate some of the competitive pressure.

But, all in all, it would mean that a more financial upside to GigaMedia from our ongoing involvement financially with Mangas Everest through our 40% stake and also our true-up mechanism for the 60% stake that we already sold. And the true-up mechanism let me remind the public that the deal was such that by next year we will look at the value of the 60% on a true-up basis and if there was an upside that will mean there are more upsides to GigaMedia financially given the 60% we already sold.

That's all we have for now. For further information about GigaMedia, or if you have questions and would like to contact the Company please visit our website at www.gigamedia.com. Thanks everyone for joining us today.