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Executives

Kenneth Lowe - Vice President of Strategic Marketing

Elias N. Nader - Interim Chief Financial Officer and Corporate Controller

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

Mustafa Ozgen - Vice President and General Manager

Gabi Hilevitz - Chief Executive Officer and Executive Director

Analysts

Hamed Khorsand - BWS Financial Inc.

Stephen Chin - UBS Investment Bank, Research Division

Sigma Designs (SIGM) Q4 2013 Earnings Call March 13, 2013 5:00 PM ET

Operator

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

Kenneth Lowe

Thank you, Regina. Welcome to Sigma's conference call to discuss the financial results for our fourth fiscal quarter 2013. With me today are Thinh Tran, our CEO; Elias Nader, our interim CFO; Mustafa Ozgen, our Vice President and General Manager of Home Multimedida Products; and Gabi Hilevitz, our Vice President and General Manager of Home Connectivity Products. The press release containing the quarter results, including selected income statements or balance sheet information, was released after the market closed today. If you did not receive the results, the release is available on the Investors section of our website.

Today's agenda will begin with my brief introduction, a review of selected financials by Elias; an executive overview by Thinh; a business update by Mustafa; and Gabi on the respective business units; and finally, our forward guidance by Thinh. We'll then open the call to questions from analysts, 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 our future revenue, gross margin and other financial measures and anticipated trends in the target markets. We caution you that the forward-looking information we present today is based on the current beliefs, assumptions and expectations that speak only as of 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 by the SEC December 6, 2012.

A partial list of these important risk factors are set forth at the end of today's earnings press release. Sigma undertakes no obligations to revise or update publicly any information, forward-looking statement information 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 the call over to Elias.

Elias N. Nader

Thank you, Ken. Good afternoon, everyone. For the fourth quarter of fiscal 2013, revenue was $44.2 million, a decrease of $19.7 million or 31% compared to $63.9 million in the previous quarter. Compared to the year ago quarter, our revenue increased $8.6 million or 24% from $35.6 million. Our revenue breakouts for the quarter are as follows: By target market and percentage of total revenues for the quarter, home multimedia was $21.9 million or 50%; home connectivity, $19.9 million or 45%; licensing and other, $2.4 million or 5%. During the fourth quarter, we had 1 customer that exceeded 10% of our net revenue, and that is Flextronics, representing $6.5 million or 15%.

Gross margins. GAAP gross margins were 30% for the fourth quarter compared to 39.9% in the preceding quarter and 46.6% in the same period last year. Non-GAAP gross margins were 44% for the fourth quarter compared to 44.4% in the preceding quarter and 51.4% in the same period last year. During the fourth quarter, we had a write-down of inventory that negatively impacted our margin. Without this $3.4 million write-down of inventory, non-GAAP gross margin would have been 52%, which represents a 3% increase above our guidance. The primary factor in our improved non-GAAP gross margin in Q4 was product mix, which in Q3 was heavily weighted with greater shipments of DTV products to one of our larger customers, 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 continue to make as part of our further integration of the DTV product line.

Operating expenses and cost reduction program. Sigma remains focused on returning to profitability in Q1 FY '14, as well as achieving profitable revenue growth throughout the coming fiscal year. By the end of Q4 FY '13, the company had taken the actions required to achieve the $45 million cost reduction plan for FY 2014. As a result of these cost reductions and our expected revenue and gross margin, we believe the company will experience profitability starting in the first quarter.

We also expect our pro forma operating expenses in Q1 to be between $25.6 million to $26.1 million, which includes $2.7 million of depreciation and amortization. Additionally, we have taken significant steps to further reduce our cost of production during fiscal 2014. GAAP and non-GAAP net loss for the fourth quarter of fiscal 2000 -- the GAAP net loss for the fourth quarter of fiscal 2013 was $35.5 million or $1.05 per diluted share. This compares to a GAAP net loss of $39.5 million or $1.18 per diluted share in the previous quarter and a GAAP net loss of $18.8 million or $0.58 per diluted share in the year ago quarter.

On a non-GAAP basis, the net loss in the fourth quarter was $18.2 million or $0.54 per diluted share. This compares to a non-GAAP net loss of $9.1 million or $0.27 per diluted share in the previous quarter and a non-GAAP net loss of $14 million or $0.43 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. Also please note that our reported results are preliminary and subject to a final closing procedures and fiscal year audits, including final resolution of a $1.8 million open claim related to our DTV acquisition from Trident.

Now I'd like to cover a few areas on the balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $84.7 million at the end of the quarter, a decrease of $14.2 million compared to the end of last quarter and a decrease of $65.5 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 of $39.7 million. In addition to our collections of accounts receivable and the change in other working capital items that we assumed in the acquisition, we expect to recover an additional $2.6 million of the cash used in the acquisition as a result of remaining open items with Trident, following the closing of the acquisition.

Cash used in our operations in the fourth quarter was $7.1 million. Net accounts receivable was $21.6 million at the end of the fourth quarter, a decrease of $16.2 million compared to the previous quarter. The average days sales outstanding for our receivables as of the end of the fourth quarter was 48 days, a decrease of 6 days compared to the previous quarter. Net inventory was $24.9 million at the end of the quarter compared to $30.5 million in the previous quarter, a decrease of $5.6 million. The decrease in inventory brings our inventory turns for the quarter to 5.4 on an annualized basis compared to 4.3 in the previous quarter.

Net working capital was $97 million at the end of the quarter compared to $98 million in the previous quarter, a decrease of $1 million. The decrease is primarily due to our pro forma net loss for the quarter.

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

Thinh Q. Tran

Thank you, Elias. 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 fourth quarter results, I would again like to start by emphasizing that Sigma remains focused on returning to profitability in Q1 FY '14, as well as achieving profitable revenue growth throughout the coming fiscal year. By the end of Q4 FY '13, the company had taken the action required to achieve a $45 million cost reduction plan. As a result of these cost reductions and our expect revenue levels, we believe the company will experience profitability starting in the first quarter. We have restructured our organization from top to bottom, reducing our headcount by 15% in our higher cost location and cutting our usage of external consultant. We are converging on a single SoC platform to deliver our next-generation solution for both set-top box and digital TV market, resulting in significant cost efficiencies.

Now let's review the result of fourth quarter and our current business trends. For the fourth quarter, we report $44.2 million revenue within the range of our previous revenue guidance. Our home multimedia business unit contribute $21.9 million for this quarter. The details of which will be covered later by Mustafa. Our Home Connectivity business contribute $19.9 million for this quarter. The details of which will be covered later by Gabi. Overall, we are confident that the long-term demand from 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 announced with Opera Software that we will team up to optimize Opera TV products for Sigma-optimized SmartTV processes. As a result, Sigma-based solutions will be available -- will be able to access the Opera TV browser and the Opera TV Store, a complete HTML5-based solution for SmartTV available for OEM developers and content providers to reach millions of app-hungry users.

We demonstrate the technology to create a 4K x 2K digital TV platform based on the company Motion Estimation Motion Compensation based Frame Rate Conversion technology. We announced our new CG5200 family or G.hn chipset, which provides optimized functionality, performance and cost structure for a variety of market needs. We are now -- the Comtrend has select Sigma new G.hn family of chipset for its Powergrid 9051 Powerline Ethernet Adapter. We also announced the launch of EZD -- EzTV dongle reference [ph] design, an innovative, simple and affordable solutions that enable users to access multimedia content on their mobile device, cell phone, tablet or laptop and shared under HDMI TV set or projectors. We announced that Microsoft Smooth Streaming client technology has been integrated into Sigma state-of-the-art multimedia chipset solutions.

In summary we are very proud of the technologies and market position we have developed and are excited to move forward with new emphasis on profitability.

Now I would like to pass the call to Mustafa and then Gabi, who will cover the progress and outlook for home multimedia and Home Connectivity business units, respectively. Mustafa?

Mustafa Ozgen

Thank you, Thinh. For this call, let's review our business progress and outlook by segment for the home multimedia group. Overall, our revenues came in sequentially lower this quarter as anticipated due to a seasonal decline in digital TV shipments. We have now combined our set-top box and digital cable organizations into one single business unit, which is focused on developing SoCs and software for the smart consumer multimedia devices, primarily hybrid IPTV set-top boxes and SmartTVs. This combination is driven by the convergence of set-top box and TV as a consumer device. We have also begun executing our combined product roadmaps for chips and software, which will be shared between the set-top box and digital TV product lines, a major gain in efficiency and time to market. Our set-top box business is being driven by 3 major trends at this time. The first 2 of which are fully shared with the digital TV business. First is the continued development of more over-the-top web content access capabilities. This will enable service providers to deliver measured access to the open Internet as a managed video service. Second is the industry push to support the new Ultra HD, also known as 4K x 2K display resolution. Demand is increasing for this new high resolution to push video quality up to the next level. Third is to drive toward a broad array of hybrid IPTV set-top box configurations that supports both Internet streaming and broadcast TV.

This is aligned perfectly with Sigma's strategy to introduce universal tuner and demodulator-based IPTV platforms, a strong benefit to the OEM set-top box makers. We are continuing to experience renewed success in second-generation Microsoft Mediaroom based set-top box deployments.

We continue to win in this space because of our advantages in low-power consumption and low-developed materials cost. We are also starting to engage in new customer designs for the hybrid IPTV set-top boxes, that should lead to future deployments in Europe and Latin America. We believe we will win in this space because of our more optimal SoC designs and platforms that lowers the bill of materials cost.

Our digital TV business is also driven by the pursuit of the next generation display resolution, as well as the over-the-top web content access capabilities. As such, these technologies are being developed by one integrated team in the Home Multimedia business unit and will be leveraged across both product lines. We are continuing to work with VIZIO, TP Vision and other existing TV accounts to expand our footprint within their product lines and drive increased volumes during this year. We are also aggressively working to develop new Tier 1 accounts to expand our market share. As of [ph] this call, we are positioned as the only other company besides the MediaTek and MStar combination with a full end-to-end technology portfolio and market understanding. Customers and third-party technology providers recognize this capability and continue to approach us for partnership.

Beyond set-top box and digital TV, we are continuing to leverage our existing platforms to gain opportunistic business in digital media adapter and Wi-Fi display market. One of the largest manufacturers in the digital media adapter space is in the midst of developing a new Sigma-based product line planned for launch later this year. Several other manufacturers are looking at Sigma's SoCs to introduce mirror-cast products that will deliver wireless connectivity to televisions or projectors, a market that Sigma is helping to pioneer.

We currently have design wins in this space that should move into production next year to provide additional revenue growth. To succeed in this 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 faster than market, more powerful and more cost effective to meet our customers' requirements.

In summary, I'd like to reiterate that within my business unit, we are strictly following our overall corporate objectives, which are to focus on improved operating efficiencies, further cost reductions, while pursuing opportunities for growth.

I'll now pass the call to Gabi to cover our Home Connectivity business unit.

Gabi Hilevitz

Thank you, Mustafa. For this call, let's review our business progress and outlook by segment for the Home Connectivity Group. Overall, our revenues came in sequentially lower than this quarter as anticipated due to primarily service providers inventory adjustments for our HomePNA product.

Beyond our existing HomePNA accounts, we are driving this year's growth from new deployments as HomePNA continues to prove itself, the most reliable in all new [indiscernible] SoC technology or IPTV distribution in the home. Throughout Q4, the company continued to see strong HomePNA penetration both North America and in Latin America markets. Our newly announced SMP8680 SoC with integrated HomePNA continues to be part of our strategy to offer cost-effective solutions for IP set-top boxes by sensitive markets.

To provide growth with our HomePlug AV product, we are leveraging ClearPath and TR-069 technologies, which have succeeded to help position ourselves the leader in several other MEA [ph] and believe will materialize in the first part of next year. We also announced that Devolo selected Sigma's CG2210 ClearPath for their HomePlug AV diversity plus adaptor product, targeting service providers market. At the same time in the HomePlug AV markets we continue to face strong price bid competition, challenging but manageable. The leader in the G.hn space, our products are undergoing evaluations by many major service providers around the world.

Simplifying this momentum, we announced the introduction of the CG5200, the company's second-generation G.hn chipset family that's working cords [ph], phone line, online networking, moving to the latest IPU G.hn manual standard. We also scored several design wins with OEMs and ODMs. And after that, our newest CG5200 family of chipset fairing themselves to be ready for large-scale field trials and service providers worldwide in the first half of 2013.

Part of our ongoing G.hn design wins, we announced that Comtrend selected Sigma's CG5200 chipset for its Powergrid 9051s Powerline Ethernet Adapter.

Moving over to home control, we are focusing on gaining more volume design wins service providers for our Z-Wave product line, large ecosystem of over 735 profitable products, the most appealing feature of Z-Wave to any service provider interested in home security and home automation services in any geography.

AT&T announced that it will commercially launch the digitalized service in 8 U.S. markets in March. Digitalized includes home security and automation elements followed by Sigma's Z-Wave, HomePlug AV technologies. Another development, home guest controls was introduced. It involves AI ecosphere, new Z-Wave-based set of hospitality controllers, the company says it will introduce it with new paradigm [indiscernible] continue our momentum, we are in the process of finalizing the major announcement of new range of Z-Wave platform product. Overall, the Home Connectivity Business unit had a good fiscal year 2013, growth in all market and product segments versus the year before.

I'll now pass the call to Thinh for other forward guidance.

Thinh Q. Tran

Thank you, Gabi. As we have indicated, we feel we are in exciting markets and are confident on our ability to deliver technology core innovation that will enable future growth along with profitability. In IP set-top boxes, demand will start to ramp due to new deployment in Mediaroom segment. In DTV, demand will increase due to seasonal regrowth. And in Home Connectivity, demand will pick up due to HPNA, HomePlug AV and home control resuming growth.

Moving to our formal guidance, which is based on our visibility at this time, we expect total revenue for the first quarter to be approximately $49 million to $52 million. We expect pro forma gross margin for the first quarter to be in the range of 52% to 53%. We expect pro forma operating expense to be in the range of $25.6 million to $26.1 million, which include $2.7 million in depreciation and amortization.

In summary, we would like to underscore our commitment to becoming profitable in the first quarter of fiscal 2014. Towards this call, we are closely monitoring our revenues and expenses against our core operating plans, and we'll make adjustments as required. We'd now like to open up the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial Inc.

Just a couple of things I want to touch on. First off, it's great to see that you guys are talking about profitability for Q1, but how sustainable is it going forward? Is this a onetime event?

Elias N. Nader

No. We're confident -- Hamed, it's Elias by the way. We are confident that we will continue having sequential growth in revenue. It's not a onetime event.

Hamed Khorsand - BWS Financial Inc.

And where do you think that's going to come from? Is it the IPTV, HPNA? What's going to drive that factor?

Elias N. Nader

It's going to be a continuous product mix, and that's about it. It will be a product mix of different issues.

Hamed Khorsand - BWS Financial Inc.

Okay. And then are you seeing any kind of traction with your second gen IPTV? You've been talking about it more. I just -- it doesn't seem like it's showing up on the revenue line, though?

Kenneth Lowe

Yes, actually, that's one of the things that we mentioned on the call is that the Mediaroom ramp for second gen is starting to show up. We expect it to strengthen during the year as more of them kick in into deployment.

Hamed Khorsand - BWS Financial Inc.

How much of the guidance from incremental standpoint is associated with that second-gen rollout?

Kenneth Lowe

At this point in time, we've rebalanced the company substantially. So it represents just 1 of about 4 or 5 pieces now, no heavier, no less weighted than that.

Hamed Khorsand - BWS Financial Inc.

Okay. And my last question is on the operating expense side. Is this -- should I assume this is going to be an ongoing level of operating expense, around $26 million a quarter?

Elias N. Nader

Yes.

Operator

Your next question is from the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

A couple of questions on the top line in terms of the trends going forward. Firstly, I just -- could you first break out what the split between IPTV versus digital TV chipsets were in the home multimedia division?

Mustafa Ozgen

This is Mustafa speaking. Just a second, let me give you the number quickly here. It's roughly -- basically, digital TV is a bigger piece compared to IPTV. But I'll give you the details, just a second please. So combine basically in the IPTV, we definitely have a different types of products, the digital media adapters and then the pure IPTV. And in digital TV, it's basically digital TV SoCs and some discrete components. When you look at both sides, it's 50-50 in total. So IPTV segment is 50% and the digital TV segment is 50%.

Stephen Chin - UBS Investment Bank, Research Division

Okay. That's helpful. In terms of DTV, you mentioned, I guess, from my perspective, just 2 factors there, the consolidation industry and also the markets move to ultra high-definition resolution as a potential catalyst for you guys. But can you talk a little bit more detail on, first of all, what kind of share capture or design wins that you may have picked up as a result of media text consolidation in the industry? And how much of the business are you seeing as a result of OEMs wanting a second merchant supplier? And in terms of ultra high-def, can you talk about what you're -- what customer expectations are for that feature just given that it kind of at this point seems a little bit like 3D TV technologies, and we saw kind of what that -- how short-lived premium was for 3D TVs, and just kind of wanted to get your take on ultra high-def and really how important that is from ASP or even a unit growth catalyst standpoint.

Mustafa Ozgen

For the first one, for the market share, we are definitely going through the impact of -- positive impact of the consolidation of the market for the TV. In terms of market share, we'd like to report in the second half of the year as we close our design wins in the first half. We have some design wins and then we have ongoing discussions with the customers. But we will really have a clear picture of that in the second half as we start understanding the volumes and then the -- when the customers are going to mass production. But clearly, we are being considered as the second source supplier for the Tier 1s. We are in discussion. As you know, this is a cyclical business sometimes, your products have to line up into the right time frame. So therefore, our engagements continue. Some of them, we are winning. But I'd like to sort of not make a comment about the market share until the second half of the year. In terms of ultra HD, definitely, it's a new market. Definitely, it's a questionable, I would say, development in the market because of the 3D experience, but always 3D versus resolution change, it's a different thing. 3D is, I would say, sort of an optional feature. It brings maybe a different type of user experience for user's consumption of entertainment content, where display resolution is driven by different factors. And historically display resolutions always happened in a sort of a periodic basis. As the technology evolves panel makers can produce more pixel on the glass. So we believe that the ultra HD is a real trend versus 3D was experimental trend that it will be tried again different shapes and forms. It's hard to know if 3D will succeed, but it is part of the current TV specification. We should also not forget that from an hardware point of view. Whereas, we believe ultra HD will be really enjoyed by the consumer just like from standard definition to high definition. During those years, the transition was always being questioned. It's always been questioned. There was no content. Why HDTV was going to pick up? But it's just a matter of time. Eventually, it picked up because it creates value for everybody in the food chain, including the consumer, retailer and the OEMs and SoC makers.

Stephen Chin - UBS Investment Bank, Research Division

Okay, great. That's helpful. And just on the cost side, circling back to the -- to Trident product line, I guess, when -- which node is -- will you be transitioning the Trident products to? And when will that happen? And also, what can that do for gross margins going forward?

Mustafa Ozgen

Yes, we will be in multiple process nodes since we build products for different segments of the market. We will be in the range of 55, 45, 40 and 28. So we'll follow the natural transition of the process node to basically feed in our high-end products into the new process node, but all the products or the middle and low-end products we will keep them in the metro [ph] process nodes because we can control the cost better in all the process nodes than the new process nodes.

Operator

And there are no further questions in the queue at this time. We'll give one more opportunity for people to ask a question. [Operator Instructions] And as there are no further questions in the queue, I'll go ahead and turn the call back over to management for any closing remarks you'd like to make.

Kenneth Lowe

Thank you. Thank you for joining us on Sigma's Fourth Quarter Conference Call. We look forward to seeing you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you so much for your participation today. This does conclude our presentation, and you may now disconnect. Have a great day.

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