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Executives

Edward McGregor - Manager, Investor Relations

Thomas E. Gay - Chief Financial Officer

Thinh Q. Tran - Chairman and Chief Executive Officer

Kenneth Lowe - Vice President, Strategic Marketing

Analysts

Analyst for Tristan Gerra - Robert W. Baird

Uche Orji - UBS

Mark Sue - RBC Capital Markets

Quinn Bolton - Needham & Co.

John Vinh - Collins Stewart

Sukhi Nagesh - Deutsche Bank

Lauren Stoller - Lazard Capital Markets

Hamed Khorsand - BWS Financial

Dunham Winoto - Avian Securities

Sigma Designs, Inc. (SIGM) F3Q10 Earnings Call December 2, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2010 Sigma Designs earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Edward McGregor, Manager of Investor Relations. Please proceed, sir.

Edward McGregor

Thank you and welcome to Sigma Designs' conference call to discuss financial results for our third fiscal quarter 2010. I’m Ed McGregor, Sigma’s Manager of Investor Relations. With me today are Thinh Tran, our 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 on 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 margin, 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 our SEC reports most recently on Form 8-KA filed with the SEC on November 25, 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

Thank you, Ed. For the third quarter of fiscal 2010, revenue was $35.5 million, a decrease of $15.8 million or 31% compared to the $51.3 million reported in the previous quarter. Compared to the year ago quarter, our revenue decreased $11.3 million, or 24% from the 46.8 reported then. Our revenue break-outs are as follows: by market segment and percentage of total revenues for the quarter, IPTV represented $22.5 million or 64% of our quarter; connected media players, $10 million or 28%; prosumer, $1.8 million or 5%; connected home technologies, $1.1 million, or 3%. By billing region, the revenue breaks down so that Asia was $27.5 million or 78% of the total; Europe, $5.4 million, or 15% of the total; and North America, $2.5 million or 7% for the quarter.

During the third quarter, we had three customers that exceeded 10% of our revenue. Highest was [Yuniyan] Corporation, coming in at $5.3 million, or 15%; Cowen represented $4.2 million or 12% of the total; and Motorola Singapore, $3.8 million or 11% of the total.

Gross margins were 45.3% for the third quarter compared to the same result in the preceding quarter and 46.3% in the same period last year. Because of the lower revenue in the current quarter, the absorption of manufacturing overhead was lower, having a negative impact of approximately 1% in the third quarter compared to the previous one.

GAAP net loss for the third quarter of fiscal 2010 was $2.3 million or $0.09 per share. This compares to a GAAP net income of $4.8 million or $0.18 per diluted share in the previous quarter. On a non-GAAP basis, net income for the third quarter was $2.5 million, or $0.09 per diluted share. Compared to the previous quarter, this is a decrease of $5.3 million from non-GAAP income of $7.8 million or $0.28 per diluted share. Compared to the year-ago quarter, this is a decrease of $4.7 million from the $7.2 million or $0.27 per share that we reported net.

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 third quarter. First is amortization of intangible assets associated with three acquisitions, a total of $0.8 million from [Blue 7], BXP, and [Zensys]. Second, stock-based compensation of $2.2 million, and third, G&A expenses of $1.8 million associated with the work done on the acquisition of CopperGate during the third period.

I would now like to cover a few key areas from our balance sheet. Cash, cash equivalents, and marketable securities totalled $235 million, an increase of $43 million, or $1.54 per share outstanding compared to the beginning of the current fiscal year. The increase is due to the $12.8 million reduction in receivables, $12.9 million reduction in inventory, and $4.8 million increase in accounts payable besides a $12.9 million cash generated by other operational activities. Based on our shares outstanding at the end of the quarter, this represents a total value of cash, cash equivalents, and marketable securities of $8.78 per share outstanding.

Net accounts receivable was $17.9 million at the end of the third quarter, a decrease of $12.8 million compared to the beginning of the fiscal year. Average day sales outstanding for our receivables as of the end of the third quarter was 46 days compared to 45 days in the previous quarter.

Net inventory was $23.1 million at the end of the quarter, a decrease of $12.9 million compared to the beginning of the fiscal year. This reduction brings our net inventory turns to 3.4 times per year compared to 4.3 in the previous quarter. The primary reason for the increase was the decrease in revenues during the quarter, accompanied by a mild increase in the inventory level.

Now that the CopperGate acquisition is closed, the details are finalized and I would like to take a few moments to make sure that the total net cash cost is clearly communicated. As you know, the acquisition was paid for in a combination of cash and stock. Sigma transferred a total of $116 million to the CopperGate shareholders, which was reduced by the net cash on CopperGate's books at the closing, which totalled approximately $25 million. The net of those two amounts less the $4 million of expenses leaves us with a net cash reduction of $95 million from the acquisition [to occur] in the fourth quarter. Balance of the purchase was made in shares which resulted in 3.9 million shares being issued as of the purchase date and stock option grants for 0.7 million shares being granted as of the same date to vest over the same life as the grants being replaced.

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

Thinh Q. Tran

Thank you, Tom. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma. In today's call, I would like to review the results of the third quarter, emphasize our achievements, and evaluate our [challenges].

First off, we are disappointed to report a shortfall in revenue for the third quarter. This shortfall is due to a number of factors affecting our IPTV demand, some of which are believed to be one-time events. We do feel that the IPTV market in general has a positive outlook and that next year [we'll see renewed market growth].

Sigma powered set-top box are currently being deployed at a total of 36 individual telco providers around the world, providing a broad portfolio of demand for this segment. We believe this broad portfolio should help with stabilizing demand and eventually bolstering future sales as we move ahead.

Beyond IPTV, we are seeing increased demand for digital media adapters, VX3 video processing products, and [V-Way] based home controlled devices. At the same time, we are pursuing major design wins for the next generation of IP cable set-top boxes and believe deployments will begin towards the end of 2010.

Finally, we have substantially bolstered our revenue and technology portfolio through the acquisition of CopperGate, the leading provider of home P&E networking solutions. We anticipate that the addition of CopperGate business will add over $10 million of quarterly revenue in the near-term, while positioning Sigma for strong future growth in IPTV set-top box segment.

Now let's discuss our results and our disposition of our IPTV business in a little more detail. As I mentioned earlier, there are a number of factors that affect our IPTV demand this quarter. First, we believe that we experienced the tail-end of the economic slump that has had an impact on the growth of our industry. It is our belief that we have seen the last of this slump and that the IPTV market will demonstrate growth in the coming quarters.

Second, we believe that some of our major telcos deploy refurbished set-top box inventory. It is our belief that most of these refurbished deployments was a one-time event and should enable true demand to reappear in future quarters.

Third, we believe that one of our largest telco saw a decline in set-top box in-store subscribers due to marketing program changes. It is our belief that this will be -- this will continue [back to the set-top box] demand coming on this account, which will be factored into future forecasts.

In summary, while we feel that we have shipped to a lower level of demand as a result of external forces, we feel that most of this decline is recoverable.

I would like to highlight some of the important business developments we have achieved since the last conference call. We jointly announced that Samsung would be delivering the ETS-7200 line of set-top box products based around Sigma [inaudible] media processor chip, supporting Microsoft Media room client. This announcement signifies the momentum building for Sigma [inaudible] series media processors.

We announced our commitment to broad-scale support of the [Enjoy] operating system on media processor [SOCs]. We also announced the availability of a [portal] version of [Enjoy] onto our [Vantage] [inaudible] platform, which enables OEM to move ahead with real-time design work.

We announced the launch of fourth generation Z-Wave architecture, the ZM4100 series. The ZM4100 modules provide a new generation of home control capability that adds more frequencies, memory, security to open up new markets on a worldwide basis.

Finally, we announced the acquisition of CopperGate. It will make a profound impact on our organization. Let's discuss this in more detail.

We believe that the marriage of CopperGate and Sigma provides substantial benefits to our existing business while positioning our combined companies to offer superb value solutions for the future. This perspective is supported by several major attendants. First, we will form a world class provider of integrated home entertainment chipset solutions. Our companies currently provide a leading component for the IPTV market but moreover, we encompass a range of technologies required to compete for the next generation solutions on a broader scale. Our technologies combine into a highly complementary platform, a platform that can enable fully integrated system on the chip solutions with media processing, content security, and entertainment networking. Furthermore, we will be able to take advantage of a number of synergistic elements, including improved design methodologies, high integration, and increased production volumes, all combining to yield better competitive position.

Second, we achieved a strengthened position with our key customers and partners. Our mutual customers will benefit from a larger and more stable organization and the promise of future integration with potential cost savings. Furthermore, CopperGate has built a substantial amount of good will with each of the major telco providers, largely as a result of the intimate ongoing service that provides for support of the home network installation. This is a mission critical element for TV services. This will result in increased access [affinity] with the telcos, which is so critical in securing next generation opportunities.

Finally, CopperGate provides Sigma with a highly capable and proven team, a team that has developed industry-leading communication technologies, penetrate top-tier customers, and successfully built a profitable operation. This team will not only greatly assist in the development of future technology but will also enhance our strategic and operational management of the company toward a more competitive overall organization.

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

Kenneth Lowe

Thank you, Thinh. For this call, I would like to provide an update on Sigma's market opportunities and the new potential that lies ahead for us. Let's start with a quick summary of factors affecting our demand outlook, and then we will go into the details.

First, the IPTV market has moved past this economy driven slump and is expected to see increased growth during next year. Second, Sigma's widely deployed by a large number of independent telcos that have been successful using Sigma Silicon and are in control of their future set-top box migration plans. Third, the addition of CopperGate adds a substantial revenue contribution and future growth potential in both IPTV and multiple dwelling unit markets. Fourth, we are seeing future increases in demand coming from the digital media adapters, VXP processors, IP cable, and home control segments.

Now let's move on to the IPTV market specifically. In spite of our current revenue results, all indications are that the IPTV market remains positive with expectations of strong growth over the next several years. According to i-Supply, the global IPTV market has already withstood the worst of the economic storm and 2010 is expected to be up 56% over 2009, resulting in a total of $52 million subscribers. By 2013, they forecast that subscribers will again double, reaching a total of $115 million. We also believe that IPTV offers advantageous features and service costs that will drive its continued increase in demand.

Let's now look at the overall IPTV demand and Sigma's penetration in each of the three worldwide regions. In North America, AT&T continues to be bullish about its U-Verse program. At the end of their third quarter, AT&T reiterated that their U-Verse service continued its strong ramp with a net subscriber gain of 240,000 for a total today of 1.8 million. Additionally, AT&T indicated that the U-Verse broadband attach rate continues to run above 90% and that over 75% of U-Verse CV subscribers have the triple play or quad play option from AT&T.

Total of 10 operators in North America currently deploy solutions based on Sigma silicon, which include AT&T, Century Tel, RTC, SureWest, MaxCom, Codatel, Telus, MTS All String, SaskTel, and Alliant.

Europe is continuing to show IPTV deployment growth, though it has slowed in many countries as a result of economic difficulty or other issues. The following is an update from some of the largest operators in Europe.

Deutsche Telecom now reached 885,000 subscribers in Germany and 1.2 million in total for Europe. [Belgacom] added 75,000 subscribers last quarter to reach a total of 663,000. France Telecom reached a total of 2.9 million subscribers for its Orange TV service, up 67% over last year. Portugal Telecom added 57,000 subscribers last quarter to reach a total of 577,000 by the end of this year. Telefonica reached a combined total of 2.5 million pay TV subscribers, up 15% this year. A total of 15 operators in Europe currently deploy solutions based on Sigma silicon, which include Deutsche Telecom, Belgacom, Portugal Telecom, Swisscom, TDC, [Illiad Freebox], [Neufschate Segitel], [Tascali], Vodafone, Wintelecom, T-Com affiliates, Telus Online, Vimplecom, Via-Pass, and DU.

Asia is continuing to demonstrate its IPTV acceptance with footprints spreading out to encompass more countries. The following is an update for the region based on some of the largest operators.

Korea Telecom reached a total of 988,000 subscribers last quarter. SK Broadband reached a total of 817,000 subscribers. LG Daicom added 111,000 subscribers to reach a total of 300,000. Singtel added 25,000 subscribers to reach a total of 126,000. A total of 13 operators in Asia currently deploy solutions based on Sigma silicon, which include Korea Telecom, SK broadband, China Telecom, [U-syn], KDDI, PCCW, LG Daicom, Reliance, Shanghai Media Group, Singtel, and MT&L, plus the cable provide, Guangzhou.

Now let's talk a little bit about the set-top boxes in our solutions. Contrary to certain published reports, our 8650 family of media processors represents an industry leading offering for second-generation IPTV deployments offering both performance and cost advantages. Furthermore, there is an increasing number of set-top box at telco providers that are working on designs based around the 8650 family that should see trials or deployments begin in 2010.

Under the Microsoft Media Room platform, the 8650 series currently provides the highest CPU performance available and is being ready for deployment by certain European telcos. This family has also merged the target platform for a wide range of cost-sensitive deployments in all regions. The 8650 series also currently provides the lowest cost solutions available under media room and it is now under design by at least three leading set-top box providers for potential deployment in China, India, and North America.

So let's touch base on the increased demand we are seeing in the DMA segment, which Sigma enjoys a leading position. Recent events have increased the appeal of the market and we are seeing our potential pick-up as a result. The momentum in the DMA market is fuelled by the availability of content on the Internet, along with a number of new products that provide video library mobility or Internet TV connections for this over-the-top content. Many of the new products can directly stream content from various paid, free, and user generated content locations. Paid content providers include Netflix, Cinema Now, and Amazon. Free content providers include ABC.com, NBC.com, and CNN.com. And user generated content sites include YouTube, Picassa, and Flickr, among others.

For the youth market, the choice of content on the Internet is more propelling than standard service provider fair. Several news top name suppliers are lined up to enter this market and exploit this demand, which will improve consumer visibility and retail channel promotions. We would expect to see continued revenue contributions from this segment over the next several quarters with demand modestly increasing over time.

Turing to the [inaudible] cable segment, many providers are in the process of planning a careful transition to IPTV technology for future video delivery. Much of the cable industry is coming under pressure from satellite providers who are providing their HD -- expanding their HD channel suite and from telco providers who are offering advance features. To take advantage of this, Sigma is offering its vast depth of IPTV expertise and technology leadership to the cable industry to help drive the adoption of DOCSYS 3.0 [true two-way] and delivery of the first generation of hybrid IPTV cable set-top boxes. This transitional opportunity represents a market potential much larger than the current telco-based IPTV deployments. To address this market, we are investing heavily into the cable gateway platforms, thin clients, and associated software to provide a complete solution and drive this transition. At this point, some operators are moving into the lab trial phase and determining their route to deployment. We would expect to see revenue contributions when North American deployments begin to occur, which has been predicted to happen towards the end of 2010.

The [UA] wireless home control is another steady growth revenue growth generator for Sigma. This product line taps into the demand for security and energy management services, which are fast becoming a target for operators. The [UA] brand devices are already the most popular solution for home control, providing hundreds of options for RF-based remote control and home appliances. Momentum is steadily building in the security sector, which now includes industry leader ADT as a customer. By connecting the Z-wave mesh network to an Internet link, this set of home control devices becomes accessible to consumers online or in the alternative, to operators or utility companies offering revenue generating services.

Although revenue contributions to date have been measured, we expect to see material increases when take rates by set-top box providers and operators begin to occur.

Now let's turn our attention to the CopperGate acquisition. To start with, Sigma immediately benefits from increased revenues, which represented about $61 million for CopperGate as a standalone business last year. From a sales standpoint, we also gain a broader portfolio of customers by selling to established CopperGate accounts while providing an increased value proposition to establish Sigma accounts. CopperGate is widely know and respected in the IPTV and home networking markets as the leading supplier of HP&A devices. To date, their products and differential value proposition have resulted in over 10 million [ICs] shipped. Their home P&A solutions provide the only commercially available devices based on this IT standard which deliver IP content across existing coax and phone lines. CopperGate has also developed substantial penetration into the MDU market which demands a low cost solution for delivering Ethernet over coax for high density housing and apartment buildings.

Since 2005, they have successfully deployed HP&A solutions at over 30 service providers through a broad ecosystem of OEM customers. These OEM customers include leading suppliers for many product classes, including IPTV set-top boxes such as Motorola and Cisco, residential gateways such as two wire and Motorola, ethernet bridges such as Cisco and [Cameo], intelligent network interfaces devices such as Two Wire and Alcatel, test equipment such as Sunrise and JDSU, and MDU access equipment such as Cisco and [Acton].

To expand their market appeal, CopperGate recently introduced its home plug AD device, which is the latest generation of power line technology that provides a cost effective, high performance solution for triple play home services over existing power lines. This product is expected to increase penetration into Europe and parts of Asia where the availability of coax is far more limited.

Moving forward, Sigma and CopperGate together will form a world-class provider of integrated home network, home entertainment chipset solutions. We believe that the future holds an era wherein multimedia and home networking converge, forming a more pervasive market for connected home entertainment. This market encompasses nearly all forms of future consumer entertainment products, including televisions, Blu-Ray players, and digital media adapters. By combining forces, it enables us to launch a more comprehensive set of solutions, it allows us to capitalize on a broader market opportunity, and readies us to compete at a higher level with rivals such as Broadcom and Intel.

Over the long-term, utilizing the complete range of media processing, content security, and entertainment networking technologies, Sigma will become a one-stop shop for nearly any form of home media deliver solutions.

In summary, Sigma remains the market share leader in IPTV media processor space and we are confident we will remain the leading provider for the foreseeable future. Moreover, Sigma has become a complete technology provider for the way consumers want to live. Now with five distinct but inter-related product lines, Sigma participates in a diverse set of market segments and offers increased value proposition to some of the largest consumer customers in the world.

We hope this analysis provided you with some insight about the opportunities that lay ahead for Sigma. We feel strongly about our leading technologies and established market position and look forward to building on this foundation.

Now I will pass the call over to Thinh to cover our forward guidance.

Thinh Q. Tran

Thank you, Ken. While we have indicated that the IPTV portion of our core business has seen a decline, we expect a rebound from this in the fourth quarter. We also expect the demand from our other core segments will continue to exhibit strength in the foreseeable future. Finally, the addition of the newly acquired CopperGate business will add over $10 million to our top line in our fourth quarter.

Our visibility is reasonable at this time. However, we will remain conservative in our future projections. Given those conditions, our forward-looking guidance is as follows -- we expect a partial rebound in our core business, which combined with the addition of CopperGate revenue will result in fourth quarter revenue in the range of $50 million to $55 million. We expect our gross margin excluding CopperGate to be similar to that of the third quarter.

In summary, I would like to reinforce that we believe our fundamentals remain strong, that our target market should experience growth, but we remain a strong leader in the IPTV market and we are redoubling our efforts in development to strengthen our position going forward.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Tristan Gerra with Robert W. Baird.

Analyst for Tristan Gerra - Robert W. Baird

This is Scott calling in for Tristan. Can you kind of walk us through where the shortfall occurred? Was that specific to any kind of business, whether it was media room or whether it was Linux or any kind of color that you can walk us through on that?

Kenneth Lowe

Well, it was IPTV centric, as you can see from the reported percentages of our revenue for that, and we would say the largest portion of it is connected to media room. Some of our largest customers are through media room and I think that's kind of the direction that we would have anticipated, or excuse me, that we would have analyzed from that situation.

Analyst for Tristan Gerra - Robert W. Baird

And can you walk through any reasons for that? Was it just some more order lumpiness or -- I know you talked a little bit at a high level about a couple of factors but I mean, is it positioning for transitioning to second gen boxes or anything like that that you can walk us through?

Kenneth Lowe

On one hand, we had some of our telcos that were refurbishing some of their existing inventory and then redeploy refurbished inventory, so for every box that they fixed and put back out there, that's another chip that they didn’t have to buy from us.

Secondly, there are a number of people that have been trying to realign their inventory to be a much leaner than it had been before, just to basically stay hand-to-mouth with their inventory, not try to have too much exposure, given the economic situation.

And I think those are the primary factors that drove what we were seeing. We did have one operator that was -- whose business model changed and they ended up seeing less set-top boxes per household and that factor dropped back out of there and that did affect the number.

Analyst for Tristan Gerra - Robert W. Baird

Okay. And so I guess it wasn’t anything from a competitive positioning as far as you are concerned?

Kenneth Lowe

We do not believe any of those factors were driven by competitive issues.

Analyst for Tristan Gerra - Robert W. Baird

And competitive issues not impacting the January quarter guidance as well?

Kenneth Lowe

No.

Analyst for Tristan Gerra - Robert W. Baird

Okay. Tom, a question for you -- how should we look at the OpEx buckets post the CopperGate? I guess if we are looking at it on a pro forma basis, you know, ex all the kind of one-time costs, how would you expect the business to look in the January quarter and then just kind of in general after that on kind of a percentage of revenue basis?

Thomas E. Gay

I provided that breakdown when we went over the acquisition conference call. And those ballpark numbers still stand. They are roughly about a third of the existing OpEx were pretty much shadowed in CopperGate's addition.

Analyst for Tristan Gerra - Robert W. Baird

Okay. And pro forma gross margin, maybe for next quarter, you know, you guided for gross margin to be flat ex CopperGate but the CopperGate gross margin has been higher but it might be lower on a reported basis just because of the amortization, so I mean if we were to look at kind of the underlying gross margin of the business, how much do you think that can bring you up?

Thomas E. Gay

Well, on a GAAP basis, the inventory that we will be shipping in the fourth quarter will have no margin at all from the CopperGate inventory, so that's one factor that we will communicate pretty clearly to you because you can make your own calculations. We'll provide what that impact was. Their standard margin has actually been a few points higher than ours, much closer to 50 and I will quantify that when we report the Q4 results, so you will be able to do your pro formas to track against what the actual acquisition cost of the inventory versus the selling price.

Analyst for Tristan Gerra - Robert W. Baird

But nothing on a guidance basis -- you're not giving anything on that?

Thomas E. Gay

Well, if you take those numbers and add them together in the way that would be traditional without the acquisition adjustment, the margin would actually be a little bit higher than what we report on the total that we guided you for.

Analyst for Tristan Gerra - Robert W. Baird

Okay. And given the weakness in the afterhours and the weakness in the shares recently, have you guys started to re-look at kind of getting more aggressive on the repurchase side or did you repurchase any shares in this last quarter?

Thomas E. Gay

We have made no update announcements to our repurchase program. We have just gotten done spending a chunk of our money on the CopperGate acquisition. I feel that we should let this settle down a bit. Some of the early after hours trading was done before our guidance was revealed and folks may not have realized that our message was that the low revenue for the quarter was not to be an expected trend.

Analyst for Tristan Gerra - Robert W. Baird

And how much of the next quarter -- I know you have been saying over $10 million but can you give us a little bit more of an idea of what the revenue you are expecting for the CopperGate next quarter? I mean, is it 15 or is it 11 -- can you give us any color on that?

Thomas E. Gay

Well, the over 10 -- [Copper] is just over 10 is the number we penciled in and don’t forget that it's actually 10% less than a full quarter. That's another factor because it only becomes effective with the acquisition.

Analyst for Tristan Gerra - Robert W. Baird

Right, and was purchase price accounting impacting that at all or not?

Thomas E. Gay

No.

Analyst for Tristan Gerra - Robert W. Baird

Okay. Thank you guys very much.

Operator

Your next question comes from the line of Uche Orji with UBS.

Uche Orji - UBS

Some clarification on CopperGate acquisition -- before the acquisition, the run-rate was about $17 million and you are saying over $10 million. I realize that 17 is over 10 but again, there seems to be quite a big deal of conservatism here, so could you explain what is happening here, other than the short quarter and when is the near-term -- does it include the quarter after that as well?

Thomas E. Gay

Some of the same factors that affected our shortfall this quarter are directly affecting CopperGate. They are in the same IPTV market going into many of the same boxes and the same dynamics of the supply chain tightening a little bit, just [revisiting] what the pools of inventory levels are and the effect of some of the refurbishments and recycling of already purchased parts was very much a factor for them as well as us.

So their recovery from that is expected to play out in the future and we are still at a point where there's some shadows of that activity going on into the fourth quarter.

Uche Orji - UBS

Okay, so -- I mean, so -- if I look at a quarter out or two quarters out, let me ask the same question a different way -- when do we expect them to get the quarterly run-rate of $17 million?

Thomas E. Gay

They should be approaching their previous averages in another quarter or two.

Uche Orji - UBS

Okay, fair enough. And coming to your guidance, excluding CopperGate, it looks like the core revenue was the $45 million. Could you break it down in terms of how much upside is from IPTV versus connected media players?

Thomas E. Gay

The majority of that is IPTV coming back much closer to its historic run-rate.

Uche Orji - UBS

Okay. And this is for Ken -- you said that you expect modest growth in the connected media player and could you explain your near-term outlook, how this business is going to shape out?

Kenneth Lowe

There's a couple of pretty substantial customers that we have that are going to be rolling out new versions of the product there. There's a certain amount of market development that is taking place there and demand increase that we think is just fundamental to the area. We are just seeing a lot more convergence between the Internet and the TV, so we think as that happens, there's going to be some growth in the market demand itself, there's going to be some growth in the specific products that these new, major new customers of ours are putting out, so we just feel pretty positive about that.

Uche Orji - UBS

Okay. Thank you.

Operator

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

Mark Sue - RBC Capital Markets

Thank you. You planned for sequential revenue to rebound [with all your customers] [inaudible]. Is there some additional confidence that your customers don’t have extra set-top boxes [inaudible] out there? Any comments [from what they have shared with you would be great].

Kenneth Lowe

You know, we -- like we said on previous calls, we don’t get a lot of specifics about existing inventories, et cetera. The indication is that there was a refurbishment program and that refurbishment program has pretty much gone the majority of its course. You know, it's possible that you get a little bit of bleed over from quarter to quarter on that but the indications that we are getting from current order rates and stuff indicate that we are moving back toward where we expect to be.

Mark Sue - RBC Capital Markets

Is the refurbishment carrier specific or do you think it's broader -- is it more vendor set-top box maker specific? And how often do we see that during the lifecycle?

Kenneth Lowe

You know, of course our data gets filtered through the set-top box guys but we think it's just a couple of the major carriers that kind of drove that type of program. The larger the carrier, the more exposure they have from carrying inventories of dead boxes and those are the types of things that they don’t want to sit there and hold on their books and so that's -- I think it's -- the raw numbers of having larger inventories is more of an impact on those people.

Thomas E. Gay

We don’t believe this pattern is likely to be repeated. They will probably be more diligent about refurbishing in a more current mode.

Mark Sue - RBC Capital Markets

Okay, got it. And I just have a [high level], as we look into next year, do you think we are at a point where including CopperGate and including the rebound in the service provider segment and the other projects that we should expect Sigma to grow revenues year-on-year next year?

Kenneth Lowe

You know, we haven’t been adding up the entire year. We've been looking at what's been happening in short-term. We felt that the instantaneous decline in revenue we had needed to be looked into very carefully and that is where we have put all of our focus. I think over the next couple of months between now and the next call, we'll be looking much more heavily at next year and the factors that could impact for the whole year. We'd like to believe that we are going to exhibit growth but we again haven’t added the numbers up.

Mark Sue - RBC Capital Markets

Okay, so there is nothing structural as it relates to carriers, IPTV carriers, rethinking their business model that will impact your revenue recovery [more in time] [inaudible] [that could actually cause a big hiccup and] [inaudible]?

Kenneth Lowe

That's what we believe.

Thomas E. Gay

The market itself has been suffering a bit from the economic conditions and the primary survey makers of this area are saying that they really expect very strong year-over-year growth in the IPTV segment.

Mark Sue - RBC Capital Markets

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

Operator

Your next question comes from the line of Quinn Bolton with Needham & Co.

Quinn Bolton - Needham & Co.

I just first wanted to follow-up on one of the prepared comments -- you said you had seen at one carrier a number of boxes per household has been reduced and you expect that to continue. I was just wondering if you could sort of put some further numbers behind that comment.

Kenneth Lowe

Well, I mean, you know, we've had -- one of our carriers has been more typically seeing in the range of three boxes per household and that specific carrier believes that that number, or we believe that the number has dropped down into the mid to low twos. So it's a definite effect on the box and chip level demand that you are going to get from that number of subscribers. It doesn’t meant that we are -- that the subscriber growth is any less and so you look at some of the publicly announced indicators and it looks like everything is continuing to go up into the right but that's one of the hidden figures that impacts us.

Quinn Bolton - Needham & Co.

And was it due to a -- you know, they are including fewer set-tops as part of the standard subscription fee or was there -- you said there was some change in the way they are approaching the customers that makes you believe it is more of a permanent change.

Kenneth Lowe

Yeah, it's connected into a marketing program change where instead of saying so sign up for the service and get as many boxes as you need, you get the first box and then you have to pay a minor fee for the other boxes. If you end up doing that, that type of marketing program, it makes people think about do I really need that third TV connected up? So I think that's the impact this has.

Quinn Bolton - Needham & Co.

Okay, great. Second question -- Ken, you guys had talked about the -- well, sort of two points; one, you talked about the Samsung win with the 8654 and then I think later on you talked about a couple of the European service providers looking to launch 8654 boxes for media room. Wasn’t sure if those are connected, so I just kind of wanted to follow-up on what's the outlook for 8654, specifically that Samsung box, both in Europe and North America for next year?

Kenneth Lowe

Samsung is pretty aggressive. They are going out there and they are trying to make sure they become a substantive set-top box player. The 8654 positions them to take a good run at that. They do have some business in Europe that they are looking at and yes, I think there's a definite connection between Samsung and that European business we referred to. So we would look for them to be pretty successful in set-top box business. They've got the right approach.

Quinn Bolton - Needham & Co.

Okay, and then assuming that they are also targeting North American accounts as well?

Kenneth Lowe

Oh, they definitely are. They've got worldwide focus on this thing and I guess the comment is we think the initial success is going to be in Europe and obviously they and we look for more success in the other regions.

Quinn Bolton - Needham & Co.

Okay, great. And then just lastly, and it may be too early to really tell, but you had mentioned the home plug AV solution from CopperGate -- wondering what kind of customer feedback CopperGate has received on that part. It looks like it obviously could be a good extension for CopperGate in a lot of the European and more traditional IPTV markets overseas.

Kenneth Lowe

You know, I guess I would answer that in two ways -- one in which is they are early on. They are just in the early sampling phase, so they are collecting feedback. I guess the other comment I would make to flavour that is that that specific chip is designed to remove one of the issues that has been inhibiting power line in many areas, which is the ability to work with surge protectors and other power strips. So they have certain feature advantages that they are bringing to the market that the market hasn’t had before, so they are very encouraged that they are going to receive demand associated with that.

Quinn Bolton - Needham & Co.

It sounds like that is probably going to -- to the extent that that ramps, it is probably a late 2010, early 2011 kind of timing -- would that be the right way to think of it?

Kenneth Lowe

Yeah, we think so -- yeah, second half of 2010.

Thinh Q. Tran

Still in the valuation and qualification process.

Quinn Bolton - Needham & Co.

Okay.

Thinh Q. Tran

So far, we are very happy with the results we are getting.

Quinn Bolton - Needham & Co.

Okay, but again, meaningful ramp probably late 2010 -- certainly nothing in the next couple of quarters?

Thinh Q. Tran

Probably correct.

Quinn Bolton - Needham & Co.

Okay, great. Thank you.

Operator

Your next question comes from the line of John Vinh with Collins Stewart.

John Vinh - Collins Stewart

First question is just a housekeeping question -- Tom, can you give us the aggregate rollup number for Cisco revenues for the quarter? Were they 10% in aggregate?

Thomas E. Gay

We have that one coming in just over 20% is our best estimation.

John Vinh - Collins Stewart

20%, okay -- and the -- just to clarify on the refurbishment issue in terms of this hiccup in the quarter, did you see that impact from one of your major customers, from both of your top customers or was that kind of across the board or could you just give us a little bit more color there?

Kenneth Lowe

You know, I think we got a hit from at least two of our larger suppliers.

John Vinh - Collins Stewart

Okay. And then Ken, you had also made some comments about where you feel the Microsoft media room 8654 being positioned for next year -- can you help us understand, how do we think about kind of how the market is expected to segment you and Broadcom next year on media room? Is it going to be geographic where you are going to be widely deployed in Europe and they get North America or are you going to be dual sourced within the same carriers? If you could just give us some additional color in terms of how do we think about your market share versus your competitors next year in media room, that would be great.

Kenneth Lowe

It's kind of interesting -- you know, as Microsoft started into their second generation, it was their perception that what they needed was more performance, more headroom and that was the primary thrust. And that has been important but that importance was mitigated a little bit because the 8634, which has been deployed for about three years, has continued to provide enough performance to do anything they have thrown at it, and so if the additional headroom is positive, everybody likes it, it's more obsolescence proof but we are finding actually and Microsoft is finding that their demand has been going up much more dramatically for low cost solutions and Sigma has a definitive advantage in that sense. We have multiple models in the 8650 family that are all binary software compatible under the media room platform. So we are able to go out there and hit multiple price performance point while still maintaining one validation footprint within Microsoft.

So what we believe is going to happen is that during the second generation rollouts in total, we think that we will fair very well in probably a very wide swath of accounts and we think that Broadcom will have some penetration but we have no indication to believe that their penetration is going to go that wide.

John Vinh - Collins Stewart

Okay. Would you care to take a stab at what you think the split will be in 2010 between you and Broadcom?

Thinh Q. Tran

Too soon to guesstimate.

Kenneth Lowe

Well, on the one hand it's too soon to guesstimate; on the other hand, we've got some 14 or 15 different accounts that are using the 8635. Microsoft is hamstrung in getting new set-top boxes out for deployment so we don’t think that -- we think it will take quite a while for people to move to the second generation. Obviously some of the larger big hitters command larger numbers but in terms of sheer numbers of telcos, we think it's going to take quite a while before the second generation, whether it's a Sigma box or a Broadcom box ends up making a big impact there in terms of all the telcos.

John Vinh - Collins Stewart

Okay, that's helpful. And then on the certification front, can you clarify -- has the 8654 been officially certified by Microsoft successfully at this point?

Kenneth Lowe

It's in its final throes. It is heavily embroiled in the validation effort, along with set-top boxes based on it. So in reality, it's kind of hard to separate the two, so there's a lot of parallel effort that is going on. There's multiple set-top boxes by multiple vendors being validated that are based on the 8650 series and the [SOC] validation is being drawn to a close at the same time.

John Vinh - Collins Stewart

So you have indicated it's in the final throes -- is that going to be another couple of months, another quarter before you think you will be certified?

Kenneth Lowe

We are pretty comfortable that by the end of this year, we will be fully validated and certified.

John Vinh - Collins Stewart

Okay. And then a final question for me on the competitive front, we've also started to see some IPTV boxes start showing up from Intel. Can you just give us an update and just help us size up kind of the competition, how do you think you stack up, you know, via Broadcom and also where do you think Intel kind of stacks up in the mix as well, that would be great.

Kenneth Lowe

You know, we heavily respect Intel as a competitor. They have gone out and they certainly are the kingpin in microprocessors. I guess two comments on that, both of those kind of strategic in nature, one of which is for those accounts who feel that X86 instruction set compatibility is an imperative, it is going to be hard to compete for that socket so Intel is going to naturally get those types of people. Second comment is we believe that's a minority of the market. Most of the other markets for components like graphics and video, et cetera, have all proven out that processor oriented architectures that depend on software or micro code written for a large processor really haven’t born out to be the high volume winners. You know, it's been tried and failed in graphics, it's been tried and failed in modems and I think it's been tried and failed with [inaudible] architectures in video processing, so we think that Intel on the one hand is going to be successful at a certain level but we believe that they will find their niche. And we still look at Broadcom as our primary strategic competitor in the segment and Intel as just behind them.

John Vinh - Collins Stewart

Great, thanks very much.

Operator

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

Sukhi Nagesh - Deutsche Bank

Can you give us an indication of what your unit shipments with IPTV segment this quarter and then a corollary to that would be what ASPs did?

Thomas E. Gay

Well, our overall ASPs continued to be in the mid-teens. Not much meaningful difference quarter over quarter. In terms of IPTV units, it pretty much tracks against the dollars, so --

Sukhi Nagesh - Deutsche Bank

Got it. Okay, that's helpful, Tom. And then for your forward guidance, you talked about you have given a range here and I think Thinh said it's conservative -- what would make you beat that conservative range and how should we look at it when you say it's conservative between $50 million and $55 million?

Kenneth Lowe

Well, one way to answer that is that, just as we talked about late last quarter, we started getting some of the pull-backs that resulted in the short-fall. We are starting to see some of the OEMs come back with increased orders, so if those increased orders continue to occur and more and more velocity, we can come in with a quarter that is a little bit on the rosier side than what we projected. We certainly don’t want to work that into the numbers we give you guys though.

Sukhi Nagesh - Deutsche Bank

Got it. Do you guys expect kind of a flat quarter for your entertainment media segment? Or how should you -- what are you seeing and --

Kenneth Lowe

We think it is going to be very modestly up -- again, we do think we are seeing continued signs of growth there, so we think that will not only continue through next quarter but maybe -- and continue on thereafter.

Sukhi Nagesh - Deutsche Bank

Okay, and then one final question I had -- at the time you acquired -- at the time of your CopperGate call, you talked about how the first two months of the quarter were weaker than expected. Can you give us a sense of what linearity has been since then, so the month of October, November and what do you expect for December and January?

Thomas E. Gay

Don’t really discuss the level of detail.

Kenneth Lowe

The answer is that yeah, we did indicate that we had a -- we felt a responsibility to indicate that there was some softness in the number we were seeing in the third month but I think again, that was related to some order adjustments that were related to this inventory draw-down, so we don’t know that that would have any impact as we go through the end of this quarter.

Thomas E. Gay

So what we were seeing towards the end of last quarter has affected the beginning of this quarter.

Kenneth Lowe

In other words, it's already baked into the guidance. The part that continued on that we saw was already baked into this guidance.

Sukhi Nagesh - Deutsche Bank

Got it. Thank you.

Operator

Your next question comes from the line of Daniel Amir with Lazard Capital Markets.

Lauren Stoller - Lazard Capital Markets

This is Lauren Stoller in for Daniel. If we look at connected media player, it looks like you are saying that it is going to increase but should we assume some seasonality there as well?

Thomas E. Gay

Well, what you are seeing here is the introduction of generation 2 DMA box which was not really very significant in Q2 and did come back pretty well and continues to be rolled out successfully, so we are expecting some at least continuation if not building from that particular area as well as some others that are starting to roll out and introduce their products, so this is the traditional window of seasonality based on Christmas deliveries.

Lauren Stoller - Lazard Capital Markets

Okay, fair enough. So that it sounds like the customer base has grown a little bit there.

Thomas E. Gay

Yes.

Lauren Stoller - Lazard Capital Markets

Okay, and then should we still be assuming an 11% tax rate?

Thomas E. Gay

For now, that's our target.

Lauren Stoller - Lazard Capital Markets

Okay. And then when should we expect to hear about the design wins in the IPTV set-top box space for the next gen, the ones that you guys are up for right now?

Kenneth Lowe

I think as we go throughout 2010, I think particularly we should have something in early 2010 in the first half and then what we would hope to believe is that we are going to continue to show announcements in that second generation.

Lauren Stoller - Lazard Capital Markets

Okay, so then potentially of Broadcom does win some slots, then we could see your market share start to come down starting in the second half of 2010?

Kenneth Lowe

Sure, that possibility exists.

Lauren Stoller - Lazard Capital Markets

Okay, fair enough. All right, thank you very much.

Operator

Your next question comes from the line of [Hamed Khorsand] with BWS Financial.

Hamed Khorsand - BWS Financial

First question, do you think that some of your carriers have changed their buying habits in anticipation of Broadcom getting ready to enter the market?

Kenneth Lowe

You know, I think whether or not it's Broadcom or Sigma coming in a second generation box, they certainly -- anybody that is looking at a generational transition is looking at lowering their inventory exposure a little bit before they get into that. Even the carriers that we are working with for second gen replacement, we see a little bit of that happening. We think that's a second order effect though.

Thomas E. Gay

Pretty limited.

Hamed Khorsand - BWS Financial

Okay, and in terms of geographies and carriers with dedicated deployment to IPTV, is there a difference from geography to geography as to how it's being deployed?

Kenneth Lowe

I'm not sure I understand the question. In what sense do you mean differences?

Hamed Khorsand - BWS Financial

Meaning in region to region, is there a difference in the speed of deployment of IPTV, in their dedication to it, in their efforts at upgrading it, things like that?

Kenneth Lowe

Oh, I see what you are saying -- I guess what we would differentiate is that the tendency is in somewhere like North America where premium video services have been established for a while and the market is hotly competitive, you are going to see the need to keep those boxes at state of the art and to keep up with any feature treadmill that you need to be on. You go out to certain areas that are just getting premium video services for the first time, certain parts of Asia, eastern Europe, I think they can live with the current generation box for much longer.

Hamed Khorsand - BWS Financial

Okay, and I kind of caught it and maybe I missed it, but I know you were talking about CopperGate -- is that going to start being cross sold in this quarter or in the next quarter?

Thomas E. Gay

What was the question? Is it going to start being?

Hamed Khorsand - BWS Financial

With CopperGate, do you plan on -- is it already being cross-sold with Sigma products or is that something that is going to take place next quarter?

Thomas E. Gay

We expect the synergies to take a little while to kick in. Some of the cross-marketing and integration capabilities will take a while to actually achieve.

Hamed Khorsand - BWS Financial

Okay. And do you think that CopperGate will benefit with protecting revenue erosion from AT&T?

Thomas E. Gay

Well, their relationship with AT&T is very strong. They are in every box, IPTV set-top box that is deployed, as well as in a gateway box that we do not appear in, and so they actually sell one more chip per household. They are also the only supplier of the networking specification that AT&T has, so regardless of what second generation IPTV chip is specified, CopperGate will continue to participate in that market.

Hamed Khorsand - BWS Financial

Okay. Those are my questions. Thank you.

Operator

And the final question comes from the line of Dunham Winoto with Avian.

Dunham Winoto - Avian Securities

First question I guess is basic housekeeping for you, Tom -- for share count, do we just go ahead and add the $3.9 million that you mentioned in your prepared comments to the shares outstanding at the end of the third quarter?

Thomas E. Gay

Yes, that was -- let's see, there was 10% of the quarter that went by without that amount of shares being issued and so there will be a 90% impact on the average shares outstanding during the fourth quarter and then the full impact will be in every quarter thereafter.

Dunham Winoto - Avian Securities

Okay, got it. And then my second question is can you just explain to us -- I know you, Ken, mentioned a little bit about the certification process for the 8654, but do you have to requalify 8654 for each OEM, for each carrier, how does that process work for a new chip?

Kenneth Lowe

Well, I think the process works when new chips come out, the set-top box vendors will develop a box based on it and they will try to bid that into carriers that may be interested. There's an additional wrinkle that occurs that even if a carrier is interested and they happen to be part of the media room family, they've got to wait for Microsoft to validate that new box for that specific carrier.

So it's a fairly complex set of gates that you go through in order to get those new generations of chip out. I think the good news for us is that our 8634s continue to ship in large quantities while that stretches out and I think the other news for us is that we are hotly competitive for all the second generation business, so it's nice that we have relationships with all these carriers that have been successfully deploying Sigma chips. So we have a built-in ability to go in there and help influence their decisions.

Dunham Winoto - Avian Securities

Okay, so just so I understand this correctly -- so let's say you guys are qualified or the 8654 is qualified with a Samsung box that goes to say AT&T and then AT&T is looking for a dual source from say Cisco for the 8654, you will have to do a re-certification for the media room again for Cisco going to the same telco?

Kenneth Lowe

Not if it's an identical box. It's just that there are typically many, many of the different carriers have slightly different versions of these boxes, so --

Dunham Winoto - Avian Securities

But what if they come from two different OEMs, one coming from Cisco and the other one coming from Samsung and they both use 8654?

Kenneth Lowe

They would have to be independently validated.

Dunham Winoto - Avian Securities

Okay. Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to hand the call over to Mr. Edward McGregor for any closing remarks.

Edward McGregor

Thank you. We would like to thank everyone for attending our conference call today to discuss our third quarter results. We do appreciate your interest in Sigma Designs and do look forward to our next scheduled conference call to discuss our results for our fourth fiscal quarter 2010. Thank you.

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 F3Q10 (Qtr End 10/31/09) Earnings Call Transcript
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