Brad Miller – Director, IR
Collin Hwang – CEO
Dirk Chen – CFO
GigaMedia Limited (GIGM) Q2 2013 Earnings Conference Call August 22, 2013 8:00 PM ET
Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2013 GigaMedia Limited Earnings Conference Call.
(Operator Instructions). I must advise you that this conference is being recorded today, Friday, the 23rd of August, 2013.
I would now like to hand the conference over to your speaker, Mr. Brad Miller. Thank you. Please go ahead.
Thank you, operator. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia’s second quarter 2013 financial results. With me today are Collin Hwang, CEO, and Dirk Chen, CFO.
Before we begin, 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 April 2013.
This presentation is being made on August 23rd, 2013 in Taiwan. The content of this presentation contains time-sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, GigaMedia will not be reviewing or updating the material that is contained therein.
After today’s prepared remarks, we will respond to questions we’ve received by email and we’ll also take live questions.
With that, I’d like to turn the call over to our CEO, Collin Hwang.
Hello everyone. Thank you all for joining us today.
In the second quarter we continued to work on turning around our business and delivering profitability. The restructuring and employee incentives we implemented are helping.
Revenue was $3.7 million, which was down from the quarter due to seasonality and the market trend in PC-based games. But revenues were better than expected due to outperformance of the [turnaround] in the MMO game A.V.A.
Operating expenses continued to decrease and reached a record low. We have clearly made good progress on the cost side of our business. I want to highlight that our lower expense structure will be a big advantage as we grow revenues. As we scale up, we expect to be able to capitalize on the bottom-line leverage we will get out of that.
The next step in our turnaround is driving revenue growth. Let me now outline for you the plans we are executing to take us there. First, to grow GigaMedia, we are increasing focus on social casino games. We described this in our June 25th's press release. Today I will again provide a brief broad outline of these plans. Over the next six months we expect to fill in this outline with additional news and details.
Our growth plan [starts with] building a strong multi-platform offering of social casino games. Social casino games are our core strength and has been the strength of FunTown since the business started over 10 years ago. We already have one of Taiwan's leading offerings of mahjong and social casino games in PC-based format.
Our mahjong and casino games are not only market leaders, they're also the highest performing segment of our business in terms of profit. The single biggest value opportunity for GigaMedia is leveraging this expertise. We are now doing exactly that, executing plans to extend our social casino platform to web-based and mobile games.
The expansion of our platform to web-based and mobile games is a critical important step. Why? Because it will realign our business with the market. The online game business is a technology-driven industry. Technology is driving changes in consumer behavior, causing the accelerating shift from PC-based game to web and mobile games as smartphone and penetration grows. Technology and game platforms can be either constrained or enabled. At present this is a constraint for our business. We are working hard to ensure our platform becomes an enabling factor of our long-term success. Let me briefly explain this.
With a scalable architecture [powering] a growing number of games and brands with minimal or no additional effort, we can generate consistent personalized experiences across channels, creating a richer and more engaging experience for consumers and our strategic partners, as well as improved loyalty and customer acquisition capabilities. We believe operating a strong multi-platform offering of social casino games will deliver solid revenue growth and overall better economics than other business models.
In Korea, one of the world's most advanced mobile game markets, we know that a developer of mobile games lost approximately 70% of their games revenue due to these revenue sharing with publishers and platforms. In contrast, game platforms such as [Gree] are providing strong, highly profitable growth; we see great opportunity there. Two keys to success going forward will be building a quality pipeline and [top] technology to support a richer game experience.
We have already started converting many of our PC-based casino games to web mobile format and have made initial investment in technology to support business goals. Complementing these will be M&A and strategic partnerships. M&A will accelerate the build-out of our pipeline and our technology platform. Strategic partnerships allow us to maximize our business opportunities across Greater China. With regard to M&A or strategic transaction, we have identified targets and we'll update everyone going forward.
Let me wrap this all up turning back again to financial results. Q2 revenues were negatively impacted by the ongoing decline of PC-based games. We will continue to face this challenge ahead as we transition our business.
When do we expect to start delivering revenue growth? We forecast launch of our web-based and mobile games and our new platform in Q4 this year or Q1 next year at the latest. Initial focus will be on the Taiwan market. Long term, we are reviewing regional opportunities. So by Q4 or Q1, we expect to have stronger operations with [top] technology, a powerful game platform, and a rich pipeline of games driving improved revenue.
Finally, our growth plan also includes building up our new cloud service business focus on the SME market in Greater China. Trial operations are underway in Taiwan. We are getting good feedback from [SMB] subscribers and has been busy using feedback to adjusts our products and systems.
Within the next six months we plan to implement [SEO] and partner marketing initiatives to drive subscriber growth. We continue to hold an early mover position and remain committed to growing the business by leveraging strategic channel and technology partnership going forward.
In sum, we believe 2013 will be a watershed year for GigaMedia. We are transforming [an old unfocused] games company into a new leader in social casino games using cutting-edge technology. And we are building a new cloud service platform to take advantage of the strong market opportunity across Greater China. We are confident these steps will result in a stronger company, delivering better financial performance and improved shareholder value.
We thank you for your interest and for joining us today. I will now hand the call over to Brad to review 2Q results. Thank you.
Thanks, Collin. Next let me turn to financial results.
Revenues declined in 2Q to $3.7 million. This resulted from the traditional summer downturn in online gamer activity and also from softer demand for PC-based casual games which we currently offer but are working to transition away from. Helping to offset this decline was strong performance of the MMO A.V.A. which was up 19% compared to last year.
In line with the revenue decline, gross margin for FunTown declined to 54.4% from 56.6% last quarter.
Consolidated operating expenses continued to trend lower as a result of our ongoing efficiency initiatives and cost controls. Consolidated operating expenses were $3.3 million which was down 10% from $3.6 million in the first quarter of this year and it was down 49% from $6.4 million a year ago. G&A was down 7% quarter over quarter and G&A was down 55% year over year. Corporate operating expenses were an all-time low as a public company. As Collin mentioned, we expect our new lower cost structure to give us good operating leverage when we begin benefiting from growth initiatives and from growing our top line.
Consolidated loss from operations was $1.3 million in Q2. We recorded non-operating income of $1.4 million in Q2, mainly composed of a gain of $1.2 million related to the disposal of our non-strategic legacy investment. As a result, net income in Q2 was $84,000 compared to a net loss of $1.4 million in Q1 and a loss of $3.5 million in Q2 last year.
With regard to our balance sheet, GigaMedia's cash, cash equivalents and marketable securities current were $73.0 million at the end of the second quarter, which is approximately $1.44 per share. During Q2 we fully repaid all of our short-term debt.
Looking ahead, as we mentioned today, we face an ongoing decline in our legacy PC-based casual games business. Balanced against this, our MMO game A.V.A. is continuing to perform well. We expect A.V.A. and to a lesser extent Tales Runner to benefit in the third quarter from the traditional surge in online gamer activity.
Operating expenses may be negatively impacted in Q3 by non-cash impairment charges related to legacy MMO game projects. With the focus of our games business on social casino now, we have no future plans to develop and operate MMOs. This may trigger some accounting adjustments such as adjustments in our prepaid licensing cost. Again these will be non-cash charges.
Overall, management forecasts operating and net losses in the third quarter. We expect operating cash burn to be small in Q3, less than $1 million.
That's our 2Q review and business update for today. Thank you.
Before we proceed now to Q&A, I just want to remind everyone, as is standard protocol on these calls, please limit yourself to one question at a time so that we all have an opportunity to participate. Operator, thanks. Let's begin the Q&A.
There are no questions at this time. I would now like to hand the conference back to today's presenters. Please continue.
Thanks, operator. This is Brad Miller, Investor Relations Director again.
Now we received a question by email, and the question will be answered by Collin. The question that we received was, given all the problem experienced in the past doing business in China, what will be the structure to develop business there going forward and protect our position? Will you partner with affiliate firms? Can operations be wholly owned? Is there any timeframe for your presence in China? So Collin will address this.
Yes. Thanks for the question. We do plan on leveraging China for growth. And we believe R&D is a critical success factor for online games. And we believe we can source R&D in China. Let me explain this again. Just want to say about R&D, [research] center in China, we do believe China will surely not only just [license] games from overseas but sooner or later they will be a big exporter for games. So that's why we're considering setting up the R&D center in China.
Regarding to the ownership of this R&D center, we can, through proper and formal structure, we can actually sort of 100% own entity in China, that is not a problem. The R&D structure at the moment only (inaudible) operate in China. However, the good news is we have received information that the Ministry of Culture of China are loosening control over the mobile game industry. For example, they no longer require examination application for each game released in China on mobile devices. However, that's the initial news that we have received, which is we believe is a good sign.
So in terms of China and pipeline, we initially will have R&D center which is 100% owned by GigaMedia. And by the time that we start the marketing and sales in -- outside China region such as Taiwan, Japan, Korea. After that we will start moving into Chinese market. We believe at the time there'll be clearer picture in terms of regulation in China and we believe there will be loosening control over the mobile industry over there. So we believe that's a positive progress in terms of the regulation in China for mobile games. Thank you.
Thanks, Collin. Another question, this coming in, I'll address this -- give this over to Dirk. How much revenue decrease do you expect in Q3? Dirk?
Hi everyone. This is Dirk Chen, CFO of GigaMedia. Usually in Q3 is our peak season for game business. But, however, for GigaMedia, our casual games (inaudible) peak event. And as we know, peak events can [now face a] decline in the overall market. So it's not easy to predict revenue, what will it be in the third quarter. However, I think revenue, we still have a big chance increase a little bit in Q3. Thank you.
Thanks, Dirk. Another question follow-up question here, financial question, regarding operating cash burn. What was the operating cash burn in Q2 and what do you expect in Q3? Dirk?
Okay. Thank you, Brad. In second quarter, our total cash burn is about $5 million for GigaMedia. This $5 million include, we have prepay of short-term bank loan, about $7.8 million in the second quarter, and we also disposed a non-strategic legacy investment in the second quarter, which we received about $2.8 million. And from the operating activities, we only had suffered a cash burn of about $300,000 for operating [ability]. So combine all these items, the total cash burn is about $5 million in the second quarter. And as Brad mentioned earlier, in Q3 our expectation here are very small, we forecast is about -- less than about $1 million in the third quarter. Thank you.
Operator, at this point, are there any further questions?
There are no further questions at this time. Please continue.
Okay. Operator, that's all we have for today.
For further information about GigaMedia or if you have questions and would like to contact the company, please go to our website at gigamedia.com.
That concludes today's call. Thank you all again for joining us.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!