GigaMedia Limited
Q2 2008 Earnings Call Transcript

Published: 12 Aug 2008

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GigaMedia Limited conference call to discuss the second quarter 2008 financial results. (Operator Instructions) I would now like to turn the conference over to Mr. Brad Miller. Please proceed.

[Brad Miller:]

Thank you. This is Brad Miller, Investor Relations Director of GigaMedia. Welcome to our second quarter 2008 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, President and COO. 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 20-F filed with the U.S. Securities and Exchange Commission in June 2008. This presentation is being made on August 12, 2008. The contents of this presentation contains time-sensitive information but is accurate only as of the time here-of. 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 Q2 2008 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. With that, I would like to turn the call over to Arthur, our CEO.

[Arthur M. Wang:]

Thanks, Brad and thank you all for joining us today. In the second quarter, we delivered good results despite a seasonal slowdown. Revenues were up 31% to $52.5 million, driving a bottom line non-GAAP net profit up 17% to $12.1 million, resulting in a fully diluted non-GAAP EPS of $0.20 per share. Let me turn to the specific business units and highlight why we are so excited about our progress in building a leading online entertainment firm. First, our Everest Poker and Casino business; in overview, the second quarter for our Everest business was a solid quarter, despite difficult operating conditions. In addition to the annual seasonal slowdown, in the second quarter we faced strong competition for mine share from the number one event in Europe, the European Soccer Championship, which this year proved to be extraordinarily popular with record attendance and record viewership. Despite this, and strong competitive pressures, we were able to deliver results which, while below our norms, were in line or better than our main competitors. Let me turn to a few specific highlights and updates. First, our record casino results -- despite the difficult operating environment, our casino software business delivered record revenues of $9.5 million in the second quarter, up 34% year over year and up 10% from the first quarter. The main driver has been the increasing integration of our poker and casino platforms and the rollout of our common wallet functionality. We expect this trend to continue in Q3 and Q4 and for further platform integration to drive new record casino results. Second, Everest sports betting -- after considerable study and negotiations, we have selected a sports betting partner and plan to launch our Everest sports betting offering early in the fourth quarter. More details will follow in a formal announcement as we prepare for launch but I would emphasize that this is a key first step into the giant sports betting market, both broadening our product offering to our existing Everest players as well as attracting new types of players to our entertainment platform. In addition, we continue to discuss additional strategic partnership and acquisition opportunities with sports betting firms around the world to further accelerate our growth in this area. Third, the world series of poker -- this July, we saw the start of the 2008 World Series of Poker, the largest and richest in history, with Everest Poker as a primary sponsor and the Everest Poker logo emblazoned on the felt on every table and on the inner ring around the televised championship tables. The World Series of Poker welcome over 58,000 players from 118 countries, all playing for a prize pool of over $180 million. We are proud to be a sponsor of this preeminent sports entertainment event and pleased with the branding and visibility the World Series of Poker brings to Everest, with broadcasts ultimately reaching over 300 million households worldwide. The TV airing of the 2008 World Series of Poker has just started in the United States, to be followed by Europe and the rest of the world this fall. Based on the past experience of the World Series of Poker, we expect the world series broadcast to provide a strong boost to Everest Poker starting in the fourth quarter and extending through 2009. Fourth, our new Everest Poker VIP program -- this quarter, we are also launching our new Everest Poker VIP program, designed to both show appreciation and to be aspirational for our Everest players. We expect the VIP program will begin to contribute to our results in the fourth quarter of this year. Overall, in outlook for Q3 and Q4, for the third quarter we expect the seasonal slowdown and the added attractions of the Summer Olympics will result in revenues slightly lower than in Q2. This will be followed by a strong up-turn in the fourth quarter, which will enjoy support from Everest sports betting, the increased casino poker platform integration, the world series of poker broadcast, and the new Everest poker VIP program. We expect to finish the year with strong growth and strong momentum leading into 2009. Turning now to our Asian real money games business, at the end of the second quarter we released our new platform of real money Asian games. Though delayed by several months from our original schedule to ensure product quality, I am happy to announce that our launch has been a success. While it remains early days, we have seen very large traffic and thousands of downloads. Moreover, our games have been very well-received, with our most active players averaging more than six hours a day of game play on our Pachinko product, a strong endorsement of our Asian game development team. Player ARPU is running in line with our expectations and is gradually rising. Two new [Pachi] games are in final Q&A now and are scheduled for launch before the end of September with additional games in the development pipeline. While we expect revenue contributions to remain modest but increasing this year, we are committed to aggressively grow this business, which we believe has the potential to become another Everest. Turning now to our Asian online casual games platform, in overview, the second quarter was also a fine quarter with good operating results. Considerable attention was spent on operational enhancements and preparations for the launch of new games in the second half, as well as steps to build our games pipeline. A few highlights -- first, NBA Street online; the biggest development in our Asian games business is our recently announced partnership with Electronic Arts to operate their NBA Street Online game in China. Basketball is number one in China, with an estimated 300 million players and expected to grow further as the NBA starts a new professional basketball league, the China NBA, or CNBA. We believe NBA Street will further secure our position as the number one sports game operator in China. We plan to work closely with EA, with the NBA, and with the many NBA stars to make NBA Street the undisputed number one game in China. This new deal with EA builds on a growing partnership between GigaMedia and EA in Asia, where we will also operate EA’s NBA Street and Warhammer games in Taiwan, Hong Kong, and Macau, and in Southeast Asia; through our affiliate, Infocom Asia, where we will operate EA’s FIFA Soccer game. We look forward to continuing to build a close partnership with EA. Operational preparations -- this summer, we have been busy making operational enhancements and preparing for the launch of new games in the fall. Our next title is the [cube style], massively multi-player game titled [Holik], developed by [EM Games], authors of a top 10 game in China. We believe that [Holik] will fill the market niche previously occupied by R.O, Ragnarok Online, one of the all-time most popular games across Asia. We are pleased to be releasing [Holik] in all of Greater China -- that is China, Taiwan, Hong Kong, and Macau. We have also released a new front-end to our world number one FunTown Mahjong platform and continue development on the state of the next generation game platform. Finally, our studio and developer equity partnerships -- we are committed to offering the best in online entertainment to the 93 million registered users on our Pan-Asian platform. To this end, we have adopted a three-pillar content strategy. One is to partner, to license games from the best publishers, studios, and developers in the world, such as our partnership with EA. Another strategic pillar is self-development, to continue to build upon our self, our own game development capability, already strong in Taiwan as evidenced by our number one Mahjong and other Asian games, and increasing our strength in China. Finally, we believe in developing strategic equity partnerships with top studios and developers, a strategy by which we make equity investments and obtain rights and privileges for games under development which we believe have the best potential. To date, we have five such equity partnerships, including with such top game developers and XLGames, led by [Jake Sun], the original creator of Lineage, one of the top MMOs in gaming history. We believe these equity partnerships, as well as our game development and licensing with top firms such as EA, will provide us with the continued strong growth across Asia. In conclusion, in the second and now third quarter, we continue to make strong progress on our top strategic initiatives, putting in place the drivers of accelerated growth and market position. We are indeed building a new GigaMedia with growing shareholder value as its cornerstone. We thank you for your interest and continued support.

[Thomas T. Hui:]

Thank you all for joining us. Let me now take a few minutes to review our Q2 consolidated financial results. I will then highlight some key factors affecting the Q2 results in each of our core business units. Following that, there will be an opportunity for you to ask some questions. Overall, second quarter results were in line with our expectation despite a challenging operating environment. Beginning with revenues, year over year we grew consolidated revenue 31% to $52.5 million. Our gaming software business remained our largest business segment and contributed most of the growth in absolute dollar terms. Complementing this was strong growth in our Asian online game business, up 67% year-on-year. On a sequential basis, our revenue decreased by 4%. This was largely due to the impact of traditional seasonal downturn in online gaming activities on our gaming software business combined with the impact of the 2008 European Soccer Championship. The quarter over quarter revenue decline also reflects comparison with exceptionally strong revenues in our Asian online game business in Q1, which surged to record levels on the favorable mix of mass media game promotion, new game patches, and the Chinese New Year holiday. Turning now to our consolidated operating income, second quarter operating income increased 18% to $11.9 million from the same period in 2007. Both of our core businesses contributed to this year-over-year growth of our operating income. Quarter over quarter, operating income decreased 8% compared to our Q1 results. Operating income margin also declined slightly, impacted by lower revenues and gross margin and higher product development and engineering expenses. Consolidated net income in the second quarter grew 11% year over year to $11.2 million and decreased 7% sequentially. The sequential decline in net income was mainly due to a lowered Q2 net income from the gaming software business partially offset by a sequential increase in net income from the other business units. We continued to maintain a robust balance sheet in the second quarter. Cash, cash equivalents, and current marketable securities at the end of Q2 were $81.7 million and total debt was $32.3 million. In Q2, we generated $11.4 million in operating cash flow. Let’s now look in greater detail at the performance of our core business units. The gaming software business -- following record results achieved in the first quarter, the gaming software business entered a seasonally quieter period of online gaming. The summer months, when many Europeans have long vacations and generally spend less time online, are always a challenge for our gaming software business which targets the European markets. In addition to this seasonal slowdown, the very popular 2008 European Football Championship began in June, further reducing online gaming activity. With this difficult operating environment as a backdrop, revenue for the gaming software business grew 26% year over year but declined 4% sequentially, in line with the challenges faced. Drilling down further, in Poker, revenues grew 26% year over year and decreased 8% sequentially. We recorded 191,00 active depositing real money customers in Poker during the second quarter, down 8% sequentially. And during Q2, we added approximately 46,000 new depositing real money poker players, which was down 32% sequentially. As we recently announced, Everest Poker is celebrating record participation in this year’s World Series of Poker. As Arthur mentioned, TV broadcasts of the World Series of Poker event are expected to begin in different countries in our targeted European market at the end of 2008 and we expect that this, in combination with positive seasonality, will drive improve metrics in our poker business as we approach year-end. In casino, cross-selling targeting Everest Poker players is on track and proving successful. We have completed several key steps in integrating the poker and casino products, including cross registration and launch of the casino products on the poker lobby. Initial indications are very positive. In June, approximately half of the new casino players were players of our Everest Poker product. We expect ongoing cross-selling initiatives to continue to drive user growth and revenue [goals]. On the back of these initiatives, second quarter revenues from the casino software business were a record $9.5 million. This represented a 10% increase over Q1 results. Operating income in our gaming software business grew 8% to $10.4 million year over year and decreased 10% sequentially. The quarter over quarter decline reflected lower revenues from the business unit, which was partially offset by a reduction in sales and marketing expense in Q2. In sum, our gaming software business faced a challenging operating environment in Q2 and we expect the negative seasonality factors to continue in the third quarter but we are also confident that we have put in place the right steps to drive growth in Q4. Let me now turn to our Asian online game business -- we are continuing to scale up and build our pan-Asian platform and are very pleased with our progress. Total second quarter revenues from the Asian online game business climbed 67% year over year to $12 million. As expected, second quarter revenues were below first quarter results. In the first quarter, our business benefited from the combined impact of mass media game promotions around the Chinese New Year holiday, new game patches, the severe winter storm in China, which resulted in exceptionally high online activity. Let us review the breakdown of revenues from this business unit further. Revenues from T2CN, our China platform, jumped 361% year over year to $5.4 million. This was primarily due to the effect of three full months of consolidation of T2CN in Q2 of this year versus one month of consolidation during the same period last year. I would also like to highlight that on a like-for-like basis, T2CN also achieved significant revenue growth. Revenue for the second quarter of 2008 was approximately $1.8 million per month, up 54% from T2CN’s revenue in the same one-month period last year. On a sequential basis, T2CN’s key player metrics were lower than Q1’s record results. In Q2, average monthly active paying accounts were approximately 447,000, down 13% from the first quarter but average monthly ARPU -- monthly revenue per active paying account was $3.97, up 3% sequentially. Peak concurrent users of Freestyle were approximately 139,000, a decrease of 25% from the first quarter. FunTown, our Taiwan and Hong Kong online game platform, continued its steady growth trend with second quarter revenues up 10% year over year at $6.6 million. Revenue decreased 6% sequentially on lower revenues per customer. In Q2, average monthly active paying accounts were approximately 116,000, up 5% from the first quarter but average monthly revenue per active paying account was $19.02, down 10% quarter over quarter. Peak concurrent users were approximately 44,000, a 2% increase from the first quarter. Q2 operating margin of the online game business was 26.3%, down from 28.8% in the first quarter, largely on lower revenue and investments related to product development and platform integration and increases in G&A expenses. Looking ahead, we expect revenues to climb in the second half of 2008 and 2009 as we begin to more fully leverage our unique regional platform and launch a strong set of major new game titles, including [Holik], NBA Street Online, and Warhammer. In conclusion, in Q2 we faced strong operating challenges but we began to deliver solid results. We continued to build and strengthen our businesses and we are on track for a very exciting 2008 and beyond. Thank you.

[Brad Miller:]

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

[Operator:]

(Operator Instructions) Our first question will come from the line of Alicia Yap with Citigroup. Please proceed.

[Alicia Yap:]

Thank you. Good evening, Arthur and Thomas. I have a few questions. First of all, can you guys actually give us some color in terms of the trend in 3Q for T2CN? Obviously the second quarter was a little bit dropped from the very, very strong first quarter. So how should we look at for the third quarter with the Olympics impact?

[Thomas T. Hui:]

We actually think the use activity for both the T2CN and actually for FunTown are going to pick up in Q3 because traditionally, the summer months are stronger for this side of the business, the Asian side of the business for us and we don’t think we would actually see too bad of a negative impact because of the Olympics in China, specifically for T2CN, primarily because our game is sports related, Freestyle obviously being the dominant basketball game. In fact, we may see some pick-up there. So we do see some upside potential comparing to Q2 results for both FunTown and T2CN on the revenue side.

[Alicia Yap:]

I see. So just to follow-up a little bit on the Olympics trend, did you see any drop of usage during the opening ceremony last Friday? And then, how were the trends going in the last few days? I know it’s still early but whatever color you can provide.

[Thomas T. Hui:]

It’s probably a little too early for us to speculate the trend for the next two weeks but on that particular day, obviously we saw a significant reduction in terms of traffic because I think most of China and the world, for that matter, are spending time watching the few hours of the spectacular show instead of playing games online. But we do not think -- again, we are just a few days into it -- we do think it will have such a significant impact on our revenues as a whole and also for in particular T2CN. Now we did actually -- we did introduce a new game patch earlier last month on Freestyle, which was Freestyle 2008 and for that, we actually stopped the service for about two days because it’s a very major patch and those two days obviously had some revenue impact but we remain hopeful that the new patch and the content associated with the new patch can more than make up for those two days of revenue loss.

[Alicia Yap:]

I actually saw some -- I think the downloads is actually quite active on the new patch so hopefully -- is that a good indication that people are actually quite interested in that?

[Thomas T. Hui:]

Right. We are also very encouraged by both the search ranking and download ranking and so on and so forth, so again we are still a little over one month into the quarter and we are actively monitoring the activities and we remain hopeful that we can see some upside in Q4 in terms of revenue comparing to Q2.

[Alicia Yap:]

Okay, thank you. My second question is for the online poker and the casino site, so compared to last summer, how is the trend of both business this year versus last year? Do you expect any impact from the Olympics as well?

[Arthur M. Wang:]

Unfortunately in every summer, we do experience pretty significant seasonality and if we are fortunate, the best case is that we could diminish the impact by growing through it. This year, it’s a particularly difficult summer because of the Euro Cup and because of the Olympics and it just happens to be that both events have a viewership footprint that is similar to our Everest Poker demographic. So we do consider this to be a challenging summer but one we think we’ll come through fine and we look to a very, very strong up-turn in Q4.

[Alicia Yap:]

I see. Now, and then my next question is your casino business actually came in really, really strong this quarter, up 10% while your poker is actually down, and then you attribute the strong results to the cross-selling, right? So I’m just wondering, did the casino actually cannibalize the poker business a little bit or try to steal away some of the playing time for the poker players that caused a more sequential drop in the poker business?

[Thomas T. Hui:]

Alicia, we are only seeing the early results of the cross-selling effort. As I indicated in my prepared remarks that with those initial implementation of cross registration and also product crossing, we saw actually about half -- in the month of June, about half of the new players we recruit in the casino side came from players from the Everest Poker side. So certainly a very high overlap in the course of [inaudible]. Now, we are still analyzing data. It’s probably too early to conclude that there is a cannibalization of the spending power, if you will, of those players from the Everest site that got cross-sold to the Everest Casino product. Because if you were to look at the quarterly contribution of the paying customers for Everest Poker, from Q2 and Q1, they actually remained roughly the same at about $140 for the quarter or so. So there isn’t a suggestion of a reduction in ARPU. It’s really a slow-down in terms of user activity, we believe, in relation to the seasonality and also the European Cup, as both Arthur and I mentioned in our prepared remarks. But we are on the other hand actually very excited about the results of the casino site. As you correctly point out, it is a sequential 10% growth and also, cross-selling as a percentage of our total active poker base has remained at a very low single digit number and we think there is more room for us to cross-sell to our existing poker base.

[Alicia Yap:]

I see. And then my next question is on the sales and marketing costs -- I think you actually tried to reduce it a little bit compared to the first quarter. And how should we be looking at for the third and fourth quarter, being the third quarter you have the World Series of Poker sponsorship coming in, and then fourth quarter traditionally is a strong quarter. You probably will market a little bit more aggressively and you mentioned that you will have some targeted TV programs by the end of the year. So how should we be thinking about that and how the margins will be trending?

[Thomas T. Hui:]

I think Q3 is seasonally slower on the revenue side, so what we will do is we will unlikely be spending much because also we do not have the audience sitting in front of the TV or be in contact with the media content we would like to use to get our products across to them. Obviously some type of the more serious poker expense will begin to amortize beginning from Q3. As we have indicated before the amortization of the World Series of Poker expense will be done through Q3, Q4 this year, Q1, Q2 next year and basically over four quarters. So only a very small portion of that will be amortized in Q3. And as to the overall level, as we have indicated before we always monitor our level relative to the revenue level and therefore try to maintain our operating margin above the 25% to 30% ranges for this business, so we will basically maintain that accordingly. And for Q4, then you have obviously a full quarter of amortization of the World Series of Poker, but we do expect a strong rebound on the revenue side, which would give us more capability to spend on absolute dollar terms on the sales and marketing front.

[Alicia Yap:]

I see. Thank you. And then just lastly, can you elaborate what is the VIP program, the Everest VIP program?

[Arthur M. Wang:]

Alicia, it’s a membership retention and reward program. Think of it similar to a frequent flier program. It will come with a number of benefits which will reward and provide higher status to our frequent players, to our VIP players. And so it is both by way of a thank you and appreciation and also we would like it to be something that our players will aspire to, that they will play more so that they become VIPs and get treated like VIPs.

[Alicia Yap:]

I see. Okay, thank you. I’ll get back in the queue. Thank you.

[Operator:]

Our next question will come from the line of Andrey Glukhov with Brean Murray. Please proceed.

[Andrey Glukhov:]

Thank you. First of all, Arthur and Thomas, could you please give us an update on the timing of the release of a fully integrated casino poker platform? When are we going to have the casino applets within the poker platform?

[Thomas T. Hui:]

As we have indicated today, we have implemented so far a cross registration that allows people to cross register between the two platforms very easily. And then we have already implemented a button within the poker lobby for people to launch casino games easily. But what we have not implemented is a totally shared wallet and also a basically directly embedded in-game casino product while you are within a session of poker. What we have seen actually is with what we have implemented so far, we are actually getting a significant results already. As I have indicated, 50% of our new casino players come from poker, and although the cross-sell, the percentage of cross-sold customers of our entire base of active Everest Poker players still remains small, we think with what we have implemented so far is actually a good start for people to pick up the casino [product]. So we will continue to implement the rest but the schedule will probably take a little longer than just the summer because we want to spend some of our item operating -- like the VIP program, some of the initiatives. So the two common share wallet will be probably towards Q3, Q4.

[Andrey Glukhov:]

Okay. And if you look at a casino player that is coming from the poker side, how different is the ARPU, total ARPU on that player versus a player that plays just the poker?

[Thomas T. Hui:]

Again, it’s the initial months we’re seeing it, because again the -- some of these initiatives were only implemented towards the end of Q2. What we are seeing so far is not that different once they become our players, compared to some of the players we recruit from other channels, so that is another good indication that there is a significant amount of overlap and interest on both verticals.

[Andrey Glukhov:]

Okay. You indicated that you are going to step up the investment in Asian real money games and Pachinko. First of all, the revenue that goes through that line, is it going to go through the gaming revenue or through the Asian online games? And secondly, what is the implication for the operating margins from stepping up these investments?

[Thomas T. Hui:]

The line item will be going through gaming software because again it will most likely be operated through a similar structure as the [YN] structure. And as to operating margin, it would not -- while we will be stepping up but it will not be increased to such a level that we have a significant impact on our operating margin. So again, it will be increased as the level of investment will be made in consideration of the revenue potential, so we are not -- we will unlikely be sacrificing operating margin for that.

[Andrey Glukhov:]

Would you guys consider at some point starting breaking out that revenue?

[Thomas T. Hui:]

Once it becomes a significant portion of our financials, very similar to the casino and the poker side, we may break it out, again just as an ongoing consideration. The idea here is really to consider the materiality and also the level of information that is required for the investor public in general to better understand our business.

[Andrey Glukhov:]

And then the last question, as far as your sports betting partnership is concerned, is the initial focus, the first few partnerships going to be focused on Continental Europe, which is your sort of traditional strength? Or would you use them to diversify in some adjacent markets within Europe?

[Arthur M. Wang:]

The first partnership will focus upon our core market -- that is Continental Europe, but we are indeed looking at some additional partnerships which would bring us into new geographies, and we hope to have some further news on that maybe later this quarter or early fourth quarter. So the initial partnership again focused on Continental Europe.

[Andrey Glukhov:]

Great. Thanks for taking the question.

[Operator:]

Our next question will come from the line of Todd Eilers with Roth Capital Partners. Please proceed.

[Todd Eilers:]

Thomas, I’m not sure if I heard you or not in your remarks, but in the past I think the last quarter you provided some kind of full year guidance for operating margins of 20% to 25%. Do you still feel that that’s a good range? And then also, should we expect that to be kind of the range of possibilities on a quarterly basis as well?

[Thomas T. Hui:]

Yeah, that is still our targeted range for full year basis, 20% to 25%, and if you look at the first two quarters, we are right in the middle of that range. Q3 obviously will be slightly slower as a result of all the factors we talked about on the revenue side. We will try to adjust the cost and expense sides accordingly but it is probably fair to say that we will end up closer to the lower end of that range as opposed to the higher end, but this is still a good range as a full year target.

[Todd Eilers:]

Okay, and you guys mentioned the launch of [Holik]. I don’t know if you gave an exact date. Can you maybe give us a little additional color on when you expect to launch that in each individual market?

[Thomas T. Hui:]

Q3 and Q4, probably towards the very end of Q3 for some sort of open beta launch in Taiwan, followed by commercialization in Q4 in Taiwan. China will be towards the end of the year.

[Todd Eilers:]

Okay, and then lastly, obviously the sports betting opportunity seems to be pretty large for you guys and it sounds like you’ve got obviously some things in the works here. Can you maybe give us an indication of what you think kind of a reasonable conversion of players, poker players or casino players to sports betting might be that maybe give us a sense of what the opportunity might be for you guys?

[Arthur M. Wang:]

Sure. We have done some internal studies that suggest a very, very, very high percentage of our poker players are also sports betters. Up until now, they have been betting on sports at sites, non-Everest sites, non-Giga sites. And so we see this as a huge opportunity. Without releasing the exact statistics, let me say that the percentage was well north of 50%.

[Todd Eilers:]

Okay, great. That’s helpful. All right, thanks, guys.

[Operator:]

Our next question will come from the line of [Atol Bharta] with [inaudible]. Please proceed.

[Atol Bharta:]

Thank you for taking my question. So just following up on Todd’s question about the [Holik] launch -- can you guys also give some update on the launch time then for other games in Q3 and Q4?

[Thomas T. Hui:]

All the other games are going to be later than [Holik] and we don’t have a specific committed date yet, so at this stage they will all be towards the end of the year or spilled over to the beginning half of next year.

[Atol Bharta:]

Makes sense, okay. And can you also talk about -- you mentioned you guys have invested in five studios. Can you talk about the pipeline from these studios? And when can we start seeing some contribution from these investments?

[Arthur M. Wang:]

It’s probably a little bit complicated to talk about five studios and their different development schedules but we look to begin to sort of reap the benefits of our investments as early as say the first half of 2009. And we’ll come back to you and the marketplace with more specifics as we get a little bit closer.

[Atol Bharta:]

Coming to the gaming business, can you talk a little bit about your VIP program, how it can impact the bottom line? If you can give some color on what additional expenses or what impact it may have on the operating margins.

[Arthur M. Wang:]

We think the VIP program is structured such that it would be a net accretion. It will encourage players to play more, play longer, to bet more and to obtain higher status and special privileges as a result, so we think of it as an accretive move.

[Atol Bharta:]

So it’s probably going to have a positive impact on your operating margins, is that right?

[Arthur M. Wang:]

We think of it as a net plus, yes. At this point, until we have actually empirical data, I think we should limit the statement to merely an expectation and as we get launched in the next coming few weeks, we’ll have a better analytic sense.

[Atol Bharta:]

Okay, perfect. And on the sports betting, you mentioned that you have a high percentage of casino players who are also sports betters. Can you help us understand -- so the sports betting as a [menu launch], is it going to be again fully integrated with your Everest Poker platform, or is it going to be a separate platform and some timeline for integration?

[Arthur M. Wang:]

Initially, the degree of integration will not be full but we will be endeavoring to incorporate casino, sports, and Everest Poker into a single integrated platform.

[Atol Bharta:]

And the partner that you guys mention, is this more of a technology partner or is it more of a partnership with an existing sports betting platform?

[Arthur M. Wang:]

Our initial partner is primarily a technology provider and we will be operating our own branded Everest sports platform, and this will begin focused on Continental Europe.

[Atol Bharta:]

So you are not getting any installed base with the technology, it’s just the technology and skills you are acquiring with this partnership?

[Arthur M. Wang:]

For this partnership, no.

[Atol Bharta:]

Okay, perfect. And the last question for you guys, if you can give some update on the U.S. markets -- have you heard anything? Any update you can give us on the U.S. for the gaming side.

[Arthur M. Wang:]

Sure. There continues to be considerable -- I would say discussion and interest among various groups in the United States to either repeal or to severely delimit the prohibition act. The timing remains uncertain but my estimate would be within the next couple of years. Oddly enough, the United States budget deficits are also proving to be at an initiative or a cause for the repeal of the anti-poker laws as a couple of congressman recently came out with a very, very large number, almost $40 billion in tax dollars obtainable over 10 years from the re-legalization. And so to the original interest groups, the poker players, the financial institutions that do not like the existing legislation, and others who are interested in this industry, we now have those who are interested in fiscal matters supporting such a measure. I believe more activity and an earlier result will be seen on a state-by-state basis, in which several states have initiated legislation to legalize the playing of poker within states. In California, the legalization measure is advancing very rapidly through the state legislature and it’s my expectation that that will become law in 2009 and by year-end 2009, we will have a situation where California, which is a very large marketplace for Poker, will be an open and legal poker environment. And we intend to be part of that.

[Atol Bharta:]

And in anticipation of that, do you guys intend to do anymore marketing for brand awareness, et cetera in the U.S.?

[Arthur M. Wang:]

I’m sorry, could you repeat that?

[Atol Bharta:]

Sure. Do you guys have any plans for increasing brand awareness in the U.S. in anticipation of this -- your expectation of legalization of poker in the U.S.?

[Arthur M. Wang:]

Yes, we very much do. We will be making formal announcements to this end later but we intend to open Everest Poker on a play for fun -- that is, a free basis, which is entirely legal, in advance of the legalization on a play-for-real-money basis. We also are looking at additional sponsorship activities such as the World Series of Poker and similar types of events to continue to build a brand presence in the United States leading up to legalization. Again, we view the United States market as another enormous opportunity for Everest to take and expand its market share.

[Atol Bharta:]

Thank you.

[Operator:]

(Operator Instructions) Our next question will come from the line of [Chang Qui] with [Sansar] Capital. Please proceed.

[Chang Qui:]

Good evening, Tom and Arthur. One question is for NBA Street Online, do you for that game need also [apply something], like the publication number? Also, what would be the schedule in terms of a commercial rolling out?

[Arthur M. Wang:]

Sure. You are absolutely right that all foreign games operating in China need to have approval of the Chinese publishing authorities. We believe that the NBA, EA, but in particular because it’s basketball, this is a -- it poses no social threat and there is no social deviancy with playing basketball, quite opposed to what one might say about some of the more violent killing and shooting and other types of games might have some negative social impact. But we think that basketball is a clean and healthy sport that is so popular and so supported by the Chinese Government, we’ll not have problems. And we are pushing very hard to look for a launch this fall.

[Chang Qui:]

Okay. That’s great. And for the real money Asia games, you mentioned you already launched it. I just wonder how, in terms of modeling, how should we think about it in terms of revenue for the next -- maybe this quarter, next quarter, next year?

[Arthur M. Wang:]

Sure, Chang. As you well remember, having been with us for a long time, we have a policy not to release quantitative or analytic guidance when we are ourselves do not feel that we have sufficient analytic basis. So at this point in time, we are probably not going to be able to offer much by way of assistance. We are very optimistic. We had a very, very positive launch. We are seeing traffic far beyond what we expected and we are seeing player acceptance of our games get much higher than we expected. So I would say we are optimistic but we are not able to guide too much by way of numbers yet.

[Chang Qui:]

Okay, and it will launch in which countries for the moment?

[Arthur M. Wang:]

The platform is primarily directed towards a Japanese audience.

[Chang Qui:]

Okay, thanks.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to IR Director Brad Miller for closing remarks.

[Brad Miller:]

Thank you, Operator and thank you all again for joining us today. For further information about GigaMedia, or if you have questions and would like to contact us, please visit our website at www.gigamedia.com.tw. Thank you.

[Operator:]

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.