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Sigma Designs, Inc. (NASDAQ:SIGM)

F4Q09 (Qtr End 01/31/09) Earnings Call Transcript

March 4, 2009 5:00 pm ET

Executives

Ed McGregor – Manager, IR

Tom Gay – CFO

Thinh Tran – Co-founder, Chairman and CEO

Ken Lowe – VP, Business Development and Strategic Marketing

Analysts

John Vinh – Collins Stewart

Jim Schneider – Goldman Sachs

Dan Amir – Lazard Capital

Mark Sue – RBC Capital Markets

Uche Orji – UBS

Sukhi Nagesh – Deutsche Bank

Hamed Khorsand – BWS Financial

Scott Hertleman – Robert W. Baird

Dunham Winoto – Avian

Quinn Bolton – Needham & Co.

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2009 Sigma Designs earnings call. My name is Eric. I will be your audio coordinator for today. (Operator instructions) I would now like to turn your presentation over to Mr. Ed McGregor, Manager of Investor Relations. Please proceed.

Ed McGregor

Thank you and welcome to Sigma Designs conference call to discuss financial results for our fourth fiscal quarter 2009. I’m Ed McGregor, Sigma’s Manager of Investor Relations. With me today are Thinh Tran, Sigma’s Chairman and CEO; Tom Gay, our Chief Financial Officer; and Ken Lowe, our Vice President of Strategic Marketing.

A press release containing the quarter results, including selected income statement and balance sheet information was released after the market closed today. If you did not receive the results, the release is available in the Investor section of our website.

Today’s agenda will begin with my brief introduction, a review of selected financials by Tom, an executive overview by Thinh, a market update by Ken and comments and guidance by Thinh. We will then open the call to questions from analysts and institutional investors. We expect to conclude the call within one hour. Before we begin, I would like to read our statements about safe harbor and non-GAAP information.

This conference call contains forward-looking statements, including statements regarding Sigma’s expectations for revenue for the first fiscal quarter of 2010, anticipated gross margins, and anticipated trends in Sigma’s target markets.

Actual results may vary materially due to a number of factors, including but not limited to the risk that the SEC disagrees with the manner in which Sigma has accounted for and reported or not reported the financial impact of past stock option grants; a determination upon completion of further year end closing and audit procedures.

As the financial results for the fourth quarter of fiscal year 2009 are different than the results set forth in this call; general economic conditions, including continuance of the current economic conditions specific to the semiconductor industry; the rate of growth of IPTV; high definition DVD and HDTV markets; the ramp and demand from our set-top box customers; our ability to deploy and achieve market acceptance for Sigma’s products in these markets; the ability of our SoC’s to compete with other technologies or products in emerging markets; the risk that such products will not gain widespread acceptance or will be rendered obsolete by the product offerings of competitors or by alternative technologies; the risk that anticipated design wins will not materialize; and that actual design wins will not translate into launched product offerings; and other risks, including delays in the manufacturer’s deployment of set-top boxes or consumer products.

Other risk factors are detailed from time to time in our SEC reports, including our Form 10-Q, filed with the SEC on December 11, 2008. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Sigma undertakes no obligation to publicly release or otherwise disclose the results of any revision to these forward-looking statements that may be made as a result of events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, Sigma reports non-GAAP net income, which excludes amortization of acquired intangibles, stock based compensation calculated under APB #25 and SFAS #123R and with respect to the first half of fiscal 2008 non-recurring expenses associated with the tender offered to employees to resolve potential personal income tax exposure and non-recurring expenses associated with the company’s review of its historical stock option granting practices, and related financial statements for prior periods.

And with respect to first quarter of fiscal 2009 in process development costs acquired during the quarter and with respect to the fourth quarter of fiscal 2008, the release of our tax valuation allowance.

Sigma believes that its non-GAAP net income provides useful information to management and investors regarding financial and business trends related to the financial condition and results of operations. Sigma believes that this non-GAAP net income in combination with the company’s financial results calculate in accordance with GAAP provides investors with additional perspective.

Sigma also believes that non-GAAP measures provide useful supplemental information for investors to evaluate its operating results in the same manner as research analysts that follow Sigma, all of whom present non-GAAP projections in their published reports.

As such the non-GAAP measures provided by Sigma facilitate a more direct comparison of its performance with the financial projections published by the analyst, as well as its competitors many of whom report financial results on a non-GAAP basis. The economic substance behind its decision to use non-GAAP measures is that such measures approximate its controllable operating performance more closely than more directly comparable GAAP financial measures.

For example Sigma’s management has no control over certain variables that have the major influence on the determination of share based compensation such as volatility of its stock price and changing interest rates. With respect to Sigma stock option review and related restatement cost and expenses associated with its tender offer the unique nature of these costs may limit the comparability of its ongoing operations with prior and future periods.

Sigma believes that all these excluded expenses do not accurately reflect the underlying performance of its continuing operations for the period in which they are incurred even though some of these excluded items may be incurred and reflected in Sigma’s GAAP financial results in the foreseeable future. Now I would like to hand the call over to Tom who will review our financial results.

Tom Gay

Thank you Ed. For the fourth quarter of fiscal 2009, revenue decreased 1% or $0.5 million to $47.3 million from $46.8 million in the previous quarter. Compared to the year ago quarter, our revenue decreased $29.1 million or 38% from $76.4 million. Our revenue breakouts are as follows; by market segment and percentage of total revenues for the quarter, IPTV represented $36.4 million or 77% of the total; connected media players, $6.3 million or 13%; consumer, $2.2 million or 5%; and the other category totaled $2.3 million or 5%.

By billing region, Asia represented $29.7 million or 63% of the total; Europe, $15.4 million or 32%; and North America, $2.2 million or 5% of the total quarter. During the fourth quarter, we had three customers that each exceeded 10% of our revenue. Motorola Singapore had $10.2 million of revenue recognized or 22% of our total for the quarter; Cowim $5.2 million or 11% and Freebox $5.0m or 11%.

Gross margins were 45.1% for the fourth quarter compared to 46.3% in the preceding quarter and 49% in the same period last year. The decrease is attributable to a greater concentration of our revenues coming from our higher volume customers who purchased our products for lower average prices. GAAP net income for the fourth quarter of fiscal 2009 increased to $6.6 million or $0.24 per diluted share, up $2.9 million or 79% from $3.7 million or $0.14 per diluted share in the previous quarter.

Compared to the fourth quarter of fiscal 2008, GAAP net income decreased $28.7 million or 81% from $35.3 million. Operating expenses on a GAAP basis were $18.5 million or 39% of revenue in the fourth quarter compared to $18.1 million or 39% of revenue in the previous quarter and $16.6 million or 22% of revenue in the same period last year.

You can find a copy of our press release with a detailed reconciliation of our GAAP to non-GAAP performance on our website. The reconciliation includes the following categories of differences for the fourth quarter. Amortization of intangible assets associated with three acquisitions totaled $0.8 million from Blue7, VXP and Zensys and stock-based compensation totaled $2.7 million.

On a non-GAAP basis, net income for the fourth quarter was $10.1 million or $0.38 per diluted share. Compared to the previous quarter, this is an increase of $2.9 million from $7.2 million or $0.27 per diluted share. Compared to the year ago quarter, this is a decrease of $15.3 million from a $25.4 million or $0.80 per share reported for that period.

In the fourth quarter, the benefit from income taxes was $2.4 million, which brings our income tax rate for fiscal 2009 to 15.6% of income before taxes. The rate is better than the full statutory rate of 41% due to our international tax strategy activities.

Now I would like to cover a few key areas from our balance sheet. Cash, cash equivalents, and marketable securities totaled $192.2 million at the end of the year, a decrease of $83.5 million from the beginning of the fiscal year. The decrease is primarily due to cumulative stock repurchases of $85.9 million and strategic investments and acquisitions totaling approximately $32 million. These decreases were partially offset by $42.8 million of cash generated by operations during the year, $13.2 million of which occurred in the fourth quarter.

Based on our shares outstanding at the end of the year, this represents a total value of cash and marketable securities of $7.24 per share. Of the total cash and securities, $72.5 million is classified as long term securities. This breaks down into $29.5 million worth of securities with maturities longer than one year from their date of purchase and $43 million of auction rate securities that are expected to be held until July, 2010. There is also a standing offer from our bank to lend us up to 75% of the full face value of these auction rate securities upon request.

Net accounts receivable was $30.7 million at the end of the fiscal year, a decrease of $9.5 million compared to the beginning of the fiscal year. The average day’s sales outstanding for our receivables as of the end of the fourth quarter was 59 days as compared to 52 days in the previous quarter. Net inventory was $36.1 million at the end of the fiscal year a decrease of $9.1 million compared to the end of the previous quarter and an increase of $9.8 million compared to the beginning of the fiscal year.

Accounts payable at the end of fiscal 2009 was $5.7 million, a decrease of $12.8 million from the beginning of the fiscal year. Shareholders equity was $305.2 million, a decrease of $40.3 million from the beginning of the fiscal year, principally due to $85.9 million of stock repurchases during the first half of this year, offset by $26.4 million of earnings. Now I will turn the call over to Thinh for an executive overview.

Thinh 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. In today’s call, I would like to review the results of the fourth quarter and emphasize the significant activities and achievements.

First off, we are pleased to report a slight sequential increase in our revenue for the fourth quarter, which we feel is a sign of stabilizing demand in our primary end market.

As you would expect we are continuing to place every effort to most of the sales and expanding the scope of demand generation activities. The IPTV market is showing resilience to the current economic turmoil and our customer indications going to further growth throughout this year. We are also pursuing design activity in the cable industry and helping to drive the transition to Tru2way IP cable solution, which will substantially increase our addressable market.

We are also pushing forward to our consumer products agenda and looking at a wide range of vendors of Blu-ray player design, digital media adapter products and Ultra wideband based devices. Additionally, we are excited about the potential represented by recent acquisition of the Z-Wave brand home control products and anticipate the growing synergy within the set-top box market.

On the profitability side, our gross margins were affected by change in our customer mix. We continue to monitor both our costs and pricing closely to keep our margin as stable as possible. Furthermore, we are carefully watching our operating profits and have taken a number of actions to reduce controllable costs and then ready to take additional action as necessary.

Now I would like to highlight some of the foreign business developments we have achieved since our last conference call. Firstly, we have now completed the purchase of Zensys a wireless start-up developing RF transceiver for home control. During its start-up phase, Zensys developed Z-Wave, an RF solution designed to provide manufacturers with an intelligent and interoperable standard that has been incorporated into 250 household products.

The devices are implemented using a family of low-cost, low-power integrated RF transceiver chips embedded with Z-Wave, which establishes a wireless mesh network for all compatible home devices that can be controlled or monitored wirelessly. We also demonstrate an extensive range of high definition consumer technology solutions powered by the Company media processor SoC at CES 2009 in Las Vegas. This solution includes industry-leading technology featured in Blu-ray players with compelling interactive performance and best in class VXP studio video quality.

Tru2way DOCSIS 3.0-based set-top boxes for IP-Cable; multiple ultra-wideband based connectivity solutions; and Z-Wave home automation wireless technology showcased in the Z-Wave alliance pavilion. We also announced that we will integrate Adobe Flash Lite software, Adobe’s Flash Player for mobile phones and devices, into our SoC solutions for the most advanced digital television and web service capabilities in the digital home.

Finally we announced that our 8634 has been selected by Blusens, a leading provider of home digital entertainment products based in Spain, as the main processing unit in the blu:brain HDTV home entertainment device. Now I would like to pass the call to Ken who would discuss current market trend. Ken.

Ken Lowe

Thank you Thinh. For this call I’d like to start with an update on the breadth of Sigma’s technologies and products and new opportunity areas that we are addressing and finished with a full run down on the IPTV set-top box market and our expectations for this year. As most of us know, Sigma spent the last two years reaping the rewards of the dominant position in the emerging growth of IPTV market in addition to contributions from other segments. Less understood is that during the same time period, Sigma has also invested a great deal of effort to broaden its portfolio of technologies and products and build a company that can provide a stronger overall value proposition for our top tier OEM customers. Let’s sit back for a moment and reflect on the current technology position and the opportunities this provides to the future.

First, their media processors. Sigma has proved itself to be a world class supplier of media processors, able to compete with any of the largest semiconductor rivals. Media processors have grown to become a full system on ship, which is the heart of all modern consumer media products. In short, they are the hardware technology enabling all the amazing new entertainment products.

Within this industry, Sigma offers first best in class video decoding with a proven architecture. Second, best in class security engines with no successful hacking with over 10 million deployed units and third, best in class multimedia software, a differential advantage that enables Sigma’s OEMs to quickly take products to market by leveraging a proven code stack.

Next, there is video image processors offered as a stand-alone chip for professional level products. This technology is becoming a key building block for the new generation of consumer products. Why? Because the industry wants to make high-definition content look perfect. They also want to make DVD content look like HD and they want to make online contact look enjoyable.

Within this industry, Sigma’s VXP product line offers the best in class video output quality, a result of years of serving and the demanding broadcast community and investing into the finest home act conversion, noise reduction, and image enhancement techniques possible. Moving forward, this technology will provide a strategic advantage as video quality becomes the differentiator and the industry leaving VXP technology becomes intergraded into our line of media processor or accessories.

Finally, there is RS transceivers, which enable wireless communication between various devices and which continue to increase the importance as the world ubiquitously connected. Through acquisition, Sigma has broaden its technology to offer range of capabilities from low bit rate home control devices to high bandwidth ultra wideband chip sets.

Within this industry, Sigma offers two points of value. First the best in class streaming solutions under the ultra wideband banner, providing the only solution to support coax, wireless, and gigabit Ethernet all that rates that enable high-definition video distribution. And secondly, best in class home control solutions under the new Z-Wave brand whose prolific membership bodes over 300 interoperable retail devices, as well as the low power, low price, and high reliability development into an industry standard. More importantly, both these technologies are becoming important factors to set-top up box makers as they contemplate more efficient video networks and potential service offerings for home energy and security management.

As far as markets go these new technologies combined with Sigma's long-standing position in the market are pulling us into a widening array off customer opportunities across the entire spectrum of consumer products. First and foremost of course is the IPTV set-top box market, which we will talk about in some depth later. Next is a new venture into hybrid cable set-top boxes. Our new platform is based on DOCSIS 3.0 gateway that accepts both traditional cable broadcast as well as IPTV under the Tru2way scheme, which I then translated into an IP video stream for distribution as simple IPTV set-top boxes throughout the home.

This remarkably effective architecture now represents a huge opportunity over the next five years as the cable industry embarks on a major technology transition toward IPTV. To validate this concept Sigma has visited most of the top cable MSOs in the US, as well as several abroad. Feedback from these businesses has been unanimously positive with widespread interest continuing evaluation and discussion. As we stated before it is our belief that 2009 is the year of evaluation and trial for these next-generation hybrid cable boxes and 2010 will be the year of deployments.

Next is the Blu-ray market for which we have now taken more than opportunistic focus. Modernizations happen very quickly in this market, which is projected to reach 6 million units in 2009 and as a result we are not targeting partnerships were we can offer potentially sustainable advantage. This would include the new Chinese player as we provide a one-stop shop for complete hardware software solution, as well as in premium players where our differentiation with VXP technology and high performance chips and software suite should enable us to gain an advantage.

Next is digital media adapter market for which Sigma has enjoyed a dominant position while the market interest develops. Recent events have increased the appeal of this market and we are now expecting increased contributions over the next several quarters. The driving force behind this change is linked to mobilizing your video library, somewhat again to the iPod concept. If you break down the iPod demand, you would find the two facets of appeal. First, it is a convenient mobile device for playing music and second it is a repository for accessing your entire music library, whether that access has playback on the iPod or in your home stereo or in a car.

The new digital media adapter market is tapping into the second facet of appeal as it relates to your media library, and we are hopeful it will continue this growth and become a long-term revenue stream. Next is the digital TV market, while Sigma is still developing technologies that will enable us to participate in this market we found ourselves becoming very selective about the path of penetration, though Sigma has some penetration through to the connected TV and front projector TV segments, we will be taking over a circumspect approach to the strategic initiatives moving forward.

Next the home-video and networking market ultra wideband has been shown to offer the height data rates required to stream high-definition video and its wireless performance is viewed by many as ideal for the last 30 feet or within one room. By leveraging the coax plant that is available in 90% of US homes is a backbone. Sigma has been able to create keen interest in Ultra wideband as a whole home-video distribution solution. Ultra wideband is being evaluated as some of the largest Telco and cable providers with deployment subject to the long evaluation cycles for communication technologies. Bottom line, this technology and Sigma's unique CoAir solution has the potential of finding itself in many homes in the next few years.

Next is a home control market, which services the growing need for remotely controlled security, energy and convenience. As access to the control function moves to the Internet, this enable a wide range of operator service offering with the attendant revenue streams. Combining this with the government initiatives for better energy management and you have a new arena of demand that has a great potential during our current economical challenge. The more we learn the more excited we become about the potential of this new acquisition. Now let us take a look at the IPTV market that will dominate our demand over the next 12 months. We believe that the IPTV market remains strong or perhaps slightly dampened by our economic turmoil.

Television service has always been relatively resilient in times of recession, and it represents a primary avenue of consumer escape. Reassessing the available market for IP TV set-top boxes this year, we believe that the IPTV set-top box chipset market for 2008 will now be around 16.5 million units. Let’s discuss some of the current IPTV landscape on a regional basis. In North America, AT&T continues to push forward their IPTV rollouts at the end of their fourth-quarter they reiterated their universe service continued its stronger ramp with the net subscriber gain of 264,000 for a total to date of over one million. They additionally indicated the growth reflects the high quality of the video experience along with other important factors.

Additionally, the U-verse network deployment more than doubled in 2008 and it now passes 17 million living units. Other active North American deployments include leading Canadian Telco’s TELUS, Bell Alliant, MTS Allstream, and Sask Tel. Given AT&T's modest expectations for the year, we believe the total North American demand for IPTV media processor should reach around 500 million units in 2009. Europe is continuing to show IPTV deployment growth in the face of a challenging economy. Europe has over 16 Telco’s in active deployment with multiple new carriers emerging every year. The list includes Free, France Telecom, Neuf, Deutsche Telecom, British Telecom, Belgacom, Portugal Telecom, Swisscom, Telefonica, Ya.com, TDC, Telecom Italia, Scali, Fast Web, Wind and T-com affiliates. Most of the carriers that we deal with appear to be ramping their deployments this year at different rates as exemplified by the following updates. British Telecom added 78,000 subscribers in the quarter to reach a 398,000.

Deutsche Telecom added 167,000 subscribers in the quarter to reach a total of 500,000, and Portugal Telecom also announced it added 110,000 subscribers in the quarter to reach a total of 312,000 to date. Given the current trends within the US, European Telco’s, we believe the total European demand for IPTV media processors could reach about 6.5 million units this year. Asia has over 10 Telco’s in active deployment at this time, which include Korea Telecom, Eniro, China Telecom, China Net Com, Heuson, KDDI, Chunghwa Telecom, PCCW, Singtel and MTNL, as well as one IPTV cable provider (inaudible).

There are continued signs of this growth in the region and as indicated by the falling updates from the carriers. (inaudible) Digital Media Group a Chinese cable provider in a surprise announcement in January, indicated they will begin deploying Microsoft's media room platform over the next three to five years with commitments to reach 2.5 million subscribers. China Telecom reportedly surpassed 1.8 million subscribers to date, up from 1.5 million reported last quarter. Singtel added 13,000 subscribers to reach a total of 59,000. As we look at the remainder of this year, we believe the total demand, IPTV media processors in Asia could reach as high as 5 million units this year. Now let us talk a bit about the set-top boxes and competition.

We began shipping the volume of the 8654 to select its set-top box accounts. Additionally, we are expanding our product line to address both lower cost and higher performance notes within a single software compatible family. Well if you see competitors have selected accounts, they have not yet developed any degree of penetration in a Linux based set-top box business. And on the other hand, Broadcom’s work with the Microsoft media room platform would likely provide some futures for the business, so the timing continues to push out as evidenced by the lack of deployment announcements at any of the Telco’s.

Likewise Intel’s new chips are just starting down the road and have not achieved any penetration. Meanwhile ST micro share of the IPTV markets are limited over the past two years, and though they have began pushing their low-end solutions more aggressively. Finishing the IPTV analysis from a platform standpoint, Microsoft announced that the media room platform has reached nearly 2.5 million subscribers by the end of 2008. Given the multiple set-top box per subscriber rate, we would expect this to translate into approximately 5.5 million set-top boxes.

In summary, Sigma remains the market share leader in IPTV media processor space. We believe our market shares are continuing to grow and we are confident that we remain a leading provider for some time to come. We hope this analysis has provided you some insight about the opportunities that lie ahead for Sigma. We feel strongly about our leading technology and established market position and look forward to building on this foundation. I would now like to pass the call to Thinh to cover our forward guidance.

Thinh Tran

Thank you Ken. As Ken has indicated, we do expect the IPTV market to continue growing and for Sigma to remain a leading player. We expect IPTV to reduce their vast majority of revenue for this fiscal year. Similarly, we expect a certain segment of our other products and markets would build-up into meaningful revenue streams over the years to come. Though our visibility has improved somewhat in the last quarter, we would remain conservative in our future projections. Given those conditions our forward-looking guidance is as follows. We expect first quarter revenue to be similar to the level experienced in the fourth quarter. We expect our gross margin to be similar to the fourth quarter as well.

In summary, I would like to reinforce that we believe our fundamentals remain strong and our target markets experience growth that we've remain dominant in the IPTV market and that we are redoubling our efforts in development to strength opposition moving forward. We now like to open up the call for Q&A

Question-and-Answer Session

Operator

(Operator instructions) your first question comes from the line of John Vinh with Collins Stewart. Please proceed

John Vinh – Collins Stewart

First, just housekeeping question Tom. The second 10% customer, I didn't catch the name of that, can you repeat who that was?

Tom Gay

Cowim, contract manufacturer in Asia.

John Vinh – Collins Stewart

Okay. And Cisco was not a 10% customer in the quarter?

Tom Gay

Not directly. They have no made the transition to outsourcing to multiple contract manufacturers and those folks represented a little over 15% for the quarter. Although we are not certain how much of that is actually Cisco.

John Vinh – Collins Stewart

Okay. On the – I guess really to do your gross margins, you know obviously as your larger customers seem to be having some very strong momentum and they seem to be kind of driving, kind of the more aggressive price mix, maybe can you talk about kind of how you get to kind of flat quarter to quarter on margins and then maybe talk about what sort of impact the ramp of the 8654 will have in terms of stabilizing your margins going forward?

Tom Gay

One of the issues is, even though we have brought inventory down we were selling during the quarter some purchases that have been made a couple of quarters ago and things were a little more expensive. And so we should be getting to a more current cost which are a little lower and we believe that is the reason for justifying a flat margin. And your second question ?

John Vinh – Collins Stewart

Yes, 8654.

Tom Gay

We have actually made our first revenues during the quarter, but it was extremely small and we believe in the second half that we will actually see something significant from that SOC and at that time I will have to assess where the pricing in margins are. We would like to hope for a little bit of left out of that, but it is too soon to guess.

John Vinh – Collins Stewart

Okay, can you give us a sense of where the ASPs stand today relative to the 8634?

Tom Gay

It is in the – towards the mid-teens maybe a little above that.

Ken Lowe

I guess the answer comparatively is, they are very similar to each other. It is really much more customer dependent than it chip dependent.

John Vinh – Collins Stewart

Okay, and then just a follow-up question on IPTV, can you give us a sense of what you think your market share is on Linux and maybe just talk about any sort of changes and competitive dynamics in the Linux market at this point?

Ken Lowe

We have added up the market, share just to the other day and it seems like our overall market share is just over 80% right now. The Linux and the IPTV last year, we think there was something in the range of 12 million or maybe slightly greater than 12 million units in the IPTV market, we think, as I mentioned in my presentation that about 5.5 million is the Microsoft. So, you take 5.5 million that is all ours and we ended up with about 80. So, you know our Linux market share is probably still in the 75% range, 70%, 75%. As we mentioned, we haven't been impacted much there has been very little penetration by their people into the Linux segment. The dynamics there is that it is a very segmented market, unlike Microsoft, who unifies and commoditize’s the hardware underneath their platform. Linux, you provide differentiation through not only your silicon, but also the software suite you provide and the stability of your software stack. So, we find that we have brand preference with a great number of people because they have trusted us for years and we have delivered for years. There is a lot more work for somebody to break-in in each account, each Telco account that you need to break into. There is a customized work that needs to be done, customized testing. So, we find it is a much more defensible business, we find that it has been stable for us. Obviously, there is more competitors calling on them, you know part of the net impact we have felt is there is obviously pricing pressure when you have competition, but you know outside of that we feel like we are holding our own.

John Vinh – Collins Stewart

Is it still primarily a Broadcom and ST Micro you're seeing there?

Ken Lowe

Yes, we described it as Broadcom more in the higher-end HD area and ST Micro more in the low-end aggressively priced dealers.

John Vinh – Collins Stewart

Okay. And then just last question on Microsoft media, what is your current expectations, on when you would expect to see Broadcom start the ramp there?

Ken Lowe

Well, you know, even from their own statements, it would appear as though their expectation is second half. We haven't seen any announcements, we know that they have slipped apparent that that the initial targets where earlier on, you know, they announced a year ago they were working with Microsoft, so as – very, very consistent with what the position we have always been taking, this is a very long pipe line. Long time to get out and subject to a lot of agrees and validation. So, you know, they are out into I believe they're pretty safely out in the second half. So, they may be beyond that. There is always additional slips that can occur

John Vinh – Collins Stewart

Right. Okay. Thank you very much.

Operator

Next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed

Jim Schneider – Goldman Sachs

Good afternoon, I guess first off, could you comment on where you think your customer inventory levels are right now. And any kind of break down by geography would be really helpful?

Tom Gay

We don't get a lot of direct in sight into the inventory levels in the supply chain. So I know I can’t really say much about the geographies, but in general, we believe that part of the revenue adjustment that is taking place in the last couple of quarters has been driven by the contract manufacturers and the gentle supply chain getting much leaner and much closer to the consumption rate, and we think that part of the leveling off at this point is due to that supply chain now being right size for the installations that are occurring.

Jim Schneider – Goldman Sachs

Understand. And then it terms of the gross margins, II think on the last call you talked about your expectation of gross margins coming back up over the next few quarters, do think you can still move back towards that kind of 48, 50% range or do you think you expect to see more in the kind of 46% to 48% range going forward?

Tom Gay

Well we are seeing that based on what we are able to calculate for Q1 that something similar to what we just reported is the near-term expectation. Getting beyond that we've were feel it is little to soon to be able to see what the product transition impact is going to be when the 8654 comes into being, nothing to predict just yet.

Jim Schneider – Goldman Sachs

Okay then and just last, in terms of housekeeping how should we think about the OpEx as we move through the year and what's is the expectation for tax rate given the move down on the foreign tax jurisdiction effect we have in the quarter?

Tom Gay

Well with OpEx I think you are seeing it is getting much flatter and we are controlling expenses I believe that the current level is appropriate for the revenue level that we are at now and it is just a mild increase would be appropriate for the short-term. On the tax rate, we were able in the fourth quarter, to reassess the entire strategy for the year and adjust everything to get to the rates that we reported for the entire year. For next year we haven't got any firm guidance for you, but it should be below 20%. It is what we are penciling in for now.

Jim Schneider – Goldman Sachs

Thanks very much

Operator

Your next question comes from the line of Dan Amir of Lazard Capital. Please proceed

Dan Amir – Lazard Capital

Thanks. And thank you for taking my question. On the IPTV side, I guess in the previous calls you were talking about that there was some weakness a bit in France and in Korea in terms of the IPTV providers, what is the status there has there been any improvement you really feel that things are improving there or it is still kind of off a low base?

Ken Lowe

Well there is incremental improvement happening, but because it is a low basics, it is kind of still in the smallish area, so it doesn't show up as much.

Tom Gay

But we do see some improvement in Korea recently. Korea market has been picking up for us.

Dan Amir – Lazard Capital

Is the overall demand that you are seeing, is it more an issue of inventory management by the carriers or are you really seeing, you know some sort of visibility that there is a pickup in terms of subscriber growth here in the next couple of quarters?

Ken Lowe

Well, you know, we perceive, and it is the indication of customers that there is pick up in subscribers. So that is one of the primary driving forces that everybody – all the different IPTV services are continuing to see ramps in their deployment that we can see. Now some of those ramp rates have changed a little bit and adjusted a little bit, but it does appear that people are incrementally growing.

Dan Amir – Lazard Capital

Okay, and then on the Blu-ray side can you – it seems like you're much more optimistic now in terms of your strategy in the Blu-ray space focusing, I guess more on the Chinese vendors. If you give kind of the size the market that you mentioned here on the call, which was around 6 million units. I mean, are you aiming for a single-digit market share much bigger market share and if so when shall we start seeing a bit of an impact on your top line there?

Ken Lowe

Yeah, you know we were talking about actually in the last couple of days pretty intently and you know we feel like we are – you know because of the way we are carving it up, we are ending up with an addressable range may be in the 15% range off the market. So that is, you know as and acetone that is what we are probably shooting for as may be in the 10%, 15% off that market.

Dan Amir – Lazard Capital

And when do you think it should start popping up in terms of meaningful numbers?

Ken Lowe

You know because of the design cycles it would probably take until the latter part of this year to have any sort of material revenue impact.

Dan Amir – Lazard Capital

Okay, thanks a lot.

Operator

Your next question comes from the line of Mark Sue with RBC Capital Markets. Please proceed.

Mark Sue – RBC Capital Markets

Thank you. It seems inventories, overall channel inventories and even your own inventories seem pretty lean, should that imply a higher revenue expectation for April, particularly with a pick-up in subscribers, and also maybe if you can give us a sense of how February was from your point of view?

Tom Gay

We have no comments whatever on February that would be mid-quarter number which we cannot discuss. One other things that we were discussing in our overall market expectation for the year was how we believe the next ten months are going to play out in terms of the near-term guidance that we provided, that is more based on current forecast and more visible items versus the longer-term total, which is a much bigger picture. So we really don't know how to reconcile the timing quarter by quarter of how that is going to payout.

Mark Sue – RBC Capital Markets

Okay, but nothing out of the ordinary for February, I guess in terms of trajectory in the near-term?

Tom Gay

Nothing to discuss.

Mark Sue – RBC Capital Markets

Okay, Tom just your thoughts as you planned out the next ten months on cash flow for the whole fiscal year?

Tom Gay

The adjustment in inventory was quite appropriate, there may be a little more room to lean that out. Payables has probably dropped a bit more than it should on the steady-state, and that we would be generating positive cash per quarter for the fiscal year.

Mark Sue – RBC Capital Markets

Okay, lastly, Ken just is Hybrid coax a top opportunity is that a $20 million opportunity that is here are a couple of million dollars, if you could just kind of break it that for us, it would be helpful.

Ken Lowe

You know this year it is pretty small, it is mainly evaluation and trial. I would not say that we are going to experience any revenues that would accrue to any material – it’s impact it will be – maybe some development contracts, maybe a little bit of trial volume, but that is about it.

Mark Sue – RBC Capital Markets

Okay, that's helpful. Thank you gentlemen and good luck.

Operator

The next question comes from the line of Uche Orji with UBS. Please proceed.

Uche Orji – UBS

Yes, just a couple of questions. First is when I look at the US, did I say, (inaudible) 5 million units in the US?

Ken Lowe

Yes, for this year.

Uche Orji – UBS

I did just. It is kind of hard figuring out where and where that is going to compliment I am sure you made your comments about AT&T, can you just walk me through, you know just given out (inaudible) in the US how you were that confident you can get 5 million people? And while – in answering that question, can you just tell me what’s on the customer standpoint, a cost-benefit analysis is to make the comp off late required to get into IPTV at this point (inaudible) how you can get that number by the US?

Ken Lowe

When you say customer in the last part of the question, do you mean the actual consumer buying?

Uche Orji – UBS

The actual consumer, that is right.

Ken Lowe

Okay, so let's take the first part of the question first, you know, obviously North America is dominated by AT&T. AT&T has indicated that they expect to continue to doing between 250,000 to 300,000 subscribers per quarter. Their average set-top box landed rate per subscriber is about three. So, you take that 1 million to 1.2 million and you multiply it by three and that is where you are getting 3 million to 3.5 million units, and then on top of that you have Canadian suppliers that are providing boxes and then also keep in mind that both AT&T Canadian suppliers, everybody involved, there is a 60 to 90 day skew between their deployments and our shipments. So we actually ship – in a ramping situation, we will ship more this year than they will deploy. So, by the time you adjust it and get it all impacted that is kind of how much we think the market is going to count for.

Uche Orji – UBS

Just another question on margins, your guidance of flat margins, I understand the revenue part of it being flat, but on the cost side are you seeing any benefit, given the low addition [ph] rate of deposits gained cost-benefit you are seeing right now deposits and are you doing anything to try and look in at this point, which presently have come down, given the low acquisition rate?

Tom Gay

One of our difficulties was that the inventory that we are shipping during the fourth quarter had been purchased earlier before, some of the more recent adjustments have been made and that lower cost material that we are able to purchase know will be sold in future quarters and that was part of the reason for our guidance for the gross margin to be similar to where it is now because we anticipate there is a possibility of they being little bit off more ASP degradation as the larger customers continue to grow and we are able to offset that with some of the lower costs.

Uche Orji – UBS

Okay. Just in terms of the ASP degradation, what will you consider a range that one should anticipate for ASP degradation? You estimate the comments you have made in the future is that 5%, 10%, what would be the normal range of degradation we shall expect?

Tom Gay

It would depend on the maturity of the products, and some older product line. We expect the price to be fairly small. It there is any price reduction at all. We will depend on the – what product line we are talking about?

Ken Lowe

It is a customer mix issue, and that was the reason we gave for the ASP side being different than expected in the fourth quarter.

Uche Orji – UBS

Okay, and then just finally I noticed Freebox came back after two quarters of being acquired. Just in general, beyond France what else is driving the demand you see for Freebox?

Ken Lowe

I mean, Beside Freebox?

Uche Orji – UBS

Yes.

Ken Lowe

Korea, like I mentioned earlier, Korea has been picking up nicely for us and Freebox always has been very stable deployment as clearly is stable.

Uche Orji – UBS

Okay, thanks Ken, thanks guys, I appreciate it.

Ken Lowe

Okay.

Operator

Your next question comes from the line off Sukhi Nagesh with Deutsche Bank. Please proceed.

Sukhi Nagesh – Deutsche Bank

Yes, thank you guys, can you just give some numbers for 2009 in terms of the investments for the different geographies. If you look at, if you sum them all up, something like 17 to 18 million units for this year, you guys roughly did about 9 million, 10 million units this last year, should we expect you to maintain a 7% or 8% share this year, I mean is that a reasonable investment?

Ken Lowe

You know, that is our target certainly we do believe that right now we are being share because we are incrementally increasing our deployments every month, every quarter, and as he mentioned there has not been significant penetration by other people. On the other hand, you know that our competitive situations taking place so I would say in some total we do expect our market share this year in total to remain pretty similar to what it was last year. There is no reason we had to believe that it really changed that much very much at all this year.

Sukhi Nagesh – Deutsche Bank

Okay by that token then, you know it is hard for me to just math and see how you would be just flat for the April quarter, you are going to have an 80% market share in 17 million, 18 million units, you would seem to me that your IP TV business should grow significantly this year? Am I doing the math right here, what am I not getting –?

Ken Lowe

No, I mean, you're right. It was last year there was to 12 million to 12.5 million units in the whole market and next year they are 16.5, there is a 4 million unit growth that doesn't mean necessarily linear growth. I think there has been a lot of retraction of growth rates in the last two quarters. And I think we are going to see the perception is that the industry is going to grow out of it as into the second half. I would not say that the first half would be as robust as the normalized growth rate.

Sukhi Nagesh – Deutsche Bank

Okay. Just getting the split for IPTV versus your connected media player market for the April quarter, do you expect both – do you expect the Canadian media player market to grow in the quarter, decline, how should we look at that?

Tom Gay

We believe the mix would be somewhat similar to what we saw in Q4.

Sukhi Nagesh – Deutsche Bank

In Q4, you are connected media player Tom, if I had had this right, declined about 15%?

Tom Gay

Yes, it was down from Q3. We saw a surge then based on the seasonal market in that particular segment.

Sukhi Nagesh – Deutsche Bank

Where shall we see a seasonal decline for the April quarter as well?

Tom Gay

We think that is pretty well taken place and this is more of the mid-year experience that we think is appropriate.

Ken Lowe

You know, I think we do see the possibility of the connected media player going up a little bit. As you go through the next couple of quarters, maybe by because of the DNA segment giving a little bit of impact – positive impact there.

Tom Gay

Right.

Sukhi Nagesh – Deutsche Bank

Okay, so if the connected media player is going to go up in the near-term at least and you're regarding for flat growth in either and you're saying you're going to maintain your share in IPTV and just doesn’t makes sense that the IPTV segment declined in the April quarter, right?

Ken Lowe

No, I don't think so. We would hopefully not expect that.

Sukhi Nagesh – Deutsche Bank

Okay great, that's all I have, thank you.

Operator

Your next question comes from Hamed Khorsand with BWS Financial. Please proceed.

Hamed Khorsand – BWS Financial

Good afternoon guys. Just want to get an understanding of last conference call. You guys where a little cautious with the Outlook and the guidance that you provided, what has changed since then with the clarity you have going into this first-quarter?

Tom Gay

We are seeing as we get our forecast in from the field that they are tracking closer against the order pattern that follows shortly thereafter. The adjustments that we are taking place a quarter still caused us to be cautious, because some indications weren’t follow through on, but now we are seeing a greater degree of visibility. At least in the near term from the forecast and indications we get from our customers.

Hamed Khorsand – BWS Financial

Okay, and then regarding to the 8654 processor, what are you estimating as the amount of units you'll be able to ship in fiscal 2010 or this year?

Ken Lowe

It is purely demand related. We won't have any problem, I don't think keeping up with demand, and so that is going to be a matter of how quickly our customers face over the mix from the 34 to 54 and how much of an impact that makes.

Hamed Khorsand – BWS Financial

How many have done so, so far?

Ken Lowe

There are minor number of customers that have started into their production lines.

Tom Gay

Yes, mostly our Asian – some our Asian account has a smaller size company that is able to move quicker and those are the first companies that are switching to 54. But we expect similar thing will happen later from the bigger account that he have.

Hamed Khorsand – BWS Financial

Okay, and then just touching on the cable and DOCSIS 3.0, any of the major MSOs in the US that you guys are talking to that you feel comfortable about, you think it will happen in '09?

Ken Lowe

I guess the easiest way to answer that is we are talking to almost all the majors. And having visited them – response has been so positive that we are either in evaluations or continued talks with almost every one of them. This is a very hot topic for them right now and this evaluation will go on, because this is a big impact of their infrastructure, their business model moving forward, so it is going to be a very, very important decision they're going to make. So this is very positive for us, we received a overwhelmingly positive response, and I think it is – for somebody who is new to this market we were very, very pleased by what is going on there.

Hamed Khorsand – BWS Financial

And how confident are you about the field trials later this year in deployment 2010?

Ken Lowe

Well given the vagaries of how the operators work, and you have seen – on one end you know in the last couple of years IPTV took of fairly well, but on the other hand as we talked about earlier, Broadcom breaking into IPTV. They have been at it for couple of years and insulate a little bit. So, anything can happen. We'd like to believe that next year we actually see some deployments. I think the pressure is on the cable companies to migrate their technologies over to IPTV to take advantage of the unlimited number of channels and their advantage has offered there and then to be able to offer more high-definition channels and greater feature set. So, we think that that is something that they are going to be – they have their own incentive to drive their transition.

Hamed Khorsand – BWS Financial

Okay. Thank you, nice job.

Operator

Your next question comes from the line of Scott Hertleman [ph] with Robert W. Baird. Please proceed.

Scott Hertleman – Robert W. Baird

Hi guys this is Scott calling in for Tristan Gerra. Thanks for taking my questions. Tom I had one question on what your thoughts are on kind of buy backs versus doing some more of these tuck-ins, is there any more targeted areas that you guys are looking into from a technology standpoint or are you going to kind of let the cash sit there on the balance sheet, how do you think about kind of those decisions?

Tom Gay

For the time being, the buyback has been inactive, we feel that in current uncertain times that having the cash level that we do is probably a bit high for historical levels, but under current conditions we are quite comfortable on holding it. We do get various opportunities to look at acquisition, but have nothing specific on the table at this point

Scott Hertleman – Robert W. Baird

Okay thanks. And then quick couple of housekeeping questions for you as also the stock comp and the amortization of intangibles, any kind of estimates for those for this year, should those be about flat from the Q4 levels there?

Tom Gay

Yes, generally flat I think when you see the gate [ph] there will be a table showing the rate of amortization broke down for future years. I don't have that in front of me right now.

Scott Hertleman – Robert W. Baird

Okay thanks you guys talked a little bit about wafer for pricing coming down, when should we expect that to start to work through and was it a significant decrease in wafer pricing or was it down 5%-ish or was it down 15%, 20%? And what kind of an impact, could we expect that to have on margin is levels?

Tom Gay

It's only been incremental so far and the impact is delayed by at least a quarter by our inventory levels, and when we get to that quarter we will know what our pricing expectation is and will be able to comment on the margin.

Scott Hertleman – Robert W. Baird

Okay thanks. Can you kind of talk about having this large boxes per subscriber number? You know, what are your expectations for 16.5 million units, what's your expectation for subscriber numbers, are you expecting more than AT&T to continue to add multiple boxes per subscriber, and any kind of comments on how Linux works on boxes per subscriber?

Tom Gay

Well I think Linux is – Linux versus Microsoft is not so much the issue it is regional North American market is. You know pay-TV services are typically in the range of three, an average of three set-top boxes per household. Just happens to be what the long-standing number to that actually migrated from the cable industry that has occurred. You go outside of the US and Europe, it is somewhere in the range of one and a half boxes per subscriber in Asia it is much closer to one. So world wide basis it ends up somewhere in the range of just decided to I think.

Scott Hertleman – Robert W. Baird

Okay. And then, you know when should we expect a fully integrated the Blu-ray chip front-end and back end and you know, given that you are going after the high-end you would assume that would have higher gross margin, but how should we expect the China fall solution kind of turnkey to work on the gross margin front, should that allow you to have more of a 50%-ish gross margin in that business?

Ken Lowe

Well, you mean from the standpoint of the kind of pricing we can get away with the Chinese manufacturers?

Scott Hertleman – Robert W. Baird

Right.

Ken Lowe

Versus the Japanese are. You know, I think by the time it is all said and done. It's all going to be at operating in a similar sphere. Now as their volume pumps up, they will have the leverage to demand better prices, they will start out. They will start out at a lower volume therefore higher price and therefore that will be incrementally pushing our margin line upwards.

Scott Hertleman – Robert W. Baird

But I mean, longer-term, you know, if you think about the Chinese market you think about pricing that tends to go in there. Gross margins tend to be pretty low in that market, but given that you are doing the full software suite, should we expect those to be somewhere around corporate average or around your 50% target long-term?

Tom Gay

Oh I see what you're saying, because of the value add, you know, we look at that as the software content is going to allow us to get the socket and keep it and the pricing probably won't be as impacted by the software.

Scott Hertleman – Robert W. Baird

Okay. And then, you guys talked, you seem to imply that you guys have seen the inventory worked down, do you think that right now, you are shipping in line with end consumption or do you think inventory in the channel maybe comes down further next quarter, and we see both this increase in subscriber rate, and it kind of an inventory snap back, or I guess that's small bill helping kind of in future quarters, or any thoughts around how you view, how you are compared to end consumption?

Tom Gay

We believe that most of the adjustment has taken place, and some folks may have over adjusted, but in the aggregate, we think the levels are now in the supply chain and probably appropriate for the visibility that everybody has. Something will have to change, in order to expect that to change to increase much.

Scott Hertleman – Robert W. Baird

Okay, and then any comments on bookings and lead times, how those look compared to normal, I know you guys have talked about lead times of visibility are usually about 13 weeks has that come down and you know, turns requirements for the April quarter compared to normal?

Tom Gay

Actually, it is more or less held steady in the ratios compared to last quarter, but we believe the forecast we are getting are little more solid and trustable, but as much as we quote a 13 week lead time for productions, lot of our customers are giving us shorter term delivery requests and so we are capable of reacting to that because of our inventory levels.

Scott Hertleman – Robert W. Baird

Okay, thank you guys very much for answering my questions.

Operator

Your next question comes from the line Dunham Winoto with Avian. Please proceed.

Dunham Winoto – Avian

Hi guys thanks for taking my question. Most of my questions have actually been a constant but I would just sneak in one final question here. We haven't talked about the mix of Microsoft solution versus the Linux going forward, has that changed? Can you give us a little bit on the update here?

Ken Lowe

Well we think we exited the year with the run rate about even between the two as we go through 2009. You know, Microsoft might continue to ramp a little bit, but that is more Linux houses showing up in Asia, some of the Eastern European areas and Microsoft has some of the largest carriers. So it is really hard to predict, you know projected out that much, but it would be somewhere near the 50/50 point this year we think.

Dunham Winoto – Avian

Okay, but correct me if I'm wrong, I think the previous thought process was that Microsoft was going to decline become the majority, whatever the majority might be versus Linux, so, that has changed in do you think?

Ken Lowe

Well, you know, slight majority, I think it is still the expectation that there will be a slight majority, but not overwhelming. We think there is going to be still a balance.

Dunham Winoto – Avian

Okay, and then just one final thing on the Blu-ray side, I know that the Japanese OEMs have taken some of these designs back in house, any new designs development there? Do you think with the pricing possibly going down there is more opportunity for outsourcing or that's not going to change?

Ken Lowe

Outsourcing of which product?

Dunham Winoto – Avian

The Blu-ray from the Japanese OEMs.

Ken Lowe

It will go back and forth. Traditionally, like with the DVD market everything captive versus merchant silicon went back and forth there was always a struggle. There was a desire by them to control their destiny. There is a mission by them that it is very difficult to keep open the merchant market. So, they will drift in and out at times, but in general, we would expect it. In the end, it will be more merchant market dominated than anything.

Dunham Winoto – Avian

Okay, alright thanks very much, good luck.

Operator

Your final question comes from the line of Quinn Bolton with Needham & Co. Please proceed.

Quinn Bolton – Needham & Co.

I guess, I just wanted to come back to the gross margin. I think you're a little surprised by the gross margin decline in the quarter, but you attributed to volume price breaks for the larger customers. So with the function of some of the larger customers coming back in ordering a little bit stronger than you expected, leading to the more aggressive pricing, and then I have a quick follow-up?

Tom Gay

Yes, we saw some of our larger customers coming back quicker than was anticipated. And that was the reason for our margin being on the lowest side of our expedition.

Quinn Bolton – Needham & Co.

Okay, great, and then the second question, it sounded like you mentioned earlier in the call that some of the pricing between 8634, and then 54 would depend on the customer, are you seeing your larger customers effectively ask for the more effective pricing on the 54 and if that is the case are there going to be, sort of start with new volume price points from existing pricing or do you sort of start to ship the 54 to those larger customers, already sort of at a more mature pricing curve?

Ken Lowe

Well, I guess the response is that we always are under pressure by the largest guys to continue to give them price breaks over time. That is a part of the business equation. And they will use the current income and product 8634 as the starting point for negotiating a new product, either a little bit higher, little bit lower 8654 essentially is going to come along and you know, to proceed to 34 over time, and a good number of accounts and so therefore they look at over time is dropping into that price zone that they were paying. So, whether they start a little bit higher and then end up a little bit lower, it depends on the customer and how much power they have, as we start up the line we would like to keep pricing a bit higher because it affords us a little more buffering, you know the cost curve hasn't, we haven't come down the cost curve yet, but –

Quinn Bolton – Needham & Co.

I just again want to try it out is, do you see, you know with the 54 rule you see sort of less you have a smaller difference between the initial pricing and mature pricing than you did on the 34?

Ken Lowe

Yes, absolutely.

Quinn Bolton – Needham & Co.

Okay. Thank you.

Ken Lowe

Right.

Operator

You have no more questions at this time. I would like to turn the call over to management for closing remarks.

Ed McGregor

This is Ed again and we would like to thank you all for attending our conference call to discuss our results for the fourth fiscal quarter of 2009. We appreciate your interest in Sigma and we look forward to our next scheduled conference call to discuss our first fiscal quarter of 2010.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.

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Source: Sigma Designs, Inc. F4Q09 (Qtr End 01/31/09) Earnings Call Transcript
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