(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)
Cash-rich GigaMedia Ltd. (NASDAQ:GIGM) has been quietly executing an aggressive multi-pronged turnaround resulting in a leaner business, better positioned to deliver sustainable growth and profitability in 2014 and beyond.
Commenting on the company's most recent quarterly results GIGM CEO Collin Hwang stated:
"In the third quarter 2013, we made good progress in strengthening and optimizing our existing PC games business while preparing for the launch of our new mobile and browser-based games business. During the next several months, we will continue work on our new social casino games platform and deploying our cloud services business." CEO Hwang added, "We will also continue reviewing several potential strategic transactions that would enable us to accelerate our growth and enhance our value. Overall, we are confident that we are on track to deliver improved financial performance and enhanced shareholder value in 2014."
Specifically, the company reported the following 3Q 2013 accomplishments:
- General and administrative expenses were down by about 31% since 4Q 2012 while corporate operating expenses dropped by 49%.
- Consolidated operating costs were down 41%.
- Loss from operations decreased approximately 47 % from 4Q 2012.
- Healthy financial position to support long-term value creation -no debt; cash and marketable securities-current of approximately $74.3 million, or approximately $1.47 per share.
- More importantly, the company was bullish about the growth prospects for 2014 and beyond. For instance, management plans to begin launches of new social casino games late in the fourth quarter of 2013. The games will be in browser and mobile format, positioning GIGM to benefit from strong growth trends in these markets. The company also has aggressive growth plans for its cloud-services which are expected to make initial revenue contributions in Q4 2013. The company plans to launch multiple new cloud services in 2014 expanding target market to larger enterprises. I will provide more detail regarding these developments later in this article.
The market is obviously not aware of GIGM's significant potential share appreciation going forward since it closed at $1.03 on January 27 or almost 50% below cash value and 220% below book value of $2.27.
Another bullish factor that many investors might not be aware of is the fact the CEO Collin Hwang has put his money where his mouth is by buying almost a million shares in the open market!
But it appears that some value investors have GIGM on their radars as reflected by a significant volume spike in the last two trading days.
The strengthened business outlook is the end result of decisive steps management took in 2013 to turn around GIGM's financial performance. GigaMedia entered 2013 facing many challenges. The company was dependent on an online games business operating an unfocused, aging portfolio of games in a shrinking market - PC games, and its pipeline was weak.
To address these challenges, management restructured operations in 2013. The restructuring focused on cost cutting, building two new growth platforms in high-growth game markets - mobile games and social casino games, and strengthening a third growth platform - a new cloud computing business. GigaMedia also invested in new technology to support growth, including the acquisition of a majority interest in a mobile games developer, and strengthened its management team and board of directors.
The company implemented productivity initiatives to improve margins; simplified operations by reducing legal entities; closed underperforming gaming operations in Shanghai; disposed of operations in Singapore as well as non-strategic investments in game studios; completed the sale of GigaMedia's remaining 33.66 percent interest in its underperforming legacy online gambling operations; reduced personnel from approximately 500 to 300; and so on.
Going forward, the company focus is on growth markets: mobile and social casino games, and cloud computing services.
- Games business expects growth: New mobile games launches expected in the first half of 2014, followed by new social casino games.
- Cloud business forecasts growth: New cloud services expected to make initial revenue contributions in Q4 2013; multiple new services to be launched in 2014 expanding target market to larger enterprises.
Online games business
GigaMedia is investing in and repositioning its online games business to align itself with strong growth in browser/mobile games in the social casino sector. The company is leveraging its expertise in online casino games to develop new browser/mobile casino games in-house, which it expects to launch beginning in late 2013. Supporting this, management is also making critical operational improvements, including upgrading the game server system and integrating the game testing/development environment to enhance efficiencies and strengthen operations. Management targets a comprehensive, multi-platform offering of self-developed browser, mobile and PC-based games by early 2014, delivering improved financial performance and lower business risk.
Cloud services business
Developed by GigaMedia as an integrated platform of critical services and tools for small-to-medium enterprises (SMEs), GigaCloud provides cloud-based Software as a Service (SAAS) offerings. GigaCloud's hosted services enable SMEs to outsource key IT needs and increase flexibility, efficiency and competitiveness. The business launched services in April 2013 with an initial product offering of phone, fax, storage, and video security systems.
Expansion of GigaCloud in 2014 will begin with both new hosted and new private SaaS applications and services refocused on larger SMEs; new consulting services are also planned. Longer term, GigaCloud targets a full range of cloud products and services, which will include Infrastructure as a Service (IaaS) and Platform as a Service (PAAS).
To accelerate growth of its GigaCloud division, GIGM announced on Nov. 7, 2013 that technology executive Simon Lee joined the company as chief executive officer of its cloud business, GigaCloud. According to the press release, Mr. Lee helped develop and grow the Taiwan branch of global technology services leader Atos from 2006 to 2013. At Atos Taiwan, Mr. Lee spearheaded penetration of the telecom, warehouse, and government sectors, surpassing double-digit sales goals every year.
GigaMedia CEO Hwang commented: "Simon is an energetic, ambitious technology professional who is passionate about cloud and has a wealth of industry knowledge, he has a proven track record of identifying new business opportunities and developing cloud solutions and services that exploit them -- all of which make him exceptionally well qualified to lead and grow GigaCloud."
Mr. Lee commented: "Cloud is in an early, high-growth stage in Taiwan, and GigaMedia has positioned itself to benefit from this, launching trial operations this year with an integrated software platform focused on SMEs."
"We are now planning to expand the business with new products and services targeting new markets. I am excited to start ramping up GigaCloud in 2014 to take advantage of tremendous market opportunities and am delighted to have this opportunity."
In summary, GIGM is a compelling value under $2/share because the new management has executed a successful turnaround and positioned the company for accelerated profitable growth in 2014 and beyond. The company's strong financial position of approximately $74.3 million in cash and short-term investments and zero debt is unheard of for a company of GIGM's size. Finally, it is reassuring to know that the company CEO has a vested interest in the growth of the company by buying almost a million common shares using his own money. But as with any investment in the stock market, anyone considering buying GIGM shares should do his/her own due diligence by carefully reading the risks and uncertainties as discussed in the company's filings with the SEC.
Disclosure: I am long GIGM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.