PokerPulse.com Conference Call Transcripts: GigaMedia First-Quarter 2009 Financial Results
 

 

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June 09, 2009 (transcript version 0.1)

Brad Miller: Thank-you operator. This is Brad Miller, Investor Relations Director at GigaMedia. Welcome to our 1st quarter results conference call for GigaMedia Ltd. 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 today's conference call. Forward looking statements are any statements that or 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 20F filed with the US Securities and Exchange Commission in June 2008. This presentation is being made on June 9, 2009. Content of this presentation contains time sensitive information. It is accurate only of the time hereof. If any portion of this presentation is rebroadcast, retransmitted at a later date, GigaMedia will not be reviewing or updating the material that is contained herein. After the speak presentations today, we will go into a question and answer session. And with that I would like to turn the call over to Arthur or CEO.

Arthur (A01 - 2m1s): Thanks Brad. Thank-you all for joining us. Today we have Thomas Hui our President and COO and Quincy Tang our CFO with me. I will begin with a strategic overview of our business, followed by Thomas who will discuss operational highlights and finally Quincy will take us through the numbers in more detail.

Arthur (A02 - 2m20s): In the first quarter global economic downturn caused consumer confidence and spending to fall dramatically, especially in our key markets in continental Europe. The resulting drop in per player spending and betting in our European business was greater than we expected. And frankly, outpaced our ability to re-align our cost structure. As a result, top line softness has led to disproportionally soft bottom line results. Despite this near term weakness, our business remain healthy, our long term outlook remains strong, and we are taking the right steps to drive improved performance. And in Asia, we have one of the strongest game pipelines in the region and expect 2009 to be a record year, our best ever strong growth in the top and bottom lines. Let me turn now to the specific business units and highlight what we are doing to strengthen our business and sustain our momentum.

Arthur (A03 - 3m14s): First our poker and casino software business. We believe our Q1 financial performance for this division was directly related to the global economic downturn which drove a sharp drop in consumer spending on online entertainment such as our Everest poker and casino offerings. Behind the black clouds, however, the silver lining is that key player metrics in Q1, including active player days, daily average players, and in particular, new player sign-ups, all remained solid, being comparable or slightly better than Q4 demonstrating the continued appeal and entertainment value of the Everest gaming platform. Players continue to come, but as a result of the recession in Europe and a weaker Euro, they are betting less. We are entirely confident that when macro economic conditions return to normal, that player spending will also return to historical levels. In the meantime, we have taken strong steps to rationalize our cost structure not affecting the long term strength of our platform. Let me review a few of the larger steps:

Arthur (A04 - 5m34s): Q1 was a busy quarter for us despite the difficult macro economic pressures. In the first quarter, we began operation under our new European Community license based in Malta and launched a VIP store which allows players to use VIP loyalty points to purchase merchandise, a cost effective way to extend player life time. We also release a suite of new flash based casino games and launched teaser flash games running on Web sites with no download to improve conversion. We held the Everest Poker European finale in Portugal. Sponsored the Spanish poker tour, began promotional build-ups to the 2009 world series of poker where we will be sending over 50 players to the main event. While the challenging operating environment continues, the good news is that we believe we have hit bottom in this cyclical downturn. Our player metrics are stabilizing and consumer sentiment appears to be improving. Everest poker remains the 4th largest site in the world. Everest remains one of the most popular and well known poker rooms in continental Europe, awarded poker operation of the year, the past two years in a row by independent industry journal e-gaming review. Despite the economic downturn, Everest Poker continues to perform as well or better than almost all of our competitors. For the rest of 2009, we will continue to drive the business hard as a leaner and more efficient operation. More over we invested heavily in numerous initiatives in 2008. We are now excited to see the yield on these investments in 2009. Let me highlight some examples.

Cross Marketing: We will be launching the next phase of our common wallet technology in Q2, a major step in our next generation platform. This will allow us to more effectively cross register players seamlessly between our two existing verticals as well as our new Everest Bets and future products. We anticipate this phase will material improve the rate of cross registration from poker to casino. Despite some initial steps, our monitarization between poker and casino is still but a fraction of our competitors which suggests we have considerable additional monitarization available here. Second,

Local Marketing Partnerships: In 2009, we look to expand our brand and our market presence by entering into marketing partnership with strong local media groups and entertainment firms. We are currently in discussions with leading media groups and other potential partners in Italy, France, Germany and Spain and look to finalize deals soon.

Next Generation Everest Poker Client: We are very excited about our new Everest Poker front-end client to be released this quarter. Our customer tests show an 18% lift in new downloads and conversions from this new front-end client.

Sports Betting: This remains a young initiative which began at the end of 2008. We are working with our partner Victor Chandler and are bullish about the future. We believe a key driver in 2009 will be a more tightly integrated solution where players remain on a common wallet and are easily able to move chips and funds between the verticals obtaining and utilize loyalty points through out the Everest portfolio. Next,

U.S. Poker Market: We are optimistic about the eventual opening of the U.S. market to online poker. Emerging success of regulation in Europe, the adverse WTO ruling, more liberal administration in congress and both and state and federal governments desperate for new revenue sources during a deep recession, are strong positives for market opening. We note that recently 3 pro-gaming bills were submitted to Congress in April and May backed by a growing number of politicians. As the only Nasdaq listed poker firm, with poker software 100% developed in Boston Massachusetts, we believe we are best position to obtain the license when first available. Next,

The World Series of Poker: Our T.V. broadcasts of the WSOP continue to air in Europe. We are very optimistic about the 2009 event which will be of special and improved benefit to Everest. Greater visibility for and participation by Everest in European broadcast will also allow us to optimize the timing and spend of our marketing and dramatically increase the value of this key partnership. And naturally, we believe our exclusive sponsorship of the WSOP and branding on the felt of every table will continue to help us prepare for the eventual re-opening of the giant U.S. poker market.

Arthur (A05 - 10m8s): Traditional Asian Games: Our unique platform of Pachino, Pachislo, and other Asian games launched in the fall of last year and has grown double digits and sometimes triple digits month on month since that time. Player retention has been solid. We have recently added a new Pachi game to the lineup and 3 more games are scheduled for launch over the next 4 months. We continue to believe that traditional Asian games are a huge market opportunity and are building this business methodically to become a major contributor ramping up from this year to 2010. As our build out of Everest Poker, we plan to release more operational metrics as our business develops. Before concluding on this division, I know many of our are interested in the status of potential or any potential strategic transactions. So let me give you a brief update.

Arthur (A06 - 10m53s): Strategic Transactions: Currently we are in a final round of discussions with two parties concerning a potential strategic partnership or sale of our poker and software casino business. Whether or not we proceed with the deal, and if so, of what nature and what terms, can not be determined at present. Naturally because discussions are continuing, I can not comment further at this time but we will be back to you soon.

Arthur (A07 - 11m21s): Turning briefly to our Asian Online Games Business: We are happy to note that in these difficult times, that the Q1 performance of our Asian game business was strong, with little impact from the global economic down turn. In Asia we are building a powerful platform, for the delivery of online entertainment to the MTV generation, the highly valued 15 to 35 year old age . Our progress to date has been delayed by development delays in the our new line-up of games. Fortunately the waiting is over. We look forward this year to the launch of several exciting new games, including War Hammer, Luna, NBA Street Online, Holic, and others with more to come in 2010. Thomas will provide a fuller discussion of this in a few minutes. In summary, we are very confident that the strong games in our line-up in 2009 will make this a record year, our best ever, with strong top and bottom line growth in 2009 and beyond.

Arthur (A08 - 12m22s): In conclusion, despite difficult operating conditions, we remain confident in the strength of our business and the value of the online entertainment platform we are building. For 2009, our accelerated growth in Asia, and careful management in Europe, point to another good year for GigaMedia with growing shareholder value as its corner stone. We thank-you for your interest and continued support. With that, I would like to hand over the call to Thomas.

Thomas (T01 - 12m45s): Thanks Arthur and thank-you all for joining us. Let me take you through our business and operational highlights now, starting with our gaming software business and following with our Asian online games business. In our gaming software business we are taking a series of restructuring efforts in response to the global economic downturn. While moneterization in the current environment is challenging, overall the Everest brand and our market position remains strong. Key metrics point to a sound user base and business revival long term growth potential. While we expect the steps we are taking will improve performance as we move ahead, our 1stQ results did not reflect the benefit from our restructuring effort to date. As I mentioned, even during this down turn, we are continuing to attract a healthy number of users. During this 1stQ our poker platform had approximately 183K active real money customers, virtually unchanged from the previous quarter. During the quarter we added approximately 45K new real money poker players, up 3% quarter over quarter. As expected, poker revenue declined both year on year and Q on Q. This was largely attributable to a lower yield per active player as a result of the economic conditions and currency fluctuations in our core European markets. Average revenue per active account in the 1stQ decreased approximately 10% sequentially. Our player base held steady. The number of active real money customers, decreased less than 1% sequentially. Turning, to,

Thomas (T02 - 14m24s): Casino: Revenues grew 18% year over year driven by enhancement to poker software that enabled cross selling of casino games. Q over Q revenues declined 8% reflecting the impact again of economic conditions on player spending. In sum, while our gaming software faced its challenges we remain confident about the long term future of the business. Everest Poker remains one of the most favorite sites of European players. We expect Everest Poker to continue to hold its leading position in continental Europe going forward. Let me now turn to our Asian online game business.

Thomas (T03 - 15m5s): Our Pan Asian Platform had an outstanding quarter, with very strong growth in key metrics. More over this strong performance was mainly driven by organic growth of existing games. We look forward to launching several new major titles this year, to further accelerate our growth and I will review them in a moment. In China, T2CN, average monthly active paying accounts, were approximately 404K in Q1 up 20% from Q4. And average monthly revenue per active account was $4.08 dollars during the period, 18% Q over Q. Peak concurrent users of FreeStyle were approximately 119K an increase of 7% from the 4th Q. Growth in T2CN's metrics were related to improved performance of FreeStyle, following a hacking incident that we resolved at year end last year. In Taiwan and Hong Kong, FunTown, average monthly active paying accounts, were approximately 105K during the 1st Q, up 2% from the 4th Q. Average monthly revenue per active pay account increased to $24.4 dollars during the period, up 25% Q over Q. Peak concurrent users were approximately 50K, a 32% increase from the 4th Q, driven by the growth in casual games and the launch of Holic. Looking ahead we are very excited about the prospect of our game pipeline. Let me know go over the key developments with regard to several of new game titles, including War Hammer Online, Luna Online, and NBA Street Online.

Thomas (T04 - 16m54s): We have successfully completed closed beta testing of Warhammer Online and are now in open beta. Open beta began on May 28th in Taiwan. So far the game has been very well received. We look forward to an exciting commercial launch in the end of June after this final testing phase. Next, the launch of another major title,

Thomas (T05 - 17m15s): Luna Online: We have conducted some early pre-closed-beta testing of this game in China and expect open beta in early Q3. Initial results have been excellent. Luna has been a major hit in several Asian markets. We have exclusive license rights for the major China market and look forward to launching Luna in Q3 in 2009. Finally,

Thomas (T06 - 17m43s) NBA Street Online: As we demonstrated with our basketball game FreeStyle, sports game are an undeserved niche in Asia and there is strong demand for online basketball games. Given the high appeal of EA Sports brand, the excitement of NBA stars, and an enthusiasm for basketball in China, we expect NBA Street Online to be a major hit in both China and Taiwan. EA is taking to finalize refinements to the game for Asian markets. We continue that we will be ready for commercial launch in China and Taiwan by 2nd half of this year. In summary, we remain confident about the long term potential of our gaming software business and are very excited about the growth of Asian online gaming business. Thank-you that concludes my remarks and I will now turn the floor to Quincy for a review of our financial performance.

Quincy (Q01 - 18m37s) Thanks Thomas. Let me know take a few minutes to review our Q1 consolidated financial results. Following that I will highlight some key factors affecting Q1 results in each of our 4 business units. Then there will be an opportunity for you to ask questions.

Quincy (Q02 - 18m56s) The results of our online entertainment business were mixed in 1st Q of 2009. Our gaming software business continued to face challenging operation conditions as the global economic downturn negatively impacted player behavior. Balanced against this, our Asian online gaming business delivered excellent results. As we have continued to see growth in player's metrics hit by economic crisis . Consolidated results reflect this. ??? efficiencies in our gaming software business, and major new product launches to build skills and efficiencies in our Asian online gaming business will together drive improved performance going forward. However, we did not realize the extent of these initiated in 1st Q 2009. Consolidated revenues decreased 13% year over year due to the slow down of our gaming software business but held steady Q over Q. A strong growth in Asian online game revenue offset a quarter sequential in our gaming software revenue. Gross profit margin in Q1 declined to 79.1% from 82.3% a year ago and from 80.7% in Q4 2008. Due to decreases in the proportions of contributions from higher margins gaming software business during the Q and the effect the revenue decline outpacing decreases in certain ???

Quincy (Q03 - 20m44s) Q1 2009 Consolidate Operating Income decreased to $5.4M from $12.7M a year ago and decreased from $7.9M in the previous quarter. The year over year decrease resulted from the decrease in sales and lower gross profit margins. This was largely related to the impact of the global economic downturn on our gaming software business and increased expense in our Asian online gaming business as we begin scaling up our business to support future growth. Quarter over quarter, our consolidated operating margins decreased to 12.2% from 17.7% due to seasonal factors and certain one of events. We expecting operating margins to improve from current levels as a result of two facts.

  1. We are continuing to implement cost controls,
  2. We are on track for new game launches in our Asian online business.
Let me know highlight the quarter over quarter variations in a few key line items: We continue to maintain a strong balance sheet in the 1st Q. Cash, cash equivalent and firm marketable securities at the end Q1 were $97.5M. Now lets look at the performance of each individual business unit.

Quincy (Q04 - 23m58s) Gaming Software Business: In 1stQ, revenue decreased 17% year over year and revenue was down 9% from the 4th quarter. In poker, revenue declined 27% year over year and 10% Q over Q. Casino revenues grew 8% year over year and xx% quarter over quarter. Selling and market expenses trend down both year over year and quarter over quarter. The 20% quarterly sequentially decrease was mainly to ??? in Q4, decreased affiliate marketing expense in line with revenues trends in Q1 and tightening in Q1 following a ???? in Q4 last year. The quarterly sequentially decrease in selling and marketing expenses more than offset gross profit decline as well an increase in product development expense. As a result, the gross profit margin increased to 15.5% from 14.7% in last quarter. As I mentioned, that ??? increased efficiencies in our gaming software business has yet to ??? and we are working hard to improve performance going forward.

Quincy (Q05 - 25m30s) Asian Online Game Business: This sector delivered excellent business result with record results in FunTown and near record performance in T2CN despite the global economic crisis. Quarter over Quarter, revenues jumped 33% jumped driven by strong organic growth in both FunTown and T2CN. FunTown revenues grew 27% quarter over quarter from strong promotions during the Chinese holiday of new and existing games. FunTown RP?? hit a record of $24.4USD during the 1st quarter. T2CN revenues grew up 43% quarter over quarter from strong performance from the online game, FreeStyle, following the resolution of the hacking incident in Q4 last year. While, these are strong results, the Asian online game business is beginning to deliver on our investment. We have committed to greatly expanding business and having an exciting line of major new titles scheduled for launch over the next several quarters as Thomas has outlined. It is the 4th addition of these products to our platform during the first quarter we continue to scale up for business. Related increase in G&A expenses as well as RP, above mentioned increase in selling and marketing expense, outpaced revenue growth in the 1st quarter resulting in a quarter over quarter decline in operating margin. Looking ahead we expect revenues to grow significantly and operating margins to expand in 2009 as we beginning to more fully leverage our unique regional platform and launch our outstanding new set of game titles Thomas mentioned earlier, including Warhammer, Luna Online and NBA Street Online. In conclusion, in Q1 we faced strong operating challenges, but we have in place the right initiatives to build and strengthen our business. We are excited to launch these new initiative and expecting ????, we are very positive of our prospect in 2009. Thank-you. Brad,

Brad (B02 - 25m10s) Yes, thank-you very much Quincy. Operator at this point we would like to move into a question and answer session so please open the call up to questions.

Operator, ladies and gentlemen... your first question comes from the line of Alica Yap of Citi, please proceed.

Alica (QA01 - 28m35s) Hi, good evening. I have a few questions concerning your outlook for the second quarter, do you expect your European business to experience another sequentially decline in revenues and for casino business do you expect to have a sequentially down quarter as well?

Arthur (A09 - 28m55s) - Alicia this Arthur, let me response first generally speaking we are looking for a much better 2nd half than 1st half. Again, we think we have hit the bottom, and we have a normally sessional down turn due of course due to the summer months when Europeans are on holiday but generally speaking we are looking for a better second half.

Alica (QA01a - 29m25s) - Ok, just help me understand you see a stabilizing in your user base, right, but what about their spending behavior, do they still continue to be impacted by the economic downturn?

Arthur (A10 - 29m44s) - Yes to date, per player spend, RP is down, but I think we have hit bottom with that, and we have a couple of signs, early signs, for optimism. I guess what I'd like to say is we don't believe things get worse, we think we have signs for optimism, certainly, we think we have hit bottom, we have signs for a better second half, thank goodness.

Alica (QA01b - 30m23s) - I see, so if I understand you correctly, so that means your $30, $31, 32M revenues in the software business is the bottom for 2009, so we should expect a sequentially up or at least a flat quarter in the summer months.

Arthur (A11 - 30m42s) - Ok, we are trying to avoid giving specific numerical guidance at this time, but, ah, rather point to the larger phenomenon, which we feel we can speak to a little more, even though it is more generally, a little bit more accurately.

Alica (QA02 - 31m02s) - Ok, fair enough, my second question is giving your continued effort in cutting operating expenses and you've lowered revenue growth rate at least for the 1st half, what should we be expecting for your operating margin for the fully year 2009? And is your long term target of 20% to 25% still achievable you feel?

Thomas (T07 - 31m30s) - Hi, it is Thomas here Alica, yes, our goal is still for 2009 to get to a consolidated basis between 20% and 25%. Now the 1st quarter number was much lower than that as we had expected and communicated in our previous earnings call. Now what are seeing walking into the 2nd quarter, we are sitting at the beginning of June, we see April and May for the European side of the business beginning to stabilize. So for the 1st half it will be difficult for us to achieve the 20 to 25% but we believe with the stabilization of the European side of the business and the launch of the new games in the Asian side of the business, which will drive up revenue and also operating line, with those two we still remain hopeful we can get back to the 20 to 25% ranges we had set for our selves. But it is fair to say a big part of this will be back-end loaded in Q3 and Q4.

Alica (QA03 - 31m02s) - I see, and my last question is about your potential sale of your European business. So, can you help us understand what is the future growth initiative for Asian your online game business after you successfully selling your poker and casino business? How do we view, I mean, how do you view your self among other major online games players in China? Do you plan to do like partner with them or merge with other Chinese operator?

Arthur (A12 - 33m13s) - First of Alica, if I might, request that we delay this conversation until a later date. First of all we want to emphasis that we are in no way shape or form definite about going forward with the transaction, as fiduciaries, we feel obligated to consider any serious proposal, but the proposals may come in different forms, sale, partnership, or other types of combinations. So, at this point in time it would be premature for us speculate or discuss to much about this even on the Asian side, so perhaps we can look to a time when we have a little bit more information to talk.

Alica (QA03a - 34m5s) - Sure, thank-you. I'll wait for the good news then.

Operator - Your next question comes from the line of Todd Eilers from Roth Capital Partners. Please proceed.

Todd (QA04 - 35m10s) - Hi guys. How are you?

Arthur (A12 ) - Thanks Todd,

Todd (QA04a - 34m12s) - Just a couple of questions. First, I don't know if you guys broke it out but you mentioned severance charges, in a couple line items in the P&L. Can you maybe give us the total severance or non-recurring I guess charges maybe in the first quarter?

Quincy (Q06 - 34m40s) - I think because the first round of the layoff is at the end of Q1, the severance payment that we are talking about is in the region of slightly less than SUS0.5M, and the more impact is on the Q4 compensation related adjustment that we made because in light of the cyclical period in Q4. So that amount is in the region in the high, in the region of US$2.5 to US$3.0.

Todd (QA05 - 35m20s) - Ok. And then with respect to the real money business, I saw some news out recently regarding some of the private, US facing operators, operators having some problems with their US payment processors. Can you maybe comment what impact that has had or might have on your business currently and going forward?

Arthur (A13- 35m42s) - Sure, as a Nasdaq, law abiding co-corporate citizen, we are always happy to see the laws of the United States enforced, in particular where they create an unfair competition for us such as is ongoing presently, so we, we are heathen to see the actions you mentioned, the fact that several of the payment processing channels are finally being shutdown, or it appears they are being challenged in New York and some other places. So we hopeful that this will lead to what we think is a more level playing field. We naturally would like to go back into the United States, but as fully licensed operator, on the basis of our strength as a fully law abiding operator.

Todd (QA06 - 36m40s) - Ok. Great. Then just one final question with regards to some of the new initiatives, sports betting and your Japanese gaming site, can you maybe give some additional color on those. How are they performing, tracking, you probably don't want to give specific metrics because the business are still ramping up but any additional thoughts on those would be helpful.

Arthur (A14- 35m42s) - Sure. First on Sportsbetting this is still very much in the what we call the test and roll phase, there has only been partial integration, the initial tests are very positive, as we suspected. Again we are definitely leaving money on the table, by not having a tight integration with the sports partner. So that is definitely a priority and pending the outcome of some of these strategic discussions, will be an important factor in our future. Our Pachino, Mahjong software continues to be an exciting part of our business, dollar amounts are not significant in the context of our overall business yet, however, when we double, sometimes triple digits, on month on month growth, the kind of player responses, the kind of player response and the kind of player activity, we believe we have a winner on our hands. As with Everest, in the beginning we tried to roll out to build a substantial business, a business that well have long term branding, long term market penetration, and market position. This is taking a little bit long in Japan then we had originally hoped but we believe that this will be a significant contributor over the course of say the next year.

Todd (QA06a - 35m40s) - Ok. Great, thanks guys, thanks.

Operator - your next question comes from the line of Andrey Glukhov of Brean Murray. Please proceed.

Andrey (QA07 - 38m55s) - Yes, thank-you. First of all, Arthur when you talk about stronger back half of the year in the poker and casino business, I mean, obviously seasonality is working against you through about probably August here, just given the European vacation schedules. Historically, we see pressure on RP and based on the churn rates between kind of between Q2 and Q3. Do you expect that to be the case this year and then you talk about the strength in Q4 is when we are going to see the rebound.

Arthur (A15- 39m40s ) - Well, in some ways there is less, given how much trouble Q1 was to us, and some of that continuing into Q2, some of my statement is less grandiose than it might otherwise be, we, are looking for a minimum a return to some of our historical levels, and at this point in time, we don't have enough visibilities to speak to RPs. And exactly when they return to what levels. So, we directionally feel that we have hit bottom, we are optimistic about the second half, we are glad to out of the worst patch of things, we are heading out, we'll try give some more refined or granular RP forecasts when we get closer.

Andrey (QA07a - 40m44s) - Now, from a year on year comparison when I look at the operating margin, obviously this year, within your sales and marketing line we have an additional expense, of the WSOP, sort like this to amortization, can you order of magnitude can you give some sense how much of a penalty it is to your operating margin?

Arthur (A16 - 41m10s) - Thomas or Quincy do you have a sense of this?

Thomas (T08 - 41m20s) - I will leave it to Quincy to talk about the exact numbers but we began amortizing the WSOP as you know in Q4 last year and we will continue to amortize that on an every quarter basis. I can say that the Q4 is amortization is higher than the Q1 but in the ranges of a few million to a couple of million dollars. I'll ask Quincy to be more specific about this.

Quincy (Q07 - 42m) - Yes, we will be the annual of 4M dollar, its impact on the operating margin is really slight on the metrics of the other marketing expense that we would be then added together with the WSOP, or then ????, also the other very important is how well the revenue side, because this year with the economic down turn we can not see the full benefit of the WSOP. ?? It is very difficult to give a concrete figure on the impact on the WSOP add, on the operating margins this year.

Andrey (QA08 - 42m52s) - Ok. I guess lastly, you guys talked about possible optimizing the sales and market expenses in certain countries. Are you doing that on a comparable basis across all of the territories where you guys are playing or are there actually sort of countries where right now where you seek maybe outspend some of the competition and actually gain market share.

Arthur (A17 - 43m20s) - Very much so, Andrey, we look country by country at the specific market opportunities so without revealing any market sensitive data we are try to be competitive, even avaricious, on an opportunistic basis.

Andrey - ok, thank-you.

Operator, you next question comes from the line of Atul Bagga from Think Equity. Please proceed.

Atul (QA09 - 43m53s) - hey guys, thanks for taking my call. A couple of questions for you guys. Just wanted to touch on this, with foreign exchange events easing a bit now, and as you mentioned consumer sentiment is improving, it seems to me that Q2 again we could see a slight decline in RP. Is it more of a seasonal thing or is it more, is it anything beyond that, I think increased competition? Just trying to understand the dynamics that are happening in your Q2 in the online gaming business.

Thomas (T09 - 44m30s) - yes Atul, thanks for the question, it is Thomas here. The stabilization of the Euro against the dollar is certainly one of the contributing factors to our remarks that we think that we have hit the bottom in terms of European business as Arthur mentioned earlier. And as we have explained before there is almost a direct relationship between the exchange rate and our revenue level, in terms of user deposit and user RP because of the player base being concentrated in continental Europe and our ??? currency and the playing currency of Everest Poker are in USD. So, that in April and May we certainly see a stabilization of those metrics as a result of that. Now, but some of the effects have spilled over to Q2 and we remain sanguine about the future outlook and ??? on the front end currency fronts given what we have seen. And what we have seen in April and May but again obviously the results will have to play themselves out in general macro economic sense.

Atul (QA10 - 45m48s) - In terms of the cost, the restructuring cost alignment that you guys talked about. So, just to make sure I got it right, when Arthur was making comments on savings that you are going to realize, I think he highlighted 3 savings, in total, total support $1.2M and then Quincy talked about $0.5M one time severance in Q1, so that leads to $1.7M savings from the Q1 operating expenses. Is my math right on that? And second can we start to see the $1.7M saving from Q2? Are there any more savings any more restructuring you guys have in the plans?

Arthur (A18 - 46m30s) - We think we are looking at all told, there are some smaller things added in, there is, around $2M. This will flow through quarter by quarter but some of these are only being implemented this quarter, 2nd quarter, so look at them as more second half impacts.

Atul (QA10a - 45m56s) - Gotcha. So that does implies that most of your target of 20, 25% operating margins, it has to come from the top line improvement and not so much from the operating expenses restructuring. Is that right?

Thomas (T10 - 47m07s) - There is one area we spoke about before that we haven't focused on today, depending on how the top line will trend which is obviously a function of how the economy will grow, a part of the function of at least, and we will in addition to the initiatives that Arthur has mentioned, we are also looking at other potential, more strategic in nature which will potentially, could potentially yielded significant improvement in the costing the expense side. And some of these initiatives may or may not come into play depending on how the activity the user activity is trending along in the next few months, which will further improve the margins, even in the absence of a significant rebound of the top line.

Atul (QA11 - 48m05s) - Gotcha. And moving on to your Asian online game business, so it seems like in second quarter most of your growth is still going to be organic. There is nothing in the second quarter than has been out yet. So you expect, can you talk about, where the growth is going to come. Is it most from growing RP even further or more about the user metric improvement?

Thomas (T11 - 48m28s) - We, I mean the Asian side of the business as mentioned we are very excited about the growth and we look at more of 2009, year over year, 2008 basis. And or in the first have you are absolutely correct, that most of growth are coming the organic side of the business. And the second half the Warhammer commercialization and the launch of Luna in China will contribute further to that elevated base. So the, we hope to contain a high level of monitarization of the user from RP fronts, in Q2 versus Q1. But Q1 will get the benefit obviously of Chinese New Year holiday surrounding both markets which we did not have in Q2, so it is unlikely that we will have significant growth over Q1 but on a year over year is how we are looking at the business.

Atul (QA12 - 49m30s) - And the last one, can you talk about some of the internal targets you have for these new games? Luna Online and Warhammer. How big? And we have heard that Warhammer seems to be doing pretty well in the open beta stage. Can you share any metrics around PCU numbers or the long term targets, what kind of revenue you expect to come from Luna and Warhammer? Thank-you.

Thomas (T12 - 49m55s) - Thank-you Atul. Consistent with our general policy about forecasting games, we do not give out numerical targets on a game by game basis. But as a business as a whole, we think there are a lot of growth potential. Fairly significant growth potential for the entire business. And the way we look at in terms of target, for example for Warhammer, we will be targeting a not insignificant percentage of a market potential of the most similar type of game in our mind, World War Craft. Now as we know that globally, World War Craft is number one game and Taiwan, it is also one of the top 3 games, depending on which month you look at it. And are obviously looking at a significant percentage of market share as compared to World War Craft.

Atul - thank-you

Operator - As a reminder, please press *1 to ask a question. Your next question comes from the line of Scott Kessler of Standards & Poor's Equity.

Scott (QA13 - 51m12s) - Thank you. I know that you have been asked about this a little bit to some extent. But, I was wondering what give you confidence to suggest that what a lot of companies have already I think in the environment that you have reached the bottom in terms of the demand, the revenue, in terms of RP. Can you share with us for example any metrics associated with the past month, that just ended. Maybe some details underscoring your comments or confidence would be appreciated.

Arthur (A19 - 51m47s) - A very fair question but unfortunately it is not our policy to release data that we find operating and tracking data we on a month by month or a week by week basis. The reason why is that we like to make sure the data is in context and make sure we have the right explanatory power for it. Suffice to say we track about 100 metrics on a daily basis about our business and on a 24*7 basis that give us a lot of information. Over the years we have come to understand pretty well what is going on and we have a lot of local market sensibilities developed over this time. So without going into specifics, we are looking at a May which reflects better than we had hoped and reflects what we think is a bottoming out down turn with maybe even some reasons for optimism going forward. With my apologies I should probably leave it at that.

Scott (QA13a - 53m04s) - Ok. That is fair enough. Is that comment consistent across say the European and Asian geographies?

Arthur (A20 - 53m18s) - Ok. Asian has been remarkably immured from the, I mean this segment of the business has been remarkably immured from the global economic downturn. It could be cause our player base is younger and more optimistic about the future. It also could be that the down turn is less, is less in Asia then a lot of government reaction which has helped support the economies during this period of time. So, but sufficient to say in Asia we have not felt the same down turn effect. In fact, quite the opposite. We are looking for a record year. So when we speak about this we are primarily talking about hitting the bottom and looking at a stronger second half for the European business.

Scott (QA14 - 54m10s) - Ok. Fair enough. The 2nd question I have relates to your Asia focused online games business. Obviously, there have been references to a number of game launches in various geographies. Could you maybe just walk us through what you think the major launches are and the specific, and I know that a date is difficult, but, you know a month perhaps you expect to launch so that we can essentially track the progress against those assessments.

Arthur, Thomas, do you want to review your comments on this?

Thomas (T13 - 54m50s) - Sure. I will highlight three games. First is Warhammer Online in the geography of Taiwan and Hong Kong. Warhammer Online right now is in open beta. We have been conducting closed beta in April and May and the game now is currently in open beta. It will most likely go into commercialization by the end of this month.

Scott - Ok. Commercialization this month.

Thomas - That's right. And the second game I will highlight is Luna Online for the geography of China. We have conducted in the past month or two, conducted a series of small scale pre-closed beta tests. Now we do expect to go into closed beta testing and open beta testing in the beginning of Q3, so June/July timeframe. Now the exact timing of this will be harder to pinpoint because are still obviously testing the game on technical side and also going through the relevant regulatory process. But that is our expectations.

Scott - So, if I could interject, you are saying the beta is going to begin, I don't know in the next month. Is it reasonable to that expect, I don't know typically how much time say the testing and beta processes last but is it fair to say a handful of months? This is anticipated to be fully launched by the beginning of Q4?

Thomas - Yeh, I would even say the end of Q3.

Scott - Ok, then you referenced one additional game.

Thomas - The last game being NBA Street Online, this is the EA game as we mentioned. Right now we are conducting small scale testing but there is quite a bit of refinement between us and trying to put the game features more rich and everything. So this one, because of that it will be harder to pinpoint exact date at this moment but we do believe it is going to be this year, second half of this year but probably closer to the Q4 timeframe.

Operator - at this time there are no further questions in queue. I would like to turn the call over to Mr. Miller for closing remarks.

Brad - Thank you very much operator. Thank you all very much for joining us today. For further information about GigaMedia or if you have questions and would like to contact the company, please visit our Web site at www.gigamedia.com.tw. Thank-you.


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