PokerPulse Conference Call Transcripts: GIGM Q4 2007, March 11, 2008

GigaMedia Limited Q4 2007 Financial Results Conference Call
Tuesday, March 11, 2008
8:00 a.m. ET

The recording of the conference call is available here and is transcribed below on a best effort basis. You can go directly the Q&A session transcription here or back to the PokerPulse About GigaMedia page here.

Operator: Welcome the the GigaMedia Limited conference call to discuss the 4th Q and full year 2007 financial result. At this time all participants are in a listen only mode. Following the formal presentation, instructions will be given the Q&A session. If anyone needs assistance at any time during the conference, please press the * followed by 0 for operator assistance. As a reminder this conference is being recorded today, the 11th of March 2008. I will now like to turn the conference over to Mr. Brad Miller. Please go ahead Mr. Miller.

Brad: Thank-you. This is Brad Miller, investor relations director at GigaMedia. Welcome to our 4th Q 2007 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.

Brad: 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 on 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 2007. This presentation is being made on March 11, 2008. The contents 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.

Brad: The agenda for today’s call includes first a review by Arthur Wang of 4Q and full year 2007 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: Thanks Brad and thank-you all for joining us. We are very pleased to announce today our 2007 full year and 4th Q financial results. In numeric terms 2007 was an outstanding year. As a company we grew dramatically with revenue climbing 77%. Operating income up 73%. And net income rising 68% excluding non-cap share based compensation. But even more important, I would like to emphasis that 2007 was a watershed strategic year. A year of significant investment and building to forge the foundation for more dramatic, more exciting growth in up coming years. As president and COO Thomas Hui will share details with you about financial and operating performance, I will concentration on our strategic position, plans, and outlook and why we are so excited about the position we are in today.

Arthur: First our poker software and casino business. In 2007 we enjoyed strong success in building out the Everest online entertainment brand. Numerous marketing initiative combined with strong operations have consolidated our operations as the 4th largest poker site in the world. Our poker and casino software was consistently improved and broaden with the addition of the Omaha poker game, over 15 casino games and two new language geographic offerings. Are efforts have gained recognition not only among our players but also our competitors. Everest was awarded poker operation of the year for 2007 by industry journal e-gaming review. In 2008 we plan to continue to build the Everest brand as a leading poker and casino brand with strong market visibility, market recognition, market acceptance and trust. Among the 350M consumers of the European Union and around the world. In South America, in Asia and ultimately in the United States. We have many plans to bring this about. Let me highlight a few. First the World Series of Poker. We recently announced that Everest Poker secured a key multi-year sponsorship of the legendary World Series of Poker. The world's oldest, largest and most famous poker tournament. Last year over 50,000 players physically attended the World Series of Poker to play for a prize pool in excess of over $150 million. Under the terms of the sponsorship, Everest Poker will be featured on the felt at every table in the World Series of Poker and more on the televised championship table on the inner rung that surrounds the table, most visible when players check their pocket cards. Everest Poker will also have significant visibility at the event with signage, player sponsorship and special parties and functions. The World Series of Poker has a viewership of over 350 million homes worldwide from over 2700 hours of broadcasts. In short the World Series of Poker is the greatest gaming event on the planet and we look to it to help drive Everest to the next level.

Arthur: Second sports betting. This year we plan to acquire, merge or form a strong strategic alliance with a major European sports book. Sports are an enormous segment of the online gaming and betting space. But until recently our view was that regulations were to restrictive for us to be involved. As a result we have been leaving a lot of money on the table. The good news is that last year we have seen several moves towards licensing and liberalization in certain of our target markets and we have concluded that now is a good time for us to enter. By having a sports offering to pair with Everest we will be able to extend our offering from poker casino and casino to poker, casino and sports and offer our highly popular Everest poker and casino games to sports betters. By sharing players and traffic, essentially making our entertainment offering more broad and more deep. We are highly confident we can increase per player values allowing us to invest further into our brand and player acquisition.

Arthur: Third, poker and casino integration. We also plan to strength the connection between poker and casino offerings. Opening a window in the poker client allowing players to play casino blackjack and other games while waiting for others in a poker game and improving cross selling between our products.

Arthur: Fourth, launching Everest into the United States. As you are all aware, though the poker business in the United States was outlawed in October 2006, interest in and demand for poker has remained very strong. In response, legislators has begun to reconsider the prohibition. A process most observers believe will result in the adoption of a new system where by poker offerings by licensed regulated companies will be allowed. It is our intention to be first in line for such a license and our believe that we are well positioned to be one of the first recipients. In our favor is the fact that we have never offered poker or any gaming in the United States before and therefore never ran afoul of US laws in the past. In addition our status, as the only US listed poker firm. As the only poker firm subject to and complying to US corporate and securities laws. As the only poker firm preparing financials subject to US GAAP. As the only poker firm complying with Sarbanes Oxley regulations and other corporate governance measures in the United States. All of this suggesting that we will be better positioned that our competitors to obtain an early licensing in the United States. The United States is an enormous poker market, one which we are very excited to enter as a fully licensed and fully legal offering once the new regulations are adapted. We plan to begin preparations this year and are considering initially offering play for fun, tournament or subscription play in the interim. More over, we believe our multi-year sponsorship of the World Series of Poker will set the stage for our full launch into the United States upon legalization. Overall, in 2007, we have invested strongly into make Everest a well recognized, well accepted and trusted brand for online poker and casino. We believe these investments will drive further growth in Europe initially but before long into the giant United States market.

Arthur: Our Asian online games business. In Asia, we have taken majors steps to build the first and only pan Asian online gaming and entertainment platform. Extending from our traditional base in Hong Kong, Taiwan, and Macau into the Chinese mainland with our acquisition of T2CN and across the 10 countries of SE Asia with our investment into InfoComm Asia Holdings for which we are the largest shareholder. Today we have over 68M registered users with over 9M users active in the last 30 days. We look to double these numbers and then double again as we grow our pan Asia platform. Lets look at some of our plans for this business.

Arthur: First, top games from top partners. To fuel our growth in this large and rapidly growing market we have been fortunate to partner with top game and entertainment providers from around the world, including FlagShip Studios, creators of Diablo and the WarCraft games and Electronic Arts, a true global leader in digital entertainment with over 200 popular titles. In 2008 we will be launching the exciting Street online game from EA Sports and the epic MMORPG from the EA Mystic Studio as well as Hellgate:London from FlagShip Studios. In addition our SE Asian affiliate InfoComm Asia, has just signed the tremendous title FIFA Online 2 from Electronic Arts the sequel to the blockbuster FIFAs Football or soccer to Americans. A game that had over 5M users and was the number 1 mid sessions game in Korea.

Arthur: Second, top relations with top studios. In 2007 we made equity investments into 3 top game development studios. SoftStar, one of Asia's oldest and most developed gaming companies, XLGame founded by gaming legend Jake Song, the creator of Lineage, the most popular online game franchise in history and NeoStorm a game development powerhouse with creative talent from NCSoft, Nexon and NHN Corporations. Together, with our self development projects, with our licensing from top global partners like EA, our investment in top two studios forms a 3rd prong investment plan to ensure we have a strong pipeline of online entertainment and games to drive growth for the years ahead.

Arthur: Turning now to our real money Asian games. 2007 also saw the launch first real money mahjong product and development and release in open beta of our suite of Japanese products, including pachinko, pachislo and mahjong. As I have reported before, the results from initial launch of real money mahjong have been lower than planned due primarily we believe to certain marketing and platform deficiencies of our initial licensee. These problems have since been corrected and we have been told several new marketing initiatives are underway including the use of online marketing affiliates, strategic partnerships with land based channels, banner advertisements and event marketing. We believe we will see positive results from these efforts and will report more as data becomes available. We also continued discussions with several other potential licensees and expect to finalize terms soon. We believe this will help expand the market significantly when these launch in 2008.

Arthur: Our suite of Japanese products was launched in open beta on a play for fun basis at the end of 2007. The purpose of the open beta was primarily to give our affiliate partners a sneak preview of the new product offerings and to solicit new affiliate networks in Japan. In the two months since open beta the initial feedback has been overwhelmingly positive. Both our existing and new affiliate partners are very excited and very positive. In addition with no promotion and no marketing we have 100s of software downloads every day and the upward trend continues. We have also sought detailed feedback from focus groups and selected partners. Their opinions have been highly valuable, highly informative, and as a result we have decided to make certain modifications of the products in the area of the pachi games themselves, lobby and parlor functionally, art and graphics, as well as back-end business management tools. We now expect to launch commercially in the 2nd quarter. We hope and expect that our product will be able to replicate as much as possible the gaming features of existing pachi machines and the ambiance of the land based pachinko parlors as well as introducing elements that are commonly offered in the online environment such as aviators, play ranking and community features. Despite the launch delays, we continue to see an enormous market for Asian real money and play for prizes games. We look forward with enthusiasm to a strong ramp-up in 2008.

Arthur: Overall, we are very excited about 2008 and expect strong growth in both top and bottom line terms and in our strategic position Europe and Asia. In the short term, we expect a strong first quarter driven by continued outstanding performance in every business unit. In the medium to long term, we believe our strong investments in 2007 have laid the foundation for more dramatic, more exciting growth in the upcoming years. We are indeed building a new GigaMedia with growing shareholder value as its cornerstone. We thank you for your interest and continued support.

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Thomas: Thanks Arthur, and thank-you all for joining us. As Arthur mentioned, 2007 was quite simply a great year for our business. I would like to start today's discussions with a brief overview of the full year 2007 results and then move to look at our 4th quarter performance.

Thomas: We had a very strong 2007 with record revenues, operating income and net income driven by strong execution in our core business. Revenues grow 77% and operating income increased 73% resulting in record net income of $38M. In 2006, we recorded a significant non-operating gain of approximately $7M after tax related to the sell of our legacy ADSL business. Excluding this gain, to get a better apples to apples comparison net income grew to 63% year over year in 2007. Both of our core business, i.e. our gaming software business and our Asian online business had stellar performance in 2007. Lets take a quick look now at these two starting with results of our gaming software business.

Thomas: Gaming software revenues were $119M in 2007, an increase in 116% from 2006. Growth was largely due to our poker software product which soared 190% year over year. Operating income from the business units grew 125% to $37.7M.

Thomas: The Asian online business also had a very solid 2007. Full years revenues jumped 75% to $32.8M. Operating income grew 21% over 2006 to $6.7M.

Thomas: Lets now turn our discussions to the 4th Q 2007 results. In the 4th quarter our consolidated revenue were up 59% year over year or 11% sequential to $47.7M. Our poker software business continued to be the main driver of our revenue growth. Increases in revenue from our Asian online game business also contributed to our revenue growth year over year. Consolidate gross profit was $37.6M in the 4th quarter. A 16% improvement year over year and 13% growth sequentially. Gross margins increased slightly to say 78.8%. Consolidated operating income reached $9.3M in the 4th quarter which represented a 16% increase year over year and a 7% decline sequentially. Operating margin was 19.5% in Q4 2007. The year over year increase in operating income was due to strong growth in our consolidated revenue and gross profit which was partially offset by an operating margin decline due to increases in selling and marketing expenses across all of our core business units, growth in product development and engineering expenses in our gaming software business and finally the consolidation and integration of T2CN which increased general and administrative expenses.

Thomas: Quarter over quarter our operating income declined due to higher operating expenses. Selling and marketing expenses grew 34% to $20M mainly due to increases in advertising and marketing activities in our poker and casino software business which was implemented to take advantage of the seasonally strong winter months of Q4. Product development and engineering expenses also increased by 92% sequentially to $2.8M from last quarter reflecting increases in R&D related expenses in our gaming software business and an increase in product development expenses at T2CN due to a one of event in Q3.

Thomas: General and administrative expenses decreased 19% sequentially from Q3 to $5.4M, primarily due to low staff related compensation expenses and lower professional services fee.

Thomas: Non-operating income for the 4th quarter was $354K compared to $1.5M in Q3 and $2.2M in the same period in 2006. The sequential decline reflected a one time gain as a result of the cancellation of preferred share warrant and the termination of a licensing agreement both at T2CN in Q3 and the year of year decline reflect a certain gain in the disposal of marketable securities in Q4 2006. Finally as a result of all of these factors our net income in the 4th quarter grew 8% year over year and 10% sequentially to $10.7M. Our 4th quarter consolidated net income also benefited from a minor interest loss and income tax benefit during the period.

Thomas: Turning now to our balance sheet, we ended 2007 with a very strong financial position. Cash, cash equivalent and current marketable securities at the end of Q4 was $79.9M and total that was $33.3M. In Q4 we generated $13.3M in operating cash flow.

Thomas: Lets now look at our business unit operating performance, the gaming software business. During the 4th quarter the business unit generated a $34.2M in revenue, up 73% over last year and 17% growth over the previous quarter. Revenue from our poker software products were $26.8M an increase of 107% year over year and 21% sequentially. Driving this was our award winning Everest Poker offering. Everest Poker is continue to attract growing numbers of real money players and strengthen as the leading international gaming brand. Approximately 182K active, depositing real money customers played Everest Poker during the 4th quarter. And during the quarter Everest Poker add approximately 57K new real money depositing players.

Thomas: Our casino software business also delivered solid results. 4Q revenue from the casino software business was $7.4M. This represented a 7% increase year over year and 2% increase sequentially driven in large part by the launch of new games and cross selling of casino games to Everest Poker players.

Thomas: Operating income from our gaming software business increased 3% sequential to $9.8M in the 4th quarter as a result of significant revenue growth. Operating income growth was partially offset by increase in operating expenses in the area of selling marketing expense, commensurate with consistently strong winter months as well as product development and engineering expenses designed to expand our platform functionality and product offerings. As a result of these factors, net income from the business unit in the 4th quarter increased 19% sequentially to $10.9M.

Thomas: In sum, our gaming software business is continue to deliver and drive growth and as noted in our press release today, in the first 2 months of 2008, we have experienced an exciting pickup in revenues. For January and February combined, averaged net daily revenue was up nearly 12% over that achieved in the 4th quarter of 2007.

Thomas: The Asian online game business, FunTown and T2CN. Total revenues from the Asian online game business in the period increased an impressive 92% year over year to $10.1M driven by strong contributions from FunTown and consolidation of our China gaming platform, T2CN. Quarter over quarter, revenues were flat. Breaking revenues down further, 4th Q revenues from FunTown grew 16% year over year and declined 1% sequentially to $6.1M. Strong contribution from Tales Runner were the main drive for year over year results.

Thomas: Turning to T2CN. Total 4th quarter revenue was $4M, up 2% sequentially primarily due to an increase in revenues from our basketball game FreeStyle. This pickup in performance is related to the addition of new content to the game and new promotional activities during the period.

Thomas: For the Asian online game business as a whole, gross profit was $6.8M roughly flat quarter over quarter. Gross profit margin was 68% during the 4th quarter. As mentioned earlier the Asian online game business also recorded an operating income decline over the 4th quarter at $1.2M down from $1.3M in Q3. The quarter over quarter decline primarily reflected an increase in product development and engineering expense as a result of the termination of a licensing agreement at T2CN in Q3. As a result of these factors combined with the decline in the non-operating income at T2CN I spoke about earlier net income from the business unit in the 4th quarter declined 15% sequentially to $1.3M.

Thomas: Looking ahead: The competitive advantages of our unique pan regional platform and our strong portfolio of top game titles will be the key drivers for our Asian online game business. To date, we have licensed a very strong set of exciting games, including NBA Street online, Holic, Warhammer and Hellgate:London partnering with some of the world's leading game developers such as Electronic Arts. We have also complemented this by investing in leading games studios giving us the ability to source hot titles at favorable terms. We full expect both top and bottom line results to accelerate strongly in 2008 as we launch new titles, drive subscriber numbers and expand our reach.

Thomas: To summarize: In Q4 we again made excellent progress in our core businesses as we continue driving very strong growth in our gaming software business while at the same time building our platform and enhancing our offerings. Again we continue strengthing our Asian online game business, deeping our game pipeline and adding key strategic partnerships. Both our gaming software and Asian online game business are on track for a very exciting 2008. Thank-you.

Brad: Thanks Thomas. We will now move into a Q&A session. Operator we would now like to open the call up to questions.

Q&A Session

Operator: Your first question comes from the line of Alicia Yap with Citi Group. Please proceed.

Alicia: Ah, good morning Arthur and Thomas. I have 3 questions. First of all you highlight that both gaming software and the Asian online games, that you are seeing the rev com, daily revenues and player activities for the 1st two months up significantly over the 4th quarter. Can you guys help us understand whether this is because of the benefit that you saw from your aggressive marketing promotion during your 4th Q and can you help us understand the reason why you decided to spend more heavily? Was it because of changes in the competitive landscape? Or this any other reasons influence you to spend more? And what should we expect going forward? Ah, I'm lumping a little bit, but will you then see the benefit of these marketing campaign to actually contribute positively to your 2nd Q 08 or do you have to continue to spend in the 1st Q in order to drive the future growth?

Thomas: Sure, Alicia, This is Thomas here. Thank-you for your question. Ah, I think it is a combination of all of the factors that you talked about. Perhaps we can go through this business unit by business unit. On the gaming software side as you know traditionally, Q4th, the winter months, is the peak season for us as players return from the summer months and we took advantage of the winter months seasons and launched quite aggressively a series of large marketing campaign, online, off-line included, and you will notice in our Q4 financial, selling and marketing expense increased quite significantly and that is the key reason for that. We saw some impact in Q4 but all of these campaign will run through the entire duration of Q4 and then undoubtedly across over the year end as well. And what we noticed is that a lot of the results from those campaign are either increasing players coming through in the month of January and February, so that I think that would be largest reason contributing for the increase in player activity and also revenue contribution from the gaming software business. As to the Asian online game business, it is also a combination of factors. First we have some content update towards the end, I think it was December, last year for the FreeStyle gaming has significantly increased the peak concurrent user and also user spending for the end of last year and more importantly for 1st two months of this year. What we have noticed is that during the Chinese New Year holiday, this is also a significant pickup in terms of user activity for our FreeStyle game in particular. We obviously target that particular timing with some very festive Chinese New Year related marketing campaign and we also ran a campaign with a movie by a famous star, Jay Chou here, and the movie's name is Kung Fu Dunk []. All of these actually contributed to the pickup in user activities that we have seen so far in the first two months of the year. And as to outlook, we certainly believe with the right amount and timing of marketing and our product here both currently in the offering and to be launched would be the right product to address the market space and we certainly think the growth potential is there.

Alicia: Should we expect the same absolute of amount of the marketing expenses in the first quarter?

Thomas: You will notice that Q4 selling and marketing as a percentage of our revenue was higher both actually in percentage terms and in absolute dollar terms comparing to some of our previous quarters. As we had talked about before, on a quarter over quarter basis it is hard to a very smooth trend because of a launching of a particular campaign and game products. But if you look at a more longer term, say a full year basis, we think that you will not see the same level, I think is over 40% of the revenue was spent in selling and marketing in Q4, you will see more like the mid 30s as we have talked about before. So over time it should come down.

Alicia: I see. Ok. And my second question is last week you have announced you have secure a multi-year sponsorship of the World Series of Poker. Can you help us understand the estimated marketing costs you expect to commit over the next two years? It seems to us that probably you are sacrificing the short term margin extensions for more long term growth potential in the market share gain. Is that what you are aiming for?

Arthur: Alicia, hi, this is Arthur. When you look at every marketing opportunity we look at sort of a tactical basis as well as a strategic basis. A tactical basis we look for every marketing addition to have a positive ROI in terms of direct dollar contributions. The World Series of Poker was no exception. And both in terms of both short, medium and long term benefits we are very excited about the deal. We are not releasing the exact financial terms. It is not by any means something out of line with our normal marketing spend. So, we think it is a very positive deal. A win win deal. And also a situation where we will be able to bring a lot of European, South American and Asian user base to the World Series of Poker in Las Vegas. And we are going to be contributing a lot making that event an even bigger worldwide event.

Alicia: Ok. And then my 3rd question, please, in light of the overall concerns of the slowing down of the global economy, can you help us understand how sensitive is online poker business, online Mahjong business, on a soft economy, what is your expectation in terms of your poker traffic?

Arthur: Well Alicia at this point we don't have empirical data to point to any firm conclusions. There have been anecdotal reference in past about how that maybe movie going and gambling is counter cyclical. But we are not sure about the new internet era so we'll be watching that closely and adjusting our marketing and target demographics as we see appropriate.

Alicia: Ok. Thank-you. I'll get back to the queue.

Operator: Your next question comes from the line of James Rhee with Bear Stearns.

James: Hi. Thank-you guys. And congratulations on your solid recent performance. And especially on your strategic efforts that you have taken and executed on last year. Just a few questions, all kind of similar, but maybe not too timing. In terms of various thing such as sportsbook. Secondly, I know it is a guess, but US market liberalization. And finally, in terms of perhaps the game out from these three studio investments. Can you give just give me a better idea, even in rough terms, on timing issues for those three efforts.

Arthur: James do you have to ask specific questions on these 3 or would you like just more color on these points?

James: More color is fine. I understand there are specific limitations.

Arthur: Ok. At this point in time, we are not ready to announce any specific terms or any specific deal with respect to a deal with a sports book. We think that this is a, I can't emphasis how large and important a step this will be for us. It is a matter I am attending to personally and we are fortunate to have built a very attractive brand, to have a lot of momentum, to have very strong consumer response. And so we are enjoying a situation where we have some good possibilities, good opportunities, good choices for us. We are exploring those very carefully. I think it will be a while still before we are able to announce anything. But we are making good progress. With respect to the US market liberalization, this in some ways is anyone's guess as to exactly when the United States is repeals the prohibition and adopts a licensed regulated regime. Most people think within a couple of years or so. But then again this is subject to the vagaries of the U.S. political process. There is as you as know in the United States a general acceptance of poker as very different from other hard core gambling products and other matters. Poker is on TV nearly every night on channels ranging from the Travel channel to Discovery, Leisure, to National Geographic, as well as ESPN and some of the traditional ones. So it is certainly a wide spread popular phenomenon. One I think that enjoys the kind of popular support which will ultimately see this as a again a legalized regulated operating environment. And we are very excited about that. We have bear a significant burden being a United States listed company, by complying with Sarbane Oxley and all of the strict United States government measures. One benefit of this is we believe when the United States authorities come around to granting licenses it will be most ease for them to understand a United States listed company. A company that is filing in US GAPP, a company that is already in compliant with strict US government and corporate transparency regulations. And we look forward to that day and plan to be very aggressive in our launching into the United States. We think the World Series of Poker sponsorship will tie in very nicely with that. And we are very optimistic about this opportunity. Finally in terms of game out, maybe I can ask Thomas to speak to some of the pipeline and expected game time line.

Thomas: Sure. More important the financial implications of investing in those two studios is what Arthur had mentioned in his prepared remarks. We are looking at this as an important source of ongoing online gaming content for our Asian online gaming business. So for the few investment we have made we do have no horizon as to when to exit as we are treating these as strategic. Now in terms of games to be produced by each of these studios, Neostorm will have games that will be ready as early as the 2nd half of this year and it will have a continuation of gaming pipeline through out most of next year. XL will be slightly longer. Perhaps not until 2009, the 2nd half at the earliest. But as Arthur has mentioned these are long term important sources of our games and we will continue to work with them in either a commission basis, license basis or joint development basis to develop games for our target markets and operations.

James: Ok. Thank-you. One quick follow-up question on marketing costs. I guess for Q4 the big spike was related to the seasonally strong winter quarter for the online gaming software business overall. Would you consider Q1, the March quarter, to be equally seasonally strong relative to winter quarter?

Thomas: That is a very good question James. As I have mentioned, on a percentage basis we have spent a little over 40% in Q4 and that is in addition to the reason Q4 is a strong month, it is also a strong month coming out of a weak quarter. You remember when we talk about Q3 results, Q3 was seasonally weak because of the summer holiday and we have held back in Q3 and in fact last year for Q2 some of the market spends and we basically spent most of that and more than we had originally planned in Q4. Now Q1 we do not have this in a way accumulation effect of marketing spend effect that we would have spend otherwise so we will be looking at Q1 the opportunity that we have and spend accordingly. As I was answering earlier Alicia's questions I think on a percentage of revenue basis the marketing, selling and marketing spend is going to come down from the almost 40% level we saw in Q4. But it is better to look at this on a more longer basis as opposed to quarter to quarter because we do not want to miss opportunity as we see them as they happen on a particular quarter.

James: Ok. Thank-you very much.

Thomas: Thank-you.

Operator: Your next question comes from the line of Todd Elliot of Ross Capital Partners. Please proceed.

Todd: Hi Arthur, Hi Thomas, how are you.

Arthur: Great Todd.

Todd: Just a couple of quick questions. First with regards to real money Mahjong, I believe you mentioned some interest from 3rd parties, can you tell us when your expectations are for when you might launch that product with your poker/casino licensing partner UIM?

Arthur: We have been in discussion with a number of very strong partners for our real money Mahjong product and we think that we will be coming to terms very soon and we look forward then to a launch as soon as the software gets integrated. So I'd would say launching maybe by the begriming of 2nd half would be the normal timeframe.

Todd: Second half, so the 3rd Q? 2nd half of the year or second half of the 3rd quarter.

Arthur: No, I would think sometimes around the summer.

Todd: My next questions is with regards to the U.S., again just a follow-up, I believe in your comments you mentions entering the U.S. on a play for fun/subscription effort. Can you give us an indication of what the timing might be on something like that?

Arthur: At this point in time we have not finalized our plans. We will naturally be seeking to take advantage of our sponsorship of the World Series of Poker and the strength of our play for fun offerings in Asia and all of all that we have learned about operating tournaments, creating community and building entertainment value when there is no real money for stake as well as our core poker product, the Everest product itself.

Todd: Ok. And then you then guys also in your comments mentioned the creation of a common integrated platform for your money gaming business. Has that already launched? And if not, can you give a timing for when that technology should be ready?

Thomas: Sure. It has not been launched. We are looking at mid this year, around summer time to launch this product. As you see actually we did mention in our prepared remarks in Q4 that the increase in Product Development and Engineering expense, there is a big push to increase the level of cross selling between the poker side and the casino side and that what the expenses are about. So we do look to this as a big initiative in terms of instant results on the revenue side once we launch it towards the middle part of this year.

Todd: Ok. And then I'm looking at your ARPU [sic average-revenue-per-user] for the December quarter and obviously you guys spend some heavy marketing in the quarter. Is there anything else that might have drove that number. It looks like it was 49, and this is for poker, $49 for the Q, is there anything else that might be driving that strong increases sequentially?

Thomas: I think again that seasonally is one and marketing campaign on all fronts is another. And we feel that we are really having a lot of momentum with the brand as we talk about before, from a demographic perspective our RPP because of the target markets we address are relatively lower comparing to the more mature markets of the US before the ban or the UK if you will now and we feel that over time there should be actually upside potential on the RPP side for our gaming software business. But that is not our focus as we have talked about for our short to medium term. Our short to term medium term is to really build out the brand, attract the user, build out the platform, and we believe the RPP will come when the market becomes more mature.

Todd: Ok. And then just one final question. There has been a lot chatter regarding the your Canadian jurisdiction, Kahanawke, internet gaming jurisdiction, regards to the government looking to possibly shut that jurisdiction down. Can you maybe address this. Do you think that's a possibility and if so I'm sure you guys have constituency plans, can you maybe just help us understand what going on there and you'd might do if something like that did happen?

Arthur: Sure Todd. First of all we see no possibility of that happening in the near term. It is a rumor that has as been circulated around that we see no basis for. Second of all, we are in the final phases of obtaining another gaming licenses in Malta. And so we will have both redundant licensing and redundant operating facilities.

Todd: Ok. Perfect. Thanks guys.

Operator: Just to remind everyone if you would like to ask a question, please press star followed by 1 on your touch tone telephone. Your next question comes from the line of Terry Babe of ThinkEquity Partners. Please proceed.

Terry: Hi. Thanks for taking my question. Just a couple of questions. First, I guess in terms of the Japanese commercial launch, I guess it has been delayed as of recently, I just wanted to get an update on how you were thinking about the revenue and the margin ramp there as we move throughout 08 and maybe into 09, if you were expecting any material contribution.

Arthur: Sure, Terry. I am afraid that it is our policy that for new products and for new businesses not to provide a numeric, any numeric guidance. We just don't feel that we have the analytic basis to just such. We do believe that the market opportunity is very very large. And we are very very excited about the positive response we have received through our beta launch. It is a play for fun launch. And that has, there is a lot you can learn from that. And on the basis of this, I am going to go out on the limb for this and I am say this could be a good contributor. The exact timing of the which, we'll have to see the rate of ramp-up, the rate of launch and the like. But we'll be building this business as we built the Everest business in a step by step methodical basis to capture large market share and to be a long term winner.

Terry: Ok. Thanks. And then just could you comment on the regulatory issues in Europe and specifically in Germany on what's going on there and any thoughts around that you have.

Arthur: Sure. Europe, of course when we speak of Europe it is a kind of generalization there are some 27 nations in the European union and each at any one moment each could be going in its own direction. But the most important thing in our minds is that these 27 nations has joined together to form a common market with as its number one principle of a single customs jurisdiction with no barriers to move of goods and services between member nations. They have underscored this by aligning their underlying currency, by aligning their macro and micro economic policy, their fiscal policy and subjecting themselves all to a super national government, that is the European commission based in Brussels. This European commission has been very active and very straight forward about its view that online gaming is one of the services which should be, by the principles of the European union, an open and free flowing, free moving service. As such we believe that ultimately, and the pace will depend upon the decisions in every individual countries, ultimately, we see that Europe will be an open and free market for the provision of online gaming market.

Terry: Ok. Thanks.

Operator: Your next question comes from the line of Edward Hemmelgam with Shaker Investments. Please proceed.

Edward: Yes, just a couple of questions. Maybe you could clarify this. But you talk about a significant increase in the Asian online gaming business in the first 2 months of this quarter. Could you maybe give a little more of a range for that.

Thomas: We, as a policy do not give numerical guidance, and that but it is safe to say that in the past two months, January and February, we see a significant increase in players activities, which include people who login and people who spend time and spending money playing our games and that is above and beyond what we have internally budgeted for, even counting the seasonally of Chinese new year. So that is actually a very good sign of our marketing effort and game content working. So we look forward to reporting good results in business unit and others when report our first quarter results.

Edward: You had given a number for the European poker and casino business at 12%. When you talk about significant increases, just trying to get some feel for that. You don't have to give an exact number but is it. Do you consider 12% to be significant. Just trying to get some idea of ball park range.

Thomas: I am afraid that is probably is the most that we can comment at this stage but as we said we look forward to reporting good results in a couple of months time.

Edward: Ok. Thanks.

Operator: Just to remind to everyone if you would like to ask a question, please press star followed by 1 on your touch tone telephone. It appears we have no more questions in queue. At this time, I would like to turn the call over to Brad Miller for a closing remark.

Brad: Thank-you. For further information about GigaMedia or if you have questions and would like to contact the company, please visit our website at Thank you all for joining us. Thanks.


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