GigaMedia Ltd (GIGM) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the GigaMedia Limited's third quarter 2011 financial results conference call.

At this time all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today Friday, 18 November 2011.

I would now like to hand the conference over to your host today, Mr. Brad Miller. Thank you sir, please go ahead.

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia's third 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 looking statements involve risks and uncertainties GigaMedia's actual results could differ materially on 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 2011.

This presentation is being made on November 18, 2011 in Taiwan. 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 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'll respond to questions that we've received via email and with that I'd like to just turn the call over to Yichin, our CEO.

I thank you all for joining us. This is Yichin Lee.

Today I will briefly review our third quarter results, provide a short summary of the state of our business and conclude with an outline of our next step actions.

In the third quarter in Taiwan and Hong Kong our revenues were up 20% from last year due to the additions of a new MMO game to our portfolio. Quarter on quarter however, total revenues were down 3%. MMO game revenues were up sharply from last quarter, but this was offset by a decrease in contribution from casual games.

In South East Asia we took an important step by ending box game sales and focusing on online games. As a result, our gross margin climbed to 33.7% from 11.9% last quarter. Our business operation is much tighter now as the result shows. Our online games business in Taiwan and Hong Kong is profitable and we forecast continued year on year growth and sustained profitability.

In South East Asia, as a result of our restructuring, we are closing the gap and target cash flow breakeven by year end. Looking ahead we have some promising games in our pipeline, including Sponge Bob Square Pants and ArcheAge which we look forward to launching next year.

But it's important to balance claims of success with recognition of the problems and the challenges that we face. Many of our past game launches and initiatives have not been successful. In the third quarter launch of 4Story in Taiwan and FIFA Online 2 in Indonesia were both below our expectations. We have discovered weaknesses in our operations as a pure play, third-party publisher in the changing business landscape and, to date, our corrective actions have not been sufficient. For this we apologize.

Beginning in the fourth quarter we'll be taking strong steps to adjust our business structure. We'll start to move GigaMedia from a pure play, third-party publisher to cover other activities in the gaming value chain.

Today the entire business landscape in games is changing. Games are rapidly moving from console to web to mobile and the role of a pure play, third-party game publisher is diminishing. Our plan is to take aggressive steps to cover two fronts; one in content development, and the other in service platform.

In line with this strategy today we announced our first step forward partnering with Mark Jacobs' team at City State Entertainment to develop new games and brands for mobile, tablet, PC and social networking platforms. Together with Mark we'll be expanding our product offerings to games for internet based enabled mobile devices. We'll also be putting great effort into developing compelling IT that we can use for multiple business models.

We will take steps to enter the cloud space, seeking to fundamentally change the way we publish our IP, complementing this we'll also beef up our effort in building a differentiated service platform. Our tournament platform was the first element in the (inaudible) and we'll start to add differentiated customer service features to make it stand out. The other restructuring of our online games business will also start to look at adjacent value chains in the media sector to seek growth.

In 2012 we'll add offline, real-world services that will allow us to reach out to and to connect with the same demographics as our games business. This initiative will allow us to simultaneously deepen our customers' connections and lower our risk profile with businesses that are more easily planned and managed.

Let me conclude by going back to operations. We will work very closely with our Board, continue to micromanage our online games business, optimizing operations, sharing resources across VUs and protecting our cash. We recognize the inherent risk of the third-party publishing model and the upcoming big economic uncertainty that is 2012 and we will restructure our portfolio to one that is less risky.

Our balance sheet remains strong and in Q4 I will make sure that we strengthen it even further. Thank you. I will now turn the call over to Quincy, our CFO.

Thanks Yichin. Next I would like to add some details on the separate items in our financial results.

Overall revenue was slightly below forecast it was the result of two factors. First, the capital gains offered by FunTown in Taiwan and Hong Kong were down quarter to quarter due to (inaudible) games (inaudible) than expected. Secondly, our launch of 4Story in Taiwan did not gain much traction and its contribution was less than forecasted.

The decrease in FunTown's capital gains revenue in the third quarter more than offset continued revenue growth in FunTown's MMO games. FunTown's MMOs performed well in the third quarter and continue to represent a growing percentage in this total game portfolio. FunTown's MMOs represent approximately 40% of the Q3 revenue.

Growth in MMO products is in line with our strategy to broaden our product offering and diversify our revenue base. Our MMO, Tales Runner, achieved rapid results in the third quarter with revenue up a very strong 57% quarter over quarter. This was driven by very successful small online tournaments, demonstrating the effectiveness that tournament can have strong impact on our players activities.

Our other MMO, A.V.A., also made a strong contribution in the third quarter. A.V.A. continued to grow quarter to quarter and revenue was up 10% on the second quarter. Growth was again driven by contests.

In line with our focus on expanding our tournament platform during the third quarter, we sponsored the only (inaudible) in Taiwan and have a separate online and offline tournament event, including an International Open for A.V.A. Over 100 teams have attended the competition to date. Online and offline tournament events for A.V.A. are scheduled through the remainder of 2011 culminating in an exciting January finale in Taipei.

Let me turn now to results for IH games in South East Asia. In South East Asia revenues were down from quarter, from last quarter due to two factors. First, last quarter we recalled approximately 500,000 in game boxes. This quarter we can recall the factor is none, as we have terminated initiatives to focus on higher margin online games.

Second, revenues from online games were down approximately 17% quarter over quarter, mainly due to a drop in revenues from an MMO game, (inaudible). Revenue from core games consisting of FIFA Online 2, Granado Espada and Draconica Online were approximately down 6% quarter over quarter.

Turning to cost, in Q3 our operating costs were in line with our expectation. We continue our strong focus on cost controls and as a result, operating expenses were stable quarter over quarter. Consolidated operating expenses during the third quarter was $5.2 million and includes the following; first an equity loss of $5.6 million regarding GigaMedia's remaining interest in average gaming and second, an equity loss of approximately $131,000 related to our Asian online gaming business which more than offsets the onetime gain of around $665,000 related to the termination of the (inaudible).

Core net loss was $3.8 million. This has (inaudible) results from this continued operation and financial results related to our non-core gaming software business, share base compensation expenses and shares in non-cash or onetime items.

Finally, let me review our cash and balance sheets. In Q3 our net cash position decreased by $7 million quarter over quarter to about $44.4 million. Operating cash outflow in third quarter was up by $4.1 million. During the period, we (inaudible) loan to Everest Gaming to support this business growth and made payments related to development of SpongeBob SquarePants and they also continued to buy back shares during that quarter.

On the balance sheet, we would like to highlight that marketable securities - nonrecurring plus investment was up sharply by $11.3 million from the last quarter to $99.4 million. This consists of GigaMedia's strategic holdings in game studios, developers and other related entities and our remaining focus and interest in Everest Gaming. The quarter over quarter increase mainly reflecting premium fair values based on share prices of certain investments. As we have stated before, we are committed to the disposal of certain game studios within the year and to realize gains and crystallize value.

Looking ahead, we are confident in our ability to manage our core structure and (inaudible) we will continue building new initiatives to drive revenue up and profitability. We are well positioned to grow GigaMedia and have substantial financial resources to finance our business initiatives.

Thanks Quincy. We will now move into a question and answer session where we will respond to questions we have receive by email. Questions are weighted and in some cases they're combined to avoid repetition. We've organized the questions we've receive by topic. Here we go.

The first question; do the assets on the balance sheet reflect actually assets held by GigaMedia or are they assets held by an affiliated company as is often the case with Chinese-based companies?

Hi this is Quincy. Perhaps I take this question. I think in our case the answer is yes for both. Our income statement and balance sheet reflect consolidated results for our company with consolidated results from any subsidiary in which we own or control more than 50% and we also consolidate the result of the VIEs in which we are the primary economic beneficiary.

Thanks Quincy. Next question is on our listing status. What actions does GigaMedia plan to regain compliance with the NASDAQ $1 minimum bid rule? Is there a risk of a reverse split being considered?

This is Yichin, I'll take this one. We are first and foremost focused on driving improved performance. We're tightly controlling our costs and restructuring to drive better top and bottom line results. New games including SpongeBob SquarePants are scheduled for 2012, we're confident they'll help drive up our value. Finally, we expect to unlock value from our balance sheet in 2011 by disposing of certain (inaudible). A reverse split will be a final option that we will use to preserve shareholder rights, but it will be a final option, thanks.

Thanks Yichin. Next question, are there more write downs coming possibly related to the end of partnership with Blizzard, how would this show up in revenue and earnings?

This is Quincy. Let me take up this question. No, we do not anticipate any additional write downs related to our partnership with Blizzard. In addition, with the termination of this contract, we have no further commitment to the whatever potential (inaudible). So all of the financial (inaudible) as a result of the termination.

Thanks Quincy. Another financial question for you. Why do you have general and administrative expenses of $5 million for an $8 million revenue business per quarter?

Okay, I think very important that we understand that we are in a transition mode in view of business. The revenue is low at the moment, but there are some bare minimum costs in of the business unit that we operate and a very wide geographical spread of operation in greater China, including mainland, Taiwan, Hong Kong and also Southeast Asia and to build new business initiatives to drive revenue up. It is, furthermore, there is certain minimum (inaudible) at headquarters level to keep our NASDAQ listing status.

In addition, there have been more than this -- there has been disproportionately high legal costs and one-time costs during this transition. However we are actively managing these costs aggressively and we will try to keep the costs down.

Thanks Quincy. Another question, financial question, this one on investments. Do you plan to sell all studio investments in Q4?

First it is not our intention to sell all the investment. We plan to sell some, but not all in Q4. We tried to sell some in Q4 and some in next year, but I think the important thing is we want to sell in an orderly manner without disturbing the balance of those investments and also, the share price of our partner.

Thanks Quincy. A cash [burn] question. Can you update your expectations for cash burn going forward and cash balance for 4Q?

As I mentioned, we are still in the transition mode. The focus is to review pipeline, so I expect that cash burn will continue in the coming two quarters, mainly to invest in new business initiatives to drive our revenue up. However, we are very careful in spending these resources that we have. On the other hand, the balance against it, as a planned disposal of certain investments will bring in some sizable onetime cash inflows to our company.

Thanks Quincy. Turning to China, what are you doing in China, what are your plans there? What is the situation China regarding T2CN and will there be a resolution this year?

Hi, this is Yichin. We're carefully building new game operations from China. In Shanghai in fact we have an enthusiastic new team of approximately 70 people preparing to launch new games. The actual roll out of new games has been slow by developer delays, but we're pleased to announce that we have received all required licenses for game operations in China and our new game is in the pipeline and waiting to come out. We have also taken strong steps to ensure control, including securing company (inaudible) and establishing board control of related shareholders.

Regarding former operations in China with T2CN, the matter is ongoing unfortunately. So at this time, we cannot add further details, because 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 the dispute as soon as possible.

Thanks. Turning to Taiwan and Hong Kong, could you share details the launch of 4Story and iPhone MahJong?

Yes, this is Yichin again. In Taiwan and Hong Kong in 3Q, we launched a new game 4Story. This is a fantasy MMO game available in many international markets. Unfortunately the result of our launch we're below expectations. We have pulled back on marketing initiatives, but continue running the game. With regard to web based MahJong, we're adding new web-based versions of FunTown's popular causal games, including board and (inaudible) games with new functionality and a multi person MahJong for mobile platforms.

In 3Q we rolled out new [brackets] for the avatars on our iPad for MahJong product. This game continues to be well received, ranked number three in Taiwan and number eight in China in board game apps (inaudible) in greater China. The web-based version of this game and the new iPhone offering are now planned for launch in early 2012.

Further out, we look forward to the launch of SpongeBob SquarePants. The game is designed to appeal to a broad range of demographics and although the game is still under development, we're encouraged by the progress to date. The higher (inaudible) from our partner XL Games is expected to launch in Taiwan and Hong Kong following a major launch in Korea and China. There are additional games we're actively reviewing and that we may add to our pipeline. We will come to you and report on those later.

Thanks Yichin. Now it's Southeast Asia. Could you please provide some details on the launch of FIFA Online 2 in Indonesia and what games are in the pipeline in Southeast Asia?

Yes, Yichin again. In Southeast Asia we're making progress, but we're actually micromanaging the business with a strong focus on cost control and improving efficiencies. In response to this (inaudible) underperformance, we have increased focus on key markets, particularly Thailand and Indonesia. These are two large and high-growth markets in the region where revenues are projected and grow significantly in the next two years. Even their penetration rates are driving strong growth.

We have also increased our progress on online games and the cost of game [box] sales. In 3Q, this new approach was successful in driving up gross margin exponentially. Our core games, FIFA Online 2, Draconica Online and Granado Espada all continue performing well in Singapore, Thailand and Vietnam. The challenges remain. Our attempt to expand FIFA Online 2 to Indonesia is also a slow start. Results from our launch of a fully localized offering of FIFA Online 2 in Indonesia were below expectation. We need to improve our execution and we will need to take great care in sourcing new games to expand our portfolio and grow this business.

Overall, we will continue to focus on the games that are currently performing well, building up our presence in key markets and cutting back operations in others. We will also work hard to improve other aspects of our operations and build a strong pipeline of games. Finally, we're evaluating a number of new titles but we have nothing to announce at this point. On the back of our restructuring, we expect the Southeast Asian online market business to become (inaudible) by year end.

Thanks Yichin. Turning to Everest, could you please comment on reports that GigaMedia is in talks to sell its interest in Everest Gaming and can the Company name the parties involved?

This is Yichin. Actually we haven't heard about it but yeah, we're not in talks to sell our interest in Everest. We are actually continuing to diligently monitor the business from our side.

Thanks. A follow up question on Everest, how is it possible that Everest continues to generate more losses than revenues and what is the strategy of Magnus?

Yichin again. In Q3 Everest gaming accepted a legal offer actually. That resulted in a onetime charge causing a cash outflow that is not significant. We're working diligently with the majority owner, Magnus Group to see if there is anything we can do to help. That we are actively supporting lobbying efforts in the United States for a gradually re-regulated and liberalized market.

Great, thanks Yichin. That's all we have today. Thanks everybody for sending in your questions. 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 does conclude our conference for today. Thank you for participating. You may now all disconnect.