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Executives

Brad Miller - Director IR

Arthur Wang - CEO

Thomas Hui - President and COO

Quincy Tang - CFO

Analysts

Alicia Yap - Citi

Todd Eilers - Roth Capital Partners

Andrey Glukhov - Brean Murray

Atul Bagga - ThinkEquity

Alan Ruskin - Edge Capital Partners

GigaMedia Ltd. (GIGM) Q3 2008 Earnings Call November 18, 2008 8:00 AM ET

Operator

Welcome to the GigaMedia Limited conference call to discuss third quarter 2008 financial results. (Operator Instructions) As a reminder this conference is being recorded today the 18th of November, 2008.

I would now like to turn the conference over to Mr. Brad Miller.

Brad Miller

Thank you this is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our third quarter, 2008 results conference call for GigaMedia Limited. Here to speak with you and answer your questions today are Arthur Wang, our CEO, Thomas Hui, our President and COO and Quincy Tang our CFO.

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 2008.

This presentation is being made on November 18, 2008. 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 revealing, or updating the material that is contained therein.

The agenda for today’s call includes first a review by Arthur Wang of Q3 2008 business activities and financial performance. Thomas Hui, will then discuss some of our latest operational developments and results, and Quincy Tang will conclude with details on our financial results during the third quarter. After the speaker presentations, we will go into a question-and-answer session.

Now, over to Arthur, our CEO.

Arthur Wang

Thanks Brad, and thank you all for joining us today. Thomas and Quincy will take us through the operational and financial highlights of the quarter, while I will focus on our overall business outlook and new initiatives.

Before continuing a word on the stock market. As we are all aware, the crisis in the financial markets has created a tremendous loss of confidence throughout the entire capital markets. Along with so many others, GigaMedia stock has been hit hard by the turmoil.

But I would like to emphasize that for GigaMedia, nothing fundamental has changed. We continue to operate a high growth business with outstanding prospects. We continue to generate very high free cash flow with every business unit profitable, and we continue to have a strong balance sheet, and report today a cash position of over US$100 million with no net debt.

Let me turn now to the specific business units and highlight why we are so excited about our progress in building a leading online entertainment firm. First our Everest Poker and Casino business; first, to review the latest good news, we are very pleased that Everest Poker has been awarded the 'Poker Operation' of the year for the second straight year by the independent industry journal, "E-gaming Review".

We believe this is further recognition of the strong Everest Poker offering, which in just three years has grown to be one of the most popular poker sites in the world. Currently ranked fourth in terms of player activity and this ranking includes sites that still operate in the large United States market illegally.

We especially appreciate this recognition, now for the second consecutive year, because it validates and underscores the fundamental mission statement at GigaMedia to provide the highest quality software and services to our players. We look to continue to drive our growth and business expansion on this principle, cheered by this external recognition.

Coming out of our traditional slow quarter, more challenging this year did the strong competition from the Olympics. We are pleased to see a ramp-up of player activity in October and in November. Let me highlight a few of the additional initiatives, which we believe will fuel our continued growth.

First, the sponsorship of the World Series of Poker. The final event of the 2008 World Series of Poker has just concluded, but for us it is actually the beginning. In our key markets, in Continental Europe, television broadcast of the World Series of Poker Tournament and the World Series of Poker finals is only just beginning.

From now, and through 2009 ESPN will be airing thousands of hours of the World Series of Poker. All with Everest Poker on the centerfield and on in the inside [rung], most visible as players check their pocket cards. Ultimately, the WSOP will reach an estimated 300 million households.

We are very proud to be the multi-year sponsor of the WSOP, which this year was the largest and richest ever with over 58,000 players from 118 countries all playing for a price pool of over US$180 million. We believe the broad syndication of WSOP broadcast, across our markets in the fourth quarter and in 2009 will give us a strong boost throughout the entire year.

Second sports betting. Later this quarter we will be launching our Everest Sports Betting product, representing one of our most significant product expansions since the launch of Everest Poker. While having a sports betting product to join with Everest Poker and Everest Casino, we provided a broader and more complete entertainment offering to our players, while at the same time begin to monetize from the largest and richest segment of the online entertainment market.

Our entry into this market will be in partnership with one of the leading brands in the business. A partnership which will enable us to have the best of sports offerings from the start, as well as other potential corporations in the future. We believe we will see improved per player revenues driving even greater growth in 2009.

Third, branded casino games, we are also excited to welcome the Incredible Hulk, X-Men and Spider-Man to the GigaMedia team. These new branded casino games will increase feasibility and further the attractiveness of the entire gaming platform. We are certain that adding the muscle of the superheroes will surely strengthen our offering.

Turning now for our Asian real-money gains business, together with sports-betting, our Asian real-money games business is our largest and most significant expansion since the launch of Everest Poker three years ago. We are pleased to report strong progress and growth permitted into the small base.

Our products Pachinko, Pachislo, MahJong are the first of the kind in the market and our initial concern was whether we can deliver the quality of products and virtually experience necessary to meet the high standards of the Japanese consumer. The good news is that since our launch this summer, the market’s response has been enthusiastic with strong positive reviews of our products, driving player activity that is steadily increasing.

To support this nascent growth in early October, we released two new Pachi games modeled on the most popular real world Pachinko and Pachislo machines, which I am happy to report led to another spike in software downloads and player registrations. An additional six games are in the development pipeline and set to launch in Q4 and Q1.

We continue to believe this is an enormous market opportunity and are building a foundation for this to be a large business and serious contributor to GigaMedia’s operational results in 2009 and on.

Now our Asian Online game platform. The unfortunate truth about our Asian business is that several of the games originally scheduled for launch in 2008 have been delayed. Certain online games inherited, when we acquired the Asian businesses have failed to meet our internal standards and were therefore canceled.

As a result, our game offering this year has been thin with our platform supported by all games still popular but unable to drive further growth. While we have made good progress under the circumstances, the best is yet to come.

I believe we stand at the start of the steep part of the curve with very large and very exciting growth over the next four quarters. Later this year and into 2009, we are rolling out a number of games with the potential being mega hits in the marketplace and explosive growth drivers for GigaMedia.

Let me highlight a few. First NBA STREET Online from EA SPORTS the undisputed leaders in sports games. We are excited to be bringing this arcade-style game to the Greater China marketplace including China, Hong Kong, Taiwan and Macau, where frankly speaking basketball is king. We are preparing for closed beta now with Open beta and commercial launch scheduled for late first quarter.

Second Warhammer Online, Age of Reckoning, we are very excited by the market response to Warhammer in the US and in Europe both markets, which launched late last month. Warhammer is a great game loved by game reviewers and game players alike. It looks like the EA and Mythic Studio has produced another mega hit and we are proud to be partners in Asia. We are looking to launch in the first half of 2009.

Third FIFA Online also from EA SPORTS is preparing for commercial launch in Southeast Asia this month through our affiliate Infocomm Asia. This game already a proven hit in Korea has great promise in Southeast Asia, where software is the undisputed number one sport. We currently hold a 28% stake in Infocomm Asia and are in discussions to increase our position in the Southeast Asian game leader.

Finally in this quarter, we will be launching Holic a cute-style MMO developed by Mgame’s, author of the previous top ten games in China. We believe that Holic will fill the market niche previously occupied by RO, Ragnarok Online, one of the most popular all time games in Asia. We are pleased to be releasing Holic in all of Greater China, China, Taiwan, Hong Kong and Macau.

In addition to third party license games, we continue to strengthen our pipeline of new games through our investments in outside game studious and in in-house game development.

One example is our training style MMO called, The House of Flying Daggers tied to the movie of the same name by China's top director Zhang Yimou. This martial-arts adventure game is set in the fascinating and breathtaking world of ancient China. We are looking forward to its release next year.

We will soon be announcing an exciting new partnership with MTV International. MTV and GigaMedia together will co-develop and then operate a new online game based on one of the worlds most popular IPs. We look forward to providing more information in a formal announcement within the next two weeks.

In Asia, we are well along our way to building an unrivalled gateway to online entertainment in the region, a one-stop-shop for game developers and entertainment providers addressing the pan-Asian market. Today, we have over 90 million registered users with over 8 million active over the last 30 days and we look to double these numbers and then double again as we grow our pan-Asian platform.

In conclusion, in this past quarter, we disposed of our final legacy business thereby completing our transition, our transformation to the new the GigaMedia. Over the last four years, we have [shed our loss making past] as an ISP and music retailer and built the leading online entertainment firm.

In the third and now fourth quarter, we continue to make strong progress on our top strategic initiatives, putting in place exciting drivers of accelerated growth and market position, building a dominant online entertainment business. We are indeed building a new GigaMedia with growing shareholder value as its cornerstone. We thank you for your interest and continued support.

With that I would like to turn the call over to Thomas.

Thomas Hui

Thanks, Arthur and thank you all for joining us. Let me take you through our third quarter business and operational highlights now starting with our Gaming Software business and following with our Asian Online game business.

Revenue from our Gaming Software business grew 18% year-on-year, as we continue to leverage our investment in the Everest brand. Poker revenues increased 7% year-on-year driven by expansion of the Everest Poker player base. Casino revenue grew 51% from last year fueled by strong cross selling to Everest Poker players, as we continue to integrate our Poker and Casino offerings.

As expected revenues in the Gaming Software business in the third quarter were lower than that in the second quarter reflecting normal seasonality. Poker metrics also reflected this. During the third quarter, our Poker platform had approximately 176,000 active real-money customers down 8% from the previous quarter.

During the quarter, we added approximately 38,000 new real-money poker players down 17% quarter-over-quarter. While seasonality negatively impacted user activities in both the Poker and Casino verticals, our efforts to drive Casino revenues through cross selling, we are able to overcome the impact of seasonality and resulted in quarterly sequential growth in our Casino vertical. Casino results were also boost by the launch of three new games during the quarter.

During the quarter, we continued to make good progress in developing our common wallet initiative. Approximately half of our total new real-money casino players for the quarter were also our poker players.

During the third quarter, we saw our cross selling conversion ratio continue to increase and expect it to continue to do so in the next few quarters. Most of the remaining work here is database programming oriented and we will not have player facing features.

During the quarter, we also continued to develop our new VIP program and I’m happy to say that with much of the backend work complete, poker players in November are now being awarded points on a monthly basis with different VIP categories concerned unique benefits such as exclusive tournaments, [freeroll] etcetera.

Players can convert chips for real-money play or into cash. Our overall objective here is to do a compelling retention program that we can use across the Everest gaming platform and we are very pleased with the progress to-date.

On the marketing side, we continue to organize various online tournaments and offline activities to strengthen the Everest brand and enhance the overall player experience. We also ran television commercial in Sweden, Germany, and the Netherlands.

The big marketing event for Everest of course was the World Series of Poker, where we had great media coverage with over 80 journalists filming and interviewing in the Everest launch. We expect broadcast of the World Series of Poker in Europe to begin in Q4, in Germany and in Netherlands, and then continue throughout next year across all European markets.

Overall, given to relatively low level of online user activity in the quarter, we did not aggressively market during the period. Looking into the fourth quarter, we are already seeing an increase in poker player activity and we will rollout three new casino games as well as certain flash-based games, featuring some of the Marvel characters as Arthur mentioned. We will also continue to expand our VIP program and make further incremental steps toward delivering our common wallet initiative.

We touch auto gaming growth initiatives as Arthur mentioned, where we continue to add to our Japanese games offerings and we expect our licensees of the Japanese game products to significantly ramp up marketing activities in December. On top of this, we also expect to add a complimentary sports betting offering before year end.

Coming now to our Asian online game business; revenue increased 11% year-on-year driven by continued growth of our China platform T2CN. Revenues were down 7% from the previous quarter, primarily reflecting the impact of Beijing Olympics on T2CN and decreased revenues from FunTown.

As expected, we experienced sharply decreased player activity in T2CN's game Freestyle during the television broadcast of the Beijing Olympics in the third quarter. This was particularly acute, during the opening ceremony, during which concurrent users drop by as much as 50%.

T2CN average monthly active paying accounts, were approximately 398,000 during the third quarter, down 11% from the second quarter and average monthly revenue per active paying account was US $4.06 during the third quarter up 2% quarter-over-quarter.

Peak concurrent users of FreeStyle were approximately 118,000, a decrease of 15% from the second quarter. FunTown’s revenue decreased on a sequential basis due to drop off in revenues under licensed games Tales Runner and decreased sales of virtual items in the third quarter.

During the period we began to sell virtual items with a limited lifetime, which resulted in a lower volume of virtual item sales. However, we expect this negative effect to be only transitional and temporary. FunTown’s average monthly active paying accounts were approximately 109,000 during the third quarter, down 6% from the second quarter and average monthly revenue per active paying account was $19.11 during the period, steady over quarter-to-quarter.

Peak concurrent users were approximately 46,000, a 4% increase from the second quarter. As Arthur mentioned, we continue to be very excited about the prospect of our new game pipeline, which we believe will provide significant growth to our Asian online game business.

Let me now walk you through the key developments with regard to our new game titles, namely Holic, Warhammer Online and NBA STREET Online. Development of Holic has made great progress in 2008. The game is now in three open theater in Korea and that is a full open theater with a complete marketing schedule in Korea for the end of November.

In Taiwan, we have now completed two small scale beta tests and a third is currently ongoing. The game is now successful larger open beta test and commercial launch in Taiwan in January 2009 and we expect launch in China soon after.

Into Warhammer Online, Age new game has been an enormous hit with gamers in the US. The game has sold over 1.2 million copies and has over 800,000 registered users already. We are now in the process of localizing the game for the Taiwan market. We expect to launch Warhammer Online for closed beta testing in Taiwan in Q1 2009 and open beta by Q2 next year.

Finally, we also plan to launch another game title from EA next year; NBA STREET Online. As we have stated in the past, sport games at undeserved niche in Asia and basketball is one of the most popular sports in the region. Given this, the built-in brand of the EA SPORTS brand and the excitement of playing with or again NBA stars in this game, we expect NBA STREET Online to be a major hit in China and Taiwan.

The game was in open beta in Korea in late July and is now undergoing additional development. Our expectation is that it will be ready for commercial launch in Korea near yearend 2008 and that we will start closed beta testing in China and Taiwan by Q2, Q3 next year.

In summary, we continue to be very excited about our gaming software at Asian online game businesses. In Europe, our strategy to broaden the gaming software platform and leverage the Everest brand positions us to drive continued long-term growth. In Asia, our multi prompting source approach, solid pipeline and massive reach give us powerful asset to accelerate our growth strongly.

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

Quincy Tang

Thanks, Thomas. Let me now take a few minutes to reveal our Q3 consolidated financial results. Following that, I will highlight some key factors affecting Q3 results in each of our core business unit. There will then be an opportunity for you to ask questions.

One quick reminder, following the sale of our non-core legacy ISP business to allow for meaningful comparisons, operating results present on a continued operations basis, unless otherwise noted.

Overall, third quarter results were inline with our expectations despite a challenging operating environment. Beginning with revenues: Year-over-year, we grew consolidated revenues from continuing operations 16% to $25.7 million. Growth was lead by our games software business, which increased 80% year-over-year and remains our largest business segment.

Complementing this was continued growth in our Asian online games business, up 11% year-over-year. On a sequential basis, our revenues decreased by 7%. This was largely due to two factors; one, the traditional slow downturn in online gaming activities in Europe during the summer months, which impacted our gaming software business. Secondly, a significant decrease in online game activities in Asia during the Beijing Olympic Games which affected our Asian online gaming business. Our gross profit margin in Q3 was 81%, which remain steady year-over-year and quarter-over-quarter.

Turning to consolidating operating income; as noted in our release today, operating results were affected as results from discontinued operations and several non-cash items relate to our Asian online gaming business. These items include the following. First, income from discontinued operations in the third quarter were up approximately $8 million. Second, a write-off of approximately $2.6 million relating to loan receivables from Flagship Studios, the developer of Hellgate: London.

Thirdly, impairments totaling approximately US$1.3 million related to capitalize cost for certain games. The impact of which after minority interest was approximately US$1.1 million and lastly a write-off related to certain investments recorded in T2CN, the impact of which was approximately US$2.1 million after minority interest.

Third quarter, 2008 operating income and net income on GAAP basis includes these results from discontinued operations and non-cash items. GAAP consolidated net income, which includes the above mentioned items grew 24% to US$12 million from the third quarter of 2007, increased by 7% from the second quarter of 2008.

Looking at the key expenses line item details; General and administrative expenses decreased year-over-year by approximately US$588,000 or 9.4%. This has offset the year-over-year increase of US$2.8 million or 220% in product development and engineering expenses, attributable mainly to the hiring of more engineers for our gaming software business.

As well as a year-over-year increase of approximately $3.1 million or 22% in selling and marketing expenses, related to growth in television advertising and other initiatives surrounding our online book of products. On the quarter-over-quarter comparison, general and administrative expenses decreased by US$1.7 million or 23%.

This was more than offset a quarter-over-quarter increase in approximately 188,000 or 14% in product development and engineering expenses relating to our gaming software business, a net increase of approximately 265,000 or 2% in selling and marketing expenses, relating to increased initiatives in our Asian online games business.

Non-GAAP figures, excluding these items; non-cash items are provided in addition to GAAP results in our Q3 results. As we believe that these items recorded in the third quarter are not indicative of our core operating results, and that our non-GAAP measures allow more meaningful comparison.

Let's look at non-GAAP results now. As we believe this would be more meaningful in understanding our core operating results and trends. Third quarter non-GAAP operating income increased 12% year-over-year to US$10.7 million from the same period in 2007. Growth was primarily attributable to strong operating income growth in our China online games platform, combined with the effect of cross controls over our general and administrative expenses in the gaming software business.

Quarter-over-quarter, non-GAAP operating income decreased in line with expectations, down 15% compared with our Q2 results, reflecting the impact of seasonality. As a result, non-GAAP consolidating operating margin declined slightly quarter-over-quarter to 23.5% in Q3 2008, from 25.8% in Q2.

Turning to net income; non-GAAP consolidated net income in third quarter grew 22% year-over-year to US$10.7 million and decreased 10% sequentially. The sequential decrease in net income was primarily due to low Q3 net income from Asian online gaming business.

We continue to maintain a strong balance sheet in the third quarter. Cash and cash equivalents and current marketable securities at end of Q3 was US$103.7 million and total debt decreased to US$29.5 million. In Q3, our net cash position improved by US$24.9 million, which was attributable mainly from the proceeds from sales of our legacy ISP business.

Next let's look in greater details at the performance of our core business units. The gaming software business entered into seasonality in the summer months. Where many Europeans have long vacations, generally spend less time online, are always a challenge for gaming software business, which targets the European markets.

The third quarter is traditionally the weakest quarter of the business. Within this context of a challenging operating environment, revenues for the gaming software business grew 18% year-over-year, but declined 6% sequentially. This was inline with our expectations given the challenges we faced. In poker, revenues grew 7% year-over-year and decreased 14% sequentially. Looking at the fourth quarter as I mentioned poker metrics are [spending up].

In casino, cross-selling efforts targeting Everest Poker players continue at a very high percentage level. Casino revenues were a record high of US$11 million in the third quarter up 51% year-over-year and a strong 15% up quarter-over-quarter. We expect ongoing cross selling initiatives to continue to drive users and revenue growth.

Gross profit margin in Q3 was 84%, a decrease of approximately 2% year-over-year and steady quarter-over-quarter, with the year-over-year decrease reflecting a more competitive operating environment during the year.

Operating income in our gaming software business decreased 2%, to US$9.3 million year-over-year and increased 10% sequentially. The quarter-over-quarter decrease reflects reduced revenue from business units as well as increased product and development and engineering expenses in Q3.

In sum, we delivered a solid quarter despite a challenging operating environment in Q3 and we are confident we are on track for good growth in Q4 in this sector.

Let me now turn to our Asian online game business. We are continuing to scale up and build our pan-Asian platform and are pleased with our progress. Total third quarter revenues from the Asian online games business grew 11% year-over-year to US$11.2 million. As expected, third quarter revenues were below second quarter results due largely to the effect of the Beijing Olympic Games.

Let’s breakdown the revenue by business units. Revenues from T2CN, our China platform, climbed 27% year-over-year to US$4.9 million, mostly driven by growth of the basketball game FreeStyle. On a sequential basis, revenue decreased 9% in Q3 2008 from Q2, reflecting a decrease in revenues from FreeStyle during the period.

As Thomas mentioned, metrics of FreeStyle dropped during the Beijing Olympics Games. Revenues from FunTown our Taiwan and Hong Kong online game platform were steady year-over-year at $6.2 million and decreased 6% sequentially on lower revenues from Tales Runner and a decrease in sales of virtual items. Gross profit margin in Q3 was 73% up from 69% in the first quarter last year, and remains steady quarter-over-quarter.

Turning to operating income. Again I want to emphasize that results and period comparison ere distorted by several cash items in the first quarter this year and last year. Excluding such items, operating income for Asian Online Game business was $1.6 million and operating margin was 14.6% for the first quarter of 2008.

Quarter-over-quarter excluding the aforesaid items Q3 operating income decreased 48% quarter-over-quarter to $1.6 million from $3.2 million. This was mainly due to lower gross profit and increased selling and marketing expenses in the quarter related to the new patches for our FreeStyle 2008 and MahJong 3.0.

Looking ahead, we expect revenues to grow in the fourth quarter and accelerate in 2009 as we begin to more fully leverage our unique regional platform and launch the outstanding set of new games titles as Thomas mentioned earlier including Holic, Warhammer and NBA STREET Online.

In conclusion, in Q3 we faced strong operating challenges, but we again delivered solid results. We continue to build and strengthen our business and we are on track for a very exciting end to 2008 and beyond. Thank you.

Brad Miller

Thanks, Quincy.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alicia Yap from Citi. Please proceed.

Alicia Yap - Citi

Hi. Good evening and good morning. I have a couple of questions. First of all, can you actually tell us the trend in October and November for your online gambling business? Have you seen any slowdown in the user traffics given the external macro environment? And do you think that global recessions will have an impact to your poker and casino traffics and revenue?

Thomas Hui

Thank you, Alicia. This is Thomas Hui. Thank you very much for the question. In terms of user activity in Q4 for the month of October and about 20 days of November, we have been in now; we did see a seasonal rebound of both the poker and casino activities.

So, at this stage, it is probably too early to tell whether or not the macro environment would have or the degree of the impact of the macro environment have on both our poker and casino products, but directionally we did see a rebound in activities.

The degree of the rebound has not been as high as the previous seasonal rebound we have seen. But that we cannot be sure at this stage whether that is due to the macro environment or due to the change in competitive dynamics in the market. But we did see a smaller rebound than previous years but nonetheless there is a significant rebound.

Alicia Yap - Citi

I see. Thank you. And then the second question is regarding the Casino market. I mean, I understand that is actually is even more competitive in this market. So, what is, your strategies to actually differentiate yourself with other bigger competitors and do you think like by licensing some of the slot machine games from CryptoLogic’s will help to expand your user base?

Thomas Hui

Again, it’s Thomas Hui. The way we think about our business is really creating a online entertainment brand surrounding the Everest properties that we have starting obviously from the very successful Everest Poker product in the Continental European Markets, whereby is a recognized brand that is cater for Europeans, build for the Europeans in their local languages.

So, the brand association and the brand value created around that give us a lot of comfort our ability to cross sell that both Casino product into the existing Poker customers as we have discussed in our prepared remarks that we have been seeing the conversional ratio to be increasing since the beginning of the year, when we brought out a common wallet initiatives.

The ratio is still low comparing to what we believe it’s an achievable ratio. But nonetheless it is the direction is certainly moving in the right manner. And on top of that we believe as we broaden our product offering for the Everest brand, you actually increase the brand appeal in such a way that we can attract new customers onto our platform for both the Poker and the Casino products surrounding at Everest brand.

Now, as Arthur mentioned, we also will be rolling out maybe I can ask Arthur to talk more about it the sports-betting product before year end, which were going to exert a complete the brand offering as a online gaming entertainment brand, which we believe would not only fertilize cross selling among the existing customer, but also provide more reasons, why new customers want to come on to our platform.

Alicia Yap - Citi

I see. Thank you. And then my third question is, can you actually tell us on the competitive environment for the poker business. I think previously you mentioned that it was five, but then, I think on this press release you actually mentioned that there were some increased competitive or intense, a little bit more intense over there?

Thomas Hui

Okay. I mean the competition we are referring to obviously are primarily the PokerStars in the hotels some of these used poker rooms that are to US facing. They remain accessed Their level of intensity has not increased, but we believe as we have mentioned in previous discussion, they will continue to be here and what we need to do as a company is continue to be competing against them effectively through various manners such as asset that we will have they don’t have.

For example, utilizing the World Series of Poker sponsorship, which is going to give us the reach and association that PokerStars hotel or even some of our other competitors would not be able to have. So, we would need to be more nimble in some of the other online marketing campaigns instead of just for dollars on TV Commercial.

We will probably need to be more creative, otherwise the return on investment for such initiative would not be as attractive as it used to be. So, you will have some impact. But again, we have been competing long before the time of PokerStars [virtual] coming to our market. We have been competing with some of the other competitors in our market. Now we just have to continue to do so effectively with all this newcomers.

Alicia Yap - Citi

I see and lastly can you give us some color in terms of the trend in October and November for your Asian online games business on your MahJong and the T2CN unit?

Thomas Hui

Yes, we expect the business to be flat. We have not launched any new patches or games for neither the FunTown platform in Taiwan or the Freestyle game in China Q4 year-to-date. So, there hasn't been any increase in user activity. Therefore, we expect Q4 revenue in that units to hold steady for Q4 until Q1, which is when we feel very excited about the new set of titles that we have in the pipeline, which includes Holic in January and as Warhammer towards the end of Q1, Q2. So, those were significantly proposed our revenue and profitability for that business unit in the next year.

Alicia Yap - Citi

I see, at that I actually saw some like new content upgrade for Freestyle recently?

Thomas Hui

Yes, there was a new patch of Freestyle 2008, right before; we did that right before the Olympics actually. So, that was, unfortunately the effect of that was negated, more than negated actually by the competition for viewers playtime if you will or watch time because of the Olympic Games. And in Q4, we haven't we currently do not have any major plan for game patches for the Freestyle game.

Alicia Yap - Citi

I see, but was that an increased marketing effort for Freestyle actually. It's kind of like, another promotion for the patch that you already launched?

Thomas Hui

Yes, we increased slightly a bit of the marketing, again towards the Olympic time, it was quite difficult for us to gain the viewerships mindshare therefore we do not increased the marketing activities then, but towards the beginning of Q3, we did increase the bit of the marketing activities there, but since we don’t have any -- the important thing is since we don’t have any big batches coming up in Q4, we may choose to continue to be quite inactive on the marketing side.

Alicia Yap - Citi

And then can you just tell us how was that, what are the some of the main reasons, why the games launches have been delayed? I mean understand that is always any delays happened at a time, but what are some of the main reasons?

Thomas Hui

Sure, sure. I think for Holic, it was -- basically it was almost like a conscious decision because we were to launch it to near -- because we could launch the game in Q4 this year. But we think that because of the way accountings and the potential market was, if we were to launch in January, our marketing dollar will be more effective in generating revenue for the financial reason.

So, that the game is quite ready and we are just basically timing it for January launch. Warhammer has always been a ‘09 launch, and the game as you know the game is quite has been very well received in the US, we are just in the process of localizing the game and probably about 50% done in terms of localizing the game.

We are just trying to time it into right timing now given that we are launching Holic in first quarter in January, and then end of January, Chinese New Year holiday, we think towards the end of Q1 is a better time for that game.

Alicia Yap - Citi

I see, okay. Thank you so much.

Thomas Hui

Thank you, Alicia.

Operator

Your next question comes from the line of Todd Eilers from Roth Capital Partners. Please proceed.

Todd Eilers - Roth Capital Partners

Hi guys. Thanks for taking my question. Arthur I think I heard you in your remarks mentioned that you might take an increased ownership or look to increase your ownership in Infocomm Asia Holdings. Would you guys look to take a majority stake there or just could you talk a little bit more about that and what the timing might be?

Arthur Wang

Sure. Yes, we would be interested in taking a 51% position at minimum. Basically we’ve worked very closely with IAH as an affiliate company, we are an essence partners and have looked at games together and evaluated market position opportunities together. We have always encouraged IAH to grow and to expand as well as they can and always held ourselves out as is one possible future for them and that looks like the way that we are, we are going. The timing is likely to be either, most likely to be the very beginning of 2009.

Todd Eilers - Roth Capital Partners

Okay.

Arthur Wang

We’re bringing a game such as FIFA Online into our stable of sport games. So, we’re excited about the potential there and when we have some final terms negotiated, we’ll make announcement to the marketplace.

Todd Eilers - Roth Capital Partners

Okay, that’s helpful. Thomas, with regards to sales and marketing in the fourth quarter, I think I heard you mentioned that the Japanese side was starting to ramp up and that you have got some new games that are going to launch, but thought I heard you say you might look to add some marketing there. Can you maybe just talk about sales and marketing in general in the fourth quarter, what your expectations are and then also how that’s impacted by I guess the success of the Japanese side?

Thomas Hui

I think overall sales and marketing will increase in absolute dollar terms. That is a combination of factors. Firstly, as you mentioned, there is the Japanese side, second is there will be the World Series of Poker part of the sales and marketing as some of these TV Commercials start to air in our target European markets. And also taking advantage of the seasonal upturn, we may choose to increase both online and offline marketing for that side of the business.

However, on the Asian side as we have talked about, there aren’t any plans for new game launches. So, they'll probably remain at similar if not lower level, but on a overall basis, sales and marketing will increase on absolute dollar terms basis.

Todd Eilers - Roth Capital Partners

Okay. How about on I guess a percent of revenues? Should we still kind of expect the 35% to 40%, is that still the range?

Thomas Hui

On that I think we still go by our policy of looking at target of a 20% to 25% operating margin are in on the annualized basis, full year basis. There will be quarter and quarter variations as we have talked about, and so far, for the first three quarters, we have remained within the 20%, 25% guidelines we had talked about, and on a full year 2008 basis, we expect to be within that guideline too.

Todd Eilers - Roth Capital Partners

Okay. And then last question, with regards to the Casino/Poker integration, when exactly do you expect the bulk of the integration to be complete and you would obviously have some maybe some smaller things t complete. I know you would obviously have some, maybe some smaller things to complete. But when will the bulk of that be complete if it hasn’t already. And then also what’s the exact timing or date for the launch of the Crypto games on the Casino product?

Thomas Hui

In terms of the cost selling, the way we like to think about it is to follow. It is really an incremental asset as supposed to [build it] for six months or nine months and then flip on the switch. As we had talked about in the past few conference call, for we have different milestone where we gradually grow out the initiative to gradually increase the ease for our customer to cross register, to cross transfer their fund and eventually to basically play it almost as one wallet. But then the one wallet concept is composed of many features we have gradually rolled out.

So at this stage I would tell you that we have rolled out most of the features we want as I have mentioned in my prepared remarks that the remaining assets or the modules are primarily databased and backend related. Or if you would also create some ease on the customer experience part, but most of the customer features are already rolled out. And what we have seen is actually a gradual increase in terms of cross selling ratio.

So basically a percentage of our existing Poker, active Poker value base become our Casino players and that ratio has been gradually going up. Right now, its still single-digit, we think that the growth rate is a healthy one and we think you can go to a healthy double-digit.

Todd Eilers - Roth Capital Partners

Okay and then the timing on the Crypto games?

Thomas Hui

Arthur want to comment on that.

Arthur Wang

I am sorry I missed the question.

Todd Eilers - Roth Capital Partners

Just the exact date of when you are expecting the launch to CryptoLogic games on the Casino product?

Arthur Wang

I think the schedule is early 2009, if memory serves --

Todd Eilers - Roth Capital Partners

Okay, thanks guys.

Operator

Your next question comes from the line of Andrey Glukhov from Brean Murray. Please proceed.

Andrey Glukhov - Brean Murray

Yeah, thanks for taking the question. A couple of things; Thomas, I guess to the extent that the new content both on the gambling side through the CryptoLogic, as well as on the Asian games side through some of the licensed MMO is probably coming at a lower margin, because it has either revenue share or royalty component to it. Maybe can you give us a little more color why do you think that you’re not going to see some pressure on the operating margin next year? What are some of the offsets that you have in the business model that sort of you can leverage next year?

Thomas Hui

On the Asian side, we are average, what we are doing, if you look at our run-rate basis we are doing US$45 million to US$50 million in revenue this year. And that is for the geography we cover doesn’t reach the critical scale yet, which is covering obviously a very big China market and a not too best Taiwan market, plus a smaller Hong Kong market. And that is primarily on Taiwan just on one platform. The whole suite of games, casual games, MahJong and others, and in China its primarily just one game, FreeStyle.

The incremental revenue we are going to generate from the new games does not require that much more headcount and infrastructure cost in order for us to run. You’re absolutely right Andrey that we will have to incur higher licensing cost there for royalty and ongoing revenue share and royalty payment.

But given that we are only on a, I think Quincy mentioned in his prepared remarks on Q3 running at a 14% on an adjusted basis operating margin. We think that is, not a number we are going to be looking to dilute, as we have increased the game offerings. In fact, fickle to the contrary the scale effect on the people and infrastructure and the platform maintenance and all that, we think they've some more room there.

Now on the, European side, again, the license casino games, the Marvel product is just one of the many initiatives. First of all, basically inherent costs, if were to deal our own product. We have not obviously disclosed the licensing terms with CryptoLogic, but we believe, the incremental we get out of those products, given that the specific IP related product with obviously Marvel characters behind them, will give us very good margin.

At this stage, we are not showing that's necessarily going to be dilutive in and out of itself. But even this becomes slightly dilutive in terms of our margin or the other initiatives cross-selling from the casino, other casino games through our existing poker player, which obviously is very high margin in a sense, that we do not need to invest our biggest variable cost, which is marketing expense to our widest customers, again which basically means that we should be able to maintain the 20%, 25% overall margin.

So those are on a high level, how we think about it, Andrey.

Andrey Glukhov - Brean Murray

Okay. And looking on the poker side, I guess cost to customer acquisition continues to go up fairly noticeably. Do you guys think that as we enter into next year, that number will start to flatten out as maybe some of the ankle bitters fall off? And do you think that World Series of Poker broadcast will help you moderate that number in anyway?

Quincy Tang

Yes, Andrey this is basically almost (inaudible) question about the competition world. I think the way we look at it is two fold right. First, in terms of directly acquiring new customers competing against some of these poker rooms, whether is the US facing one or not, we would basically continue have to use asset that we have, they don’t have such as the World Series of Poker and also being more local as a company because we have been operating longest in the Continental Europe and now being the more nimble instead of just throwing dollars and acquiring customers, so that’s point number one.

Point number two is our cross sell, I mean that’s why we have been working very hard this year, whether is the Casino, Poker vertical cross selling or the introduction of the sports-betting all these will help us basically generate additional revenue dollar that we need to acquire that customers.

Now even if we did the second thought as we need to prepare in the worst case situation that customer acquisition costs will continue to rise this year then we will have enough revenue to [adjust] for such acquisition. So, we are quite, we have been sanguine that with these two part strategy. We will continue how to compete, but we believe that our business model and profitability could be intact.

Andrey Glukhov - Brean Murray

Okay. And last question on the Pachinko side of the business, when do you expect to sort of become profitable in that effort?

Arthur Wang

Andrey, this is Arthur. I think, we continue to ramp up the business and I think when our numbers become significant or meaningful, we will begin to release them as we did with Everest Poker. So my hope is that we begin to release some operating metrics or financial metrics in Q1.

Andrey Glukhov - Brean Murray

Thank you.

Operator

And your next question comes from the line of Atul Bagga with ThinkEquity. Please proceed.

Atul Bagga - ThinkEquity

Hey guys. Thank you for taking my question. Can you talk a little bit about Q3, how the Poker business performed month-over-month was the weakness mostly in the month of July, August, September, can you talk a little bit on that.

Arthur Wang

Sorry Atul, you broke up in there. Can you repeat your question?

Atul Bagga - ThinkEquity

Sure. My question was can you talk a little bit on month-over-month performance of Poker in Q3, was the weakness mostly in July, August, September? When did you see the weakness, is that -- ?

Arthur Wang

Yeah. We don’t specifically provide months-over-months data. But I can tell you that August was the weakest of the three months in Q3. And weaker August was really the month that we see exceptional amount of weakness comparing to previous years. So August was definitely the weakest month.

Atul Bagga - ThinkEquity

And if you were to breakout this weakness in two parts, the seasonality and competition. Where do you think most of the weakness is coming from? Is it competition or is it more seasonality?

Quincy Tang

We believe it’s the combination of both probably with seasonality taking most of the blame for the seasonal downturn. The seasonal downturn is worse than previous years, but then, it was not out by a huge margin. So, we believe the seasonality is still the key reason for the Poker, the weaker August.

Atul Bagga - ThinkEquity

And is there any reason for us to believe that competition from the US facing side will not intense over the next quarter, next year?

Quincy Tang

They are certainly here. As we have mentioned in our prepared remarks and some of our responses, they are certainly here and would they have an impact? They definitely will have an impact. But as a company we believe we can even with the competition we can continue to deliver growth that is acceptable as by way of target for us and profitable by way of our financials.

Atul Bagga - ThinkEquity

And on the World Series of Poker broadcast, can you share some anecdotal evidence or maybe in terms of your expectation or what you might have seen with the previous sponsors in the past? What kind of uplift you can reasonably expect from the sponsorship?

Quincy Tang

PartyGaming became a US$10 billion company overnight when they list themselves in 2006 and if you talk to most industry participants, they would say, one of the key reasons why they become number one is because of their sponsorship of World Series of Poker. So, we certainly have a lot of confidence in the association with World Series of Poker because this is the premier event in the world and so far as physical poker goes.

And the anecdotal evidence is abundant. But again this is our first year. We do not want to putout numerical guidance until we have empirical data. And then as we get there, as we collect more data, we can share more with you.

Atul Bagga - ThinkEquity

Thank you. And lastly, can you talk a little bit on your expectations from CryptoLogic games that you are launching next year?

Quincy Tang

It’s one of the many growth initiatives of ours and we think the Marvel IP certainly has appealed to those existing customers and more importantly, as we talked about, how best to run our brand in terms of product offerings to customers and how that would basically not only the way we look at it, it’s not just the incremental revenue we generate off of these games, but the increasing customer stickiness and satisfaction and association or understanding of our brand. And so, we think this is a very good at to our platform.

Atul Bagga - ThinkEquity

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of [Alan Ruskin] from Edge Capital Partners. Please proceed.

Alan Ruskin - Edge Capital Partners

Hi, thank you for taking my question. Most of the questions have been answered. I wanted to ask you about any thoughts on the stock buyback with the price of the stock where so low?

Quincy Tang

I take a step at it and I please Chairman if you wish. We as Management here continue to look at obviously the value of return back to shareholders, stock buyback, dividend payments all included and we evaluate all of this on a constant basis. And at this stage we think given the market we are in and opportunities we have seen they are probably higher returns way for us to utilize the cash we have on hand than a strict return back to the shareholders. So, at this stage we don’t have definitive plan for a share buyback or a dividend payment, but that is something that we constantly evaluate.

Alan Ruskin - Edge Capital Partners

Okay. Thank you.

Operator

At this time there are no further questions in the queue. I would now like to turn the call back over to Mr. Brad Miller for closing remarks.

Brad Miller

Thank you very much operator. That concludes today’s call. On behalf of GigaMedia thank you very much for joining us. For further information on GigaMedia or contact company, please visit our website at www.gigamedia.com.tw as in Taiwan. Thank you.

Operator

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

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Source: GigaMedia Ltd. Q3 2008 Earnings Call Transcript
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