Gigamedia
GIGM is an online gaming company through its Everest Poker and Asian online gaming segment. Giga IPO’d on Nasdaq in February 2000 largely as an ISP in Taiwan. This is now a very small segment of the company which it is looking to sell. Giga’s management has proven to be solid allocators of capital with its successful acquisitions in online gaming.

Giga has agreements with several game companies, like Electronic Arts ERTS, to offer their latest games in Asia. It also has strategic investors in several Chinese game development companies from whom it will license games. The company also develops games in-house. An investment in Giga is a great opportunity to benefit from their two solid gaming platforms as well as their ability to make acquisitions and strategic investments.

The company expects to launch online sports betting in late 2008 through an acquisition or partnership. While the company expects flat sequential revenue growth through the seasonally weak summer it will launch several games in the latter portion of 2008.

Online gaming is an extremely profitable, high growth business which I will cover in more depth later. Tomorrow Giant Interactive reports Q1 results and the numbers should be very good. Below is an overview of GigaMedia and a detailed summary of their recent financial results.

Everest Poker

In April 2004, Giga acquired software developer and application service provider Grand Virtual Gaming Alliance and its subsidiary Cambridge Entertainment Software Limited the maker of Everest Poker. Everest Poker is the company’s largest business segment. Everest Poker is an online poker website that is very popular in Europe. Everest Poker has a multi-year advertising agreement with the World Series of Poker where it is the main sponsor of the world’s largest poker tournament.

Asian Online Games

The other major business is the company’s Asian Gaming segment which has over 60M registered users in Asia. In January 2006, Giga acquired FunTown the world’s largest online MahJong game site by revenue and a leading Asian online casual games portal with 5M registered users. At the time TCN had approximately 2o million registered users in China.

In May 2006, Giga began an exclusive partnership with online casual game company T2CN Holding (T2CN) through a $15M strategic investment. In January 2007, Giga acquired a majority of T2CN for $22.9M (18.3M shares or 40.3% of T2CN) to bring its total ownership above 50%. TCN is the operator of FreeStyle, an online basketball game, which is the largest online sports game in China.

T2CN has licenses to two 3D Internet games, Rush Online and Shenmue Online, which are multiplayer online role-playing games (MMORPG). More importantly it is the leading online casual sports game company in China and its game FreeStyle is the most popular online sports game in China. FunTown has developed almost all its games in-house and promotes stickiness by providing community aspects to the site such as

• Game clubs for players
• Tournaments related to FunTown’s online casual games
• Social networking
• Players ability to create an online persona such as an avatar

The FunTown and TCN units offer a merged online gaming platform.

Full Year 2007 Results

• Revenue = US$166.9M up 77%
• Operating Income = $38.1M up 73%
• Net Income = $38.9M up 63% (had a one-time after-tax disposal gain of $7M in 2006)
• EPS = $.65
• Cash = $79.9M

Q4 2007 Results

• Revenues = $47.7M up 59% (up 11% Q/Q)
  • Poker Software Revenues up 21% Q/Q
• Operating Income = $9.3M up 16% (down 7% Q/Q)
• Net Income = $10.7M up 8% (up 10% Q/Q)
  • Earnings up only 8% because spent 45% of revenue on advertising (vs. usual 30%)
• EPS $.18

Q1 2008 Results

Giga reported record results yesterday.

• Revenue = $54.6M up 51%
• Operating Income = $12.9M up 49%
• Net Income = $12.1M up 43% (up 13% Q/Q)
• EPS = $.20 up 41% (up 14% Q/Q)
• Cash = $79.9M
• Gross Profit Margin = 79.0% vs 79.7% (78.8% in Q4 2007)
• Operating Margin = 23.6% (19.5% in Q4 2007)

Guidance

Gaming software

• Expects strong revenue growth for FY 2008
• Expects Q2 revenues in line with Q1 (reflecting industry-wide slowdown due to summer seasonality)
  • May be offset by the launch of new products like casino games in Everest poker client and traditional Asian gaming products

Asian online games

• Expects revenues to climb sharply in the second half of 2008, driven by major new game launches
  • In Taiwan and Hong Kong, expects major new game launches of: NBA Street Online, Holic and Hellgate: London
  • In China, expects to launch Holic in Q4 2008

Poker Software Vertical

• Revenue = $29.7M up 56% (up 11% Q/Q), 77% of business unit’s revenue
  
• 208,000 active depositing real-money customers played on poker platform up 14% Q/Q
  
• Added 68,000 new depositing real-money poker players, up 19% Q/Q
  

Casino Software Vertical

• Revenue = $8.6M up 20% (up 17% Q/Q)
  
• Helped by rollout of new video slot games and cross-marketing to Everest poker players
  

Strong organic growth in FunTown in Taiwan and Hong Kong as well as the consolidation of T2CN in China

FunTown

• Revenue = $7 up 28% (up 15% Q/Q)
  
• Strong contributions from:
  
  • Advanced casual game Tales Runner
    
  • Favorable impact of effective mass media marketing
    
  • Successful MahJong game events around Chinese New Year holiday
    
  • Appreciation of New Taiwan dollar against US dollar
    
• Average monthly active paying accounts = 111,000 down 5% Q/Q
  
• Average monthly revenue per active paying account = $21.09 up 21%
  
• Peak concurrent users = 43,000, down 12%
  

T2CN

• Revenue = $5.9M up 48% Q/Q, Increased revenue from FreeStyle driven by:
  
  • New game patches
    
  • Marketing of game in conjunction with a hit movie
    
  • Increased online gamer activity resulting from severe snowstorm around and during Chinese New Year
    
  • Appreciation of renminbi against US dollar
    
• FreeStyle
  
  • Average monthly active paying accounts = 514,000 up 43% Q/Q
    
  • Average monthly revenue per active paying account = $3.86 up 12% Q/Q
    
  • Peak concurrent users = 185,000 up 7%
    

Disclosure: I own Gigamedia and several other Chinese online gaming companies including GA, SNDA, and SOHU.