GigaMedia's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.13.13 | About: GigaMedia Limited (GIGM)

GigaMedia Limited (NASDAQ:GIGM)

Q3 2013 Earnings Call

November 13, 2013 7:00 PM ET

Executives

Brad Miller – Director, IR

Collin Hwang – CEO

Dirk Chen – CFO

Analysts

Jeff Gordon – Private Investor

Greg Weaver – Investec

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2013 GigaMedia Limited Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday, 14 November, 2013.

I would now like to hand the conference over to Mr. Brad Miller. Thank you. Please go ahead.

Brad Miller

Thank you, thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia’s third 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 U.S. Securities and Exchange Commission in April 2013.

This presentation is being made on November 14, 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 again respond to questions we’ve received by e-mail and we’ll also be taking live questions.

With that, I’d like to turn the call over to our CEO, Collin Hwang.

Collin Hwang

Hello everyone. Thank you all for joining us. The third quarter results were in-line with our expectations.

Moving quickly from top to bottom through our results. Revenue, revenue was up slightly reflecting greater execution by our team running the MMO game AVA.

Cost, we continue to benefit from our lower cost structure, not including impairments in Q3. Consolidated overwriting expenses were down approximately 41% compared to the Q3 last year.

And net income, net income was small, the period was essentially breakeven, excluding impairments, comparable to the second quarter of this year. More importantly, we continue to make good progress preparing for strategic expansion in 2014 and beyond which has strengthened our outlook.

Let me update you now on where we are with development of growth in initiatives, in online games and cloud computing.

In online games, earlier this year, we formed new mobile games and social casino games team. Part of the strategy repositioning of our games business is to align it with where we see market growth and opportunities.

Over the past several months, we have added new talent to these teams, including new directors of our mobile games and social casino games as well as a new Chief Technology Officer.

In addition, we recently acquired a small mobile game development team in Taipei, which gives us immediately technology, skills and experience to support our growth plans.

We expect multiple new game launches over the next several months. Following that, in the second half of 2014, we will be launching the MMO game ArcheAge. While MMOs are not our focus and we have historically not done well bringing these games to market, the cost for ArcheAge are largely already sunk. And we now have a strong experience in MMO operation team that regularly outperform our expectations and made AVA a top game in Taiwan for several years running.

Based on progress to date, in strengthening our team, our pipeline, building a new technology platform and executing new growth plans, management is confident that our online games business would deliver growing revenue in 2014.

Cloud computing, to drive further growth and diversify our business, we also launched a new cloud computing business earlier this year. As announced last week, we have added a new CEO for the cloud business, who comes with an impressive record of developing new cloud business and driving growth. Under his leadership, we now forecast initial revenue contributions in the fourth quarter of this year and we will be applying key learning FunTown operations this year to pursue new expansion plans for 2014.

We are re-focusing our hosted solutions from the small enterprise in the SMB market to this, with larger revenues. And we’ll be launching a whole new category of solutions, so called private solutions. In response to request that, we have had from the market for them.

Also new for 2014, there will be consulting services to help enterprise managed cloud solutions and maximize the effectiveness longer terms. We look to enlarge our opportunity by offering a full range of cloud solutions and services, including software as a service, infrastructure as a service and platform as a service.

Overall 2013 has been a transition year. And we have made great progress. Our outlook for strategic expansion and improve financial results is bright. With a growing pipeline of mobile and social casino games, the MMO game ArcheAge, a new and expanding cloud business and the solid balance sheet, we expect our sharply lower cost structure.

Growth plan and strategic M&A to drive significant growth in shareholder value in 2014 and beyond. We thank you for your interest and for joining us today.

I will hand the call over to Brad, to review the Q3 results.

Brad Miller

Thanks, Collin. Next, let me turn to a few items on our income statement and balance sheet. Revenues were $3.8 million up slightly quarter-over-quarter and we’re composed entirely of online game revenues.

The quarter-over-quarter increase was due to strong execution by the team running the MMO AVA. Growth in MMO revenues more than offset weaker metrics in PC based category games which we currently offer but are working to transition away from.

In line with the revenue, gross margin increased slightly to 53.3% from 52.8% last quarter. Consolidated operating expenses were $6.6 million including non-cash impairment losses of approximately $3.1 million in the third quarter which was primarily related to the write-off of the legacy game project pursued by previous management, a SpongeBob SquarePants MMO.

Regarding the write-off, past strategies by previous management were to develop and license major MMO titles. These strategies were not successful and we are no longer pursuing them. This MMO project no longer fits with our strategy and we will not be operating the game in the future so we haven’t prepaid licensing fees related to the project.

We will remain focused on mobile and social casino games and we are confident that the opportunities we have in these markets far surpass the potential of past strategies.

Excluding the 3Q impairments consolidated operating expenses were steady quarter-over-quarter at approximately $3.4 million. As Collin noted, we have made great progress in lowering our operating expenses this year. And for the second straight quarter we had record low headquarter expenses.

Consolidated loss from operations for the third quarter was $4.6 million, excluding the non-cash impairments, consolidated loss from operations was approximately $1.4 million.

We recorded non-operating income of $1.3 million in Q3 mainly composed of the disposal of our non-strategic legacy investment, foreign exchange gains and investment income. Net income in 3Q was a loss of $3.1 million excluding impairments net income was approximately $30,000 which was comparable to the previous quarter.

With regard to our balance sheet, GigaMedia’s cash and marketable securities were $74.3 million at the end of third quarter or approximately $1.46 per share. The company has zero debt.

Looking ahead, we will continue to face the challenge of an ongoing decline in our legacy PC based casual games business. We will also stop operating the game AVA in December following a determination that renewing the games license under new less favorable terms was economically unattractive and very difficult to make a profit.

Finally, at year-end, we will be revealing goodwill carried on our balance sheet related to the acquisition of FunTown in 2006 and evaluating the potential need to impair some of this goodwill.

But balanced against this is a strengthening outlook based on the development status of growth initiatives for online games and cloud computing businesses. We expect multiple new game launches over the next several months to be followed by launch of our new social casino games platform and then in the second half of 2014, we will be launching the game ArcheAge.

We also expect new contributions from cloud computing in fourth quarter and we forecast momentum to continue for cloud from new growth plans for 2014.

At this time, it’s difficult to forecast GigaMedia’s short-term results. We plan to update forecasts once we have more definitive information available to us. But longer term, we are confident that we are on track for accelerating revenue growth, significant improvement in our financials and increasing shareholder value.

That’s our 3Q review and business update for today. Thank you.

Before we proceed to Q&A, just a quick reminder for everyone, as its standard protocol, we ask that you please limit yourself to one question at a time so that everyone has a chance to participate. Operator, let’s please begin the Q&A.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Our first question comes from the line of Jeff Gordon. Please go ahead.

Jeff Gordon – Private Investor

Yes, how are you doing guys? I hear a lot of talk about how the cloud computing and the social games will have greater advancement in the year 2014. Is this something you were looking at for January 2014, December 2014? Could you give me more of an idea on the timeframe?

Brad Miller

Okay. Jack (ph), this is Brad Miller, Investor Relations Director. Thanks for your question, thanks for calling in. As we’ve said, it’s very difficult at this point to give short-term guidance. I think the best we can do is say that over the next several months we’ll see some new game launches.

Close on the heels of that we’ll see the new social casino games platform developed. So I think what we can say for short-term at most I think we can say, mobile games coming first, social casino games coming next. And then we move into sort of mid-part of the year, second part of the year where we’ll see ArcheAge.

And again, we have a team here that’s very experienced with running AVA, very good MMO team that’s excited to start operating ArcheAge next year. As far as cloud goes, we have a brand new CEO who has some exciting plans. But I don’t want to put the cart in front of the horse here. He’s delivered some revenues in 4Q and we’re looking at growing revenues next year. But at this point it’s too early to forecast quarter-by-quarter.

Jeff Gordon – Private Investor

Thanks. I have another question, could I ask it or press star one again?

Brad Miller

Why don’t you go ahead?

Jeff Gordon – Private Investor

I’m just curious, every time I’ve been to GigaMedia, they always stress about how much the book-value is. Once again, your book-value went up, I think it’s $1.44 a share. But the stock is lagging at near $1. I’m curious why insiders haven’t been buying the stock?

Brad Miller

Okay, thanks Jack (ph). I think actually the cash value is about a $1.46 or $1.47 per share. And the book value is above that, I would say $2.27 per share. As far as insider buying those I think you’ve overlooked the fact that there has been insider buying. Our CEO Collin purchased shares close to 1 million shares to this point.

As far as why other insiders haven’t bought to this point, I can’t speak for individual’s capacity to buy. I think everybody is, there is consensus among management and the board that the company is on track and the shares are undervalued but everybody has to make their own buying decisions. And I don’t think I can speak for them.

Jeff Gordon – Private Investor

Okay. I have just, another follow-up question on that. I understand you were talking about the insiders on the way, of the million purchases. I know you’re on 1 million shares of the JCE, wouldn’t they make more sense not to have that stock and to use some of the cash that the company has that the company should buyback the stock to do a stock buyback?

Brad Miller

Well, I’m not quite sure what the question was, is the question, should we do a share buyback?

Jeff Gordon – Private Investor

Question is, why isn’t the company doing the stock buyback to enhance shareholder value?

Brad Miller

Well, we have done buyback in the past, something that we continue to look at and review with the board. And as we’ve said in the past, we have a number of different restrictions on our ability to buy back shares due to Singapore rules and NASDAQ rules.

So, we’ll continue to look at that. We’ll be looking at all possibilities, we put everything on the table to look at what we can do to support and drive shareholder value. We’re not turning our back on that.

Jeff Gordon – Private Investor

Okay, I understand that. But I’m sure you know the rules allow you to buy some shares back. I think with that any shares back it doesn’t sound as good as message even we see some shares being bought back.

Brad Miller

Okay. Thank you.

Operator

All right, thank you. (Operator Instructions).

Brad Miller

Okay, operator. We’ve received a few questions by e-mail we could address at this time.

Operator

Yes.

Brad Miller

The first question that we’ve received is regarding the acquisition that was made of Taiwan Web Mobile Games Development Company. Regarding this company, can you give more details on it and pull these revenues etcetera? So I’ll let Collin address this question.

Collin Hwang

Yes. (Inaudible) is a highly skilled firm specialized in mobile game and mobile platform development. And they are about 1.5 years old. But they have already signed several contracts with about half dozen game companies. We purchased a major stake. And they operate on the basis of revenue sharing. So this investment has upside potential and a strategic – is suppose our growth plan in mobile games. And we see it as a first step in building up our R&D.

Brad Miller

Thanks Collin. Some other questions that have come in from investors, financial questions, I’ll address these to Dirk. What was the operating cash burn in Q3 and what do you expect your cash to be in 4Q?

Dirk Chen

Okay, thanks Brad. Revenue operating cash burn in Q3 was about very small, about $78,000. And I say it’s pretty small in Q4 again. We already paid off our debt in Q2. So, GigaMedia currently is a non-pay outstanding right now.

And in Q4, I’ve beside (ph) the cash balance in our business activity, I forecast we will have a cash increase about $2 million, that’s because we tried to close preferred disposal in Q4. And this is where we’re putting up cash increase about $2 million in Q4.

We may make some borrowing from the local bank because we have to support our local cost initiative. And while the currency U.S. currency trend stronger we will use our U.S. dollar precision to pay off the entire borrowing in Q4.

Brad Miller

Okay, thanks Dirk. Another financial question, for Dirk, that came in on the impairments. Could you give a little bit of description of the impairments that you might be taking in Q4 and give us an indication of the size of the impairment?

Dirk Chen

Sure. I think this year we were clear to evaluate our goodwill. And the goodwill, we carry it on our balance sheet. This is related to the acquisition of our campaign business in FunTown in 206. However, over the past so many years, I’ve seen the game environment is changed so rapidly and significantly.

So we first time we evaluate our goodwill on last year and we impaired about $12 million in 2013. This year, I’m seeing with last year with a small concept to evaluate our goodwill. However I would like to point out this goodwill impairment which is the non-cash impairment. And also I forecast the impairment line should be this than more last year. Thank you.

Brad Miller

Smaller than last year.

Dirk Chen

Yes, yes.

Brad Miller

Thanks Dirk. Another question that’s come in similar to the question that was asked on the call today, what can you do to increase investor trust in GigaMedia? Let me pass this on to Collin.

Collin Hwang

Yes, over time as we continue to execute our plans, we are confident that we will see good growth and increasing shareholder value. And that is we’ll go a long way to building investor trust in GigaMedia.

In addition to building our games business and our car business we are also taking actions to improve shareholder trust. First, the management has purchased over 950,000 shares to-date. Second, to increase investor confidence in our financial reporting, we have changed our audits this year to a big-four company firm KPMG.

And third, we no longer operate VIE, unlike many of our NASDAQ listed peers. So number four, we have strengthened our board of directors and majority of them independent directors. And the board has more oversight of our strategic matters than in the past.

For example, in the positions we have a straighter policies and procedures including a greatly lower level of investment that are required board approvals. They are much more – there are checks and balances in the system now than it was I say two years ago. And number five, we continue to host Investor Calls and benchmark our IR, against best parties. And looking ahead into 2014, we will be out on the road again meeting investors face to face.

In sum, building trust take time but we are committed to doing our part to building stronger relationship with investors. Thank you.

Brad Miller

Thanks Collin. Operator, let me turn this back to you now. Do we have any questions, any people waiting?

Operator

Yes. Our next question comes from the line of Greg Weaver from Investec. Please go ahead.

Greg Weaver – Investec

Yes, hi. What percent of your $3.8 million revenue in the current quarter was associated with AVA?

Brad Miller

Percentage of revenue from AVA is going to be about 30%.

Greg Weaver – Investec

So, in the March quarter that will be totally gone right?

Brad Miller

Right. We’re stopping operations in December.

Greg Weaver – Investec

Okay. Thank you.

Operator

Thank you. (Operator Instructions).

Brad Miller

Okay, operator. Thank you very much everyone 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 visit our website at www.gigamedia.com. That concludes today’s call. Thank you again for joining us.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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