Sigma Designs Management Discusses Q2 2014 Results - Earnings Call Transcript

| About: Sigma Designs, (SIGM)

Sigma Designs (NASDAQ:SIGM)

Q2 2014 Earnings Call

September 04, 2013 5:00 pm ET


Kenneth Lowe - Vice President of Strategic Marketing

Elias N. Nader - Interim Chief Financial Officer, Principal Accounting Officer, Principal Compliance Officer, Corporate Controller and Secretary

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

Mustafa Ozgen - Vice President and General Manager


Quinn Bolton - Needham & Company, LLC, Research Division

Hamed Khorsand - BWS Financial Inc.

Charles Iver Frumberg - Emancipation Capital LLC


Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Sigma Designs Earnings Conference Call. My name is Ayesha, and I will be your coordinator for today's call. [Operator Instructions] As a reminder, this conference 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. You may proceed, sir.

Kenneth Lowe

Thank you, Ayesha. Welcome to Sigma Designs' conference call to discuss our financial results for our second fiscal quarter of 2014. I'm Ken Lowe, Sigma Designs' Vice President of Strategic Marketing; with me today are Thinh Tran, Sigma's CEO; Elias Nader, Sigma's interim CFO; and Mustafa Ozgen, Vice President and General Manager of Home Multimedia Products. The press release contain 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 will be available in the Investors section of our website. Today's agenda will begin with my brief introduction, a review of selected financials by Elias and executive overview by Thinh, a business update by Mustafa, and finally, our forward guidance by Thinh. We'll then open the call to questions from analysts and institutional investors and we expect to conclude the call within 1 hour.

Before we begin, I'd like to remind everybody that today's call contains forward-looking information, including guidance that we provide about future revenue, gross margin and other financial measures and anticipated trends in our target markets. We caution you that the forward-looking information that 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. Other risk factors that may affect our business and future results are detailed from time to time in Sigma's SEC reports, including Sigma's quarterly report on Form 10-Q as filed with the SEC on December 2012. A partial list of these important risk factors are set forth at the end of today's earnings press release, and Sigma undertakes no obligation to revise or publicly update 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 exclude certain cost and expenses. These excluded items are described in more detail in today's earnings press release along with a detailed reconciliation of our GAAP to non-GAAP results.

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

Elias N. Nader

Thank you, Ken. Good afternoon, everybody. For the second quarter of fiscal 2014, revenue was $53.8 million, an increase of $1.3 million or 2.5% compared to $52.5 million in the previous quarter. Compared to the year-ago quarter, our revenue decreased $14.5 million or 21.2% from $68.3 million.

Our revenue breakouts for the quarter are as follows: DTV market, $14.4 million or 27%; set-top box, $11.5 million or 21%; home networking, $19.6 million or 37%; home control, $5.9 million or 11%; license and other, $2.4 million or 4%.

GAAP gross margins were 52.2% for the second quarter compared to 51.3% in the preceding quarter and 44.8% in the same quarter last year. Non-GAAP gross margins were 55.3% for the second quarter compared to 54.7% in the preceding quarter and 51% in the same period last year. The primary factor in our improved non-GAAP gross margins in Q2 was product mix that had higher gross margins.

In the second quarter, our non-GAAP operating expenses decreased by approximately $1.4 million to $26.9 million compared to the previous quarter mainly due to continued reductions in labor -- on labor-related expenses and other variable operating expenses. Operating expenses in Q2 were $11.8 million below the same quarter a year ago, a 30% reduction. Since announcing our restructuring in third quarter of 2013, we have reduced our operating expenses, on an annualized basis, by $40 million. As a result of our emphasis on cost control and the significant improvement in our cost structure, we expect our non-GAAP operating expenses in Q3 to trend lower than Q2 operating expenses. We remain focused on continued profitability in the remainder of FY '14 and beyond. We are also focused on achieving profitable revenue growth throughout the fiscal year. The GAAP net loss for the second quarter of fiscal 2014 was $4.8 million or $0.14 per share. This compares to a GAAP net loss of $4.5 million or $0.13 per share in the previous quarter and a GAAP net loss of $13.4 million or $0.41 per share the year-ago quarter. On a non-GAAP basis, the net income in the second quarter was $2 million or $0.06 per share. This compares to a non-GAAP net income of $300,000 or $0.01 per share in the previous quarter and a non-GAAP net loss of $4 million or $0.12 per share in the year-ago quarter. Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance.

Now I'd like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $90.7 million at the end of the quarter, an increase of $3.7 million compared to the end of last quarter. The increase in cash was mainly due to $6.5 million of cash generated by operating activities and $1.5 million cash generated by financing activities. The increase in cash was partially offset by purchases of approximately $4.2 million in IP, software and equipment during the quarter. After the quarter ended, we received our second installment payment on a license agreement and collected $8.6 million in license revenue. This $8.6 million is not reflected in our cash balance at the end of the second quarter.

Net accounts receivable was $39 million at the end of the second quarter, an increase of $12.8 million compared to the previous quarter, primarily due to the pending license revenue of $8.4 million which was collected after the quarter ended. The average day sales outstanding for our receivables, as of the end of the second quarter, was 66 days compared to 46 days in the previous quarter, which, again, was primarily impacted by the timing of the collection of the license revenue.

Net inventory was $20 million at the end of the quarter compared to $19 million in the previous quarter, an increase of $1 million. The increase in inventory was due to purchase of inventory intended for our Q3 revenue, which brings our inventory turns for the quarter to 6 on an annualized basis compared to 7 in the previous quarter.

Trade payables was $22.9 million at the end of the quarter compared to $12.5 million the previous quarter, an increase of $10.4 million. Our trade payables include on-invoice receipts and accruals. The increase in trade payables was mainly due to purchases of inventory intended for our Q3 and Q4 revenues, as we usually require a 6-month supply to meet our inventory demands.

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

Thinh Q. Tran

Thank you, Eli. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma. We are pleased to announce, that as a result of our restructuring efforts and the significant cost reduction that we have achieved to date, the second quarter of fiscal '14 represent our second sequential quarter of non-GAAP net income. We remain focused on continuing to achieve profitable results, as well as achieving incremental revenue growth throughout this fiscal year and beyond.

Now let's review the results of the second quarter and our current business trends. Our financial results for the quarter were all positive, with an increase in gross margin, a decrease in operating expense, a positive pro forma net income and a positive net cash flow.

As Elias pointed out in his comments, since announcing our restructuring in the third quarter of last fiscal year, we have removed approximate $40 million annualized from our operating expense cost structure. This was a necessary and challenging effort that has brought a newly renewed sense of cost control to our company. Despite the significant restructuring, we were able to continue to improve our products and advance many R&D projects, which will allow us to be more competitive in the future.

As stated earlier, for the second quarter, we report $53.8 million in revenue, a slight increase over our previous quarter and in line with our guidance. Our home multimedia business unit contribute $25.9 million in revenue this quarter, an increase of $0.8 million over our previous quarter, mainly as a result of increased sales of SoC products sold into the set-top box market, offset by a slight decline in legacy video processor sold into the DTV market. In our Home Connectivity business, contribute $25.4 million in revenue this quarter, an increase of $0.6 million over our previous quarter, mainly as a result of increased sales of our Z-Wave products sold into the home control market, offset by a slight decline in home networking controller sold into the IPTV market.

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

Now let's review some of our major product accomplishment during this quarter. We announced that YES, an Israeli satellite provider, had chosen Sigma Design HomePNA solution. We began sampling our next-generation ARM-based chipset for the set-top box market, which will offer a dramatic increase in performance and is set for public demonstration at the upcoming IFA and IBC trade show in Europe. We achieved milestone in home connectivity deployment, having shipped over 40 million HomePNA chipset. We achieved HomeGrid certification for our second generation chipset, validating the quality of our solution.

In summary, we are proud of the technologies and market position we have developed and are excited to move forward with a renewed emphasis on profitability. Now we'd like to pass the call to Mustafa, who will cover the progress and outlook for our Home Multimedia and also our 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 multimedia group.

Overall, our revenues came in sequentially higher this quarter, as anticipated, due largely to an increase in set-top box shipments. The overall multimedia business is being driven by 3 major technology trends, which include support for the new Ultra HD or 4K x 2K display resolution, more over-the-top web content access capabilities, and need for substantial increase in computing and graphics performance. To capitalize on these trends, we are introducing our new high-performance single-chip products for TV and set-top box applications. As mentioned in the Q1 conference call, we have already begun sampling our ARM CPU-based TV SOCs. Similarly, we started sampling our ARM CPU-based set-top box SoC in this quarter. Both of these SoCs meet the performance targets that we expected, and they are now sampled to select lead customers for their prototype designs.

Our set-top box business is showing renewed strength as we position ourselves for more diversified hybrid set-top box offerings. We start initial deployment of our set-top box products in emerging markets, starting with a leading Vietnamese operator. We expect to see further deployments in Vietnam and other emerging markets as we mature our solutions.

We continue to experience renewed success in second-generation Mediaroom-based set-top box deployments, especially in North America and Latin America, many of which are getting set to move into operator deployment phase during the second half of this year.

Business from retail versions of set-top boxes and Digital Media Adapters, also known as DMAs, that enable access to over-the-top services, is also contributing meaningful revenue to this segment. We expect to see our existing DMA customers, who recently upgraded their boxes to Sigma's new HTML5 software spec, to expand their over-the-top content offerings to a wider audience. This should allow Sigma's platforms to see increased deployments and stickiness in the market.

Moving over to digital TV. We are seeing increased interest in Sigma's SmartTV solutions, based partly on our established position as well as our upcoming products for Ultra HD display support, excellent picture quality for large-screen TVs and the roadmap for cost-effective Ultra HD TV platforms for OEMs to use in their next-generation products.

We continue to move forward with new product introductions at our existing customer base such as VIZIO, TP Vision and Blu Ray, who have a reputation for innovation and leading edge features. We are also aggressively working to secure business at additional accounts located in Japan, Korea and China, which will help grow our base business and expand our market share.

One of the unique capabilities that set Sigma apart is our frame rate conversion technology for Ultra HD displays. Top TV OEMs recognize and value the differential advantages we provide, including seamless conversion of 24- and 60-frame per second high definition resolution content to 120-frame per second Ultra HD resolution, and other features that achieve the highest picture quality possible.

Our intention is to drive our research and development forward in a cost-efficient manner, to be a leading provider of innovative technologies which enable us to gain increased market visibility and better account penetration to achieve greater total shipments. As expected, we are always striving to drive our development to become faster to market, more powerful and more cost-effective than our competition.

I will now cover our Home Connectivity business. For this call, let's review our business progress and outlook by segment for the Home Connectivity group.

We are very pleased with our performance this quarter, again, due to the high demand for our HomePNA and Z-Wave products. We are proud to report that we passed shipments of 40 million units of HomePNA chipsets that provide, today, the highest quality home networking solution or IPTV and multimedia content distribution. Throughout [ph] new HomePNA products from 7 different manufacturers have passed certification this quarter. These include set-top boxes from ARRIS/Motorola and Con Media [ph], residential gateways from ZyXEL and Pace, ONTs from Salex [ph], an ethernet bridge from Cameo [ph] and a new reference port from Sigma Designs.

YES, the satellite television service provider in Israel, announced that it is using Sigma's HomePNA to power its new whole-home digital video recorder service. YES chose to expand its commitment to HomePNA because of its field-proven capabilities as a high-quality networking technology.

The HomeBrew Forum [ph] and the HomePNA alliance announced that they have merged to create a single organization focused on promoting the smooth transition of legacy wireline home networking technologies to, the any-wire technology defined by IT open international standards. As an interested party, Sigma design was instrumental in making this merger happen.

Our HomePlugAV products with ClearPath technology enjoyed significant growth in shipments this quarter primarily due to increased demand generated by the launch of AT&T's Digital Life service. Sigma HomePlug AV chipsets are incorporated in 3 different products used in Digital Life service, providing a reliable home-wide communication backbone and a plug-and-play experience during installation. Our second generation chipset, the CG5200, successfully passed the home grid forms tests and was awarded certification. This means that our customers can be confident that they are developing system with the highest performance, flexibility and reliability for streaming multimedia content.

During this quarter, we announced that this newly certified CG5200 chipset was selected by ZyXEL for their PLA6245 gigabit ethernet adapter. Sigma continues to work with various OEM partners to support field trials conducted by service providers in North America, Europe and Asia.

Moving over to Z-Wave. We are enjoying the growing interest in the home automation and security services in worldwide markets, and furthermore, Z-Wave is the choice of technology for this growing trend. The best recent example is the AT&T Digital Life service, where Z-Wave was selected over competing technologies due to the best ecosystem of inter-approval products AT&T could use to support its service. Z-Wave is enjoying substantial growth in the security industry. Most security devices, panels and services available in the market today, include Z-Wave as a feature. The newly introduced Z-Wave Next Gen platform positions Z-Wave right in the middle of the Internet of things, also known as IOT market. The fact that Z-Wave Next Gen is backwards compatible with 20 million units of Z-Wave installed base, Z-Wave NexGen is fueling new design starts with existing and new customers who want to leverage the improved performance and the complete software suite offered at an attractive price point. We expect to see new customer products based on Z-Wave NexGen to hit the market later this year.

We have experienced significant increase in Z-Wave revenues this quarter and we expect to see continuous growth in the coming quarters. Overall, the Home Connectivity business unit had a good second quarter, demonstrating overall growth and stability in our major market segments.

I will now pass the call to Thinh to cover forward guidance.

Thinh Q. Tran

Thank you, Mustafa. As we have indicated, we feel we are in exciting markets and are confident in our ability to deliver a technological innovation that will enable future growth along with profitability. In the short term, our demand is being shaped by a number of markets specific for us, as follows: In set-top box, demand will increase due to new SoC deployment in the Mediaroom segment, as well as incurring shipment to emerging market; in DTV, demand will be flat because of softness in both European sector and in legacy discrete products; in-home networking, demand will be flat to down due to inventory adjustment by service providers; in home control, demand will increase due to ramp up of home monitoring segment.

Moving to our formal guidance. We expect total revenue for the first fiscal quarter to be approximately $54 million to $58 million. We expect pro forma gross margin for the third fiscal quarter to be between 52% and 54%. We expect pro forma operating expense in the third quarter to trend lower than the second quarter. In summary, we would like to underscore our commitment to remaining profitable. Towards this goal, we are closely monitoring our revenues and expenses against our operating plans and will take adjustment as required.

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

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company, LLC, Research Division

Just, first, wanted to touch on sort of your expectations for profitable growth through the remainder of the fiscal year. I guess my question is, if I look at normal seasonality in the DTV business, that tends to peak in October and then has a seasonally slower January, I'm wondering, can the rest of the businesses -- or do you expect the rest of the businesses to be able to offset that seasonality in DTV as part of your expectation for profitable growth for the year?

Elias N. Nader

Yes, Quinn. It's Elias, by the way. Yes, we expect it to be that way, yes.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. And then second question, about the DTV business. It looks like China did finally approve the MStar, MediaTek merger with certain provisions that those 2 companies keep their DTV asset separate for 3 years. Do you think that, that provision changes the competitive landscape and keeps potential customers either with MediaTek or MStar, or do you think that customers are still likely to look for alternative suppliers to those 2 companies?

Mustafa Ozgen

This is Mustafa speaking. I think the latter comment is the direction that we're seeing in the market, that the customers are looking for alternative solutions. Although the China government's approval was recently announced, as far as we could see in the market, the operating model of MediaTek and MStar has been in this sort of path, I would say, from the beginning of the year. They were sort of putting more focus on to MStar for TV and the rest of the MediaTek was focused on the mobile. So the announcement comes from China government is really sort of a reflection of what was happening during the last 1 year in the market. So we don't see much change from a competitiveness point of view. Meaning that it's going to be 1 unified company. There won't be 2 competitors in the market as far as we can see. There will be 1. And as a result, the customers are looking for alternative solutions and we're seeing that day by day.

Quinn Bolton - Needham & Company, LLC, Research Division

Great. And then a follow up for you Mustafa. You mentioned that you're now sampling both the new DTV and set-top box ARM-based solutions. Can you give us some sense, now that you're sampling, when you might expect to see production revenues for each of the set-top box and DTV platforms?

Mustafa Ozgen

Our expectation, based on our current design win and activities we see, we expect the first revenue to coming in mainly in Q2 next fiscal year or maybe late Q1. Will depend on the OEMs development progress. But our expectation in terms of -- modeling-wise is Q2 for TV. And set-top box will be very likely in the Q3 and Q4 timeframe, a little bit later than TV because it takes a little bit longer to develop set-top boxes products on the customer side.


[Operator Instructions] Your next question comes from the line of Hamed Khorsand.

Hamed Khorsand - BWS Financial Inc.

I want to start off with the easier one. If you could just clarify for me, your comments regarding the license revenue, the money you received in the current quarter. Is that all being recognized over set amounts of quarters or is that going to be all recognized in the current quarter?

Elias N. Nader

No, it's actually spread out over the next 3 quarters, Hamed. It's Elias, by the way.

Hamed Khorsand - BWS Financial Inc.

Okay, perfect. And then my other question was -- you guys bought some IP this quarter. I think, if my memory serves me right, you guys bought some IP last quarter. Can you just expand with you guys are building on the IP end? I know they're small acquisitions but it sounds that you're building up something.

Elias N. Nader

No, it's pretty much a lot. The majority of those purchase are for renewal license in our software EDA tools. Those are the largest of the expenses, yes. Software tools or ARM chip design, yes.

Hamed Khorsand - BWS Financial Inc.

Got you. And my last question is on the Z-Wave line. It sounds like you guys are finally gaining traction on the customer end. How confident are you this is not inventory buildup with the customer and there's actual sell-through in the channel?

Thinh Q. Tran

Well, we're seeing actual products hitting the market. Again, there are various retail product in the market that we see. When you go to Home Depot, Best Buy and other stores you see it. There are about 900 certified products available in the market today, worldwide. So this is driving quite a bit of a volume. And on top of it service providers like AT&T Digital Life, they did initial buildup, maybe about 1 or 2 quarters ago. But now we see that they're deploying the product and the consumers. So it's really selling through in the market.


Your next question comes from the line of Charles Frumberg with Emancipation.

Charles Iver Frumberg - Emancipation Capital LLC

First, congratulations on achieving profitability and sustained profitability, if I caught it correctly. So, in that vein, I was a little disappointed not to see some return of capital to shareholders or any plans for return of capital in whatever form, whether it's a buyback or a dividend. Because, with sustained profitability, it's the easiest way for an over-capitalized company to enhance its return on equity. So I'd like your thoughts or the board's thoughts on what the prospects are for that.

Elias N. Nader

Simply put, Charles -- by the way, it's Elias Nader here. If you go back and recall, this is second quarter of profitability in the last 10 quarters. So we have just started turning the corner and so we haven't had time to simply dive into such a plan, but it's in the works to talk about it and it's not, at this stage, ready to be discussed yet. But we are working on something.


There are no further questions in the queue at this time. I would now like to turn the call over to Ken Lowe for closing remarks.

Kenneth Lowe

Yes, thank you again for your interest in Sigma, and we look forward to seeing you again at this time next quarter. Thank you much.


Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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