GigaMedia Limited
Q1 2013 Earnings Call Transcript

Published: 22 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2013 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, Wednesday the 22nd May 2013. I would now like to hand the conference over to your speaker today, IR Director, Mr. Brad Miller. Thank you, sir. 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 first quarter 2013 financial results. Joining me today are, Dirk Chen, our CFO, and on a separate line Collin Hwang, our CEO Before we begin, I would like to remind you that a number of forward-looking statements will be made during this conference call. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of GigaMedia and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, GigaMedia’s actual results could differ materially from these statements. Information about factors that could cause, and in some cases have caused, such differences can be found in GigaMedia’s Annual Report on Form 20-F filed with the US Securities and Exchange Commission in April, 2013. This presentation is being made on May 21, 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’ve received by e-mail and we’ll also take 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 will review what we have been doing in the first part of 2013, to grow GigaMedia and why we are confident in building shareholder value. I will then turn the call over to Brad for look at financial and operational details. I joined GigaMedia as the CEO in late November 2012. Since then, we have been focused on an internal restructuring, raising the bar on operational excellence and driving our costs. At the same time we have been building out our product offerings and improving our platforms. We are laying the foundation for growth in our online games and cloud service businesses. The web and mobile games and cloud computing set are both full of opportunity in Greater China. Following a lot of hard work in the first half of this year, we plan to begin scaling up our operations in these markets in the second half of this year. We are off to a good start, cutting cost and building stronger operations. G&A was down sharply year-to-year. Headquarters expenses in the first quarter were the lowest in more than 15 quarters. Development of new web and mobile games is on track. And our new cloud business has launched operations and recently expanded into the government sector. I want to highlight at our lower expense structure, it’s a big advantage as we grow revenues. As we scale up, we expect to be able to capitalize on the bottom line leverage, we would get out of that. Looking ahead, we are confident about our prospect in 2013 and beyond. And we discussed our primary growth drivers. Our first major driver is FunTown, our online game business. With FunTown, we plan to enter the high growth web mobile game market in Greater China. Web and mobile games, I enjoy a stronger double digit growth in Greater China, driven by the high usage of smartphones and tablets and the popularity of casual games on social sites. We are enthusiastic about our prospects to leverage our expertise in casual games through packaging some of our popular PC based content into web and mobile format and to develop web and mobile games in-house. As I would say, our initiatives are on track and we are confident that we’ll drive improve financial performance. Our second major driver of business, a new business is our cloud computing service business GigaCloud. This business is positioned to benefit from the way cloud changes the world. The computer is still the hardest working guy in the room, except it’s no longer in the room. Next cloud, the technology that is disrupting markets, new cloud based software as a service subscriptions give you access to cloud based processing power, a storage, creating all kinds of new service opportunities. This is especially attractive to SMEs who often cannot afford to upgrade and manage server systems and other critical IT needs. And who depend on technology to enable them to compete. GigaCloud is a cloud service platform with a robust and skillful architecture. We had released GigaCloud 1.0. In the next several months we will add new functionalities to our existing offerings following that we look forward to adding new services on to the GigaCloud 2.0 platform. Our strategy has been to focus on the large underserved SME sector. Complimenting this, which was announced especially into the government sector, this is an important development for a new – for a few reasons. First, we went through a rigorous screening process and we’re honored to be selected to work with the government and receive an endorsement of our product. Second, in Greater China, the government plays a strong role in adoption of technology by businesses. Cooperating with regional government on Cloud initiatives with help drive migration to Cloud services and grow our subscriber base. It might also represent new revenue streams from contracts with government agencies themselves. Our cloud service represent a huge opportunity for GigaMedia. We have moved quickly by building an integrated platform of service with a strong hand power by our self-developed software. We’re committed to capitalizing on our earlier mover position and plan to leverage strategic channel and technology partnership going forward. In sum, we believe 2013 will be a wonderful year for GigaMedia. With our restructuring and execution of new growth plans restarting in a stronger company, delivering better financial performance and improve shareholder value. We also continue to examine any value strategic acquisition and partnership opportunities that we believe may add synergies to our business and accelerate our growth. We thank you for your interest and for joining us today. I will now hand the call over to Brad to review our first quarter results. Thank you.

[Brad Miller:]

Thanks Collin. As Collin mentioned, in the first quarter we continued to restructure, invest in and grow our businesses. We are making major transitions. In our games business, we continue taking important steps to reposition and strengthen our operations to enter the high-growth web-mobile games market where players are continuing to migrate and where market growth is strongest. We are moving away from PC based games as that market is in decline. In our cloud services business, we expanded into the government sector. Overall then, there are a number of growth initiatives underway. Let me now highlight some of these in a review of our businesses. In FunTown, our online games business, we took strong steps to build a better business that will enjoy better margins and that will enable us to more quickly develop and modify products for targeted markets. Significant changes are underway in one, our focus and two, the way that we operate our online games business. In line with our new focus on self developing games versus licensing them. In the first quarter, we terminated several underperforming license games to support the launch of new self-developed web and mobile games starting in the second half of this year, FunTown continued developing a new game platform. FunTown continued developing a new integrated internal game developed in this testing environment which will enable FunTown to better identify and resolve game issues and drive efficiencies. In addition, FunTown began transitioning from an on-premises server system to a virtual cloud based system which is expected to lower future operating cost and increase the stability of game operations. We are making investments of approximately $130,000 to upgrade these systems and expect these investments to pay off in about 24 months. In GigaCloud, our cloud services business, we began providing services to our per subscribers which we obtained by way of our referral from our strategic distribution partner Chailease. We conducted early stage training of Chailease sales people at several of their branches in the Taipei area. These training sessions are ongoing and this year they will enable us to leverage the Chailease sales force throughout Taiwan. We also continue working with another key strategic partner Atos, work with Atos is ongoing in several dimensions, including help building our internal systems, system security work and discussions on potential for adding new products and services. So, as I mentioned earlier, each could ahs expanded into a government service sector. Cooperation with and endorsement by government should have two beneficial effects. One, it should help educate the market and the endorsement by government should drive our subscriber base and two they may represent an additional revenue stream. Next, let me turn to financial results. Revenues declined in first quarter to $4.2 million, this resulted from softer demand for PC based fragile games which were currently offer better working to transition away from. Helping to offset this decline with growth in our 2 MMOs, Sales Runner and ABA. Note that despite the revenue decline, gross margin for FunTown grew to 56.6% from 51.5%. This was due to a decrease in licensing fees, which demonstrates initial success of our transition to self developed gains. Consolidated operating expenses continued to trend lower in line with our ongoing efficiency initiatives and cost controls. Consolidated operating expenses were $3.6 million down from $6.8 million a year ago. G&A was down sharply 48% year-over-year. Corporate operating expenses were record low. As Collin mentioned, we expect our new lower cost structure to give us good operating leverage when we began benefiting from our growth initiatives and growing our top-line again. We recorded a consolidated loss from operations of $1.3 million in Q1. Now, looking ahead, Q2 is the low point for online gamer activity, so we expect a seasonal decrease in revenues. We strengthened our balance sheet in Q2, during Q2, we recorded a non-operating gain of approximately $1.2 million which was related to the disposal of a non-strategic legacy investment. We use cash proceeds from this to pay all of our short-term debt. We expect operating cash burns in Q2 to be small to neutral. In Q2, we are on track for zero debt and we estimate cash would be approximately $56 million at the end of Q2. Added to this $56 million, our marketable securities current which are planned for disposal, as of today this represents an additional approximately $21 million. Altogether then we forecast Q2 cash and marketable securities current to total about $77 million or approximately $1.50 per share. That’s our review today. And business update as well. Thank you. Before we proceed now to Q&A, let me give everyone a quick reminder. As a standard protocol, we ask that you please limit yourself to one question at a time, so that we all have an opportunity to participate. Operator, please begin the Q&A.

[Operator:]

Thank you. (Operator Instructions).

[Brad Miller:]

Operator, as we’re waiting for any possible questions, we have some questions that people have e-mailed in. So, I’ll start with a question regarding the Taipei, new Taipei City Announcement that we just made. Could you tell us a little bit more about the new Taipei City endorsement of GigaCloud? And I think Collin has a few comments to share on this.

[Collin Hwang:]

Yeah. It was a honor to be selected by the New Taipei City government. We were selected after a very competitive screening process, as our product matches well with the least of SMEs. This endorsement of our product will help us build the trust of SMEs and build our subscriber base. Corporation with new Taipei City will also help educate the market about cloud services. We plan to continue to look for opportunities with government in Taiwan and Mainland China. And please note that this corporation is a five-year program. So it’s a long-term commitment between the government and GigaMedia. And government is acting profitable between us and SMEs. And platforms and the government does a really good job promoting and educating the market as well. Thank you.

[Brad Miller:]

Thanks Collin. Another question that’s come in is, could you estimate your cash and your debt in 2Q, Dirk?

[Dirk Chen:]

Okay, thanks Brad. Hi, good evening, this is Dirk Chen, CFO of GigaMedia. In Q1, our company cash and the much of the activities is about $78 million and we also have one short-term debt, it’s about $7.8 million. This is equal to only one often best we had. To strengthen cash SME, we have our limited, this only one short-term in Q2. And we see stronger disposal of SE in Q2 in the prior, somehow cash in our (inaudible) to payout this debt in Q2. And focusing Q2 end, our total cash and cash marketable securities are now should be within the range of $78 million to $79 million. That’s our cash position right now. Thank you.

[Brad Miller:]

Thanks Dirk. Operator, any questions on the line?

[Operator:]

At this stage, no questions from the phone lines. (Operator Instructions). It appears there are no questions from the phone line. I’d like to hand the conference back to the presenters. Please continue.

[Brad Miller:]

Okay, thank you. Another question has come in, it’s – we get a number of questions from investors on potential for share buybacks. And what are some of the steps that you’re considering to do to grow shareholder value? I think I would say, first of all, we’re very focused on building a new business, a stronger company and driving shareholder value that way. We’re not making incremental changes this year to GigaMedia, we’re making major changes. We’re improving our games business as we’ve said in a number of ways to build better revenues, better margins, better product controls to adapt to market trends. We launched the new cloud business which we think has a great opportunity and we’re continuing to build that business out. In addition to focusing on our business, we’re confident that these changes will increase shareholder value. But in addition to that, there are some other steps that we’re continuing to take a look at in terms of shareholder buybacks. There are some options that we have but there are also some restrictions that we have. On share buybacks and dividends and another option, we have to keep in mind that we’re a Singapore company and we face restrictions because of that. Share buybacks are limited to 10% of all outstanding shares and price and volume are limited to 105% and 25% respective averages for previous 5 days. For us, basically that means the limit of about 10,000 shares a day and a buyback program. Now under the rules, our buyback would need to be during an open window period which for us means from basically about now until June 21, meaning the buyback would be limited to a total of about 22 days or 200,000 to 250,000 shares. Bottom line is, we wish we could buy more shares but we cannot. So we’ll continue to look at that option, another option of course is dividends. But again, as a Singapore company we face restrictions, dividends in Singapore are only allowed when a company has posted an annual profit. So, we’ll revisit that option when it’s open. Other options include, insider buying some IR programs. To address undervaluation, management has already purchased over 950,000 shares to date, to increase investor confidence and our financial reporting. We plan to change auditors this year to a big four accounting firm. You may have noticed that in our proxy materials. This change of course is subject to shareholder approval at our AGM next month. We also recently launched a new corporate website, and we plan to do road shows as our story unfolds, to market our story in the US and participate in investor conferences as well. In sum, we’re just committed to addressing undervaluation and enhancing shareholder value going forward. And we’ll continue to take actions available to us to do so. Operator, any further questions?

[Operator:]

At this stage, no questions from the phone lines. (Operator Instructions).

[Brad Miller:]

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

[Operator:]

Thank you ladies and gentlemen. That does conclude the conference for today. Thank you for participating. You may all disconnect.

[Collin Hwang:]

Thank you.