Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
ChinaDirect Logo

GigaMedia Limited (NASDAQ:GIGM)

Q4 2006 Earnings Call

March 13, 2007 8:00 am ET

Executives

Brad Miller - Director of IR

Arthur Wang - CEO

Thomas Hui - CFO

Analysts

Traci Mangini - ThinkEquity Partners

Todd Eilers - Roth Capital Partners

Chang Qiu - Forun Technology Research

Andre Steiner - Notre-Dame Capital

Alicia Yap - Bear Stearns

Bill Garrison - Ironworks Capital

Andrew Schopick - Nutmeg Securities

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GigaMedia Limited Conference Call to discuss Fourth Quarter and Full Year 2006 Financial Results.

At this time, all participants are in a listen-only mode. Following the formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, the 13th of March 2007.

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

Brad Miller

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our fourth quarter and full year 2006 results conference call for GigaMedia Limited.

Here again to speak with you and answer your questions today are Arthur Wang, our CEO, and Thomas Hui, 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 U.S. Securities and Exchange Commission in June 2006.

This presentation is being made on March 13, 2007. 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.

The agenda for today's call includes first a review by Arthur Wang of our Q4 and full year business activities and financial performance. Thomas Hui will then provide details on our financial results during the period. After the speaker presentations, we will go into a question-and-answer session.

And with that, I would like to turn the call over to Arthur, our CEO.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

To sponsor a Seeking Alpha transcript click here.

Arthur Wang

Thanks Brad and thank you all for joining us. We are very, very pleased to announce today our 2006 full year and fourth quarter financial results. Full year revenue climbed 113%, driving a net income line that tripled to $30.8 million from just $6.3 million in 2005.

[Technical Difficulty] quarter, the outstanding full year numbers were the results of an even more outstanding fourth quarter. We have recorded an all-time high consolidated net profit of $9.8 million. Most noteworthy, our quarterly operating income crossed $8 million for the first time in Q4, pointing to an even better 2007.

In simplest terms, we had a great year with excellent performance in every business unit. Although we delivered today strong financial results, I believe that 2006 numbers tell only half of the story. Even more important are the key strategic accomplishments of the year.

Let me review our main business units with a focus on our strategic positioning.

First, our poker and traditional gaming software business. Over the last three years, we have invested heavily into building a leading pan-European online entertainment brand and platform, and we have enjoyed remarkable success, led by our Everest Poker product.

Everest Poker was a new product that we developed internally in 2004, launched in 2005, and from the outstanding start have grown approximately 50% quarter-over-quarter in each of the last five quarters. Today, Everest Poker stands at the top of the ranking as one of the top five poker platforms in the world and actually, one of the top three in the world excluding sites that continue to accept United States players.

We have built a well known and well respected online brand, a pan-European online entertainment brand and platform serving 350 million consumers in the European community with a localized offering in 11 languages.

We plan to continue to invest in building this brand and platform, to enhance our entertainment offerings. And by doing so, to increase our ability to monetize on the platform, as revenue and operating leverage increase.

I believe Everest Poker is a demonstration of both smart strategy and strong execution.

We have grown rapidly in part because of strong focus and strong execution. And in part, because of our strategy of targeting the emerging growth markets, Continental Europe and the giant non-English language markets of the world.

I note that all of our growth thus far has been organic. Although, we continue to explore partnerships, business combinations and acquisitions, which would create shareholder value and expand our market position.

Next, our Asian casual game business. 2006 was a key strategic year for us in Asia. We began the year with our FunTown casual game platform in Taiwan and Hong Kong, and have been busy building a pan-Asian game platform, primarily by acquisition.

Today, we have an online game platform that spans most of the Asian continent with large user numbers.

At present, we have over 50 million registered users. Over 7 million users, active in the last 30 days, and have peak concurrent users of over 175,000.

To this we add Southeast Asia, where we are the largest shareholder with about a 30% equity interest in an emerging leader Infocomm Asia Holdings. We believe the market opportunity in Southeast Asia is similar to that of China, three or four years ago.

All told, we've built an online game platform with an enormous footprint, providing the ability to deliver entertainment to users on a scale and with the efficiency of broadcast television. We believe this platform, which we initially monetized with online games, provides us with an opportunity to deliver a wide variety of entertainment for ourselves and future partners.

Notwithstanding our outstanding performance in 2006 and the strong financial results we report today. I personally am even more gratified, even more excited about the strategic moves we have made and about the powerful online platform we are building.

I believe the results today are but the early returns from our strategic investments into building a dominant online entertainment business.

Looking forward, I can say that the first quarter is doing very well, with continued strong growth in both Everest Poker and our Asian online game business.

In our poker software business, we are launching Everest Poker in three new languages, addressing an additional 70 million consumers, bringing our fully localized solutions from 11 to 14 languages, more than any other platform.

We've also released a completely new table design, integrated voice chat into our gaming platform and enhanced our underlying software code to offer improved speed and performance for improved player experience.

Q1 also sees the launch of our real money MahJong software, by our initial licensee, Carmen Media. We look forward to reporting further on this and our own initiatives into the Japan market in the near future.

We continue to be excited about the potential of this real-money Asian game business and expect it to be a strong contributor for the full-year.

In summary, 2006 marks the completion of three years under the new management team at GigaMedia. We have traveled far, from our early days as a loss-making ISP and music retailer, to our current position as a leading online entertainment provider.

We are thrilled with our progress to date, confident in our ability to continue to execute on our plans, and excited about our strategic position and prospects. We are building a new GigaMedia, with growing shareholder value as its cornerstone.

We thank you for your interest and continued support.

Thomas Hui

Thanks Arthur. This is Thomas Hui, the CFO here. And let's now look in more detail at the financial performance of our business in the fourth quarter. I would start with our consolidated results and then move to look at each business unit.

The fourth quarter of 2006 was outstanding from top-line to bottom-line across all our businesses. During the period, GigaMedia again delivered excellent organic growth.

Let me quickly summarize the quarterly results. Consolidated revenue grew 155% year-over-year, or 23% quarter-over-quarter to $30.1 million. The key drivers for our quarterly sequential revenue growth were record performance in our poker software business, and significant top-line growth in our Asian online game business.

Operating income rose 361% year-over-year, and 33% sequentially to $8 million, as a result of increased revenue and expansion in our consolidated operating margin. Our operating income margin jumped to 26.7% from 14.8% a year-ago and 24.8% in the previous quarter.

The strong performance of our Asian online game business, FunTown, in the fourth quarter drove both the sequential and the year-over-year expansion of our margin.

Net income jumped 317% year-over-year and 52% sequentially to $9.9 million, resulting in fully-diluted earnings per share of $0.17.

As stated in our release today, our fourth quarter net income also benefited from an after tax gain of $1.9 million as a result of the sale of certain marketable securities during the quarter.

We also maintained our financial strength during the quarter. During the period, our cash, cash equivalent and current marketable securities increased from $35.1 million to $36.2 million. Operating cash flow for the period increased to $9.1 million, partially offsetting cash payment during the quarter for our strategic investment in Infocomm Asia and our exclusive licensing of Hellgate: London, which together amounted to $12.5 million.

Capital expenditure was $1.8 million for the quarter and we recorded total debt of $12.9 million at the end of the fourth quarter.

Overall then, our business ended the year performing better than ever and continuing to gain momentum. We are thrilled with our progress to date and excited about our growth prospects.

Let's now look at our business unit performance. The gaming software business; the business unit again delivered all-time high in revenue and net income. During the fourth quarter, the business unit generated $19.8 million in revenue, representing 183% year-over-year growth and 34% growth sequentially.

Operating income increased 155% from the same period in 2005 and 29% sequentially. Operating income margin decreased slightly to 30.3% from 31.6% in the previous quarter due to increased selling and marketing expenses. Net income grew to $5.9 million, a 219% improvement year-over-year or 30% growth sequentially.

Let me quickly break this down further into results for our poker software business and our traditional gaming software business.

Our poker business again achieved record results. Revenues from our poker software products were $12.9 million, up 54% sequentially. Poker revenues represented 65% of the total revenue. This growth was largely driven by the increase in the number of poker players on our platform.

Approximately, 90,000 active depositing real-money customers played Everest Poker during the fourth quarter, up 47% sequentially. And during the fourth quarter approximately 43,000 new depositing real-money players were added.

Everest Poker user and revenue growth has been driven by the efficient targeted marketing and brand building initiatives, including high profile poker tournaments. During the fourth quarter, our licensee kicked off another exciting poker tour. The Everest Poker Nordic Summit, which targets the Scandinavian players.

Everest also launched its biggest event ever in late December, Avalanche; a $1 million poker tournament that runs through September. Everest and Avalanche are off to a flying start in 2007 positioning our poker software business for what looks to be another great year.

The traditional gaming software business also delivered strong results. Fourth quarter revenues from the traditional gaming software business were $6.9 million. This represented a 44% increase year-over-year and 8% growth sequentially.

In summary, this business unit continues to scale up rapidly. We believe that there is plenty of room for growth potential from organic expansion in our target markets, and we are confident in our ability to compete successfully in this market.

The Asian online game business, FunTown: FunTown accelerated its growth momentum in the fourth quarter, delivering sharply improved performance. During the period, we continued to execute our strategy to expand our game offerings to attract new gamers and increase gamer spending through offering an increased selection of in-game virtual items. We supported this with strong marketing initiatives, in both the third and the fourth quarter of 2006.

As a result of these initiatives, we accelerated the momentum we started to generate in the third quarter in our top line and experienced a significant improvement in our fourth quarter operating margin.

Revenues in the period increased 16% sequentially. Operating margin increased to 35% from 27% in the previous quarter, pushing up net income 48% sequentially. EBITDA margin was a healthy 44%.

Let me briefly go over a few key initiatives in the period. During the fourth quarter, we continued the strong marketing initiatives which began in the previous quarter. These include, the launch of a large mass media campaign with television commercials in Taiwan focused on our leading MahJong offering and traditional board games.

On the product side, we continued our program of monthly releases of new virtual items. As a result, monthly revenue per active paying account increased 20% sequentially to $16.6 in the fourth quarter.

In addition, our newly licensed advanced casual game, Tales Runner, continued to increase in popularity. It is now one of the most popular online casual games in Hong Kong and is gaining traction in Taiwan. Tales Runner was a meaningful contributor of FunTown's fourth quarter revenues, and we expect its contribution to increase in the first quarter.

We also expect to launch two to three newly licensed games in 2007 to further enhance our product offerings.

During the fourth quarter in 2006, we also announced a number of strategic growth initiatives in the Asian online game sector. Let me take a moment now to review each of these.

First, Hellgate: London. The global launch of Hellgate: London is scheduled for the second half of '07. We showcased Hellgate: London at last month's Taipei Game Show, which attracted tens of thousands of gamers. Given the extraordinary feedbacks we have received, we expect the addition of Hellgate: London to significantly increase our revenues and profitability.

Second, our China platform T2CN. As stated in our release today, we will begin equity accounting for T2CN in the first quarter. We are in very early stages of building this growth platform and expect near term financial contributions to be relatively modest. However, our focus on sports, our large and already established player base, and our access to a deep pipeline of games through our relationship with Korean developer and operator CJ Internet, all position us to deliver significant long-term growth.

Third, our Southeast Asian platform investment in Infocomm Asia. As this investment will be cost accounted for, we do not expect any immediate direct financial contributions. However, Infocomm Asia broadens our already unmatched regional footprint, giving us a strong position to secure regional licenses to top online games. We are also well positioned to develop regional marketing relationships with leading international brands and secure operational leverage through our regional footprint.

Finally, a quick review of our broadband ISP business. Our legacy broadband ISP business delivered another stable quarter. Increased revenue on the corporate side of the business helped offset a slight revenue decline on the consumer side of the business. And we continue to take strict cost and expense control measures. As a result, we post revenue of $5 million and operating income of $1.3 million for the period.

We expect the relative contribution of our ISP business to our consolidated financials to continue to decline. Specifically, in the first quarter of 2007, we expect a decline in revenue and decreased profitability in the legacy ISP business as part of the services fees we will receive in relation to the sale of our ADSL business we'll end in this quarter. This is in line with our ongoing strategy of shifting resources away from this legacy business.

To summarize, in 2006, we laid the foundation for a powerful online entertainment platform. We delivered tremendous growth in our gaming software business, especially in the poker business, and added another high-margin growth engine, our Asian online game business.

We're thrilled with where we are now, excited about the opportunities and growth prospects in front of us, and confident in our ability to execute and continue to deliver. 2007 promises to be a very exciting year and we look forward to sharing it with you, as we continue to grow our shareholders' value. Thank you.

Arthur Wang

Thanks Thomas. We would like to now move into the question-and-answer session. Operator, at this point we'd like to open up the call to questions please.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Traci Mangini with ThinkEquity Partners.

Traci Mangini - ThinkEquity Partners

Thank you. Good morning or good evening actually for you guys. Just, if you can give us a sense on the FunTown business? And in particular with the launch of real-money MahJong in Taiwan, what type of conversion or cannibalization if any do you expect from folks moving over from the play-for-fun to the play-for-money?

Arthur Wang

Hi, Traci. This is Arthur. We are not launching real-money MahJong in Taiwan. And so, we expect no cannibalization there. Of course, there is illegal gambling, and has been for a long time in Asia. And so, I would suggest that we probably already compete against illegal offerings, underground casinos, and the like. And basically target a different sector and basically address a different marketplace.

Traci Mangini - ThinkEquity Partners

Okay. Well then, can you speak to -- yes, I am sorry, Thomas?

Thomas Hui

Yeah, I was going to say, I guess, to your question with respect to the FunTown business, which is purely a casual play-for-fun business, the growth we've seen in the fourth quarter was not because of any launch of the real-money site, which we don't have a plan to. That was primarily because of the continued execution of our two strategies. One is to increase existing customers' or players' spend by increasing the amount and variety of virtual items we have in the offering and together with newly licensed games, and Tales Runner was the first one, last year.

So, both strategies are yielding results in the fourth quarter, together with our marketing strategy. We'd expect to continue to adopt these two strategies in 2007 to continue to increase the revenue growth there.

Traci Mangini - ThinkEquity Partners

Okay. And also with respect to real-money then, can you speak about the geographic focus that Carmen will have?

Arthur Wang

We have given a license to operate in Asia. And as a software provider, are not privy to certain operational details. That is, I guess, proprietary for them.

Traci Mangini - ThinkEquity Partners

Okay. And also, I realize you are going to launch it in the first quarter at some point. I don't know if it's necessarily delayed. Can you just talk about the timing of it, whether it's technically ready to go? Or is it just logistics or waiting for Carmen to decide to move? What's the timeframe on it?

Arthur Wang

Technically, we have delivered the software. And I think the operational decision is up to the licensee.

Traci Mangini - ThinkEquity Partners

Okay. With respect to T2CN, I don't know if it is appropriate, can you speak to, how they are improving since the summer hacking issues that they have? Do you see remarkable improvement there? Or is it still kind of --?

Arthur Wang

Absolutely. One of the reasons why we are so excited about the opportunity at T2CN is their ability to, and their response very difficult operating situations. They launched the leading online sports game in China, this game is called FreeStyle. And unfortunately over the summer, there was a hack that allowed players to score at will essentially and greatly disincentivized people from playing the game, when the guy who would be playing against can score anytime he wants to without even facing the basketball courts.

The team at T2CN worked closely with the developer of the game and in September launched a patch and fixed the problem. Since that time, the game has been able to regain an enormous amount of its previous market share. And that is quite noteworthy in the game world, where usually a game gets momentum and people play it and if it's no fun to play, they walk away, and there are always new games for them to play.

The fact that this team was able to draw back the user numbers that it has, where today FreeStyle is the number one game in China of a sports nature, we think is very impressive.

Traci Mangini - ThinkEquity Partners

Okay. And then Thomas last question is just for you. On the Infocomm investment, you said you are at about 30%. And we saw them on the news last week, talking about their IPO and they gave some projections for net income. Where will we see that? Are we going to see that on the minority interest income line for you? And when would you expect to be starting to see that?

Thomas Hui

Right now the investment, because of the securities we have used to invest in the company, which is preferred securities. We will be accounting it on a cost basis. So, you would not have any direct impact from a P&L perspective on our income statement.

So, until such point that the securities we invest in is convertible preferred shares, until such time we decided to convert into the common shares, it will remain to be a cost accounting securities, and therefore will not have any P&L impact.

Traci Mangini - ThinkEquity Partners

Okay. Speaking about on the T2CN, you had mentioned that you were going to, I think you said, consolidate in the first quarter. Did that convert step-up a little bit? I thought you weren't able to convert until May?

Thomas Hui

Right. We believe in the first quarter, we will equity account our interest in the company. And upon conversion of the remaining pref shares we have, we would cross over the 50% threshold, and therefore be able to consolidate the entity, probably towards the second quarter.

Traci Mangini - ThinkEquity Partners

Okay, great. Thank you.

Operator

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

Todd Eilers - Roth Capital Partners

Hi guys, how are you?

Arthur Wang

Good. Todd.

Todd Eilers - Roth Capital Partners

Couple of questions here, I guess, one, just may be talk about the current regulatory and legal landscape in the European markets. We have got some recent news out with the positive ECJ ruling in Italy. I haven't really heard any news regarding Germany and France; can you maybe update us on your thoughts on the regulatory environment? It seems that it's moving in a more favorable direction through online gaming, a real-money online gaming operators and suppliers. Can you comment on that?

Arthur Wang

Sure. As you can imagine Todd, we closely follow the regulatory developments around the world. And fortunately, we've continue to see very positive developments in the overall regulatory climate in particular, in Europe. We note with great pleasure the recent European Court decision handed down just last week, in a case called Placanica. Where the European court ruled conclusively and upheld the principle that member governments of the EU may not seek to prohibit the free offering of goods or services between member nations, especially, to protect their own domestic gambling monopolies.

It's my personal belief that this landmark case will have a tremendous impact on the regulatory environment in Europe, resulting ultimately in the removal of barriers to the offering of online gaming.

That being said, I think it would be unrealistic to expect all member nations suddenly to throw up their hands and be compliant. I suspect the domestic monopolies will still attempt to impede or to slow down a true opening of the market. But I believe this decision, as well as many of the other developments have basically made the ultimate conclusion quite clear.

Todd Eilers - Roth Capital Partners

Okay.

Arthur Wang

In particular, in France and Germany. In Germany, we see no imminent movements. We are studying the recent movements in France based upon what we understand so far. My personal expectation is there will be no significant negative impact on our business.

Todd Eilers - Roth Capital Partners

Okay, great. Can you also talk a little bit about what type of effects you guys might be seeing on the poker side of the business, with the recent pull out of NETELLER from the US market? Are you guys seeing an increase in player traffic as you guys offer highly liquid poker networks? Whereas maybe some of the other larger players that were exposed to the US markets might be suffering a little bit from the NETELLER pull out? Are you seeing any benefits from that?

Arthur Wang

Todd, naturally we have limited information into the actual fares of our competitors and particularly the private operators. But from what we understand, in particular, those operating in the United States are being hit quite severely.

At the same time, our poker numbers continue to grow. We continue to set new internal records every month.

How much of this is directly as a result of the NETELLER pullout and the difficulties our competitors are having, and how much is a result to our own marketing efforts, it is difficult for us to say.

Todd Eilers - Roth Capital Partners

Okay. Fair enough. With respect to your outlook and guidance, we are pretty fairway through the first quarter. Would you care to give any further color on individual business units with respect to poker, casino and the casual online space in terms of what you are seeing right now in the quarter? It looks like you had, obviously, very strong sequential growth in the poker business. Should we see something similar to that or do you expect to see something similar to that in the first quarter?

Thomas Hui

Todd, in the poker business the fourth quarter growth versus the third quarter growth was very strong, because of the seasonality effect. Traditionally the fourth quarter is a stronger quarter and the third quarter is a weaker quarter.

What we are seeing so far in the first quarter is, as the growth momentum continues at a slightly less level than the fourth quarter versus third quarter level. But still, very-very strong. And, for the casual game business, we saw a 16% pick-up in the top line from the two strategies we mentioned, and that strategy has been continuing in this quarter and we see similar level of revenue tractions from the data we have so far. So, poker businesses is growing very strong. Now the ISP business as we mentioned is a legacy one, and we do expect some revenue decline in that one.

Todd Eilers - Roth Capital Partners

Okay, that helps. And then with regards to sales and marketing, this is my last question. But with regards to sales and marketing, do you guys still anticipate being between maybe 30%, 35% of revenue. Obviously if you guys see opportunities to spend some money to grow the top line you're going to take advantage of that. I am just trying to get a feel if you kind of still see that as a range going forward?

Thomas Hui

Sure, that continues to remain the range that we look at our business. Given the business opportunity in front of us that continues to be the range we operate under. Todd, exactly like what you mentioned, for example in the first quarter, in the casual game business there was a big Taiwan Game Show which were participated by the biggest, largest exhibitor showcasing the Hellgate: London game and that obviously would increased the selling and marketing expenses for the casual game business quite a bit in the quarter. But over a period of time that's roughly the range we're operating under.

Todd Eilers - Roth Capital Partners

Okay great. Thanks guys.

Operator

Your next question comes from the line of Chang Qiu with Forun Technology Research.

Chang Qiu - Forun Technology Research

Right, good evening, Arthur and Tom.

Arthur Wang

Hey Chang, how are you?

Thomas Hui

Hey, Chang.

Chang Qiu - Forun Technology Research

I am fine, and also congratulations for this very strong result. I actually have a few questions follow-up with the last questions from Todd. For clarification, Arthur, are you saying, even the France situation turns less positive, do you think the impact to GigaMedia is not as significant?

Arthur Wang

Yes. Based upon our understanding of the legislation and operations in France, my personal belief is that there will be not a significant impact on us.

Chang Qiu - Forun Technology Research

I see. Okay. That's great. And Tom, you kind of mentioned for the short-term, basically it looks like the strongest growth, which is clear from the poker side and followed by may be FunTown and then casino and maybe real-money MahJong. If we look at slightly longer term, may be later this year or next year and how you rank all these growth drivers in terms of long-term growth?

Thomas Hui

Ranking them may be a bit unfair. They all stand from different basis. But we believe the poker business do have a lot of more room to grow, even beyond the next few quarters extending into second half of the year. We believe FunTown's platform on the existing products through the licensing of the newer games and also selling of more virtual items actually has quite a bit of room to grow.

And in the second half of the year, we are going to augment and complement that by a launching of obviously a very big game Hellgate: London. Probably in the second quarter or second half of the year, we think the contribution of T2CN, both from direct financial perspective and also from a strategic perspective, will be more apparent. So, all of these will increase the contribution from the Asian online games platform that we've been building throughout last year.

So, at the end of the day, we think all of these would deliver a significant amount of growth. But if you are just talking about from pure dollar and cents perspective, obviously the poker business right now have the largest base and therefore, on an incremental basis, it has the highest amount of growth.

Chang Qiu - Forun Technology Research

Right. And you did mention earlier Hui that the real-money MahJong will be a significant contributor for '07 too, right?

Arthur Wang

Yes. I continue to be very bullish about this business.

Chang Qiu - Forun Technology Research

Okay, okay. Yeah, that's great. Thanks.

Arthur Wang

Thanks Chang.

Operator

Your next question comes from the line of [Andre Steiner] with Notre-Dame Capital.

Andre Steiner - Notre-Dame Capital

Good morning.

Arthur Wang

Good morning.

Thomas Hui

Good morning.

Andre Steiner - Notre-Dame Capital

I have a couple of quick questions concerning the MahJong, the cash-wager version.

Arthur Wang

Yes.

Andre Steiner - Notre-Dame Capital

I was wondering if you could go a little bit more into detail about the profit model.

Arthur Wang

Sure. As you know, we begin with the base of having a play-for-fun MahJong platform that is the largest in the world in terms of revenue. And this MahJong platform is offered now on a play-for-fun basis only. What we have done is taken this play-for-fun software and combined it with our experienced operating 24/7 real-money cash-wager business. That is making sure it is a highly secured and highly trustworthy platform and then licensed that initially to one licensee, but quite likely to others in the near future.

The business model as a software provider can vary depending upon the exact range of services one provides, whether it is merely a download of the source code. And then, you say, "go to it", whether or not there are additional services added on, such as monitoring and helping in the operation and doing things of that sort.

Generally speaking, there are some upfront fees and then a variable licensing fee depending upon again the nature of the license and the strength of the parties involved. But license fees may range from, I suspect, in the market from 15% to 45% of revenue -- 15% to 40% of revenue maybe is a range.

Andre Steiner - Notre-Dame Capital

Okay. Have you ever considered the play-for-points model?

Arthur Wang

By play for points, I think it's probably what you mean what we do right now with our FunTown platform and with all of our online casual game platform in China. And that is where one plays for virtual status. And that can be reflected in a larger bank balance of plates or of virtual gold coins. Successful play can be rewarded with better looking avatar, better clothes for one's avatar, or purchasing power of other virtual items, some of which are vanity related, i.e. appearance related, and some of which are performance related. For example, in our basketball game, one can use the online currency to purchase Nike branded virtual tennis shoes to jump higher, Nike branded virtual clothes to run faster or virtual cans of Coca Cola to give you more energy to play in the game.

Andre Steiner - Notre-Dame Capital

Okay. And in regards to the world series of MahJong, I was also curious as to when and where? And any sponsors? Have any of them signed on yet?

Arthur Wang

I don't think we are ready to release details of, I am afraid, of any of those factors. I believe the European Tournament has been calendared. I think it is in Denmark this year, but I better get back to you on that. And there will also be North American and Asian variance, as well as the final. But we will definitely be making a lot of noise hopefully and there will be a lot of publicity surrounding those events.

Andre Steiner - Notre-Dame Capital

Okay. And one last quick question, to contrast your short versus long-term country targets. Would you be able to tell me where you think your long-term bread and butter will be from this MahJong software?

Arthur Wang

This is an excellent question because I think it goes to the heart of our strategy. What we are trying to do, is to be an online entertainment platform with enormous platform reach. We now have a platform that extends from Southeast Asia through North Asia. We hope add Japan to our platform, and then to be able to address something like a third of the world. And on that platform, to be able deliver a wide range of different entertainment forms, we begin with games, because games are early monetizers, but we can easily imagine a world in which whole wide range of different entertainment offerings are delivered through this channel.

So, we believe the value creation is in building the channel. We like the channel to be as large and as broad as possible, so that we can find the right product to deliver in any of the market the platform serves. So, we don't think necessarily in terms of single country, but we think in terms of having an entire pan-Asian platform for delivery of entertainment products.

Andre Steiner - Notre-Dame Capital

Well, thank you very much. All the best to all of you.

Arthur Wang

Thank you.

Operator

Your next question comes from the line of Alicia Yap with Bear Stearns.

Alicia Yap - Bear Stearns

Good evening, Arthur and Thomas.

Thomas Hui

Hi Alicia, how are you?

Alicia Yap - Bear Stearns

Good, really good, as I am little bit tired, but I am good. Yeah, so I have a few questions. Now, the first question I have is regarding the casual game FunTown business. You have in the press release ARPU this quarter [$15 pre-tax]. Do you think that you can maintain around $15 in the future quarters?

Thomas Hui

Yeah, the ARPU was high in Q4, for the reason we mentioned, because of our marketing initiatives and the fact that we wrote off quite a bit of virtual items, which were well accepted by our player base. And so, it was actually the highest of all the quarters we have reported last year.

So the ranges of the ARPU for the fourth quarter of last year ranged from $12.60 to $16.60. So, we think we will continue to see fluctuation of these numbers. But we believe that the player base we have, because the demographics are actually slightly older, 25 to 35, people that they have more purchasing power, disposable income. And to sustain a relatively higher ARPU comparing to other casual games offerings or MMORPG offerings within the region, we think that is something that we strive to achieve. So, while there might be fluctuations, we hope to maintain a high number.

Alicia Yap - Bear Stearns

Okay. Now, in terms of your active paying players in this quarter is actually declined a little bit. Is that a concern to you at all?

Thomas Hui

No, that also is something that fluctuates within the normal ranges as we see them from a quarter-to-quarter basis. And we do see quite a large registered user base and some of these players do come back to us, and we do have programs in place to offer a certain period of time to try to re-attract some of the old players that have not been on our platform.

So, we think we are brand-rich within markets that's broad and deep enough for us. As far as we continue to refresh our products, the customers will continue to be here. Again; if I can remind you, the product we keep selling to you is not like a one MMORPG product that has three years life span.

This is a whole platform of casual game with MahJong game and the board and chess game being the dominant key-leading products. And this set of products has been around for a long time. It's the community effect we're selling; it is the satisfaction of interacting with such players we're selling, and we believe that has much more longer life span.

Alicia Yap - Bear Stearns

So, I would guess, like more creative virtual items selling will drive more of the growth rather than the addition of an active player, right?

Thomas Hui

Yes. I think it's a two-pronged strategy. One is of the existing customer base, who is attracted to our FunTown platform on the board and chess and the MahJong platform. We continue to have more attractive in-game items to increase their wallet share.

And second prong of the strategy is to license, as I mentioned in my prepared remarks, advanced casual games. This will hopefully address a different clientele and increase the number of customers who play FunTown games. So, this will be on a licensed basis similar to Tales Runner and we have few games in the pipeline and in due course we will make an announcement of them.

Alicia Yap - Bear Stearns

Okay. Now, in terms of your Tales Runner, you have improved performance. Would you be able to disclose, like how much contribution was from Tales Runner to this quarter revenue?

Thomas Hui

We don't disclose game-by-game revenue contribution. It is as I mentioned, is already amenable contributor. That number was below 10% in Q4, but that number was growing above 10% of FunTown's revenue in the first quarter so far we have seen.

Alicia Yap - Bear Stearns

Okay, now is there any strategic reason why you sold the Gamania stake?

Thomas Hui

We actually have always owned Gamania shares even before their IPO. There was a long corporate history between GigaMedia as an ISP in Taiwan contracts and Gamania being an online game company in Taiwan. We have maintained about 3% of their shares until December last year. We are also on their Board. But we disposed of the share not for any particular strategic reason. There is no strategic reason why we really want to hold it, the price was good, and we chose a time to exit out of it.

Alicia Yap - Bear Stearns

I see. Okay, that's great. And one last question is on the poker software. I think Arthur mentioned that there were three new languages launched for the software. Maybe I had missed that. Can you tell me what the three new languages are?

Thomas Hui

It is Polish, Hungarian and Finnish.

Alicia Yap - Bear Stearns

All right, great thank you so much.

Arthur Wang

Thanks Alicia.

Operator

Your next question comes from the line of Bill Garrison with Ironworks Capital.

Bill Garrison - Ironworks Capital

Yes, good evening and thank you for taking my question. For purposes of modeling, as you look at that the margins within the Everest brands. Would you say that the current margins are essentially in line with where you think long-term margins should be? Or are you still in the investment mode and over time we can expect those to move still higher?

Thomas Hui

Yeah, around 30% operating margins, where we think the short to medium term margin would be, given the opportunities we have in front of us. And that would mean, with the increased revenue, we invested the increased revenues back into product development and also in our licensee's case, selling and marketing.

So, over time, in the long run, we do expect upside on the margin. But on the short to medium term, we think the current margin level is where we are comfortable with.

Bill Garrison - Ironworks Capital

Thank you. Secondly, you mentioned in the press release the benefit in the fourth quarter within the casual games side, from expired game cards. Could you disclose the revenue or operating income contribution from that onetime benefit?

Thomas Hui

It's not a onetime benefit, because game cards are sold on a prepaid basis. It is a business model which is quite prevailing and common in Asia.

So, on the prepaid business, just like any other prepaid business, whether it's telecom or not, retrievable expired game cards sold but unused. It is a recurring revenue. So the fourth quarter, we would point that out, that is something that we are planning. In the fourth quarter we will continue to do on a quarterly basis every quarter in the future.

Bill Garrison - Ironworks Capital

Okay. And can you give us any kind of order of magnitude to the contribution?

Thomas Hui

It is just a couple of $100,000 to $200,000.

Bill Garrison - Ironworks Capital

Okay, all right. And lastly, can you remind me within FunTown kind of a broad range of the overall games platform, what percentage of the play is your MahJong play?

Thomas Hui

Okay. Over 90% of the revenue from FunTown generated from the MahJong flash board and chess game. As we mentioned, the remaining is coming from the Tales Runner games whose contribution has been increasing quite significantly. Now MahJong of the 90 odd percent is more than half of it.

Bill Garrison - Ironworks Capital

Okay. All right, thank you very much.

Arthur Wang

Thanks Bill.

Operator

(Operator Instructions). And your next question comes from the line of Andrew Schopick with Nutmeg Securities.

Andrew Schopick - Nutmeg Securities

Thank you and good morning. I just want to ask if you know approximately what percent of your investor base is currently comprised of the US investors.

Arthur Wang

We're looking to see whether we have any good data on this.

Andrew Schopick - Nutmeg Securities

Secondly, what are your plans for visiting the United States in 2007 in presenting or appearing before the US institutional investors?

Arthur Wang

Thomas Hui has a sense of that.

Thomas Hui

Yeah, based on the latest 13F filings we have received, we have about 35% of the investor base, institutional investors we've reported. As to whether they are based or out of the US is hard to say, but most of these do need to file with the 13F. If you count that as a proxy then it would be about 35% that we know for the institutional side. On the retail side, obviously we do not have any insight into that.

Andrew Schopick - Nutmeg Securities

Understood. Any plans to visit the US for various investor presentations this year?

Thomas Hui

Yes. Right now, we have not had the timing set up yet, given the various things that we are working on. But typically after earnings release, like last year after our first quarter earnings release, we did do a round of five cities, five days in the US, and we are considering that this year as well, but the timing of which have not been finalized.

Andrew Schopick - Nutmeg Securities

Thank you very much.

Thomas Hui

Thank you.

Operator

And there are no further questions.

Brad Miller

Okay. Thank you very much operator. And thank you again everyone for joining us 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.tw for Taiwan.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

To sponsor a Seeking Alpha transcript click here.

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: transcripts@seekingalpha.com. Thank you!

Source: GigaMedia Q4 2006 Earnings Call Transcript
This Transcript
All Transcripts