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Executives

Thinh Q. Tran - Chairman and Chief Executive Officer

Thomas E. Gay - Chief Financial Officer

Kenneth Lowe - Vice President, Strategic Marketing

Edward McGregor - Manager, Investor Relations

Analysts

John Vinh - Collins Stewart

Quinn Bolton - Needham & Co.

Mark Sue - RBC Capital Markets

Lauren Stoller - Lazard Capital Markets

Sukhi Nagesh - Deutsche Bank

Hamed Khorsand - BWS Financial

Gary Mobley - Noble Financial Group

Parag Agarwal - UBS

Dunham Winoto - Avian Securities

Sigma Designs, Inc. (SIGM) F1Q10 Earnings Call May 27, 2009 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 Sigma Designs earnings conference call. (Operator Instructions). I would now like to turn the call over to Mr. Ed McGregor, Manager of Investor Relations.

Edward McGregor

Welcome to Sigma Designs conference call to discuss financial results for our first fiscal quarter 2010. I’m Ed McGregor, Sigma’s Manager of Investor Relations. With me today are Thinh Tran, Sigma’s Chairman and CEO; Tom Gay, our CFO; and Ken Lowe, our Vice President of Strategic Marketing.

The 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’ll 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 remind everyone that today’s call contains forward-looking information including guidance we provide about our future revenue, gross margins, and other financial measures, and anticipated trends in our target markets. We caution you that the forward-looking information we present today is based on our current beliefs, assumptions, and expectations; speak only as of today’s date, and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

Specific factors that may affect our business and future results are discussed in the risk factors section of our annual report on Form 10-K filed with the SEC on April 2, 2009. A partial list of these important risk factors is set forth at the end of today’s earnings press release. 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.

Now, I’d like to hand the call over to Tom who will review our financial results.

Thomas E. Gay

For the first quarter of fiscal 2010 revenue increased 8% or $3.9 million to $51.2 million from $47.3 million in the previous quarter. Compared to the year-ago quarter, our revenue decreased $5.7 million or 10% from $56.9 million. Our revenue break-outs are as follows. By market segment and percentage of total revenues for the quarter, IPTV represented $34.4 million or 67% of the total, connected medial players $13.3 million or 26%, prosumer $1.5 million or 3%, and the other categories $2.0 million or 4% of the total.

A breakdown by billing region; Asia $38 million or 74% of the total, Europe $11.8 million or 23%, and North America $1.4 million or 3%.

During the first quarter we had two customers that each exceeded 10% of our revenue. Motorola Singapore represented $9.5 million or 19% and Cowen was $9.3 million or 18% of the total.

Gross margins were 47.6% for the first quarter compared to 45.1% in the preceding quarter and 49.3% in the same period last year. The increase is attributable to a more favorable customer mix. GAAP net income for the first quarter of fiscal 2010 decreased to $2.7 million or $0.10 per diluted share which includes a charge of $3.5 million or $0.13 per diluted share for the write-off of deferred tax assets due to changes in California corporate income tax laws. This compares to GAAP net income of $6.6 million or $0.24 per diluted share in the previous quarter which also included a tax benefit of $2.4 million or $0.09 per diluted share due to Sigma’s adjustment of its effective tax rate for fiscal 2009. Compared to the first quarter of fiscal 2009, GAAP net income decreased $3.9 million or 58% from $6.6 million.

On a non-GAAP basis, net income for the first quarter was $8.3 million or $0.30 per diluted share. Compared to the previous quarter this is a decrease of $1.8 million from $10.1 million or $0.38 per diluted share. Compared to the year-ago quarter this is a decrease of $5.3 million from $13.6 million or $0.46 per share.

Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance. The reconciliation includes the following categories of differences for the first quarter. Amortization of intangible assets associated with three acquisitions, a total of $0.8 million came from the acquisitions of Blue7, VXP, and Zensys. Another adjustment was the stock-based compensation totaling $1.2 million and the third was the write-off of $3.5 million for deferred tax assets associated with the change of income tax laws in California. In the first quarter, the provision for income taxes is based upon a projected tax rate for fiscal 2010 of 14% or $1.1 million of income before taxes plus the $3.5 million from the one-time write-off of California deferred tax assets.

I’d now like to cover a few key areas from our balance sheet. Cash, cash equivalents, and marketable securities totaled $221.3 million, an increase of $29.1 million or $1.08 per share outstanding from the beginning of the fiscal year. The increase is due to the $9.7 million reduction in receivables, a $6.3 million reduction in inventory, a $4.2 million increase in accounts payable, and $10.1 million of cash generated by other operations activities. Based on our shares outstanding at the end of the quarter, this represents a total cash, cash equivalents, and marketable securities value of $8.32 per share.

Net accounts receivable was $21 million at the end of the fiscal quarter, a decrease of $9.7 million compared to the beginning of the fiscal year. The average day sales outstanding for receivables as of the end of the first quarter was 37 days as compared to 59 days in the previous quarter. The decrease was affected by the pattern of shipments during the quarter and would be 46 days if measured against actual shipments. Net inventory was $29.8 million at the end of the quarter, a decrease of $6.3 million compared to the end of the previous quarter. This reduction brings our inventory to a level more appropriate for our business at this time.

As an additional note, I also want to let everyone know that we plan to file an amendment to our Form 10-K later this week. We will not be amending any information previously disclosed but rather just supplementing that disclosure with information that would have otherwise appeared in our proxy statement.

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

Thinh Q. Tran

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 first quarter and emphasize the significance of our activities and achievements.

First of all we’re pleased to report the sequential increase in the revenue for the first quarter which we feel provides continuous signs of stabilization and strength in our primary markets. We’re continuing to place heavy efforts on bolstering ongoing sales as well as expanding the breadth of our market opportunities. The IPTV market has continued to show resilience to the current economic issues and we’re confident that it will continue to demonstrate some level of growth for this year. We’re also pursuing design activity in the cable industry and helping to drive the transition to true two-way IP cable solutions, which will substantially increase our addressable market.

We’re also pushing forward with our consumer products agenda by working with a widening range of vendors for Blu-ray players design, digital media adapter products, and home entertainment connectivity device. Additionally, we’re encouraged about the potential opportunities addressed by our recent acquisition of the Z-Wave brand home control products and anticipate a growing synergy within the set-top box market.

I also would like to highlight the meaningful revenue contributions we have been receiving from digital media adapter. While sales from some of our existing name brand customers in this space have been lackluster, we continue to have measured success with a global assortment of second-tier brands and are finding new traction among at least one leading name from the storage space to the degree that the consumer increasingly demands connectivity to and mobility of their download and store high-definition content in the future, Sigma remains well positioned to succeed in this space.

On the profitability side, gross margin was benefited by change in our customer and product mix. We continue to monitor both our costs and pricing closely to keep our margins as stable as possible.

Now, I would like to highlight some of the important business developments we have achieved since our last conference call. First, we announced, our Sigma’s highly integrated SMP8654 media processor will be used to power Celrun’s TD-1100 set-top box which has been selected by LG Dacom to be deployed throughout Korea. Second, we also announced that Z-Wave technology has reached a new milestone by providing IP interoperability. As part of public showings which took place at Interop 2009, Sigma announced complete interoperability between its Z-Wave wireless home control standard and IP with the single chip IP-Wave solution demonstrated in real products for energy management, remote home monitoring, and security.

I would like now to pass the call to Ken who will discuss current market trends.

Kenneth Lowe

For this call I’d like to provide an update on Sigma’s market opportunities, technology developments, and new potential that lies ahead for us. First, I’d like to set the tone with an update on the market environment and product breadth that we’re now dealing with.

To start with, consumers want more of everything. They want more high-definition home entertainment that rivals a trip to the theater, they want more content access so that they can have less trade-offs to make, and they want more ubiquitous connectivity so they have unlimited control. To meet this demand, Sigma Designs has become a complete technology provider for the way consumers want to live. With four distinct, but interrelated product lines, Sigma now offers the diversity to deliver complete solutions for a wide variety of high-demand consumer electronics. This includes media processors as full system on chip solutions, video image processors which are marketed under the VXP brand, high-bandwidth ultra-wideband devices, and low bit-rate RF home control devices marketing under the Z-wave brand.

More importantly Sigma products have been making a difference in the world. As a result of the widespread deployment of IPTV services by most of the world’s largest telco carriers, there is now a third alternative for bringing television service in the home. This success in the IPTV services market has resulted in over 16 million set-top boxes shipped in 2008 according to iSuppli. Furthermore, as market demand remained strong in spite of a down economy, they expect demand to reach 56 million set-top boxes by 2013.

Striking a balance between the pressure from their new telco competitors and the cost of infrastructure changes, cable providers are now planning a careful transition to IPTV technology for future video delivery; a transition that requires a new area of expertise. Sigma is now offering its vast depth of IPTV expertise and technology leadership to the cable industry to help drive the adoption of true two-day and deliver the first generation of hybrid IPTV cable set-top boxes.

Sigma’s innovative solution features a hybrid gateway platform that supports both traditional cable broadcast as well as true two-way based IP video and data over DOCSIS 3.0, which in turn talks to low-cost thin client boxes in the rest of the home. This unique architecture has captured the attention of many cable providers who want to begin deploying customer premise equipment that serves today’s video delivery while being ready for tomorrows. This transitional opportunity represents a market potential many times the current telco based IPTV deployments.

Cable and telco operators not only compete with other, but they compete within the home for a greater share of consumer spending. Towards that goal one of the key segments that most operators are exploring is home control services for security and energy management. By placing a set-top box in the home connected to the internet, operators can provide ready access to any number of connected electronic devices in the home for a modest monthly fee. To enable carriers to tap into this demand Sigma can now offer them a Z-wave solution.

Z-Wave brand devices are already the most popular solution for home control providing hundreds of options for RF based remote control, energy, security, and convenience appliances. Now, by connecting the Z-Wave mesh network to an internet link, the set of home control devices becomes accessible to consumers online or in the alternative for utility companies for energy savings or security companies for home monitoring. Helping to bring living rooms into the internet age, Sigma’s consumer solutions also provide a broad range of cross-industry support to enable access to allow users the widest range of content, from broadcast online and packaged media.

Sigma offers package development kits that allow OEM customers to configure capabilities that match the target market. This range of capabilities include support that will enable new internet-savvy applications based on Flash, Android, downloadable widgets, subscription services such as Amplex and online contents such as YouTube and Hulu. Together, our new product lines and software offerings are helping to enable the most engaging media rich consumer products available.

Now, let’s take a detailed look at the upcoming IPTV market that will be providing the majority of our revenue over the next 12 months. We believe that the IPTV market remains strong although somewhat dampened by the overall economic turmoil, television service remains relatively resilient in times of recession as it represents a primary avenue of consumer escape.

Current IPTV landscape on a regional basis is as follows. In North America, AT&T’s U-verse program continues unabated in their efforts to establish themselves as a viable alternative for TV service. At the end of their fourth quarter, AT&T reiterated that their U-verse service continued a strong ramp with a net subscriber gain of 284,000 for a total to date of over 1.3 million. They additionally indicated that their growth reflects the high quality of their video along with other important features such as whole-home DVR, over a hundred high-definition channels, and integrated voice plus broadband capability. Additionally, to date AT&T has achieved video penetration of 12.6% of the households they serve with broadband.

Other active North American IPTV deployments include the four leading Canadian telcos; TELUS with 100,000 subs, MTS Allstream with 85,000 subs, and Sasktel with 62,000 subs, as well as Aliant.

Europe is continuing to show IPTV deployment growth albeit at different growth rates depending on the country and carrier. Europe has over 16 telcos in active deployment with multiple new carriers emerging every year. The list includes Free, France Telecom, Neuf, Deutsche Telekom, British Telecom, Belgacom, Portugal Telecom, Swisscom, Telefonica, Ya.com, PBC, Telecom Italia, Tiscali, Fastweb, Wind, and T-Com affiliates. Most of the carriers that we deal with appear to be ramping their deployments this year at differing rates exemplified by the following.

Belgacom added 49,000 subscribers last quarter to reach a total of 555,000, British Telecom added 25,000 subs last quarter to reach a total of 423,000, Deutsche Telekom added 120,000 subscribers last quarter to reach a total of 600,000, and Swisscom added 21,000 subscribers last quarter to reach a total of 139,000.

In Asia, there’s a total of 10 telcos in active deployment at this time which include Korea Telecom, Hanaro, China Telecom, China Netcom, USEN, KDDI, Chunghwa Telecom, PCCW, LG Dacom, Singtel, and MTNL, as well as one IPTV cable provider Guangzhao. There are continued signs of growth in this region as indicated with the following updates.

Chunghwa Telecom added 10,000 subscribers to reach a total 686,000, LG Dacom has become Korea’s third largest IPTV provider which is being sold into an installed base of 2 million users and has sold over 85,000 IPTV subs in the last three months. Singtel added a record of 19,000 IPTV subscribers to reach a total of 78,000.

Now, let’s talk a little bit about set-top boxes in competition. Our SMP8654 is in full production and we’re in the process of expanding our product line to address both lower cost and higher performance nodes within a single software compatible family. Towards this goal there will be a forthcoming announcement of a new member, the 8650 series, aggressively aimed at IPTV and the thin client market. While we do see some competitors at selected accounts they have not developed into any degree of penetration into the high definition Linux based set-top box business.

Turning to the mediaroom segment, Microsoft announced that their IPTV deployments have reached 3 million consumers, more than double their number a year ago. It’s noteworthy that all 3 million consumers are using set-top boxes based on the Sigma SMP8634. During the early part of 2009, Microsoft also added four additional accounts, which are Guangzhao, TELUS, and WimpelCom, all of which are believed to be based on Sigma chipsets. While Broadcom was announced nearly one and half years ago as a second source supplier of media processor chips for Microsoft’s Mediaroom, we’re yet to witness an actual deployment take place. As we continue to state, though there will be a likely and eventual split of Microsoft IPTV business, the delay of competitive offerings continues to benefit Sigma through new telco deployments.

In summary, Sigma remains the market share leader in the IPTV media processor space and we believe our market share is continuing to grow and we’re confident that we’ll remain a leading provider for some time to come. We hope this analysis provided you some insight about the opportunities that lay ahead for Sigma and we feel strongly about our leading technologies and established market position and look forward to building on this foundation.

Now, I’d like to pass the call back to Thinh to cover our forward guidance.

Thinh Q. Tran

As Ken has indicated we do expect the IPTV market to continue growing and for Sigma to remain a leading player. We also expect IPTV to represent a vast majority of our revenue for this fiscal year. Similarly we expect that certain segments of other products and market will build up into meaningful revenue streams in the future bringing more balance to our business. While visibility has improved somewhat we remain conservative in our future projections.

Given those conditions our forward-looking guidance is as follows. We expect second quarter revenues to be similar to the level experienced in the first quarter. We expect our gross margins to be similar to the first quarter as well.

In summary, I would like to reinforce that we believe our fundamentals remain strong, that our target markets should experience growth, that we remain dominant in the IPTV market, and that we are doubling our efforts in development to strengthen our position moving forward.

We’d now like to open the call up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of John Vinh - Collins Stewart.

John Vinh - Collins Stewart

My first question is on the digital media adapters or the connected media segment. Can you just give us a little bit more color on the growth in that segment; that segment basically doubled on a sequential basis. I assume that had to do with the storage customer and it’s the ramp of their digital media adapters that you talked about earlier on the call. Can you talk about that segment; was that primarily all digital media adapters, was there any Blu-Ray revenues in that segment, and how much of the growth in that segment was due to that one storage customer?

Kenneth Lowe

The general trend that we’re seeing is that DMAs are picking up; predominantly the type of devices is what some people refer to as a sneaker device contains mass storage with the DMA device and it can be loaded up with your entire cadre of music and videos and then taken over to any device and played like a DVD player. That’s becoming more popular in certain areas. We have seen it pick up. It is becoming a very strong targeted device by the storage manufacturers as another way to move drives. That is the larger portion of the connected media players; however, there still are Blu-Ray players and other devices in that category, and we don’t have any comment about the magnitude of the largest player in there. We really haven’t talked about that.

John Vinh - Collins Stewart

Is it safe to say that the growth that you saw on that segment predominantly is driven by DMAs?

Kenneth Lowe

Yes.

John Vinh - Collins Stewart

Going forward, is this run rate that we’re looking at right now, is that a sustainable run rate that you think we could use for modeling off through the end of the year at this point?

Thomas E. Gay

We’re hesitant at this point to project further growth. We’re not really sure of how to predict that.

John Vinh - Collins Stewart

One last question on this segment; the mix of your 8634 versus previous generation chips; in DMAs, what is generally the mix of your SoC there?

Kenneth Lowe

You mean which parts in the series are moving?

John Vinh - Collins Stewart

Yes, is it generally the 8634s or your 8620 series or…

Kenneth Lowe

8634 is still the dominant part, the 8620 series still contributes materially, and the newer parts are starting to ramp, the 8650 series.

Thomas E. Gay

The DMA business is largely centered around the 8634.

John Vinh - Collins Stewart

How does pricing in your DMA segment compare to the rest of your business?

Thomas E. Gay

This is very similar as volume driven. A volume account gets better discounts than a lower account.

John Vinh - Collins Stewart

Just turning to IPTV; you guys talk about growth. Ken, you walked us through all the major carrier deployments and they all with the exception of Korea are showing signs that IPTV is a growing market; even the shipment trends of the major OEMs continue to show that. IPTV continues to remain robust and yet your IPTV avenues were down in the quarter and you’re guiding for flat in the following quarter. Can you reconcile your comments about growth versus some of the trends that we’re seeing here? Is growth going to be heavily back-end loaded? Are we expecting to see growth on a sequential basis in the IPTV segment Q2 at this point?

Thomas E. Gay

I guess what we would say is that when we refer to the growth is flat we’re talking in an overall sense, the entire revenue for the company; so there can be some differences up and down. IPTV could go back up a little bit in the second quarter and other things could come down a little bit. Secondly, within IPTV itself you’re talking about the magnitude of change there represents two or three days of shipments during the quarter if you look at it that way. So, the vagaries of when orders actually get placed and shipped are enough that that could sway the number one way or the other. So, we view ourselves as in a steady but stable state with IPTV right now.

John Vinh - Collins Stewart

Are you cocking to the overall market growth number and what do you think the overall IPTV market growth number is right now for 2009?

Thomas E. Gay

I think in general we’re in a relatively flat spot amongst a larger growth curve. In other words if you take the entire set of the next few years, we’re very confident as are the independent industry analysts that this will be a substantive growth area. However, we think we’re in a couple of quarters that have been a little bit flattened as a result of the economy and we think there’s growth ahead.

Operator

The next question comes from the line of Quinn Bolton - Needham & Co.

Quinn Bolton - Needham & Co.

Ken, just wanted to follow up on that last question about the market; I think on the last call you guys had outlined the market for IPTV set-tops at around 12.5 million in 2008 going to I believe 16.5 million in 2009; are those still good figures. I think you quoted iSuppli, which might have had a higher number for 2008; so I just wanted to get a sense of whether you think 12.5 million going to 16.5 million is still good or do you think it is flatter based on the commentary that you’ve had on this call.

Kenneth Lowe

The answer to that is with more and more industry analysts providing detailed forecasts on the IPTV market and related set-top box areas, we feel it better to cite their overall numbers although in this case we think iSuppli aggregates additional providers that we don’t necessarily under our numbers. We think that they provide a bigger picture view that is independent. So, that’s the reason that we’ve pulled our numbers in favor of their numbers and in reconciling our numbers we feel that what we were stating is an extrapolation of the numbers that we were doing plus what we thought perhaps our competitors were doing. As independent analysts they should have a better number overall knowing exactly what these other people are doing or knowing fairly close.

Quinn Bolton - Needham & Co.

You may not have given it, but do you have a figure for what iSuppli then is looking at in 2009, if from that 15 million base, they’re projecting a flatter market in ’09?

Kenneth Lowe

We do have those numbers. They’re going from 16.3 million to 20.8 million. So, they’re showing just over 4 million units of growth during this year.

Quinn Bolton - Needham & Co.

So, a similar change to 2009 versus 2008, just off a different base?

Kenneth Lowe

Exactly; it was 12.5 million to 16 million, and now 16 million to 20 million.

Quinn Bolton - Needham & Co.

The second question I had was you talked about the gross margin benefited from mix shift, but just trying to get more detail there. It looks like your mix shifted from IPTV to the connected media players, but I think both of those revenue streams are still dominated by the 8634. So you effectively mix shifted away from some customers in IPTV that had had reached the volume price discounts to lower volume players on the connected media side where you’re able to get better pricing on the 8634 given the lower unit volumes in that market or is there some other mix shift going on?

Thomas E. Gay

The 8634 continues to dominate the revenues, but there are a number of other products and smaller customers and they can affect the mix that results in a change in margin such as we saw in the first quarter; so it’s really a pretty complex set of numbers we try to boil down to just that simple guidance. Quite a few things changed in terms of other products and the customers and where they are in their cumulated volume and the pricing is adjusted as that occurs.

Quinn Bolton - Needham & Co.

Was the biggest component then of the better mix just the mix shift within the customer base to customers that were shipping at unit volumes and therefore you were getting better pricing, or was it that say the VXP business ramped significantly and you’re getting a much higher margin on VXP?

Thomas E. Gay

VXP didn’t change all that much, although we’re still seeing improvements in some of the margins in there. It was the rest of the high-def related stuff that tended to drive the change.

Quinn Bolton - Needham & Co.

Lastly, just a clarification. The two 10% customers, you mentioned Motorola Singapore was the first, did you say Celrun was the second, or did I miss that name?

Thomas E. Gay

Cowen. They’re a contract manufacturer in Asia.

Operator

Your next question comes from the line of Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets

Can you help us understand the level of set-top inventories out there? Do you still think things are pretty lean in terms of channels?

Kenneth Lowe

The best information we have is that everybody has lowered their set-top box inventory exposure because nobody wants to be holding high-value assets. Our feel is that orders are flowing through the channel and getting out into deployments.

Mark Sue - RBC Capital Markets

On orders, any sense of what IPTV chipset orders may be maybe on a month to month basis or any color there?

Kenneth Lowe

Do you meant throughout the quarter is it linear versus backend loaded, that type of thing?

Thomas E. Gay

For our shipments…

Mark Sue - RBC Capital Markets

Actually, for orders, not shipments.

Thomas E. Gay

We don’t really go into details about orders.

Mark Sue - RBC Capital Markets

But can I assume that the month of May was better than the month of February?

Thomas E. Gay

I’m not at liberty to discuss that.

Mark Sue - RBC Capital Markets

Maybe a different one then. Revenues will be similar, gross margins will be similar, can we assume OpEx will be similar or should we actually see that trend lower?

Thomas E. Gay

The R&D, we’re seeing a continuing growth at about the 5% quarter over quarter range, which is the same as we’ve talked about before. Sales and marketing has more or less stabilized in the area that it’s at at this point. G&A, you see that the stock option expense actually took a temporary dip in Q1, but the usual year-end expenses associated with audit and legal and that we’re up about $500,000 which should be not repeated in the balance of this Q2 and Q3. Does that give you enough to go on?

Operator

Your next question comes from the line of Lauren Stoller - Lazard Capital Markets.

Lauren Stoller - Lazard Capital Markets

I just had a few questions. Is it fair to assume that your market share remains in the IPTV market in the 70% range?

Kenneth Lowe

Yes. I think we’ve continued to state that it’s in the 75% plus range for quite sometime. We think it’s still growing at this point in time.

Lauren Stoller - Lazard Capital Markets

What’s going on with ASPs in that market?

Kenneth Lowe

ASPs have gone down a little bit over time. There’s been a general downward curve over the last couple of years, but certainly at this point in time we don’t see any precipitous drops. It’s following a typical expectation of lifecycle at this point. They are approaching the mid teens and seem to be I would say approaching a leveling out where the forces of volume in the market are equalizing against the practicality of the cost of manufacturing for everybody in the industry.

Lauren Stoller - Lazard Capital Markets

About you comments before about the worldwide market for IPTV, it seemed like you guys were sticking with the 16.5 number even though iSuppli is saying that the market is actually bigger?

Kenneth Lowe

No. What we’re saying is we’ve begun to adapt an externally generated number. We’re using iSuppli at the site at this point in time because we feel that they’re a reasonable firm, so we’re just citing their numbers. We’re happy to talk about our performance on a quarterly basis. It moves us away from talking about how much our competitors are contributing to the market by adding what’s our own.

Lauren Stoller - Lazard Capital Markets

So they are projecting that calendar year 2009 will be 20 million units. Is that what you said?

Kenneth Lowe

I believe it is 20.8, almost 21.

Thomas E. Gay

But that does include other categories than we had in our 16.5 million.

Lauren Stoller - Lazard Capital Markets

Back to connected media player, it looks like you guys have established a base of business in Blu-Ray then. Is that fair to assume going forward?

Kenneth Lowe

We’ve had a base of Blu-Ray business for quite some time, but it had gone down a lot, and it has become the minority of that category. The majority of that category is now digital media adapters.

Lauren Stoller - Lazard Capital Markets

So it’s not half anymore?

Kenneth Lowe

No.

Operator

Your next question comes from the line of Sukhi Nagesh - Deutsche Bank.

Sukhi Nagesh - Deutsche Bank

Ken, on the connected media player, can you talk about unit opportunities for you guys? How you units you guys sold in the April quarter, how we should be looking at that for this year?

Kenneth Lowe

It’s a little bit difficult to triangulate on because our customers, some of them had witnessed very strong growth, stronger than they expected, stronger than we expected, and then there’s been some up and down as they tried to find the exact amount of demand, so I would say that it’s been on a very strong curve for the last two quarters, and as we move in the future, it’s hard to tell, but as we’ve said, it’s well over 50% of that connected media segment, and we expect it to remain as the dominant portion of that as we move forward.

Sukhi Nagesh - Deutsche Bank

What are the typical ASPs? Are they similar to your IPTV chip, lower than that, or how should we look at it?

Kenneth Lowe

Similar. At this point, slightly higher perhaps because their volume is not quite as great, but it’s all volume driven. Again, they’re buying 8634s, as Tom mentioned, predominantly, so as an 8634 customer, they get very similar prices to anybody in the same volume range. We have a lot of crossover customers, multiple applications, it’s very difficult to manage a sliding rate card when you have different customers in the different segments.

Sukhi Nagesh - Deutsche Bank

For the July quarter, in terms of your different segments, IPTV versus connected media or prosumer, what segments do you expect to grow, stay flat, or decline?

Thomas E. Gay

In general, IPTV we think the flatness from Q4 to Q1 is probably a momentary pause in what we think is the long range growth, so we would tend to believe that Q2 would be more probable than not to increase. Connected media players has surged so strongly in the recent quarter that we are a little hesitant to predict further growth at this point, and the rest are pretty small and shouldn’t change all that much.

Sukhi Nagesh - Deutsche Bank

Moving forward to the gross margin line, if you were to think that IPTV will grow for you in the second half of this year or the October and January quarters of your fiscal year, do you expect gross margins to trend down because of mix or should they stay where they are in the 49% range?

Thomas E. Gay

At this point, our guidance for next quarter of being flat or similar is as good as we can get. Past then, we’ll be doing our best to manage it in the zone that we are now. We think that would be a reasonable outcome, and we’ll strive to maintain it.

Kenneth Lowe

Let’s put is this way. We don’t have any reason to believe at this point in time that they will change materially one way or the other.

Sukhi Nagesh - Deutsche Bank

One last question for me then, inventory levels on a dollar basis, Tom, are you expect it to decline further this current quarter?

Thomas E. Gay

We believe we’ve seen most of the decline and where we are now is probably close to appropriate for our current level of business.

Operator

Your next question comes from the line of Hamed Khorsand - BWS Financial.

Hamed Khorsand - BWS Financial

I wanted to ask you on the UWB, where is that status, because I’m seeing people use this and they are demonstrating their product with streaming wirelessly, has high-definition great quality, but you guys from UWB, so far you guys have just been saying it’s on the cable side, so I just wanted to see what you guys scan with this investment and this great talk you guys made last year on the technologies?

Kenneth Lowe

I think in general, ultra-wideband has been a very strong technology and that’s the reason that it’s gone so far in the evaluations with some of the major carriers and some consumer companies because the technology has demonstrated its merits. At the same time, there’s been a little bit of a pull-back on widespread support for the standard in certain other areas, so what we believe is happening is that it’s getting adopted in certain areas because of its technology merits and it really does not have to be part of a wi-fi level standard in order to become a very strong revenue stream for a company like Sigma; Sigma was going to bear the majority of the fruit from that area, and as such, would be happy to be the dominant supplier for the sub-segments that it’s going to end up into.

Hamed Khorsand - BWS Financial

Okay, we’ll keep a timeframe as to one we could see UWB start actually being used?

Kenneth Lowe

To be honest, communication systems operate on a longer time scale then a lot of the other products we play into, and so, we probably expect although continued activity this year probably more material contributions to revenue next year.

Hamed Khorsand - BWS Financial

My other question was as to Broadcom, still there’s no sign of them really in the market from the Microsoft side, where do you guys stand with SMP8654?

Thomas E. Gay

Basically, we stand with the SMP8634 as the sole part that’s going into their current deployments and with the SMP8654, that is the part that we’ve been working on for future deployments while Broadcom works on their 7405 code hardening efforts, so, it’s our hope that as we move into next year that anybody, any telco looking at a new deployment cycle is going to be looking at the two of them and weighing them off against each other and that we hope to prevail more times than we lose.

Hamed Khorsand - BWS Financial

The 7405 is having problems with certification and it’s being delayed, is that going to get to a certain point where we can see you SMP8654 get priority and getting certified so we can see the next upgrade cycle on the set-top boxes?

Kenneth Lowe

It would, this market doesn’t absorb disappointment very well, and so, yes, if they continue to disappoint, which slipping schedules quarter by quarter like this has got to be construed as a disappointment, then you would expect the backlash of that would be that more and more people would gain more confidence that moving with Sigma would be a better idea.

Operator

The next question comes from the line of Gary Mobley - Noble Financial Group.

Gary Mobley - Noble Financial Group

I have a question about the Sigma’s opportunity in the true two-way market, most of the cable MSOs are moving from the trail base of true two-way to full-scale deployment in major set-top box vendors have introduced true two-way cable set-top boxes, so now the market is somewhat established, how do you gain a toe-hold in the market and then as well should we view true two-way as 2010 event for you guys?

Kenneth Lowe

Let’s reframe it, we would refer to the market as in transition now, not established because what there are is lots of demonstrations, there is virtually no shipment volume with true two-way, and secondly, we view our chances in coming out as a key supplier of one of the types of platforms that the industry will be using is very good; there are multiple different approaches that the cable industry will take and we believe that we are offering the types of solutions that will do well there; so, I think the way that we grab a toe-hold is the way that we’ve approached it, which is we’ve come out there as a first mover demonstrating solutions, offerings new ways in which they can transition to true two-way in a very conservative approach against the types of changes they have to make. So, we’ve been received very well and certainly because a lot of that transition depends on them introducing IP streaming capabilities within their cable network, they look at Sigma’s strength as the dominant supplier of IPTV solutions as a very key advantage. So, we think we’re positioned very well over there.

Gary Mobley - Noble Financial Group

I do have a followup question for Tom, in your commentary about the tax rate, did you mention you expect a 14% tax rate for fiscal year 2010 in the Sigma’s GAAP base?

Thomas E. Gay

Yes, that is correct. The one-time aberration we had in Q1 was away from the base of 14% which is what we project for the rest of the year according to our current expectations.

Gary Mobley - Noble Financial Group

Okay, so for the balance of the year, the remaining three quarters, you expect 14% rate?

Thomas E. Gay

If everything holds to what we believe is in our forecast, yes.

Operator

The next question comes from the line of Parag Agarwal - UBS

Parag Agarwal - UBS

Just had questions about the DMA market, firstly, could you talk about competition in that market, who are the other players who are in that market and what could be the potential alternative offerings in that market, and also, the barriers to entering that market like you have in IPTV, there’s a Microsoft certification, so if you could talk about that, that will be very helpful.

Kenneth Lowe

It’s a great question, I wish we could articulate more about the competitors there, but frankly, other than a sprinkling of competitive offerings here that we see, there’s nobody that’s come off that space in a definitive manner. We really don’t see Broadcom re-targeting for it and we having seen ST Micro at all, so what we do see is Sigma serving the majority of it; we’re not walking away with any lost order reports in the DMA business, we have good positioning with our software that goes along with our chips; so, what’s happening, to target a little bit about the trends which create the barriers, each couple months we go through, there’s a new standard people want us to support; we’re moving a lot more online content to the DMA platform, a lot more access that people want to take advantage of, because the DMA is all about access of content on your TV; so new sorts of audio CODECs, online video CODECs, servicing areas like flash playback, etc. So, we’re finding that because we’re staying ahead of that curve that we’re the go-to player in that market; now obviously, that market is still relatively small; so you wouldn’t find it hitting the radar yet as of somebody like a Broadcom, but eventually if the market keep growing, we’ll have to face more competition, but right now, we seem to have a pretty clear pattern.

Parag Agarwal - UBS

That was very helpful; the second question is for Tom, in terms of gross margin, other than mix, are there any potential levers that could make the gross margins go higher and also could you talk about the foundry pricing given that the capacity is beginning to tighten up.

Thomas E. Gay

Well, we’ve seen some dips in the recent past in foundry pricing, it tends not to go up as often as coming down, so we’re hopeful that we will be able to at least maintain foundry prices at this time; other than that, we’re sticking with our guidance that we believe we can hold in the range that we currently are experiencing.

Parag Agarwal - UBS

Okay, and my last question is about the inventory, so as you said that you benefited from a little bit of dip in the foundry pricing, that should show up in your inventory and has that inventory been cleared or do we expect to see the benefit of that in the following part of the year?

Thomas E. Gay

Well, inventory continues to turn the decreases largely in the dye bank where we had gotten ahead of ourselves a little bit in building that up and some of the dye and now we feel that the throughput is matching much more closely the output and the current level is one that we’re comfortable at.

Operator

The last question comes from the line of Dunham Winoto - Avian Securities.

Dunham Winoto - Avian Securities

My question really has to do with the true two-way IP cable; can you guys first of all talk about where some of the players out there that you think would be relevant?

Kenneth Lowe

In the true two-way market?

Dunham Winoto - Avian Securities

Yes.

Kenneth Lowe

Are you talking about providers or are you talking about competitors of ours?

Dunham Winoto - Avian Securities

Competitors of yours.

Kenneth Lowe

First and foremost, Broadcom made a foray into the DOCSIS area a long time ago and they have a significant market share in cable, so, they will be the competitor we’ll have to steal market share from in order to break into the cable market, and obviously, that’s the advantage and disadvantage; the advantage to us is that they have been trying to maintain status quo and have not been in too much of a hurry to push the industry in that direction; we’ve come in on the other hand offering very strong forward-looking solutions for that industry and has been received very well. So, it’s given us a little bit of an advantage and certain amount of credibility, and then, beyond them, ST Micro does hold a little bit of the cable market, Conexant just holds a small shred of it; so those are the players that we’ll be facing off against, nobody novel really.

Dunham Winoto - Avian Securities

In the previously traditional cable?

Kenneth Lowe

Exactly, TI forms a side-line player because they’re making the Puma chip that delivers the DOCSIS 3.0 interface, but at some point in time it is possible for them to go down the integration path that at this point they are a partner providing a chip for the overall solution.

Dunham Winoto - Avian Securities

How are you hedging against that possibility?

Thomas E. Gay

As you can imagine, we don’t limit ourselves to one partner or limit ourselves from technologies we eventually might want to move into ourselves; so, we keep all the doors open and we’re keeping near to the ground as far as what’s going on in the industry.

Dunham Winoto - Avian Securities

So, what do you think would be the catalyst that maybe will drive the growth in that market, the transition to that market is a little bit faster if it does have to happen on the infrastructure side or is it just a matter of upgrading on the client side, can you give us a little bit more thoughts on there?

Thomas E. Gay

I think the reason it goes a little bit slow to begin with is because it is a substantial infrastructure change for the cable industry to adopt anything beyond just a QUAM distribution. Secondly, once it starts going it will develop steam because once they add the hybrid capability including the IPTV, it unleashes a set of capabilities they can offer that then to competitive everybody will have to move in. So, that will increase the increase the number of HD channel, it will increase the amount of VOD content, it will increase a lot of capability. So, we think that that’s something that will move with substantial amount of velocity once it really gets going.

Dunham Winoto - Avian Securities

Is it fair to say that one of the biggest benefits going to the hybrid cable solution is to increase bandwidth availability substantially; is it fair to look at it that way?

Thomas E. Gay

Yes, I think by the time that they come through the curve on the other end, they will have achieved two things one of which is when you employ IPTV once you get bandwidth for one channel you can opt for any number of channels over that same bandwidth. So, you don’t have the channel limitation. Number two, if there’s enough bandwidth for a high-quality high-definition you don’t have to go through the compression trade-offs that they are going through right now and offering degraded high definitions across a number of channels, and the third thing is pure IPTV is a far cheaper set-top box than a QUAM-based cable with tuners and other things to hold the cost up. So, they will be propelled to move down that path I think economically.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today’s conference. I would now like to turn the call over to Mr. Ed McGregor for closing remarks.

Edward McGregor

We’d like to thank everybody for attending our conference call to discuss our results for our fiscal quarter 2010. We do appreciate your interest in Sigma and we look forward to our next scheduled conference call to discuss our second fiscal quarter results for 2010.

Operator

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

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Source: Sigma Designs, Inc., F1Q10 (Qtr End 05/02/09) Earnings Call Transcript
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