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Sigma Designs (NASDAQ:SIGM)

Q3 2013 Earnings Call

December 05, 2012 5:00 pm ET

Executives

Kenneth Lowe - Vice President of Strategic Marketing

Thomas E. Gay - Chief Financial Officer, Principal Accounting Officer and Secretary

Thinh Q. Tran - Founder, Chief Executive Officer, President and Director

Mustafa Ozgen - Vice President and General Manager

Gabi Hilevitz

Analysts

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Stephen Chin - UBS Investment Bank, Research Division

Hamed Khorsand - BWS Financial Inc.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Sigma Designs Earnings Conference Call. My name is Deanna, and I'll be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Ken Lowe, Vice President, Strategic Marketing. Please go ahead.

Kenneth Lowe

Thank you, Deanna, and welcome to Sigma Designs' conference call to discuss the financial results for our third fiscal quarter 2013. I'm Ken Lowe, Sigma's Vice President of Strategic Marketing, with me today are Thinh Tran, Sigma's Chairman and CEO; Tom Gay, our CFO; Mustafa Ozgen, our Vice President and General Manager of Sigma's Home Multimedia business; and Gabi Hilevitz, our Vice President and General Manager of Home Connectivity Business.

The press release containing the quarter results including selected income statements and balance sheet information was released after the market closed today. If you did not receive the results, the release is available in the Investors section of our website. Today's agenda will begin with my brief introduction, a review of selected financials by Tom, and an executive overview by Thinh, and a business summary by Mustafa and Gabi for their respective the business units. And finally, our forward guidance by Thinh. We'll then open the call to questions from analysts and institutional investors, and we expect to conclude the call within 1 hour.

Before we begin, I'd like to remind everybody that today's call contains forward-looking information, including guidance we provide about future revenue, gross margin and other financial measures and anticipated trends in our markets. We caution you that the forward-looking information we present today is based on our current beliefs, assumptions and expectations that speak as of only today's date and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

Other risk factors that may affect our business and future results are detailed from time to time in Sigma's SEC reports, including Sigma's quarterly report on Form 10-Q as filed with the SEC on September 10, 2012. A partial list of these important risk factors is set forth at the end of today's earnings release and Sigma undertakes no obligation to revise or update publicly any forward-looking statement, except as required by law.

In addition, during today's call we will be reporting certain financial information on a non-GAAP basis, such as non-GAAP net income, which excludes certain costs and expenses. These excluded items are described in more detail in today's earnings press release along with a detailed reconciliation of our GAAP to non-GAAP results.

And with that, I'll turn it over to Tom.

Thomas E. Gay

Thank you, Ken. For the third quarter of the fiscal 2013, revenue was $63.9 million, a decrease of $4.4 million or 6.4% compared to $68.3 million in the previous quarter. Compared to the year-ago quarter, our revenue increased $24.2 million or 61% from $39.7 million. Our revenue breakouts for the quarter are as follows: DTV, $27.8 million or 44% of the total; Home Networking, $19.7 million or 31% of the total; IPTV Media Processors, $6.3 million or 10%; Connected Media Player, $2.8 million or 4%; Home Control and Energy Management products, $2.7 million or 4%; Prosumer, $2.3 million or 4%; and Licensing and Other, $2.2 million or 4% of the total. During the third quarter, we had 1 customer that exceeded 10% of our net revenue, that was TP Vision for $14.6 million or 23% of our total.

GAAP gross margins were 39.9% for the third quarter compared to 44.8% in the preceding quarter and 45.3% in the same period last year. Non-GAAP gross margins were 44.4% for the third quarter compared to 51% in the preceding quarter and 52.4% in the same period last year. The primary factor in our reduced gross margin was product mix, which was heavily weighted with increased shipments to one of our large customers of DTV products, which have lower margins. The DTV product line continues to be based on customers and products acquired from Trident that have not had the benefit of various cost-reduction efforts we intend to make as part of our further integration of the DTV product line. As we will discuss later, we see an opportunity to increase the gross margin for the DTV product segment significantly over the course of the coming year. Gross margin on our non-DTV products continued to be above 50%.

During the quarter, the company announced a broad restructuring plan with the intent to reduce operating costs to a level which should put us at a breakeven financial position for our first fiscal quarter of 2014, ending April 2013. As a result of the actions taken, the company recorded a restructuring charge of $0.8 million during Q3 and expects to incur additional charges in fiscal Q4 as we continue to reduce our cost base. The impact of the reduction in force taken at the end of the quarter is approximately $4.8 million in annual salaries and benefits. The remaining portions of our previously announced program will result in expense reductions of approximately $16.8 million in annual cost for salaries and benefits, as well as $19.1 million in non-labor-related expenses. Additionally, we have taken various actions that are expected to lower our cost of production by $5 million in fiscal 2014. Total proforma expenses for the third quarter were $36.8 million compared to $38.8 million in the previous quarter.

In the current quarter, the company concluded it is necessary to establish a valuation allowance for its deferred tax assets. This decision was made based mainly on certain historic losses of the company, and is consistent with U.S. GAAP regulations. Sigma has just begun its corporate restructuring plan and as such, has not yet seen the improved financial performance. The company felt it prudent to establish a valuation allowance for its federal deferred tax assets in the amount of $17.9 million. The company will continue to assess the need for the valuation allowance periodically based on available evidence and management's judgment.

GAAP non -- GAAP net loss for the third quarter of fiscal 2013, including an entry to adjust the company's deferred tax assets of $17.9 million was $39.5 million or $1.18 per diluted share. This compares to GAAP net loss of $13.4 million or $0.41 per diluted share in the previous quarter and GAAP net loss of $121.6 million or $3.78 per diluted share in the year-ago quarter. On a non-GAAP basis, net loss for the third quarter was $9.1 million or $0.27 per diluted share. This compares to non-GAAP net loss of $4.1 million or $0.12 per diluted share in the previous quarter and non-GAAP net loss of $2.7 million or $0.08 per diluted share in the year-ago quarter. Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance.

Now I'd like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $98.9 million at the end of the quarter, a decrease of $7.5 million compared to the end of last quarter, and a decrease of $51.3 million compared to the beginning of the fiscal year. The most significant item contributing to the year-to-date decrease in cash was the cash used to purchase the DTV business assets of Trident at $39.7 million.

In addition to our collections of accounts receivable and other working capital assumed by us in the acquisition, we expect to recover an additional $7.6 million of the cash used in the acquisition as a result of accounts receivable collected by Trident on our behalf during the transition period following the closing of the acquisition and other working capital assets that we assumed in the acquisition along with certain miscellaneous recoverable items. Cash used in operations in the third quarter was $5 million. Net accounts receivable was $37.9 million at the end of the third quarter, a decrease of $5.2 million compared to the previous quarter. The average day sales outstanding in our receivables at the end of the third quarter was 54 days, a decrease of 3 days compared to the previous quarter. Net inventory was $30.5 million at the end of the quarter compared to $33.2 million in the previous quarter, a decrease of $2.7 million. Decrease in inventory brings our inventory turns for the quarter to 5.1 on an annualized basis compared to 5.8 in the previous quarter. Net working capital was $98 million at the end of the quarter compared to $116 million in the previous quarter, a decrease of $18 million. The decrease is primarily due to our proforma net loss for the quarter.

Now I will turn the call over to Thinh for an executive overview.

Thinh Q. Tran

Thank you, Tom. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma. Before I review our quarter results, I want to begin with what is currently our #1 priority today, which is the implementation of our previously announced restructuring plan and expense reduction efforts. While we continue to believe in the long-term prospect of our technology leadership and target market, the reality is that our expense has not been commensurate with our revenue levels. As a result, we have undertaken a thorough review of operation opportunity. While this review is ongoing, we have already begun to implement a plan to restructure our business. In providing more detail about this restructuring plan, I would like to start by emphasizing that we are fully committed to achieving profitability beginning in the first quarter of next year. Toward this goal, we have created an operating plan for fiscal 2014 that is based on 2 primary principles: first, while we are challenging ourselves to achieve consistent revenue growth, our operating plan and profitability targets will be based on conservative estimates of expected revenue for the next year; second, we are implementing aggressive cost reduction program within each of our business units to achieve profitability. To ensure that we achieve our profitability objectives and preserve our cash resources, we have already taken a number of cost reduction measures which include the following: reduce the workforce in our Set-top Box business unit by implementing a headcount reduction at our North American operation; we reduced the workforce in our sales and marketing department to eliminate unnecessary overhead; we combined our Set-top Box and Digital TV businesses into one organization, headed by Mustafa Ozgen as our General Manager, to ensure that we achieve maximum efficiency and eliminate unnecessary overlap. Mustafa will provide more detailed information on these efforts later in the call. We also put in place a new company-wide policies and procedures for operating expense control, which call for reduction in travel expense, consulting expense and other cash conservation measures. We implement shut down in the coming holiday period to further eliminate expense during this typically low productivity period.

As I mentioned, these are the steps we have already taken. We would begin to see the benefit of these actions in Q4 expense levels. Now, let's review the results of the third quarter and our current business trends. For the third quarter, we reported $64 million in revenue, with $9.1 million in non-GAAP losses, indicating that we must focus on increasing our business efficiency and reducing overall cost. Our Media Processor businesses consisting of IPTV, Connected Media Player, Prosumer, contribute $11.4 million for this quarter, which is showing relatively stability as we continue to position ourselves for increased demand on the emerging hybrid IPTV and second-generation Mediaroom segment. Our DTV business contribute $27.8 million for this quarter, an increase that reflected typical seasonality of the television market at this time of the year. Our Home Connectivity business contribute $19.7 million for this quarter. This increase is primarily due to emerging deployment in Latin America, and continued deployment in North America.

Overall, we are confident that the long-term demand for our market is strong, and that our challenge is to increase our market share through continued innovation and efficient execution.

Now let's review our major accomplishment during the quarter. We launched our SMP8680 series of Media Processor with integrated HPNA connectivity for IPTV and hybrid set-top boxes. We are now the design win with [indiscernible] to provide the first-to-market over the top thin client set-top box with HomePlug AV powerline connectivity. We are now design win with Devolo to use Sigma HomePlug AV chipset as a basis with their new powerline 200 AV adapter which they will use to pursue service providers in Europe. We also announced the Comtrend powerline single port adapter which is based on Sigma HomePlug AV chipset, has won the 2012 Communications Technologies Platinum Award in home networking. We're very proud of the technologies and market position we have developed and are excited to move forward with a renewed emphasis on profitability.

Now, I would like to pass the call to Mustafa, and then to Gabi who are taking responsibility for managing the growth and profitability of our new Home Multimedia and Home Connectivity business unit respectively. Mustafa?

Mustafa Ozgen

Thank you, Thinh. For this call, let's first review the integration of our set-top box and Digital TV organizations and discuss the efficiencies we gained through this. During the last quarter, we combined our set-top box and digital TV organizations into one single business unit, and established its management structure. This combined group will be called the Home Multimedia business unit. The charter of this group is to synergistically develop SoCs and software for the new era of intelligent consumer entertainment solutions, primarily from our TVs and hybrid IP-based set-top boxes. By combining the group, we can drive commonality in the majority of our hardware and software components, fortify our expertise in the most critical elements, and eliminate needless R&D overlap. This combination should further support our company-wide expense reduction plans by taking out duplicative costs. Specifically, we have established the following organization structure: we created a single SoC development team that will be responsible for the architecture, logic design, back-end layout and validation of all our IC designs. Over the coming year, this team will converge the 2 separate product lines into a single SoC architecture and leverage common core elements across all products. We created a single software development team that will be responsible for the architecture, development and testing of all our core software and libraries. Again, over the coming years, this team will drive the convergence of a single software stack for the benefit of all SoC products.

We created separate teams for applications engineering and product marketing, focused on each of our 2 target markets: Digital TV and set-top box. These teams will each focus on defining new products for their individual market, and work with customers on tailored platform solutions that will drive success. Over the next quarter, we will be evaluating our resource needs and eliminate overlaps where possible within the combined teams.

Now, let's discuss the business opportunities we are addressing and how we are expanding our external engagements to drive future growth. Our set-top box business is driven by a push-pull strategy involving direct sales into the OEM manufacturers while simultaneously establishing a preference for our technology at the network operators. We've already developed a strong OEM channel for demand through 2 of the top worldwide set-top box OEMs, Pace and Motorola as well as a number of regionally-focused suppliers such as Tatung, Samsung and Netgem. We believe that with the right products, we have access to set-top box opportunities in every region of the world. Currently, we are experiencing success by capturing new Mediaroom deployments in North America and Latin America. We are continuing to win in this space because of our advantages in lower power and lower bill of materials cost. We are also starting to engage more deeply in new designs for the hybrid IPTV set-top box space that should lead to deployments in Europe and Latin America. We believe we will win in this space because of our more optimal SoC designs, front-end solutions and mature middleware software spec.

Our digital TV business is also driven by a push-pull strategy, involving direct sales into OEM and ODM manufacturers, as well as establishing preference for our technology at the TV brand marketers. Our strategy involves directly working with TV and LCD panel OEMs, while leveraging key ODMs such as ClickTV [ph] and Foxconn to design and push market ready solutions based on Sigma DTV components. Currently, we are aggressively working with existing TV accounts at Philips, TP Vision, VIZIO and others to achieve increased penetration of their product line. We are simultaneously working to develop new target accounts in Japan, Korea, China and Europe to grow our base business and expand our market share. Toward this goal, we continue to be benefited by the pending merger of Taiwan-based MediaTek and Morningstar (sic) [MStar] Semiconductor which creates the need for a truly independent second source supplier at their largest account. We are the only other company besides MediaTek and Morningstar (sic) [MStar] with full end-to-end TV SoC technology portfolio and market understanding. Customers recognize this and have been approaching us for partnership.

Beyond digital TV and set-top box, we are leveraging our existing products to gain opportunistic business in the Digital Media Adapter and WiFi display segment. We currently have design wins in this space that should move into production next year to provide additional revenue growth.

Now let's talk about how we are driving our technology and road maps to ensure that we will be delivering future products ahead of the market need. The television industry will always try to take features to the next level in order to drive up prices and overall replacement demand. For the digital TV market, the next frontier is to offer televisions with 4k x 2k resolution and overall, fourfold increase in on-screen pixel. The hope is that the photographic quality of imaging will create a new way of consumer replacement cycle. To enable this high resolution, as well as gain network efficiency, the new HEVC or H.265 codec standard will be required across all devices including set-top boxes and television. Furthermore, to assist in creating commonality of access to applications and content, the HTML5 protocol is driving convergence in the mobile, computing and digital TV market.

To succeed in the coming generation of solutions, we are driving our R&D team to come up with innovative ways to support these new capabilities in a manner that is earlier, more powerful and more cost-effective than our competition.

In summary, I would like to reiterate that we are focusing on improved operating efficiencies and further cost reduction while pursuing opportunities for growth. I will now pass the call to Gabi to cover our Home Connectivity business unit.

Gabi Hilevitz

Thank you, Mustafa. For this call, let's first review the business opportunities in home connectivity we are addressing and what we are doing to drive future growth. Overall, our revenues came in higher than projected for this quarter, with the potential drop in Q4 due to operator's inventory adjustment. But the overall second half of the year is in line with our prior expectations. Our success in HomePNA products over the past several years has created a strong base business and relationships, which we leveraged to expand market share with our complete connectivity portfolio. Beyond our existing HomePNA accounts, we are driving growth from next year, from new deployments in Latin American markets, which is adopting HomePNA due to its demonstrated performance and reliability in North America. Our newly announced 8680 SoC with integrated HomePNA is part of our strategy to offer cost-effective solutions for IP set-top boxes in these price-sensitive markets. To drive growth with our HomePlug AV products, we are leveraging our unique ClearPath technology, combined with native TR-069 management functionality to win new service providers accounts primarily in EMEA. As Thinh already mentioned, we added 2 leading European OEMs to our HomePlug AV customer base. We are confident that with these 2 on top of our existing HomePlug AV partners, we are now better positioned to expand our market share, especially in the service provider segment.

At the same time, in the HomePlug AV market we continue to face strong price-based competition which is challenging but manageable. In the G.hn space, Sigma is recognized as one of the leading providers of G.hn chips, having been primary driver of this specification, standard and options and earliest [ph] products. This recognition, combined with our reputation for highest performance home connectivity solutions, has given us a strong reception at network operators. At this point, our G.hn products are undergoing evaluations by more than 10 major operators around world. Complementing this momentum, we have a growing number of ODMs and OEMs designing new products using our G.hn solution for network connectivity. Based on the aforementioned activity, we are on track to support customers for potential introduction of products in Q1 of next year.

Moving over to home control, we are focusing on gaining more volume design wins at service providers for our Z-Wave product line. The large ecosystem of over 735 interoperable products is the most appealing feature of Z-Wave to any service provider interested in deploying security and home automation services in any geography. AT&T is moving ahead with the digitalized security home automation and energy management service, which includes a number of Z-Wave and HomePlug-AV-based elements, and we hope to see the service commercial soon in the U.S. Due to the large ecosystem of certified and interoperable Z-Wave products, we are entertaining additional technology licenses for Z-Wave, which will serve to expand its endorsement and generate additional income.

Now let's discuss the range of cost control measures that we are taking. As part of the company-wide efforts of cost control, my business unit is also taking initiatives to further reduce operating cost and product cost wherever possible. We are reducing our external R&D activities and committing to no headcount growth during fiscal 2014. We have identified additional actions to reduce our cost of goods sold on our products, including material, royalty cost and logistics. I will now pass the call to Thinh to cover forward guidance.

Thinh Q. Tran

Thank you, Gabi. As we have indicated, we feel we are in exciting markets and are confident in our ability to deliver innovation that will enable future growth along with profitability. However, in the short-term, our demand is being shaped by a number of market-specific forces. Our DTV demand will be down in the fourth quarter due to seasonality, as well as weak economic conditions in Europe. Our set-top box demand will be relatively flat in the fourth quarter. Our home connectivity demand will be down in the fourth quarter due to inventory adjustment.

Moving onto our formal guidance, which is based on our visibility at this time, we expect total revenue for the fourth quarter to be approximately $42 million to $45 million. We expect our fourth quarter gross margin on a proforma basis, to be in the range of 49%, driven in part by expected shift in product mix. We expect lower operating expense in the fourth quarter compared to the third quarter.

In summary, we want to underscore our commitment to becoming profitable in the first quarter of fiscal 2014. We anticipate the recovery in revenue in the first quarter and feel strongly that we will have the cost structure in place to drive profitability. In light of the uncertain economic environment, we are proactively implementing further expense reduction beyond what we contemplated when we originally announced our restructuring plans. We'd now like to open the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Gary Mobley, Benchmark.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Tom, I had a question for you to start out. I know you're not going to share with us your revenue outlook for the first quarter, but I guess, you do sort of open yourself up to the question given your target for breakeven for the first quarter of fiscal year '14. I'm just wondering what the revenue breakeven target is on a quarterly basis based on the operating expense reductions anticipated by the time we hit the start of the fiscal year?

Thomas E. Gay

Everything that we have underway and the timing of it that we see is an orderly transition, we'll be bringing that breakeven down close to $50 million as a result of all this.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Okay. And the IPTV business, down again sequentially in the just reported quarter, down -- according to my calculations, it's about $4 million or 40% sequentially. Could you discuss what's driving that decline? And then as well, relating to the combined digital TV and set-top box businesses, what products or customer opportunities have you basically capitulated on?

Thomas E. Gay

Part of our challenge at this point is some inventory corrections and we see a dip in the fourth quarter that started particularly in IPTV in Q3 and that's part of why we're targeting Q1 of next year as our profitability strategy. So we see this, the short term dip in the IPTV as we transition to that next generation of a few -- in some customers.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

And I guess the essence of the last part of my question was try to identify whether or not you're pursuing as aggressively in the past some of the Mediaroom opportunities with some of the leading North American telcos.

Kenneth Lowe

Gary, it's Ken Lowe. We're still pursuing the Mediaroom opportunities with the same amount of vigor. As a matter of fact, we've gotten a lot of our efforts bolstered there in the last few months from increased support, not only from Microsoft but some of our partners as well. We've gotten some new boxes validated, these then get out to the operators for their trials and RFQs responses and we're very encouraged about what we're going to see in the next year from a Mediaroom standpoint. You should see some increased engagements there.

Operator

Your next question comes from the line of Stephen Chin, UBS.

Stephen Chin - UBS Investment Bank, Research Division

My questions primarily revolve around the restructuring and how you guys are managing the execution risks around that. I was wondering, are there any milestones that you're putting out there internally and how are you managing this whole restructuring and the reduced headcount? And then secondly from a COGS standpoint, some of the cost reductions that were mentioned, the different product areas, is that considered like low or high hanging fruit from a manufacturing and efficiencies perspective? Or does it entail some new product redesign in order to lower the production costs?

Thomas E. Gay

Pretty heavily loaded set of questions all at once. So as we've said, the first phase began at the end of Q3, resulting in the $0.8 million restructuring cost. The impact on Q4 is a reduction in OpEx of $1.5 million. We've taken other steps to bring some other cost savings into Q4. The remaining amount of the $10 million per quarter, the $10.5 million that we're targeting for showing up entirely in Q1 is a number of different things. We were talking about some outsourcing or reducing outsourcing, the various activities and eliminating the overlapping as we converge on a unified platforms in 2 of our biggest product lines. In the COGS area where we see the -- it's a combination of low-hanging fruit along with some economies of scale as we unify the production over less platforms.

Thinh Q. Tran

And also some new design for lower cost as well.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And just one more follow-up on the -- in terms of the convergence of your 2 technology platforms for digital TV and IPTV platforms. I guess from my perspective it seems like the technologies that go into those 2 product areas they seem to be or appear to be on different product cadences, in terms of how quickly new features renew on either side of the business. Just kind of wondering whether or not you'll get the full benefit of combining the 2 architectures? And being able to get the -- I guess the pricing or being able to sell the features that you're going to have on this common chip platform, I guess?

Mustafa Ozgen

So this is Mustafa, Stephen. Maybe you can look at in the -- it's sort of 2 sides of the platform. One is the software side, one is the hardware side. Software side will combine quicker, as expected. So some of the features that we have on the SMP platform will help the TV side to sell, which we are already seeing the effect of it, whereas the Sigma set-top boxes, very rich in terms of Internet connectivity, OTT and similar applications which is used [ph] On the TV side, but TV side wasn't really ready for that. So we're seeing some of those convergence helping out on the TV side. Some of our existing designs are really SmartTVs and need such software technologies. So if you look at it from a software side, convergence is moving faster as expected. On the hardware side, there are 2 pieces also, one is the -- using the common IP in terms of design block, the other one is actually having the same architecture. Ultimately we want to have the same silicon shipping to both the TV and the set-top box markets. So our first step on the hardware side to start using the same design blocks either from an internal resources or from external resources. For instance, when we are using a third-party IP, TV and set-top box teams were historically licensing potentially from different vendors. Now we are combining those vendors into one. So we're driving convergence from both from a OpEx saving point of view and also design based [ph] point of view. And as we move forward, some of our silicons will be basically serving both the TV and the set-top box side, mainly on the high-end first and then on the lower-end side. And that's how we plan to move forward.

Operator

Your next question comes from Hamed Khorsand, BWS Financial.

Hamed Khorsand - BWS Financial Inc.

Are you at risk of losing Z-Wave revenue as companies start to enable remote services using WiFi and by-passing the Z-Wave chip?

Thomas E. Gay

Actually, our latest generation is geared towards Internet connectivity and has some potential for interfacing through devices into WiFi.

Thinh Q. Tran

Gabi, you want to...

Gabi Hilevitz

Yes, I think that we definitely are not losing revenues to WiFi and I think that the WiFi solutions have to walk many miles more in order to achieve the same level of performance, as well as an ecosystem that Z-Wave is currently capable of offering. The fact that Z-Wave has today, more than 700 different products that service providers can select from and they're based on new services upon something that either WiFi nor similar technologies can offer today. So we don't feel that we are losing customers to WiFi. I've seen customers that have been using competing technologies who are coming back to Z-Wave.

Hamed Khorsand - BWS Financial Inc.

A question for the TV line. First, how satisfied are you with the visibility you have in TVs after the calendar Q1 as far as design wins and productions are concerned? And what timeframe do you have of generating higher margins from that line?

Mustafa Ozgen

In terms of visibility, we have the design pipeline basically, very visible. As a sort of retail product, quantity sometimes can change based on what customers forecasting now versus when the mass production starts. So that portion definitely -- so there's always some risk, but in terms of design pipeline, ongoing platform designs with the customers, it's pretty visible to us. In terms of margins, currently we are shipping the products that we inherited from Trident, including the pricing and we expect to increase the margins end of fiscal year '14, to the basically high 30s, close to 40%. So we took some actions in terms of both the cost of goods sold, as well as the pricing, and also as I mentioned in my statement the consolidation in this market, MediaTek and Morningstar (sic) [MStar] Mergers helping out also on the ASP side. We see a more stable pricing environment that will help us pull up the margins.

Operator

[Operator Instructions] Your next question comes from the line of Daniel Amir, Lazard Capital Markets.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

A couple of questions here. First of all on the guidance, is the fall off of the DTV business the major reason for the guidance or the home connectivity? I mean, what -- can you give a little more of a magnitude, kind of what the big moving factors here are related to the guidance? And then I have another follow-up.

Thinh Q. Tran

The big portion of the revenue shortfall in Q4 is because of seasonality of the TV business, and a lot of TV business order very big in Q3 and drop off in Q4. But this year, even more deep because of the economic condition in Europe. Some of our customers in Europe really feel the impact this year, which is -- so make the Q4 effect a little bit larger than usual. And also as I mentioned in my call, we also have some inventory adjustment in our Home Connectivity business as well. So those are the 2 factors that contribute to lower-than-expected Q4.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

So now, I mean, if I look at bigger picture, I mean, if I look at next year's fiscal year, I mean, can the company -- what type of growth shall we see for the company? I mean, can the company actually grow in the markets here, despite that in some of your end markets, you have some pricing pressures here -- that's concerning -- you're trying to gain some share in some instances. So, I mean, it's been a challenging number of years for your company. I mean, is it finally next year, you think it's a turnaround year or it's still too early to tell?

Thinh Q. Tran

No, we fully expect to recover and resume growth next year. We see our IPTV hybrid set-top box coming back next year. You will see our DTV and also home DTV will grow as well. Our Z-Wave, I think, is going to do very good next year. Our home connectivity at least will be growing slightly or fairly constant. And we do expect growth next year.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

I mean, so you've said this in the past as well. So, I mean, did you feel more confident now than you did a year ago at this time that on your end businesses or is it about the same?

Thinh Q. Tran

I think we feel much more confident now than the previous year. We wait long enough for the IPTV to come back. I think we -- it's, hopefully we're coming back strong next year and again, we have the DTV business as well. We think it's going to be -- should do well for us now because only us and MediaTek/MStar is providing complete solution for this market.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Okay, and the one additional question. On the breakeven level here, you said $50 million is kind of your breakeven that you expect to get, I guess, next quarter. Shall we see -- and you just revised, I guess, your OpEx level again in terms that you're doing more reductions, I guess, than you guided last quarter. Is this it, or do you think you can actually have another step down in terms of more cost savings beyond that kind of what your restructuring plan is calling for right now?

Thomas E. Gay

As I said, we are targeting Q1 of next fiscal year, the quarter ending April, and it's our commitment to be profitable in that quarter. We are targeting a $50 million breakeven with the expectation that what we already have in place is our plan will get us there. There's a few other things that we could do as we get closer and the visibility increases but we believe that the plan we've got is clearly doable and worthy of execution.

Operator

And this concludes the question-and-answer portion for today. I would now like to turn the call back to Mr. Ken Lowe for closing remarks.

Kenneth Lowe

Thank you, Deanna, and I would like to thank everybody for participation on our call, and we look forward to talking to you at this time again next quarter. Thank you.

Operator

Thank you very much. This concludes today's conference. You may now disconnect, and have a great evening.

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