GigaMedia Limited
Q4 2012 Earnings Call Transcript

Published: 12 Apr 2013

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q4 and full year 2012 GigaMedia Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advice you that this conference is being recorded today, Friday the 12th April 2013. And I would now like to hand the conference over to your first speaker today, Mr. Brad Miller. Thank you, please go ahead.

[Brad Miller:]

Thank you this is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our conference call to discuss GigaMedia’s fourth quarter and full year 2012 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 which is filed on Form 20-F with the US Securities and Exchange Commission. This presentation is being made on April 12, 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 revealing, or updating the material that is contained therein. After today’s prepared remarks, we will respond to questions we received by email 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. Today, I would like to provide an overview of what we are doing now to grow Gigamedia and build shareholders’ value. I will then turn the call over to Brad for a look at our financial and operational details. So let me begin with our online game business and summarize for you three things. One, our view of the market, two our vision for the games business and three what we are doing to grow. So one is the market, in our market Taiwan the strongest demand is for casual browser mobile games. Revenue clearly shows this trend. Revenue for publishers of licensed PC-based games in Taiwan were basically flat in 2012 and profit declined. In contrast, revenue for companies focused on browser games grew at healthy double-digit rates. Driving this trend is a large smartphone market that is growing very fast. There are about 7 million smartphone subscribers in Taiwan at a penetration rate of 24% of all phone subs. That is more than the US market which is about 172 million subs and less than the US penetration rate of 48%. But smartphone subs are growing at 80% year-over-year in Taiwan. This is one of the fastest growth rate of any of the top-30 countries in the world for smartphones. People in Taiwan also commonly purchase games on their phones, Taiwan ranked 14th in the world by revenues for apps mobile games, despite the fact that Taiwan ranked only 29th in the world for total number of smartphones. And it’s not only changing the landscape of our existing game business but same for the cloud business which I will address later on. So in sum the casual browser and mobile games market is growing quickly fueled by very strong smartphone usage? Our vision, we believe to succeed in the casual online game we need to be multi-screen or I would say multi-platform. This includes tablet, mobile phones and standard PC. Why multi-platform, because casual mobile browser games is where the growth is and PC based casual games is delivering solid profits for us. New trendy casual mobile browser games are the future and that will enable us to attract the young demographic where market growth is happening. PC-based casual games are old school, but that will allow us to continue to monetize the older players that generate higher ARPU. In addition, we expect to benefit from cross-platform player behavior where people play two devices, play twice as much as they do on one device. Number three, where we are doing – what we are doing now to grow. Currently our games are mostly PC-based, not browser mobile based and our player base is older. So we need to reposition our games business to capitalize on the market trend. To grow and deliver better financial performance this year, we will extend our offering to casual browser mobile games and we will expand our distribution to China. At the same time, we are going to continue offering PC-based version of our popular casual games. In essence, this year we will be taking the asset of Fun Town, our brand, our player base and our expertise in casual games and refurbishing them. Adding an important new mobile dimension to Fun Town, we are adding to Fun Town phone we’ve seen creating new business that in the end will have multi-screen casual offering with player linked by our common back end given us a stronger, a more social product and a larger market opportunity. So going forward, our new focus will be on developing casual browser mobile game in-house. This master change from the past where we also licensed games, there are several advantages to this strategy. First, casual browser mobile games can be developed quickly and at a relatively low cost. Second, by developing the game in-house, we will have better control of our content. This is important as it will enable us to more quickly modify our content to take advantage of trends and events. Third, self-developed games should help us to improve our margins. Gross margin for our current sales developed casual games run close to 80% while in comparison licensed games run about 40%. As I mentioned, we have solid expertise in casual games. So we will be able to adapt quickly. Fun Town started out about 15 years ago developing and operating its own casual games and they continue to create and offer solid content. Its Mahjong offering is one of the top three in Taiwan and its casino-related games are very popular too. Fun Town also enjoys a very healthy ARPU which demonstrates that that they understand how to efficiently monetize their games. In the short-term in the first half of 2013, we will begin placing some reformatted version of our existing PC-based casual games on to game platforms in China. We will not operate the gaming on China platforms but we would expect to benefit from revenue sharing with Chinese operators that enjoy huge player bases. Teams already at work converting many of our existing casual games to browser mobile format to get them in front of more players. In the medium term, in the second half of this year we’ve planned to launch at least ten new self-developed casual browser mobile games. To drive the rebuild of Fun Town we will also be adding new tale in this year. We are excited to be rebuilding Fun Town and we look forward to creating a multi-platform leader in casual games. Next, let's talk about our cloud computing business GigaCloud, again let me briefly summarize the market. Our vision for the business and what we are doing now. The market according to a survey completed by 2011 by Taiwan’s Ministry of Economic Affairs, Taiwan’s SME market size was estimated at approximately 1.24 million enterprises. This is a large emerging market. We believe that we are the first provider of cloud service to focus specifically on solutions for SME in Taiwan. Our vision, on the convergence of cloud social and mobile technology is transforming our IT services are delivered to consumer and revolutionizing how companies connect internally and externally. Cloud solution enables firms to either avoid deployment of full-scale on-site IT infrastructure, or replace an existing company’s internal IT infrastructure with an externally managed and hosted IT function. This is what sometime called virtualization offices. This is particularly helpful for SMEs as it brings many business benefits including going to market faster and easier with lower CapEx costs. So what we are doing to grow, our team has deep and wide knowledge in SME market in Taiwan. We have developed initial suites of cloud services to address the most critical needs of SMEs, that’s including telephone, fax and storage services, which are all accessible anywhere anytime on any smart devices. We launched service in early April with services offering at special rates. GigaCloud is an integrated platform of cloud services. Our software powered from our end and we integrate the back-end solution of our strategic technology partners on this. We are leveraging strategic partners to maximize our capabilities and capitalize on the opportunities. So partnership will help us cooperatively advance virtualization technology for SME through joint marketing, product operation, collaboration and core development. To-date, we have formed strategic partnerships with our outstanding group of hardware software and cloud computing service vendors. Our partners include Taiwan’s telecom leader Far EasTone. Global computer hardware and electronic leader Asus, and leading PDF document solution provider Foxit Corporation. We created opportunities for partners by enabling them to build products that utilize our SME virtualization technology and create differentiated values through joint solutions. In turn the endorsement as a pool of our partners enhanced the awareness, reputation and adoption of our virtualization solutions. One of our key partners is Chailease, a Taiwan-based financial service firm with an enormous SME customer base, Chailease give us access to a large sales force that will market GigaCloud to over 1 million SMEs in Taiwan. It also gives us access to China where Chailease has a growing presence. On April 3, we announced another key partnership, a strategic cooperation with global technology leader Atos. Atos helped us address the number one concern of SME’s security. With Atos, we can offer bank-grade security, the partnership will also extend our market presence helping us find new distributors and customers and we expect to co-develop new cloud products with Atos in the future. Finally, in addition to marketing GigaCloud to SMEs, we see opportunities for our products with governmental agency in Greater China. We are seeing a growing number of government related cloud initiatives. This program ranging from incentives offered by local government to SME to adopt cloud technology to government mandates for government agency themselves to implement cloud technology to increase their efficiency. We believe this market represents a good opportunity and we look forward to sharing more with you on these initiatives at least for this year. In sum, in most of our online game business and our cloud computing business, we see opportunities to grow. We also see opportunities to use some of our cash to make acquisition that will have synergies with our business. We look forward to sharing more with you going forward. Further regarding to the enhancement of shareholders’ value, we actually try to formulize our business process, we see more change, we will have a new auditor this year, which is one of the major four international accounting firms. And secondly, internally, we will also – we have raised our investment community to formulize our M&A and any investments. We are also planning to form a game selection committee that would put together to make sure when we are selecting games, we will be more carefully and with more formulized process as well. Okay, I will now hand the call over to Brad to review our 4Q results. Thank you.

[Brad Miller:]

Okay, thanks Collin. Today, I will start with a shareholder question then I will summarize our Q4 results and end with our short-term and medium-term outlook for our business. Let me begin then by addressing a question that we’ve often received from shareholders, what is exciting about your business? Or what is great about your business? In online games, we are, for the first time in position to benefit from the sector where market growth in strongest, browser and mobile games. By opening up our platform, we can benefit from the many different devices that are used for games now and new ones that are being developed. We can make one app, port it to smart TV, a tablet, et cetera. There is a growing opportunity here and it’s not nearly as expensive to develop and operate games in this market. By creating a common back-end across platforms and building social features into our products, we can benefit from increased player activity and community effects. Our focus on self-development will allow us to create products designed for our market, it will give us the ability to quickly capitalize on events and trends and it will help ensure we can sustain healthy margins. And while our current PC-based casual games business is not a growth market, it does continue to provide us with benefits, gross margins for our self-developed casual games run close to 80% and ARPU for certain games run over $100 per month. Fun Town has developed strong expertise in creating, building game communities and monetizing casual games. The performance of our PC-based casual games and the expertise developed to grow and support it are solid assets and it will help us build our new games business. In cloud computing, we are in the right place at the right time. SMEs in Greater China are demanding greater flexibility of communication products at lower prices. Services such as hosted telecom solutions cloud storage and cloud faxing, reduce costs, increase flexibility and drive SME productivity. So, we are seeing increasing adoption of hosted solutions by small businesses as we began to realize the benefits of the cloud. We are also seeing increasing demand as Collin mentioned by regional government agencies for cloud solutions that lower costs and drive efficiency. We see new opportunities to cooperate with local governments that have created cloud technology parks and we are looking for content and these governments that are looking for content to add to their servers in their cloud technology parks. We also see opportunities to work with local governments that are promoting cloud products to SMEs. We’ve already formed excellent strategic technology partnerships and we expect to keep adding new partnerships. This will help ensure that we have a top caliber product, customers can trust and it will accelerate our growth by creating and promoting new products and services and extending our reach. In sum, then our cloud business is an early mover and it has multiple growth opportunities in the form of geographical expansion, cross-selling of services to customers and service its expansion. Overall, we believe we are on track to build a much strong business this year that will deliver improved financial performance. Let me now turn to our financial performance and end with a look ahead. There were a few special items in our recent results. In Q4, we recorded a goodwill impairment and certain impairments in licensing and royalty fees related to Fun Town. In Q3, we recorded gains from sales of marketable securities. We also received revenues from licensed games in Q3, which was the first and while we hope to benefit from licensing our products at some point again in the future, we do not see it in the next quarter or so. So to make comparisons more meaningful, we are providing the following brief summary of results excluding those items. Consolidated revenues in Q4 were $4.8 million, compared to $5.6 million in the previous quarter. Consolidated gross margin was $2.7 million compared to $3.4 million in last quarter. Operating loss was $1.8 million compared to $2.4 million in Q3. Consolidated net loss was $2.2 million, compared to net income of $118,000 last quarter. Fun Town revenues were $4.5 million compared to $5.1 million last quarter. Fun Town revenues were down mainly to a decline of contributions from a game called Tales Runner and that offset good growth in AVA which was about 20% in Q4. Fun town gross profit was $2.3 million compared to $3.2 million last quarter and Fun Town operating loss was about $387,000 compared to income of $185,000 in Q3. Fun Town net loss was $288,000 compared to $271,000 last quarter. GigaMedia’s cash outflow from operations was small in Q4 about $383,000. Note that our fourth quarter results do not include contributions from any of the new growth initiatives that Collin and I have outlined previously. Finally, let me review our cash and our balance sheet. Cash, cash equivalents and marketable securities current was approximately $80.5 million at the end of the quarter. This was comprised of $62.7 million in cash, $17.8 million in marketable securities current. Short-term debt was $7.7 million. Next, let me quickly provide a short-term and a medium-term outlook for the company. In the first half of 2013, in online games, we will begin extending our offerings to browser mobile games by testing a few existing games on China online game platforms. We will not operate the games, but we can benefit from revenue sharing to the user base to sell these platforms. We will also be strengthening our team by adding new talent. In cloud computing, in the first half of this year, we will continue to seek out strategic partnerships to operations before we begin mass marketing and ramping up in the second half. In the second half of this year, in online games we will keep extending our browser mobile games, launching new self-developed casual browser mobile games. We’ve planned to create by year-end, the multi-platform, multi-screen business that can maximize connections and maximize monetization. The expected benefits this better product control to adapt market trends, better revenues and better margins. In cloud computing in the second of the year, we will keep leveraging partners to improve the quality, scope and distribution of our product. We will expand from the SME market to the government services market and by year-end we plan to implement more marketing and advertising to ramp up operations. That’s our 4Q review then and our business update for today. Thank you very much. Before we proceed to the Q&A, operator I just want to provide a quick reminder, as its standard protocol on these calls, we ask that you please limit yourself to one question at a time, so that everybody has a chance to participate. Operator, let’s please begin the Q&A.

[Operator:]

(Operator Instructions) And it appears we have no questions at this time.

[Brad Miller:]

Okay operator, we have actually received a few questions by email. The first question that we have received and our CFO Dirk Chen will address this regarding goodwill impairment that was recorded in Q4. Dirk?

[Dirk Chen:]

Hi, everyone, this is Dirk Chen, the CFO of GigaMedia and (indiscernible) we record a goodwill impairment in our today's release for the 2012 financial results. Regarding the goodwill we carry it on our balance sheet, related to the acquisition of Fun Town game business in 2006 that’s about seven years ago. And the last time I think our game strategy was to license major MMO games. But however, due to outside game environment change we also changed our gaming strategy as well. Our forecast right now has changed and with a more conservative focus. We expect our strategy of focusing on self-development of casual game and we hope this strategy change can be successful in the future. So, we expect not further impairments on this goodwill. However if this cannot achieve moderate growth based on our new strategy on games development. I think the further impairment maybe necessary however I think the management will prevent this happen and we will do our best – based on our new strategy on gaming. Thank you.

[Brad Miller:]

Okay, thanks Dirk. Operator, I will turn it back to you if there are any more questions.

[Operator:]

(Operator Instructions) And it appears there are no further questions at this time. (Operator Instructions)

[Brad Miller:]

Okay, operator we have a couple of questions from investors on our cloud business. Could you talk more about the opportunities that you see for the business in the government sector? Collins has a few comments he like to share on this question.

[Collin Hwang:]

Yes, in Greater China, we are seeing a growing number of government related cloud initiatives and this program ranging from incentives offered by local government to SMEs to adopt cloud technology to government mandates for government agency themselves to implement cloud technology to increase their internal efficiency and we believe this market presents a good opportunity for us. However, investors normally concerned about the security of investment in China. But this time, we are taking our IP, or intellectual property and working with the government in China, which is no hardware involved in the business and we are working with international partners there, like hardware partner Asus. So therefore, I think our risk is minimal and growth potential is big. Thank you.

[Brad Miller:]

Another question that we’ve received on GigaCloud, will you need to make many investments in the business in 2013 to support growth? I’ll answer this question. Initially, there will not be heavy investments. We outsourced a lot of the development of this business. So that eliminates the need for heavy investments at least initially. As we scale up, we may need to make some investments, but not at the present time. Operator any questions?

[Operator:]

There are no questions at this time. (Operator Instructions) And it appears there are no questions at this time.

[Brad Miller:]

Okay, thanks very much. That’s all we have for today. For further information about the company or if you have questions and would like to contact us, please visit our website at www.gigamedia.com. That concludes today’s call and thank you again everyone for joining us.

[Operator:]

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