GigaMedia Ltd (GIGM) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen. And welcome to the GigaMedia Limited first quarter 2011 financial results conference call. My name is Alicia and I will be your coordinator today. At this time all participants are in a listen-only mode. If at any time during the call you require assistance, please press star followed by zero and an operator will be happy to assist you. I would now like to turn the call over to Mr. Brad Miller. Please proceed.

Thank you, Operator. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia's first quarter 2011 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-ooking 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 May 26, 2011 in Taiwan. 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 respond to questions we have received via email. And with that I'd like to turn the call over to Yichin our CEO.

Hi, thank you all for joining us. This is Yichin Lee, CEO of GigaMedia. Last quarter I emphasized that to turn around our performance, we are determined to better understand and engage our customers and to provide the best services that actually matter to them. I also emphasized that we have a renewed focus on operations. We are implementing a series of core process reviews designed to reduce our company's operational complexities. And we are devoting significant resources into building an operational platform that we can bring to our market, to help create realizable synergies.

We are still early in the process of turning around our operations and our financial performances. The first quarter results show we are beginning to move in the right direction. We are beginning to deliver the gains our customers want and improve our operational efficiency. In Taiwan and Hong Kong, our core cash flow gains are delivering improved performances.

First quarter results were the best in two years. And we are benefiting from growth of the new MMO game A.V.A. which continues to be a success. In Southeast Asia, we are sharpening our focus on high potential markets and products and have achieved improved margins in Q1.

Overall, we've been making progress in early 2011 with our existing business. We expect to continue this momentum and develop new value drivers and work harder to control costs. Looking beyond, we are expanding our offerings in web space and mobile games. And we will focus on games that pit player versus player, games that are competition-centric and make for exciting tournaments such as sports games and first-person shooter games. This strategic expansion to our platform will allow us to better leverage our strengths and maximize opportunities in Asia.

A case in point is our legacy MahJong game, where in Q4 last year we delivered a web-based version. And in Q1 of this year we rolled out its iPad version. This is the first in the world. And during the first two weeks of its introduction, it became the top download on iTunes app store in China, Taiwan, Hong Kong and parts of Southeast Asia. This is momentum we will continue to build on. We also see it as a cornerstone for our ongoing effort to build out our China operation.

We are also going to pool our resources together to build out a tournament platform which we believe is an area we can build a sustainable, competitive advantage for GigaMedia as a company. The heart of this is a system, an SOP -- standard procedures -- that combine online games with offline activities to run large scale and frequent tournaments. Running web and mobile-based competition-centric games on this platform will more effectively drive up market exposure as well as gain profitability. We have deep experiences in making it work for conventional games. And we are very confident that we will make it work for our new breed of games across all Asian markets.

Supporting all of this is a very strong financial position. As of Q1, we had net cash of approximately $60 million. Our plans to dispose of certain studio investments in 2011 will unlock further value and strengthen our cash position.

To conclude, in 2011 we expect a continued turnaround of our existing Asia online games system, with stable contributions from core casual games and growing contributions from our new MMOs. At the same time we are creating a foundation for further growth and enhanced shareholder value by building a game tournament platform, with focus on web-based and mobile games where we can leverage our strengths and capture new opportunities. We look forward to sharing more details with you as we go forward. Thank you very much for your time and I will now turn this call over to Thomas, our President and COO.

Thanks, Yichin, and thank you all for joining us. As Yichin noted, overall during the first quarter we began to build momentum in our Asian online game business. Today I will review some of the key initiatives driving our performance in Q1. In Taiwan and Hong Kong in the first quarter of 2011, both our casual games and MMO operations performed well, driving an increase in revenues and an expansion in operating margin. Casual games consist mainly of online board and chat games, including our core product MahJong. We ran a number of marketing events and promotions for the casual products during the first quarter to take advantage of the seasonally strong Chinese New Year holiday. These activities were successful, driving up casual revenues 18% quarter on quarter.

Our MMO products primarily consist of the licensed game Tales Runner and our new first person shooter game A.V.A. MMO revenues were up 106% sequentially. This growth was due to the success of our seasonal promotions and our first quarter of commercial operation of A.V.A., as opposed to one month in Q4. MMOs are now a significant part of our business and they represented 29% of revenues in Taiwan and Hong Kong in the first quarter. Looking ahead, we expect continued stable contributions from MMOs.

As Yichin mentioned, during the first quarter we also broadened our platform reach with new web-based and mobile products. We are now offering our leading MahJong game on a web-based technology with no download required. We also recently launched a single person variation of our MahJong product on the iPad platform. Looking ahead in 2011, we will continue to invest in web-based and mobile games. We will port over additional board and chat casual games and add new functions and features to our MahJong product to increase our customer reach in Taiwan and Hong Kong and capitalize on new technology and social network platforms.

Next, let me briefly update our business in Southeast Asia. As I mentioned last quarter, we are focusing resources on proven and already profitable games in markets that offer the highest potential, namely Vietnam, Thailand and Indonesia. In line with this, Indonesia in the first quarter will continue testing a fully localized FIFA Online 2 offering. We expect this to build on FIFA Online's great success in other Southeast Asian countries, where it is a major hit and a top three game. Commercial launch is targeted for June.

In addition, we strengthened our position in the key market of Thailand. During the first quarter we increased our space in our Thai operating subsidiary to a majority position to better capture growth in this market. As a result, revenues from online games from our Southeast Asia operation were up 37% quarter on quarter.

Finally, a brief update with regards to our online gaming software business, where we retained a 40% stake in Mangas Everest. That is in France. Mangas Everest continued to enjoy a very strong strategic position. Everest Poker offering remains one of the most popular in the market and we are optimistic that over time market conditions in France will improve and the profitability of our French poker business will increase as a result.

Second, beyond France. Several other countries in Europe are expected to regulate online poker in 2011. Mangas Everest is prepared to take advantage of this by selectively entering certain newly regulated or soon to be regulated markets in Europe. Third, we see huge opportunities, potentials in the giant US poker market if federal legislation is passed to license and regulate online poker. We believe Mangas Everest is well positioned to capture a fair share of this large US market. In line with this, we are in discussions with several US-based parties regarding strategic partnerships designed specifically to capture the US opportunities.

We believe the investments made by the Mangas Everest business will deliver improved performance and continue to see significant financial upside potential from the true-up mechanism for the 60% stake we already sold and the put/call arrangement for the remaining 40% we retain in Mangas Everest. Thank you. That concludes my remarks. And now I will now turn the call over to Quincy for a review of our financial performance.

Thanks, Thomas. Next I would like to review Q1 financial results and provide additional color on a few key items. First, on the revenue side, first quarter revenues in our Asian online game business increased 17% quarter over quarter to $10.4 million from $8.9 million. It was driven by product results in MMOs and casual games in Taiwan and Hong Kong. In Taiwan and Hong Kong revenue increases year over year and for the quarter, results in Taiwan and Hong Kong were strongest in the past two years.

Growth was driven by strong performance in casual games and MMOs. Our played number were up quarter over quarter and we achieved a 6% increase in our full quarter over quarter through successful game promotions. Results clearly demonstrate our business is turning around.

In Southeast Asia, revenues decreased quarter over quarter. However, last quarter we benefit from game box sales promotions. Revenue from box sales represents 53% of revenues in Q4 versus 32% in Q1. During the first quarter we increased our stakes in the Thai subsidiary to a majority position and consolidated this result in Thailand, one of the key markets in Southeast Asia. As a result, we grew online game revenues by 37% for the relevant quarter.

This helped offset the decrease in game box revenue I just mentioned. It also helped gross profit margins as online games revenues carried high margins. The largest contributions in online game operations came from FIFA Online 2, Dragonica Online and Granado Espada. As mentioned, IAHGames is launching in Indonesia a new fully localized version of FIFA Online 2. And as a result, we expect contributions from this game in Indonesia to grow in 2011, starting in June.

On the operating expense side, we are strongly focused on controlling costs and expenses. Planning and marketing expenses trend up slightly for the local quarter. But this was in line with our plans to promote our games during the traditionally strong Chinese New Year period. General and administrative expense decreased 23% quarter over quarter. Corporate or headquarter expenses declined even more, down 52% for the relevant quarter. We successfully controlled legal and other costs in Q1 and will continue to focus on cost controls going forward.

As a result of solid revenue growth and more effective cost controls, consolidated loss from operations narrowed quarter over quarter to $2.7 million. Consolidated non-operating expense during the first quarter was $2.2 million and includes borrowings. An equity loss of $3.4 million reflecting GigaMedia's remaining interests in Everest Gaming, which more than offset equity income of approximately $1 million related to our Asian online game business. Core net flows were $975,000. This excludes results from discontinued operations and financial results related to the gambling software business, share-based compensation expenses and certain non-cash for one-time items.

Finally, let's close with a look at our balance sheet and what is ahead. Our net cash position decreased by $7.1 million to about $60 million. Our cash burn in Q1 was substantially reduced from the $12.3 million cash burn last quarter. Operating cash outflow in first quarter was $7.2 million. This includes major one-off items, including payment of upfront game cost for games that we haven't launched yet, professional fees related to our online, ongoing legal dispute in China and 2010 year-end bonuses, which altogether, total approximately $4.1 million.

Marketable securities, non-current, plus investments consisting of GigaMedia's strategic holdings in game studios, developers and other related entities and our company's remaining 40% interest in Everest Games, were $103.3 million in the first quarter. In sum, our balance sheet is solid. Management also plans to dispose of certain game development investments to realize gains and bring in cash on the company's balance sheet.

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

Thanks, Quincy.

We will now move into a question-and-answer session where we will respond to questions we have received via email. Questions are weighted and in some cases combined to avoid repetition.

We've organised the questions we've received today by topic and here we go.

First we have a number of general and financial questions. First question, can you describe your plans or your strategy with web-based games and mobile games?

Yes, this is Yichin Lee, CEO of the company.

First, let me say that I'm very pleased that we are turning around our online games business. We are confident that this momentum will continue and that we can build on the foundations in place. This is where web-based games and mobile games come into consideration.

Strengthening our business, it will be critical for us to develop a new competitive advantage for our business. We need a powerful answer to the question, why me? Why GigaMedia? What exactly is my competitive advantage that sets me apart from all the others?

To provide that we are creating a value-added platform. As I stated before, it's focused on the tournament platform for competition-centric games. We can extend this platform across markets and we already have significant expertise here and assets we can leverage.

Player versus player in competition-based games lend themselves naturally to tournaments. We have seen this in the past in GigaMedia's large MahJong tournament and in Everest Poker's bi-weekly poker tournaments. We plan to capture a large opportunity with a unique tournament platform extended across Asia for web-based and mobile games and integration with social networks.

The systems or methodologies, or even SOPs, standard processes of the platform, will create the foundation of a sustainable competitive advantage for us. The platform will drive better monetisations for us and for our partners and immediately answer the question, why me? Why GigaMedia?

By adding this new platform we expect to significantly strengthen our business and drive improved operational efficiencies.

Thanks, Yichin. The second question, what is the plan to turn cash flow positive and when do you expect to reach that point?

This is Quincy, CFO of GigaMedia.

As discussed in my prepared remarks, cash burn in Q1 has been substantially reduced to $7.1 million from $12.3 million last quarter. Operating cash outflow in Q1 was $7.2 million. Included in this were one-off items totalling about $4.1 million including up-front game costs for games that we have not yet launched, professional fees related to ongoing dispute in China and 2010 year-end bonuses. Without such items, normalized operating cash burn would have been approximately $3.1 million in Q1.

So in the absence of the one-off items such as investment in new games, we also expect normal operating cash burn will be around $2 million to $3 million in Q2 and Q3.

Looking ahead, while we are building momentum in our business to improve our operating returns and cash flow we are focusing to control costs as well. We estimate our mobile operation of the current game portfolio that we have.

We do not take into account potential disposal of the investment that we can recoup that right now we are planning, and the disposal of the game developer investment will eventually bring in cash and monetarise our games that we have. We will continue to update shareholders in this regard.

Thanks Quincy. Next question, what is the situation in China regarding T2CN?

Yes this is Yichin Lee again, the CEO of the company.

We want to assure you that we are actively pursuing all available avenues to achieve a favourable outcome to the dispute as soon as possible. Unfortunately, at this time, we cannot add further details as our company policy is not to comment on ongoing legal matters.

Thanks, Yichin. Next question, what games are in the pipeline?

Thanks, this is Thomas here.

In Taiwan and Hong Kong we're looking forward to launching a new game 4Story, this summer. This is a 3D fantasy game that has been popular in many other international markets. We particularly like the player versus player aspect of this game which will allow for tournaments.

There's also a wide variety of new game items that can boost player performance and will help us drive monetisation at 4Story in Taiwan and Hong Kong. In addition we are also adding new web-based versions of FunTown's popular casual games, including all the board and chess games with new functionality, and a multi-person MahJong for the mobile platforms in the second half of this year.

Further out, we also look forward to launching SpongeBob SquarePants, the game that is currently under development, but we are liking the progress to date a lot. We have the rights to this game for across Asia, and we expect to make an official announcement with MTV Networks regarding the specifics of the launch, including timing and country in the near future around this summer.

Lastly, the highly awaited game ArcheAge from our partner XL Games in Korea is expected to launch in 2012, next year, in Taiwan and Hong Kong following major launches in Korea and mainland China.

There are other additional games we may add to our pipeline, but at this stage we will not be able to comment on those at the current moment.

Thanks, Thomas.

Now, questions on Taiwan and Hong Kong. Can you give a little colour on revenues from A.V.A and the new flash-based MahJong?

Sure. A.V.A was the key record driver for our business in Taiwan and Hong Kong in Q1 as I mentioned in my prepared remarks. The game remains one of the top three first person shooter games in Taiwan. The revenue from the flash-based MahJong product remains insignificant at this point. The iPad module pre-application is free.

MahJong for the iPad has been a big hit though, I would like to re-emphasise. In its first week it was the number one ranked free app in China, Hong Kong and Taiwan. The game has been available on the Apple iTunes Store -- App Store -- since April 26 and has totalled so far over 200,000 downloads.

We look forward to porting more games over to our web-based format in the second half of 2011 from the suite of casual games FunTown currently operates as I mentioned.

Next we have a question on Southeast Asia. Could you describe the plan for IAHGames and operations in Southeast Asia?

In Southeast Asia we are increasing our focus on key markets, particularly Thailand and Indonesia in Q1. There were -- these are two large, high growth markets in a region where revenues are projected to grow significantly in the next few years.

Increases in internet penetration rates are going to be the strongest driving force behind this. The internet penetration rate in Thailand now is 26%, and in Indonesia it's only 12%.

In line with this sharpened focus, so in the first quarter, we strengthened our position in Thailand by increasing our equity stake in a Thai operating subsidiary to a majority position. This resulted in strong quarter over quarter revenue growth in online game revenue from our operation in Southeast Asia.

We are also very excited about the launch -- the imminent launching of a new localized version of the hit game FIFA Online 2 in Indonesia and look forward to reporting more on that in the next news release.

Thanks, Thomas. Then we have a question on the Mangas Everest. What are Everest's plans for the US market in the light of the latest regulatory developments?

Given our minority stake in the business now, we're not really in a position to discuss Mangas' market specific plans at this time. But we can say the following. First, while market conditions in France remain very challenging due to the tax regime in place, we are strategically well positioned with one of the leading online poker offerings in France.

Second, the regulatory environment in Europe continues to evolve to an individually-regulated market. Mangas Everest is also ready to take advantage of this trend by selectively entering newly regulated -- or soon to be regulated -- markets.

Third, in the wake of Black Friday and the indictments of PokerStars and Full Tilt, we see a huge opportunity in the US online poker market. If the US were to pass legislation to license and regulate online poker on a federal level we believe Mangas Everest will have a significant chance of capturing a fair share of the market. We're currently in discussions with multiple US-based parties regarding potential partnership to capture such opportunities.

Finally, let me reiterate that we believe the mechanism made by Mangas Everest business would deliver improved financial performances. We continue to see significant financial upside potential from the true-up mechanism for the 60% stake we already sold and the put/call arrangement for the remaining 40% stake we retain in Mangas Everest.

Thanks, Thomas. That's all the questions that 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. That concludes today's call. Thank you again for joining us.

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