GigaMedia Ltd (GIGM) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to the GigaMedia Limited Second Quarter 2011 Financial Results Conference call. My name is Jeremy. I will be your operator for today. (Operator Instructions)

I would now like to turn the conference over to Mr Brad Miller, Investor Relations Director of GigaMedia.

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia's second 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 fact. These forward-looking statements are based on the current expectations of GigaMedia and there can be no assurance that such applications will prove to be correct.

Because forward-looking statements involve risks and uncertainties, GigaMedia's actual results could differ materially from the statements. Information about factors that could cause and, in some cases have caused such differences, can be found in GigaMedia's annual report on form 20F filed with the US Securities & Exchange Commission in June 2011.

This presentation is being made on 16 August 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 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 will respond to questions we have received via email.

With that, I'd like to turn the call over to Yichin, our CEO.

Thank you, Brad. Thank you all for joining us. Last quarter we began to rebuild a momentum toward turning around our business, diffusing our losses and delivering the highest revenues in two years, driven by growth in Taiwan and Hong Kong, game operations.

In Q2 we largely sustained our momentum, again delivering solid year on year growth, with revenues up 11% in Taiwan and Hong Kong. Overall results, however, were impacted by seasonality and continued restructuring of our operations in south-east Asia. In short, we have developed strong operations in Taiwan and Hong Kong, where we forecast continued robust results and sustained profitability. We will still have work to do in south-east Asia, but we are taking action in targeting profitability in south-east Asia by year-end.

Driving all of this is implementation of a series of core process reviews designed to reduce our Company's operational complexities, control costs and enhance efficiencies. This will take time - a few quarters. We have already seen the effect of these we worked (inaudible) in the first quarter. We expect further impact of operational restructuring and cost controls, going forward.

Much of this restructuring will focus on south-east Asia, where we are injecting major management resources. We are sharpening our focus on high potential markets and products in that region and implementing a strategic operational restructuring to enhance performance.

While we continue controlling costs and restructuring to increase efficiencies we are also focused on growing our existing businesses and developing new value drivers to accelerate our turnaround. We are stepping up efforts to build a healthy game pipeline. This started with the successful launch of A.V.A, a first person shooter game, and we are following up with 4 Story, multiplayer iPad MahJong, iPhone MahJong, Sponge Bob Square Pants, Dark Age and other high quality games.

Our focus is clearly fixed on web based and mobile games that pit player versus player games. These games have a competition centric and make for exciting tournaments. Underpinning the new games is our new game tournament platform. The heart of this is a system and standard operating procedures that combine online games with offline activities to run larger scale and frequent tournaments.

This quarter we have made significant progress, successfully launching several new tournament competitions. We are scheduling a major 2011 events that will feature a large prizes and international competition.

Other than these major initiatives, we are also engaging in several regional projects to better leverage our assets, upgrade our service levels and create new revenue bases. I look forward to sharing more about these projects with our investors, going forward.

Finally, we are very focused on cash management, and remain in a very strong financial position. As of Q2 we had net cash of approximately $57.5 million. In the second half of this year we are going to capitalize on several of our successful investments that will see us unlock significant value and strengthen our cash position.

To conclude, in the second half of 2011 we expect to continue making progress in the turnaround of our existing Asia online gaming business with strong cost controls, stable contributions from core casual games and growing contributions from new MMOs. At the same time will continue creating a foundation for further growth, adding shareholder value by expanding our platform and offering new products and services that focus on web based and mobile games, where we can leverage our strength capture new opportunity.

I'm very excited about our outlook, and look forward to sharing more details with you regularly as we go forward, beginning this month. Thank you.

I will now turn the call over to Thomas, our President and COO.

Thank you Yichin, and thank you all for joining us. As Yichin noted, overall the second quarter results were down from the first quarter, largely due to the impact of seasonality on our business.

While the sales were down from last quarter, in many respects business momentum was up from last year. We are poised to continue strengthening our operations in the second half of this year. In Taiwan and Hong Kong in the second quarter of 2011 our online game operations performed well. Year on year we reported a revenue increase of 11% and delivered strong improvements in operating and in profits compared to the same period last year.

This year on year improvement was primarily driven by an improved product portfolio. In Q2 we continue to drive the performance of our MMO products as part of our strategy to broaden our product offerings and diversify our revenue base. Our MMO products in Taiwan in Hong Kong primarily consist of the licensed game Tales Runner and our new first person shooter game A.V.A.

This summer we successfully concluded our first tournaments for A.V.A with several thousand participants a day. Online and offline events for A.V.A are scheduled throughout the remainder of 2011, including an international open, all of which will culminate in a January finale in Taipei.

Looking ahead, we expect continued stable contributions from existing MMOs and growth from the launch of a new MMO called 4 Story in the third quarter. 4 Story has been a stable successful MMO in Asia, and we are confident it will prove popular in Taiwan and add to our product diversification strategy.

Next, let me also update our initiatives on our 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 which has been very popular. To date total downloads have exceeded 300,000.

In Q3 we will launch an iPhone version of a MahJong game that will have new avatars, levels and refined graphics. Following that, early next year, we will release a multi-player version. Looking ahead, we will continue to invest in web based and mobile games. We will put over additional board and chess like casual games that are currently on our platform and add new functions and new features to our MahJong products.

Finally, let me briefly update our business in south-east Asia. In south-east Asia in the second quarter of 2011 we saw that our operations continue to suffer from high overhead and certain loss making products. While our key products - FIFA Online 2, Dragonica Online and Granado Espada - continue to make significant contributions, overall the business remains unprofitable.

To improve performance we are currently restructuring the business. This involves speeding up operations in key markets that offer the highest potential, and lowering our overall core structure by focusing on proven gains and reducing head count. We are (inaudible) to improve profitability by year-end, and look forward to sharing more with you on our plans for operations in south-east Asia in the near future.

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

Thanks, Tom. Next I would like to have some official details on the items in our Q2 financial results. Overall, results were in line with our expectations and our Q2 guidance. Revenue declined from the first quarter due, largely, to season factors. We continue to control our operating expenses and cashflow.

Regarding revenues, I would like to highlight a few items. First, in Taiwan and Hong Kong our existing casual games continue to derive a very stable revenue stream. On top of that we are adding a new category of games and MMOs which result in year over year growth. Our MMOs Tales Runner and A.V.A are continuing to perform well in Taiwan and Hong Kong.

In south-east Asia revenues were down due to small contributions from Dragonica Online; one of the key games we operate. The decline was related to a lack of new promotion for new content for Dragonica in the second quarter. Partially offsetting this decline in Dragonica was growth in FIFA Online 2 in Thailand and Vietnam, where we are increasing our focus.

Turning to costs, in Q2 we continued our strong focus on cost control and, as a result, we held G&A expenses steady, quarter over quarter, at $5.2 million. Within that, we lowered our corporate G&A expenses from $2 million in Q1 to $1.6 million in Q2. Looking ahead, we will continue to control these and other costs.

Our consolidated non-operating expenses during the second quarter of 2011 was $3.2 million, including the following; an equity loss of $4.4 million, reflecting GigaMedia's remaining interest in [Aberit] gaming, which more than offsets the equity income of approximately $893,000 related to our Asian online gaming business.

Our net loss was $1.7 million. This excludes results from continued operations, and financial results related to our non-core gambling software business, share based compensation expenses and certain non-cash or one-off items.

Finally, I want to highlight that we have (inaudible) slow down our cashflow. In Q2 our net cash position decreased by $2.5 million quarter over quarter, to about $57.5 million. Operating cash outflow in the second quarter was $415,000. This was down substantially from the $7.1 million cashflow in the previous quarter.

Marketable securities noncurrent, plus investments consisting of GigaMedia's strategic holding in Games2U and other related entities. The Company's remaining 40% interest in Everest gaming were $88.1 million in the second quarter. In summary, our balance sheet is solid, management also plans to dispose of certain game developer investments this year to realize gains and bring in cash on the Company's balance sheet.

Looking ahead, we are confident in our ability to manage our core structure, and we will continue building new initiatives to drive revenue and profitability. We are well positioned to grow GigaMedia 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 organized the questions we received today by topic. Here we go. The first question is a general overall question about the Company. Can you describe your plans to turn around GigaMedia's performance?

This is Yichin Lee. The turnaround began with efforts to stop losing money. We implemented a review process to reduce the complexities of what has historically been a very complicated company (technical difficulty) to rebuild and restructure operations and to start driving efficiencies.

In Q1 we began to build momentum, reducing our losses and delivering the highest revenues in two years, driven by growth in Taiwan and Hong Kong. In Q2 we largely sustained our momentum, again delivering solid year on year growth, with revenues up 11% in Taiwan and Hong Kong. Overall results, however, were hurt by seasonality and continued challenges in our operations in south-east Asia.

Going forward, our plans include restructuring of our operations in south-east Asia to achieve profitability by year-end, reducing costs and focusing on core markets and key products. We will also continue adding games to our profitable operations in Taiwan and Hong Kong.

On top of this we are implementing new growth initiatives that will give us medium to long term growth. We see an opportunity in delivering a unique game tournament platform, extending across Asia, used for web based and mobile games and integrated with social networks.

The systems, methodologies and processes of the platform will create a foundation of sustainable competitive advantage for us. Development of this platform is underway and we expect it will drive better monetization for us and for our partners. We will update the market on all of this, regularly, going forward.

Thank you, Yichin. The next question we have is regarding our share buyback. Could you update us on the current status of your buyback program?

This is Thomas. As we noted in our press release that since the beginning of the share buyback program we have now totally purchased 2.5 million shares from the market. The program is ongoing. It will continue to be so. We continue to see at the current share price level our share represent a good value for us to implement the program and as a means of returning value back to our shareholders through the continued execution of this program.

Thanks, Thomas. Next we have a financial question. Can you update your plan to turn cash flow positive, and when do you expect to reach that point?

Hi, this is Quincy. As discussed in my prepared remarks, we are making good progress in reducing cash burn. In Q2 we almost broke even on our operating cash flow, with a net operating outflow of only about $415,000. That includes one-time items such as investment in new games, we expect normal operating cashflow will be around $2 million to $3 million in Q3.

At this point it's very difficult to predict cash flow beyond that. It will be affected by the timing of initiatives. The schedules have not yet been finalized. But it is to say that we are pushing hard towards ending cash burn and delivering profitability. These are for operations of our current game portfolio only. We do not take into account potential disposal of our investment in certain game developers that we are committed to.

So it will - without any cash inflow - and also materialize potentials in Everest games from these investments; so we will continue to update shareholders on this, going forward.

Thanks, Quincy. Next a question about China. What's the situation in China regarding [P2CN]? Will there be a resolution this year?

This is Yichin again. The matter is ongoing so, unfortunately, at this time, we cannot add further detail as our Company policy is not to comment on ongoing legal matters. However, we want to assure you that we are actively pursuing all available avenues to achieve a favorable outcome to this dispute as soon as possible.

Thank you, Yichin. Next, turning to Taiwan and Hong Kong, could you update your pipeline? What games are in the pipeline for Taiwan and Hong Kong?

This is Thomas. In Taiwan and Hong Kong we are looking forward to launching a new game 4 Story later this month. In fact, this week we'll be starting our closed page test. This is a fantasy MMO game that has been popular in many international markets. Also it's a mature game, with a wide variety of content and in-game items that can be introduced to the players soon after launch. So, forcefully, we'll represent another step towards our strategy of building our product offerings and diversifying our revenue base in the Taiwan and Hong Kong markets.

In addition to that we are adding a new web based version of our most popular casual games, including board and chess games - looking at functionalities - and a multi-person module for the mobile iPad platforms later this year.

Further out, we look forward to the launch of Sponge Bob Square Pants. The game is designed to appeal to broad demographics. Although the game is still under development we are encouraged by the progress to date. We expect to make an official announcement with MTV Asia regarding the specifics of the launch in the near future.

The highly awaited game Dark Age from our partner, XL Games, is expected to launch in Taiwan and Hong Kong, following major launches in Korea and mainland China. There are additional games we are actively reviewing, of course. However, at the current moment, we do not have anything else to announce.

Thanks, Thomas. Turning to south-east Asia, could you describe your plans for your IH games operations in south-east Asia?

Sure. As Yichin stated, our operations to date in south-east Asia have underperformed. In response we are increasing focus on key markets, particularly Thailand and Indonesia. These are two large high growth markets in a region where revenues are projected to grow significantly in the next few years. Internet penetration rates are driving strong growth.

We are also restructuring operations, focusing on the games that are currently performing well, and building up our presence in these key markets and cutting back operations in others. We expect the south-east Asia business to become profitable by year-end. We look forward to sharing more about our efforts in south-east Asia with you in the near future.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.