GigaMedia Q3 2007 Earnings Call Transcript

TRANSCRIPT SPONSOR

GigaMedia Limited (GIGM)

Q3 2007 Earnings Call

November 14, 2007 8:00 am ET

Executives

Brad Miller - Investor Relations Director

Arthur M. Wang - Chief Executive Officer, Director

Thomas T. Hui - President, Interim Chief Financial Officer, Chief Operating Officer, Director

Analysts

Alice Yapp - Citigroup

James Rhee - Bear Stearns

Traci Mangini - ThinkEquity Partners

Todd Eilers - Roth Capital

Bill Garrison - Ironworks Capital

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GigaMedia Limited conference call to discuss third quarter 2007 financial results. (Operator Instructions) I would like to now turn the conference over to Mr. Brad Miller. Please go ahead, Mr. Miller.

Brad Miller

Thank you. This is Brad Miller, investor relations director of GigaMedia. Welcome to our third quarter 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.

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 Form 20-F filed with the U.S. Securities and Exchange Commission in June 2007.

This presentation is being made on November 14, 2007. 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.

The agenda for today’s call includes first a review by Arthur Wang of 3Q 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.

TRANSCRIPT SPONSOR

Get the Top 5 Stocks to Buy Now Download Robert Hsu’s just-released special report, ChinaQuake: The Truth About China, & learn how to profit from China’s unstoppable growth! The new report details China stocks that are gathering themselves for a powerful jump—in the next few days. Are you ready for the ChinaQuake? You don’t want to miss this–make sure you are on the China Express! Click here to access your free report. To sponsor a Seeking Alpha transcript click here.

Arthur M. Wang

Thanks, Brad. We are very pleased to report today our strong third quarter 2007 financial results. Third quarter performance was strong in every business unit, driving consolidated third quarter revenue up 76% year over year to $43 million, operating income up 66% over last year to $10 million, and a fully diluted, non-GAAP EPS of $0.17 per share, excluding non-cash share-based compensation.

Equally importantly, we made great progress in Q3 in positioning GigaMedia for continued strong long-term growth in our two primary growth areas -- real money gaming software and our Asian online games platforms.

Thomas will go through our financial results in more detail in a moment. I would like to highlight a few developments with an eye towards our future growth prospects.

First, our poker and casino software business -- the third quarter was another record quarter for our real money gaming software business, with both year over year and quarter over quarter growth in both financial and operating metrics. Moreover, during the third quarter, Everest Poker was recognized by the online gaming industry and awarded one of its highest honors, the Poker Operation of the Year, at the 2007 E-Gaming Review Awards Ceremony in London.

We are very proud of this recognition and appreciative of the regard and esteem from the online gaming industry. But I must emphasize; we view this recognition not as grounds to become complacent but rather as inspiration to strengthen our resolve, our commitment to build the very best online entertainment firm.

Despite the seasonal slowdown, the third quarter was very active, with a continuation of the Everest Poker European Championships, the Everest Poker Avalanche tournaments, sponsorship of numerous satellite events throughout Europe, and the conclusion of the Everest Poker Japan cup with a live finale on Tinian Island. All told, these activities resulted in strong player numbers.

In Q3, we had 163,000 active real money poker players, up 6% sequentially over Q2 despite the summer seasonality.

In the third quarter, we also took full advantage of the seasonality to make strong investments in the core Everest product, both at the visible customer-facing level with numerous product and feature enhancements, and equally or more important at the invisible middle and back-end infrastructure, including upgrades to the entire game server and database platform and the launch of a new affiliate marketing engine.

Our investments [adopted limited to] technology during the third quarter, we continued to strengthen our team by adding new senior and middle management talent. We believe these investments will drive even stronger results in 2008 and beyond.

Now with respect to our real money Asian games business. First, I must report that the results from the initial launch of real money Mahjong have been lower than forecast due primarily, we believe, to the over-reliance on electronic database marketing by our initial licensee. These start-up marketing deficiencies have since been corrected and we are told that 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 are just now beginning to see the positive results from these efforts and we’ll report more as more data becomes available.

Separately, we are happy to note that player response to our software, the Mahjong game itself, has been very good, as we’ve always expected, given our market leadership in Mahjong.

We are now in discussions with several other potential licensees and believe these will help expand the market significantly when these licensees launch in 2008.

With respect to Japanese gaming products, we are happy to announce that our public beta will be launched before Christmas this year, with full commercial launch soon to follow in the first quarter. The initial product suite will include a powerful lineup, including Pachinko, Pachislo, and Mahjong, among other games, all incorporated into a fully localized, feature-rich platform with rich functionality, including an avatar system, banking system, and scoring, payout, and other statistic systems as customary in the local market.

Despite the launch delays, some related to product development and the initial marketing weakness, we continue to see an enormous market opportunity for Asian real money and pay-for-prizes games. We look forward with enthusiasm to a strong ramp-up in 2008.

Our solid third quarter results were also driven by strong progress in our Asian play-for-fun online games business, which is comprised of FunTown, the leading casual game platform in Taiwan, Hong Kong, and Macau; T2CN, operator of the leading online sports game in China; and in Southeast Asia, Infocomm Asia, for which we are the largest shareholder with about a 29% equity interest.

Together, these platforms combine to form the first and only pan-Asian online gaming platform, a game and entertainment platform with a geographic footprint covering one-quarter of the world.

We believe this platform offers us powerful operating synergies and economies of scale in the near-term and even more powerful platform opportunities as we expand our reach over the coming years.

At present, we have over 68 million registered users with 8 million users active in a given month, while we intend to double these numbers several times over the coming years.

Initially, we see strong monetization from games, games played for fun and games played for prizes, but as our numbers grow and match and even exceed those of traditional broadcast media, we see an opportunity to be a provider of many new and different forms of online entertainment. And this I would argue by way of a medium far more relevant than traditional broadcast media to the sweet spot of 15 to 35-year olds, the so-called MTV generation in Asia.

In Q3, we also continued to invest in our game platform, kicking up work on our state of the next generation online entertainment platform for use across Asia and Europe. We are committed to adding more features, more functionality, more community, and more fun to our game platforms.

In addition, in Q3 we secured the operating rights to Holic, an exciting shoot style, flying, shooting MMORPG, much anticipated in Asia where cute-style games are perennial favorites.

Holic was the first implementation of our regional strategy in which we obtain game operating rights for all of greater China, China itself, Taiwan, Hong Kong, and Macau, a demonstration of one of the benefits of our pan-Asian platform, offering leading game studios a one-stop solution to a large and lucrative market.

In addition, we are hard at work on several exciting business opportunities, including potential partnerships in game development, publishing, and operations. We’ll report back soon.

We believe these opportunities, combined with the continued expansion of our existing businesses will allow us to drive growth of the order of several multiples over the coming few years.

And to foreshadow an announcement we’ll be making in the next few days, I am very pleased to say that we have entered into an agreement with Electronic Arts to operate one of their most exciting titles in the Taiwan, Hong Kong, and Macau markets. EA, of course, is the largest game company in the world with an incredible library of top games, and we are very excited to be joining with them. For now, that is all I can say. More details will be available in the formal press release, which should be out in the next few days.

To conclude, looking ahead, in the short-term, we expect a strong fourth quarter, driven by strong growth in all of our businesses in both absolute and percentage terms. More important, we see this growth, combined with the developments now underway, driving continued strong growth momentum in 2008.

As we move into 2008 and beyond, we have tremendous opportunities before us. We are very excited about our growth prospects and the significant new business developments that we have underway now. 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

Thanks, Arthur. I would like to begin today’s comments by highlighting GigaMedia's key achievements during the quarter. I will then review our consolidated financial results and discuss our business unit financials.

Overall, we delivered solid performance inline with our expectations in the third quarter of 2007. In our poker software business, despite the negative impact of seasonality, we were again able to deliver growth. We achieved this strong performance as a result of the growing popularity of Everest Poker, whose quality and success was demonstrated in Q3 with its award as Poker Operation of the Year, as Arthur has mentioned.

In our Asian online game business, we continue to drive top line growth while strengthening our game pipeline and continuing to integrate with T2CN. We scored regional rights to highly anticipated game titles and increased our ownership level at T2CN.

Now let me quickly summarize our consolidated results in Q3 2007. Consolidated revenue grew 76% year over year, or 7% sequentially to $43 million. This growth was due to continued record performance in our poker software business, complemented by increased contribution from our Asian online game business, which represented 23% of our total revenues in Q3.

Consolidated gross profit increased 80% from the same period last year, or 4% sequentially to $33.2 million as a result of the consolidated revenue growth. Our consolidated gross profit margin was 77.1% in Q3, down from 79.4% in the previous quarter, reflecting a sequential increase in game licensing and royalty costs in our Asian online games business.

Consolidated operating income rose 66% year over year to $10 million, and was approximately flat sequentially. Operating margin declined to 23.3% in Q3 as a result of the increase in operating costs and selling and marketing expenses in the Asian online game business.

Consolidated net income in Q3 was $9.7 million, or $0.16 per diluted share, which represents a 49% increase year over year. Sequentially, net income declined 4% from Q2. However, I would like to highlight that the quarter over quarter sequential decline was primarily due to the decline in profits from our legacy ISP business.

Solid business momentum continues in our core businesses. The gaming software business net income was essentially flat sequentially, despite negative seasonality and the Asian online game business recorded quarter over quarter net income growth in Q3.

We continued to maintain a strong balance sheet during the third quarter. Cash, cash equivalents, and current marketable securities at the end of Q3 was approximately $72 million and total debt was approximately $24.5 million.

In Q3, we generated $12.2 million operating cash flow, which was offset by cash payments made during the period for the acquisition of T2CN. Such payments amounted to $11.4 million.

Let’s now look at our business units performance.

The gaming software business -- the third quarter is traditionally the weakest business period for the gaming software business as it contains the bulk of the summer holiday period when continental Europeans typically spend less time playing online games. Despite this, the business unit once again delivered outstanding results, hitting an all-time high in revenues.

During the third quarter, the business unit generated $29.3 million in revenues, representing 99% year-over-year growth. Operating income and net income were each up over 100% year over year.

Quarter over quarter, results reflect the seasonality, with revenues, operating income, and net income each essentially flat.

Let me quickly break this down further into results for our poker software business and our casino software business. Revenues from our poker software product were $22 million, up an impressive 163% from a year ago and up 1% sequentially. Growth was driven by increasing awareness of the Everest Poker brand, which resulted in increases in real money players. Approximately 163,000 active depositing real money customers played Everest Poker during the third quarter, up 167% year over year and 6% sequentially. And during the quarter, Everest Poker added approximately 51,000 new depositing real money players.

Our casino software business also delivered strong results. Third quarter revenues from the casino software business were $7.3 million. This represents a 14% year-over-year increase, driven in large part by the launch of new games and cross-selling of casino games on Everest Poker.

Casino revenues improved a modest 2% sequentially, again reflecting the negative impact of seasonality.

In sum, our gaming software business is continuing to deliver and sustain growth [inaudible] and as noted in our release today, in the first month of the fourth quarter, we have experienced an encouraging pick-up in revenues from this business unit. In October, average net daily revenue was up approximately 15% over that achieved in the third quarter.

The Asian online game business -- in the third quarter, results in our Asian online game business were in line with our expectations. We delivered solid revenue growth on the back of ongoing investments to increase the scale of this business unit.

Results for the Asian online game business reflect for the first time a full quarter of contribution from our recently acquired China platform, T2CN. As I mentioned earlier, GigaMedia increased its total equity ownership of T2CN to approximately 58% in July 2007.

Revenues from the Asian online game business in the period increased 122% year over year and 39% sequentially to $10 million, primarily due to the full quarter consolidation of T2CN’s results in Q3. FunTown’s revenue growth also contributed to the year-over-year revenue increase.

Now, breaking this down further, third quarter revenues from FunTown grew 36% year over year and 2% sequentially to $6.2 million, with growth driven by strong contribution from our advanced casual game, TalesRunner, which drove approximately 4% sequential growth in average active monthly paying accounts. T2CN’s third quarter total revenues were $3.9 million, up 11% sequentially, primarily due to an increase in advertising revenue.

Gross profit from the business unit increased 95% year over year and 24% sequentially to $6.9 million as a result of strong revenue growth. Gross profit margin decreased to 59% during the third quarter. The key reasons for the year-over-year and quarter-over-quarter gross margin decreases was increases in revenue contribution from licensed games, which have lower margins than self-developed games.

Partly as a result of the gross margin decline from the business unit, we also recorded an expected operating margin decline from 32.1% in Q2 to 23.3% in Q3. Despite such declines, operating income from the business unit remained flat sequentially at $2.3 million, or a 94% increase year over year.

As we have discussed in our Q2 earnings release, the operating margin achieved in Q2 was exceptionally high due to the low level of marketing activities in that quarter.

Q3 operating margins were negatively impacted in particular by a substantial increase in selling and marketing expenses, with much of these related to mass media marketing of FunTown’s game products and services, and a full quarter consolidation of T2CN.

Finally, net income from the business unit increased 112% year over year and 14% sequentially to $2.6 million. As noted in our release, third quarter net income also benefited from certain non-operating income recorded during the period, which had a positive impact on GigaMedia's consolidated net income for approximately $880,000 during the quarter.

Now, to summarize, in Q3 we made excellent progress in our core businesses. First, we sustained growth in our gaming software business despite negative seasonal factors. Second, we began to strengthen and scaled up our Asian online games business and deepen our game pipeline.

Both our gaming software businesses and Asian online game business are on track for an exciting 2008. We are well-positioned, executing strongly, and excited about our growth prospect. We are also very confident in our ability to continue to drive growth and build shareholder value. Thank you.

Brad Miller

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alice Yapp from Citigroup. Please proceed.

Alice Yapp - Citigroup

Good morning. Congratulations on a great quarter. I have a couple of questions. First of all, given many big competitors are getting more aggressive, switching their focus towards the non-English countries, we understand that you are one of the early movers but given the larger budgets these bigger competitors have, do you expect any impact to your European gaming business in the coming quarters? And what are your strategies to continue to grow and defend your leading position?

Thomas T. Hui

Thank you for the question. Yes, you are absolutely right. We do see competition increasing as some of our competitors finish their exit of the U.S. market and actually move into some of our markets. But as we’ve been highlighting in the past few quarters, it is not as if these competitors were not in our market before. They were always there. We’ve always been competing with them and as we have demonstrated time and again in our quarterly results, both from a revenue perspective and also customer acquisition in terms of actual growth in the number of customers, that we are actually able to compete quite successfully against our competition.

In this quarter, for example, despite the seasonal slowness in some of the numbers that are being reported by some of our competitors, we actually grew our active paying customers in the same market that we are competing in against them.

Now, we do see customer acquisition costs in certain selected markets going up but again, because of our established affiliate networks and our ability to market nimbly and the fact that we have already build up the Everest Poker brand, we feel that we have every bit of an advantage to compete with our competitors.

Alice Yapp - Citigroup

Okay, great. My next question is regarding Hellgate: London. Can you provide us the latest update on the launch in Singapore and the U.S.? And how should we incorporate those early results in the model? I know the [IHH] is only in the equity income line, but just in the early results, how should we expect that?

Arthur M. Wang

The initial launch of Hellgate: London was probably a little premature. The game was released and there were a lot of technical problems and also the online functionality, some of the key things about the game, the player versus player mode -- go online and attack your friends or enemies, the guild system, the ability to join up and form gangs or guilds and go fight together as a group against others, some of the chat functionality -- many of these things were not incorporated in the initial release and will actually only be released in upcoming enhancement patches, which are expected to be released over the next month or two.

So the -- we believe that the initial performance of the game is not reflective of the actual ultimate operating results that are obtainable from this game, and in fact, we are very, very excited by what we see in the game. The game play itself, the graphics, and our own initial internal evaluations suggest that Hellgate will perform very, very well in our marketplaces when we launch in the second or third quarter of next year. At that time, we think that any of the initial bugs and feature limitations will be solved, so we’re quite excited about the game.

The most important thing about Hellgate is that it fits in the action segment or category of games, which is still one of the hottest and most important segments in Asia, so we are feeling very, very confident about the game.

Alice Yapp - Citigroup

Okay, good. And then I have just one quick question; in terms of the non-operating income line, there’s a big increase this quarter. Can you elaborate a little bit on that?

Thomas T. Hui

This was actually due to at T2CN level, there was a cancellation of certain [warrant] liabilities that was originally on T2CN’s book due to the conversion of the convertible [inaudible] shares and the warrants were originally attached to the [prep] shares. When the [prep] shares converted, the warrants were extinguished. So T2CN generated a gain, and also there was a termination of a game licensing contract and that also generated a game.

I think the $1.5 million or so you saw there is primarily because of these two items.

Alice Yapp - Citigroup

So it’s only a one-time event, right?

Thomas T. Hui

And because these two items at the T2CN level, so the net income impact was about $880,000 as we talked about, to our financials.

Alice Yapp - Citigroup

Okay, and it will not occur next quarter?

Thomas T. Hui

Well, I mean, they don’t have more warrants to cancel, so no, this is one-time, yes.

Alice Yapp - Citigroup

Okay, and then can you give us some update on the T2CN business? What should we expect for the game Freestyle going forward? It seems like it is declining. And other launch dates on the pipeline. Thank you.

Thomas T. Hui

The business is actually, in terms of Freestyle, again the primary game now is steady, roughly flat and we can expect it to be steady in the near future. You see actually a pick-up in revenue in the financials we just reported and that was because of an increase in in-game advertising revenue we secured during the quarter. We expect that to continue and T2CN is in the process of launching a game which will be fully launched before the year-end, probably in the next month or so, a tennis game, as we have talked about in Q2 earnings release. This will incrementally add to the revenue and help improve the margins.

In the first quarter next year and the first quarter to second quarter, they will be launching a snowboarding game, again following the general direction of sports related games. Again, that will be a game we believe has incremental revenue potential and actually will be able to help increase the margins there.

Alice Yapp - Citigroup

Okay, great. Thank you. I’ll get back to the queue. Thanks.

Operator

The next question comes from the line of James Rhee from Bear Stearns. Please proceed, sir.

James Rhee - Bear Stearns

Thank you. Thank you very much for taking the call. Congratulations on the quarter. My questions, I have a few, but the first one is broadly, in terms of the regulatory environment in continental Europe, how would you compare the current status with say 12 months ago? And if you’re willing, what do you think the outlook is perhaps 12 months later? Do you see it liberalizing or do you see it going the other direction?

The second question, you mentioned an Electronic Arts title, obviously you can’t mention any details on that specific title. However, do you in your opinion feel it’s just a one-off title or that it could be some type of stronger relationships developing in the future? And I have a follow-up.

Arthur M. Wang

First of all, with respect to the regulatory environment for online gaming in Europe, we are actually very, very pleased with the developments in Europe compared to 12 months ago and looking forward 12 months. We basically see that what I think as the die is cast, that Europe is moving as a single trade block to have an open, regulated but liberal online gaming environment.

And country by country, there have been many positive developments in this regard, so looking out 12 months, I see a situation where ultimately we see an open, liberal but regulated operating environment in Europe and that’s the outcome we’d be most happy with for our business.

With respect to our deal with EA, at present, we mentioned one title and I’m afraid that’s all we can speak to. Naturally, we think very highly of the firm, EA and their incredible content library and we look to do more things with them. At present, however, all we can speak to is the current deal. We are hoping to do some more things but we’ll have to get back to you on that.

James Rhee - Bear Stearns

Okay, thank you. Related to the Pachinko, Pachislo, and the Japan catered software products, you mentioned that it should be testing prior to Christmas, so perhaps a month later. Without getting into hard guidance, what do you think the ramp-up and the consumer adoption would be like for that market? Do you think it would be a rather gradual thing or do you think it would be rather explosive from the beginning?

Arthur M. Wang

We have naturally a very aggressive ramp-up and marketing campaign that we’ve been looking at. However, we as a company policy do not like to give forecasts on businesses which are so early, so young in their development. So at this point in time, I am going to have to pass. But we are very, very optimistic about the prospects in Japan and I personally am hoping that it is a good contributor in 2008.

James Rhee - Bear Stearns

Thank you very much, both and I’ll get back in the queue myself.

Operator

The next question comes from the line of Traci Mangini, ThinkEquity Partners. Please proceed.

Traci Mangini - ThinkEquity Partners

Thank you. I had a couple of questions tailing on the Hellgate: London questions. Do you know if other geographies also are delaying their launch, aside from obviously the ones that have already launched?

Arthur M. Wang

We think that Korea is right now in beta stage and they will be launching, I think going commercial at the end of this year, or beginning in January. That is according to schedule, and all along in greater China, we have been planning to launch after North America, Europe, and Korea. In part, this is strategic on our part to take advantage of some of the marketing buzz that happens first, and also to allow some of the early roughages to be smoothed out in the game.

Again, I would emphasize that we are really very excited about this game and we think that it has the potential to be as big a hit or bigger than Diablo I and II, which were the biggest hits in history in Taiwan.

Traci Mangini - ThinkEquity Partners

Okay, well then, given this new timing, what should we expect in terms of marketing expense supporting the game? I mean, will we still see some in Q4, Q1? Or should we push out the bulk of it into right around the time it will launch Q2, Q3?

Thomas T. Hui

I think it would be that the marketing spend would coincide with the launch. You’ll probably be slightly ahead of the launch but you will not be a full quarter ahead of the launch. So if the launch around Q2, Q3 time, that’s probably when the marketing spend is going to hit.

Traci Mangini - ThinkEquity Partners

Okay, and then just on the same topic of marketing expense and strategy there, while I know you don’t want to make any projections on where the Japanese games can go and how quickly, can you at least give us a sense of the marketing plan for that? Is it still to follow the same path that you did with Poker, minimal marketing up-front and then add to it as you get traction? Is that the idea?

Thomas T. Hui

Yes, we will adopt a similar approach, at least at the outset, utilizing our well-established and expensive affiliate marketing network, which provides us a variable cost way of marketing the product. Once we gain traction, we will -- now we have obviously a much bigger base, both from the product that UIM is operating in Japan and a new product to launch any brand-specific marketing.

Traci Mangini - ThinkEquity Partners

On the real money Mahjong, was there anything at all in the quarter from that, be it just regular revenues or any of the up-front payment that was amortized in the quarter?

Thomas T. Hui

No, I mean, it’s negligible -- basically, it’s negligible.

Traci Mangini - ThinkEquity Partners

Okay, and going forward, I know you guys have been just rethinking the model that you wanted to use with that platform. Have you come to any conclusions or are you getting more comfortable with this third-party model, given your partner is starting to devote more marketing resources to it?

Arthur M. Wang

We think that the approach is the right approach and we are going to be rolling this out, as we say, much more broadly to a much wider pool of licensees. We think that these licensees, as well as our initial license partner, will all be able to do quite well with this product and as a result, so will we.

Traci Mangini - ThinkEquity Partners

Okay, great. And then just lastly on the Asian games business, I know you guys have talked in the past about just the number of different things that are in the pipeline. You mentioned the Electronic Arts. Can you give us a sense of timing for some of the other things you are working on? Are they 2007 announcements? And then if they are, is it something that we don’t really factor in probably realistically until the second half of 2008 in terms of contribution to revenue?

Arthur M. Wang

This is a hard one to answer. Yes, we anticipate having some more good announcements in 2007, so --

Traci Mangini - ThinkEquity Partners

Thank you.

Operator

(Operator Instructions) The next question comes from the line of Todd Eilers, Roth Capital Partners. Please proceed, sir.

Todd Eilers - Roth Capital

Just a couple of quick questions; first, with regard to your guidance on the real money gaming business, I believe you said 15% sequential growth in October. Do you guys typically, looking at November and December, do you typically see those months historically as stronger months in terms of growth in the fourth quarter over October? Or are they roughly typically the same? I’m just trying to get a feel for how the fourth quarter shapes up.

Thomas T. Hui

From an historical perspective, we can tell you that November is better than October, October is better than September and December is better than November -- sorry, not in the right order here but yes, as we get to colder months, people tend to go out less and also, some of the marketing we typically put in place only after the summer is over kicks into effect. All those factors -- I can’t say for the industry for sure, but at least from our historical experience, what we’ve seen is a gradually increasing contribution and more business momentum as we move into the year-end months.

Todd Eilers - Roth Capital

Okay, great. And then, it looked like your ARPU for the real money business in the quarter dipped around $45 year over year and sequentially declined a little bit. Can you talk to what is going on there? What are your expectations going forward for that number?

Thomas T. Hui

Sorry, Todd, you were referring to which business? I’m sorry, I wasn’t --

Todd Eilers - Roth Capital

The real money gaming business, or I’m sorry, your poker.

Thomas T. Hui

The poker business, okay. I think we expect the per player yield to basically be steady. If you look at the numbers in the first -- Q3, it was about $135 and that was around the same range as -- it was in an acceptable fluctuation for Q2 and Q1 as well. We don’t expect that to significantly go up or god down. We expect it to be pretty steady.

Todd Eilers - Roth Capital

Okay, and then looking at your casual online business, your gross margins and operating margins came in a little bit below what we were looking for. I know that you guys have the lower margin T2CN business that you are now consolidating, and you also mentioned some increased advertising and marketing costs. How should we look at that going forward? Are the margins, your gross and operating margins for this quarter, do you view those as numbers that are normalized margins? And going forward, would you expect those to remain around those ranges? Or should we anticipate a move one way or the other going forward?

Thomas T. Hui

I think of the current game portfolio, we don’t see too big a fluctuation from the current set of numbers, but this business is one whereby in both the China market and Taiwan market we operate, when you launch new games, most of the marketing dollars will be incurred up-front and the accounting treatment of those marketing dollars are such that you have the expenses as you spend them.

So what would happen is when we have a big game, such as Hellgate: London or Holic, when we launch that, in that particular month of that particular quarter, you might see actually a lower margin because of that timing difference I just mentioned.

But over a long period of time, when you normalize it, we certainly think that the margin should not be lower than the current levels.

Todd Eilers - Roth Capital

Okay. That does it for me, guys. Thanks a lot.

Operator

Your next question comes from Bill Garrison, Ironworks Capital. Please proceed, sir.

Bill Garrison - Ironworks Capital

Thank you. A handful of questions; I guess with regard to your T2CN ownership increasing to 58%, is that -- can that still move higher from there or is that the end state ownership of that entity?

Arthur M. Wang

We anticipate increasing that ownership position.

Bill Garrison - Ironworks Capital

Okay. All right, and within the Asian online games business, you talk about additional expense for a mass media marketing campaign. Could you elaborate on the geographic focus of those marketing dollars?

Arthur M. Wang

In Q3, it was a lot of additional marketing dollars were spent in Taiwan promoting FunTown’s games, services, and products. And going forward, again it depends on the launch schedule of the various games. As I just mentioned, T2CN will be launching a game in the next month or so. This a tennis game and so there will be some marketing dollars, so it really depends on the new game launch schedule.

Bill Garrison - Ironworks Capital

Okay, and at this point in time, could you update me on the extent to which the FunTown offerings are available or will be available on the T2CN platform? For example, the play for fun Mahjong, is that available at the T2CN level at this point in time? And if not, will it be in the near future?

Arthur M. Wang

They are not available currently. They plan to be, as part of our new platform integration and we are looking forward to be able to take all of our games cross-platform and essentially for our games to be platform independent. We think this will be one of the key advantages of having a pan-Asian platform, the ability to offer all of our games -- to develop once and offer throughout the region.

Bill Garrison - Ironworks Capital

Okay, and is there a timeline for when that platform might be available?

Arthur M. Wang

There are many different modules or many different elements of a platform and the first component, some of the component pieces have already been finished and other component pieces are scheduled to be rolled out in the first quarter, and there will be a continuing development scheduled for both development and rollout extending over the course of the next 12 months.

Bill Garrison - Ironworks Capital

Okay, and just a couple more; I guess as a follow-up on the October strength in the poker business, could you provide any further comment in terms of whether or not that strength was due to marketing initiatives over the summer and an increase in new players, or more of an emphasis on tournaments or just a better mix of business, or a little bit of everything?

Arthur M. Wang

I’m afraid at this point in time, all that we are releasing is the increase in average daily players, as we put into our release. But suffice it to say, we’re looking at a very strong fourth quarter.

Bill Garrison - Ironworks Capital

And lastly, just to clarify, on real money Mahjong, has the initial period of exclusivity with your initial licensee expired at this point in time?

Arthur M. Wang

Yes, it has.

Bill Garrison - Ironworks Capital

All right. Thank you very much.

Operator

(Operator Instructions) At this time, I am showing you have no further questions. I would now like to turn the call over to Mr. Brad Miller.

Brad Miller

Thank you, everyone. Thank you for joining us. For further information about GigaMedia or if you have questions and would like to contact the company, please visit our website at www.gigamedia.com.tw. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Thank you.

TRANSCRIPT SPONSOR

Get the Top 5 Stocks to Buy Now Download Robert Hsu’s just-released special report, ChinaQuake: The Truth About China, & learn how to profit from China’s unstoppable growth! The new report details China stocks that are gathering themselves for a powerful jump—in the next few days. Are you ready for the ChinaQuake? You don’t want to miss this–make sure you are on the China Express! Click here to access your free report. To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!