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Sigma Designs Inc. (NASDAQ:SIGM)

F4Q10 Earnings Call

March 3, 2010 5:00 pm ET

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

Daniel Amir – Lazard Capital Markets

John Vinh - Collins Stewart

Analyst for Tristan Gerra - Robert W. Baird

Mark Sue - RBC Capital Markets

Uche Orji - UBS

Hamed Khorsand - BWS Financial

Dunham Winoto - Avian Securities

Quinn Bolton - Needham & Co.

Operator

Welcome to the fourth quarter 2010 Sigma Designs earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Edward McGregor, Manager of Investor Relations. Please proceed.

Edward McGregor

Thank you and welcome to Sigma Designs' conference call to discuss financial results for our fourth fiscal quarter 2010. I am 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, www.sigmadesigns.com. 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 will then open the call to questions from analysts and institutional investors. We expect to conclude the call within one hour.

Before we begin, I would like to 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 provide 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 10-Q filed with the SEC on December 10, 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 would like to hand the call over to Tom, who will review our financial results.

Thomas Gay

Thank you, Ed. For the fourth quarter of fiscal 2010 revenue was $68.1 million, an increase of $32.6 million or 92% compared to $35.5 million in the previous quarter. Compared to the year-ago our revenue increased $20.8 million or 44% from the $47.3 million we reported then.

Our revenue breakouts are as follows: By business segment and percentage of total revenues for the quarter IPTV processors represented $34.8 million or 51% of the total. Connected media players came in at $15.1 million or 22%. Connected home technologies were $15.7 million or 23% of the total and the Prosumer segment was $2.3 million for the quarter or 3%. By billing region, Asia represented $51.8 million or 76% of the total. Europe was $9.2 million or 14%. North America was $7.1 million or 10% of the total.

During the fourth quarter we had two customers that each exceeded 10% of our net revenue. Motorola was $16.6 million or 24% and Gemtec was $9.8 million or 14% of the total. Gross margins were 41.1% for the fourth quarter compared to 45.3% in the preceding quarter and 45.1% in the same period last year. A significant factor in our fourth quarter cost of goods sold was the fair value markup of inventory acquired through our recent acquisitions which totaled $4.6 million, an impact of 6.8%. Had we acquired that inventory directly from the manufacturers our gross margin would have been 47.9% for the fourth quarter.

CopperGate has now sold through its inventory that was on hand at the time of the acquisition which will make the pro forma gross margin adjustment minimal in the future.

GAAP net loss for the fourth quarter of fiscal 2010 was $2.8 million or $0.09 per share. This compares to a GAAP net loss of $2.3 million or $0.09 per share in the previous quarter and GAAP net income of $6.6 million or $0.24 per diluted share in the year-ago quarter. On a non-GAAP basis net income for the fourth quarter was $11.3 million or $0.37 per diluted share compared to the previous quarter this is an increase of $8.5 million from the non-GAAP income of $2.8 million or $0.10 per diluted share. Compared to the year ago quarter non-GAAP net income increased $0.9 million from $10.4 million or $0.39 per share that we reported.

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 fourth quarter; First was amortization of intangible assets associated with four acquisitions. A total of $4.3 million from Blue 7, ZXP, Zensys and CopperGate. Second was share based compensation of $3.2 million. Third, the fair value markup of inventory purchased through acquisitions and sold during Q4 came in at $4.6 million and last G&A expenses of $1.9 million associated with the work done for the acquisition of CopperGate.

I would now like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $148 million at the end of the quarter, a decrease of $44.3 million or $2.44 per share outstanding compared to the beginning of the fiscal year. The decrease is due to the $91.8 million in net cash paid in the acquisition of CopperGate which was partially offset by a reduction in inventory and cash generated by other operational activities. Based on our shares outstanding at the end of the quarter the total value of cash, cash equivalents, restricted cash and marketable securities equals $4.79 per share outstanding.

Net accounts receivable was $36.1 million at the end of the fourth quarter, an increase of $5.4 million compared to the beginning of the fiscal year. The average day sales outstanding for our receivables as of the end of the fourth quarter was 48 days compared to 46 days in the previous quarter. Net inventory was $18.2 million at the end of the quarter, a decrease of $17.9 million compared to the beginning of the fiscal year.

This reduction brings our net inventory turns to 7.8 times per year compared to 3.4 for the previous quarter. The primary reason for the increase was the unexpected surge in turns business during the fourth quarter resulting in a depletion of our inventories well below our expected levels.

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

Thinh Tran

Thank you Tom. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma. On today’s call I would like to review the results for the fourth quarter, emphasize our achievements and [inaudible].

First off we are pleased to report a substantial increase in revenue for the fourth quarter nearly doubling that of our third quarter and reflecting the underlying strength of the markets we serve. Our IPTV market sales were up sharply and we believe the market is moving through a new growth phase evidenced by main accounts that achieved the highest ever net subscriber additions in the fourth quarter. Our connected media player sales were also up reflecting increased sell through rates for consumer products such as network players, [internet] access of playback over the tough content.

Finally our connected home market sales were up dramatically as a result of added revenues from the recently acquired CopperGate operations whose revenues accrued from their leadership position in the home audio video network solution, home PNA. Moving forward we are continuing to pursue major design wins in the hybrid IP cable set top box industry and the increased adoption of Zwave based home control solutions.

Now I would like to highlight some of the important business developments we have achieved since our last conference call. We showcased a wide range of new products and technologies at the CES 2010 show in early January enabling the emergence of this year’s crop of [inaudible] consumer products. The technologies showcased included 3D video technology that portends the type of premium theater experience that will grace our living rooms in the near future. 3D graphics technology that will enable a new generation of user interface, downloadable applications and games. HomePlug AV chip sets combined with Home PNA chip sets that enable the digital broadcast content over every wire inside the home. NeoVue platform designed to wirelessly transport audio/video and text content from notebooks or netbooks to televisions or projectors at high definition resolutions up to 1080p.

We also jointly announced with Western Mediabridge the demonstration of the world's first commercially available Android set top box along with several additional advanced STB solutions. We announced the availability of the SD3402 Z-Wave chip designed to add ZWave wireless control and status capabilities to radio frequency remote controls, set-top boxes and consumer electronic products. Z-Wave provides the added value of an interoperable ecosystem of hundreds of home control devices that can provide energy management, safety and security as well as comfort and convenience solutions.

We announced that Yes, the leading satellite provider in Israel, has completed a successful commercial pilot of VoD service based upon CopperGate's Home PNA technology. Yes has already deployed the VoD solution to hundreds of consumers and has been successfully running the service for several months. We jointly announced with both Gigafast and Asoka the development of a HomePlug AV bridge based upon the high performance and ultra-green CopperGate CG2110 chipset. These new adapters will enable OEMs to deliver high performance, low power, low cost, power line communications solutions to retail consumers and service providers.

We announced a partnership with SoftAtHome to deliver the SoftAtHome Operating Platform for hybrid, terrestrial and IP set top boxes on the Sigma Designs' 8654 chipset. The SoftAtHome Operating Platform contains advanced functionality and application programming interfaces for creating next-generation applications in the digital home. We jointly announced a cooperative relationship with Ralink Technology to provide the availability of 802.11n WiFi enabled reference designs which will enable rapid deployment of wirelessly networked consumer electronic products.

Now I would like to say a few words about our recent acquisition of CopperGate and the positive impact it is having on Sigma. First, as a joint entity our entire organization is now focused on forming a world class providers of integrated home entertainment chip set solutions. We have already moved ahead with the integration of our sales force to unify our position with our accounts and ensure we are taking every advantage in cross selling all products to all of our customers.

We have also begun to integrate our manufacturing efforts to take advantage of a number of synergistic elements that benefit the cost and availability of our portfolio of products. Our combined company now offers the leading components of the IPTV market but moreover we encompass a range of technologies required to compete for the next generation of solutions on a broader scale. These technologies combine to highly complementary platform and we are examining ways in which the platform can be brought to market to the advantage of Sigma and our customers.

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, technology developments and new potential that lay ahead for us. Let’s start with a quick summary of highlights affecting our demand outlook and then we will go into the details.

First, the IPTV to market is showing signs of strengthening with over half the 15 Telco’s reporting last quarter’s results having their largest subscriber growth to date. Second, Sigma is showing continued strength in next generation IPTV deployments and we are experiencing an increasing number of customer engagements for our 8250 series. Third, the addition of CopperGate has added substantial revenue contributions to our current operating results as well as future growth potential in both IPTV and multiple dwelling unit markets. Fourth, we have experienced additional increases in demand coming from market growth in digital media adapters. Fifth we are getting closer to design wins and actual deployment plans in the cable market.

Now let’s focus on the IPTV market specifically. As illustrated by our current revenue results most indications are that the IPTV market remains positive with expectations of strong growth over the next several years. Most industry research providers are forecasting good growth over the next several years.

For example, I-Supply expects the calendar year 2010 to be up 56% over 2009 and expects subscribers will again double by 2013 reaching a total of 115 million. We also believe that IPTV offers advantageous features of service costs that will drive continued increase in demand both in continued Telco deployments as well as technology transitions in the cable industry.

Now let’s look at the overall IPTV demand and Sigma’s penetration into 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 fourth quarter AT&T reiterated that their U-Verse service continued a strong ramp with a net subscriber gain of 248,000 units for a total of 2.1 million subscribers to date. This was their fifth consecutive quarter of over 240,000 added subs. Additionally, AT&T indicated that over 75% of U-Verse TV subscribers have a Triple Play or Quad Play option from AT&T.

A total of 11 operators in North America currently deploy solutions based on Sigma silicon including AT&T, CenturyTel, RTC, [Surewest], Maxcom, Codatel, Telus, MTS Allstream, SASTel, Alliant and Intellus. Europe is starting to show more IPTV growth in most countries but some are still rebuilding. [Inaudible] is one of the largest operators in Europe. Deutsche Telecom now reaches 852,000 subscribers in Germany having added 174,000 last quarter, their highest quarter add to date. Additionally, they are now targeting 2.5 to 3 million subscribers by the end of 2012.

Beldercom added 89,000 subscribers last quarter to reach a total of 752,000 which was their highest quarter to date. France Telecom now reached a total of 3.2 million subscribers to its Orange TV service, up 45% over last year. Telefonica added 49,000 subscribers last quarter to reach a total of 703,000 IPTV subscribers. Swisscom added 44,000 subscribers last quarter which was the highest quarter add to date and now reaches a total of 230,000. [TR Havartsky] Telecom added 46,000 subscribers last quarter also their highest quarter to date and now reaches a total of 236,000.

A total of 15 operators in Europe currently deploy solutions based on Sigma silicon including Deutsche Telecom, Beldercom, Portugal Telecom, Swisscom, TDC, Ilead, [inaudible] Vodafone, [Winn Telecom], TCom Affiliates, Telus, [Vimplecom], Viapass and [PU]. Asia is seeing increased deployment rates for IPTV growth as three of its carriers experienced their highest ever subscriber adds in the fourth quarter.

The following is an update for the region based on the largest operators. Korea Telecom reached a total of 1.1 million subscribers by adding 265,000 subs, their strongest quarter ever. SK Broadband reached a total of 856,000 subscribers by adding 46,000 subs, their strongest quarter in two years. SingTel reached a total of 155,000 subscribers by adding 29,000 subs, their strongest quarter ever. LG Dacom reached a total of 344,000 subscribers by adding 73,000 subs. A total of 11 operators in Asia currently deploy solutions based on Sigma silicon including Korea Telecom, SK Broadband, China Telecom, [USEN], KDDI, PCCW, LG Dacom, Shanghai Media Group, SingTel and NTL plus the cable provider [inaudible].

Now let’s talk a bit about set top boxes and our solutions. We are encouraged to see an increasing number of engagements of our 8650 series of media processors out of the Microsoft Media Room platform. The 8650 series currently provides the highest CPU performance available and is being readied for deployment by selected Telco’s. This family has also emerged as a target platform for a wide range of cost sensitive deployments in all regions.

The 8652 specifically represents an exceptional value for low cost set top box solutions under either Media Room or Linux. Providing a substantial cost savings it delivered the performance required to meet the next generation user experience in a very efficient manner. Based on current design activity we expect to see active deployments begin ramping around the middle of this year.

Now let’s touch base on the increased demand we are seeing in the network player or VMA segment in which Sigma enjoys a leading position. Recent events have increased the appeal of this market and we are continuing to see our revenue pick up as a result. The momentum in the VMA market is fueled by an increasing availability of content over the internet along with a number of new products that provide video library mobility.

Many of the new products can directly stream content from the various paid, free and user generated content locations. For the youth market the content of choice on the internet is more compelling than standard service provider fare. Service several and top name equipment makers are lined up to enter this market and exploit this demand through improved customer visibility and retail channel promotions. VMA equipment makers have traditionally come from the networking camp but some of the latest additions are also some of the top name CE makers which will bring added visibility and potential to this market. We would expect to see continued revenue contributions from this segment over the next several quarters with demand modestly increasing over time.

For the cable segment Sigma is continuing to work with more and more providers that are examining their eventual transition to IPTV like technology for future video delivery. The cable industry remains under pressure from aggressive new Telco providers as well as existing satellite providers. Each of these operators looks for ways to increase their subscriber base through service features such as expanded channel suites, more HD content, rolling out home on DVR capabilities and other advanced features.

The cable industry currently dominates subscribers in many areas. However, they must overcome the limitations in the current infrastructure in order to remain in control. This transitional opportunity represents a market potential much larger than the current Telco based IPTV opportunity. To address this market we are investing heavily in the cable gateway platforms, clients and associated software to provide a complete solution and drive this transition. Sigma has a wealth of IPTV expertise and is helping to drive the adoption of DOCSIS 3.0, true 2-way and delivery of the first generation of hybrid IPTV cable set top boxes. 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 pilots begin to occur.

ZWave wireless on control is another steady revenue contributor to Sigma whose product line taps into the demand for security and energy management services which are fast becoming a target for operators and set top box makers. Zwave brand services are already the most popular solution for home control providing hundreds of options for RF based remote controlled home appliances. Momentum is steadily building in the security sector which now includes industry leader ADP as a customer.

Additionally, the various smart grid initiatives that will enable improved energy consumption are creating a future mass market for devices such as Zwave. By connecting the Zwave mesh network to an internet link this set of home control devices becomes accessible to consumers online or in the alternative to utilities or operators offering revenue generating services. As a result of the potential increase in average revenue per user many operators are issuing their new RFP documents with home control as one of the desired elements.

Our new generation of Zwave wireless devices referred to as the 3400 series is making it even more compelling for new participants to jump in. The 3400 series has new communication bands including 2.4 GHz along with standard interference rejection and on chip security services. As a result we now have more targeted products for set top boxes and RF remote controls while enhancing our offering for home appliances.

Now let’s turn our attention to the CopperGate operation. To start with, Sigma has immediately benefited from the substantially added revenue stream that represented approximately $15 million in the fourth quarter. Not only has this added a strong boost to our top line but it has provided us with a more diverse portfolio demand. CopperGate is widely known and respected in the IPTV and home networking markets as the leading supplier of Home PNA devices.

To date their products and differential value proposition have resulted in over 13 million [ICs] shipped. Their Home PNA solutions provide the only commercially available devices based on this IT standard which delivers IT content across existing coax cables 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.

To expand their market appeal, CopperGate recently introduced its Home Plug AV device which is the latest generation of power line technology that provides cost effective high performance solutions for triple play home services over existing power lines. Working together we are in the process of marketing the new Home Plug product into Europe and parts of Asia where the availability of coax is far more limited. Additionally, CopperGate is a major contributor to the new ITU standard G.Hn which will deliver the next generation of home networking across all three wired media meaning coax, phone and power lines. This is a transformational technology that will move the industry to one local standard with data rates up to 1G per second and throughput as much as 700 MB per second or three times faster than today.

Moving toward the future, Sigma and CopperGate are working on combining technologies to form a world class provider of integrated home entertainment chip set solutions. We believe the future holds an era where multimedia home networking converge forming a more pervasive market for connected home entertainment. This market encompasses nearly all forms of consumer entertainment products including televisions, Blue Ray players and digital media adapters. By combining forces it enables us to launch a more comprehensive set of solutions, allows us to capitalize our broader market opportunity and ready us to compete at a higher level with rivals such as Broadcom and Intel.

Over the long-term utilizing a 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 delivery solutions. In summary, Sigma remains the leader in IPTV and other emerging market segments. We are confident we will remain the leading providers for the foreseeable future.

Moreover, Sigma has become a complete technology provider for the way consumers want to live. Now with five distinct but interrelated product lines Sigma participates in a diverse set of market segments and offers an increased value proposition to some of the largest consumer equipment makers in the world. We feel strongly about our leading technologies, established market position and we look forward to building on this foundation.

Now I will pass the call back over to Thinh to cover our full-year guidance.

Thinh Tran

Thank you Ken. As we have indicated we see a positive outlook for the IPTV market which will remain the largest portion of our business for the foreseeable future. We also anticipate reasonable growth in the VMA market and relatively steady business for the rest of the segments combined. As we move further into the future we expect that the emerging IPTV cable opportunities will translate into many new revenue streams at some point.

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 continued strength in our core business which will result in first quarter revenue of above $60 million with upside depending on available manufacturing capacity. We expect our gross margin on a pro forma basis to be similar to that in the fourth quarter.

In summary, I would like to reinforce we believe our fundamentals remain strong. Our target markets should experience growth and we remain a strong leader in the IPTV market and that we are focusing our efforts to strengthening our position moving forward. We would now like to open the call for Q&A.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Daniel Amir – Lazard Capital Markets.

Daniel Amir – Lazard Capital Markets

Can you expand a bit on where the strength on the upside was for the January quarter compared to your previous expectations? I n addition can you give a little clarity about the guidance considering you essentially guided for flat or down compared to this quarter even though you are fairly upbeat on the current business environment?

Kenneth Lowe

We guided on the strength that our first quarter will follow on with the fourth quarter in general. We do see an upbeat market. As we mentioned many of the IPTV providers are showing very positive indications for the future. As we indicated, we have certain capacity limits to what we can deliver. So while we may be experiencing a pace of increasing demand as we go through the next couple of quarters we are looking at the supply constraints holding down some of that.

Daniel Amir – Lazard Capital Markets

Where was the strength here in the January quarter? Can you provide a bit more clarity on that?

Kenneth Lowe

We are actually projecting strength uniformly across our markets. As I mentioned IPTV, the connected media player, all the segments are pretty much experiencing strength at this point.

Daniel Amir – Lazard Capital Markets

Now based on your projections on the IPTV market this year what type of share could see Sigma Designs have in 2010 in the Linux and Microsoft based boxes this year?

Kenneth Lowe

Frankly we don’t anticipate a large share change in this year. We have yet to really come across any widespread competition in Linux and we continue to see status quo in the Media Room at this point in time. So we really don’t see any dramatic share shifts for this year.

Daniel Amir – Lazard Capital Markets

On the hybrid IP cable set top box business can you clarify just in your prepared comments is this a business we should be seeing revenues from this segment this year or is this something that is more a couple of years out?

Kenneth Lowe

What we would hope for is you would start to see announcements this year of design wins and then rollouts probably towards the first half of next year.

Operator

The next question comes from the line of John Vinh - Collins Stewart.

John Vinh - Collins Stewart

Last quarter you talked about kind of an inventory issue with some of your customers. It looks like given your results we have moved past that. Can you give us an update on that? What is your visibility to inventories in the channel and what is your confidence level that we have moved beyond that and this is not going to come back in the April quarter at this point?

Thomas Gay

The supply chain continues to be challenging to predict. It tends to waiver from time to time. We would hope some of the lessons experienced in the third quarter have been learned and won’t be repeated but our visibility is still limited because we are dealing directly with the contract manufacturers rather than the deploying Telco’s.

John Vinh - Collins Stewart

Just to clarify on the forecast and on the guidance, it sounds like you are capacity constrained here. Can you comment on what your lead times are? Are there initiatives underway to expedite central costs and is there a chance you will be able to guide or generate flat to up revenues and meet your orders at this point?

Thinh Tran

I think you are probably aware the capacity is going to be tight for the rest of the year across the industry. So we are not being singled out or anything like that. We do get caught by surprise how strong the revenue came back in Q4. So we should deplete a lot of our existing dye bank. We now have to rebuild against our inventory. So we hope that if we have enough lead time we should be able to manage the capacity nicely but I think we just get caught in a short position where demand was much stronger and came back so quick it has taken a lot of our safety stock out. We do expect the capacity to be tight but we have a lot of planning now in place to make sure that we can supply enough for what our customers want.

John Vinh - Collins Stewart

Can you remind us what your lead times are currently?

Thinh Tran

It is in the 12 week range right now.

John Vinh - Collins Stewart

That is stretching out at this point?

Thinh Tran

Yes it is stretching out a little bit.

Operator

The next question comes from the line of Analyst for Tristan Gerra - Robert W. Baird.

Analyst for Tristan Gerra - Robert W. Baird

On the lead time we did see a couple of years back people tended to when the lead times got a little bit stretched out they did over-order. What is your confidence that you are able to kind of scrub that backlog and prevent any double ordering on that front?

Kenneth Lowe

I think we have been working very closely with our customers the last couple of quarters. Last quarter we experienced some push outs. The third quarter some push outs. Fourth quarter some pull ins. So I think what we are doing is we are trying to develop a very tight working relationship with our customers. They are much more willing to do it now that they understand the supply constraints in the semiconductor manufacturing chain. So we are pretty confident right now we are moving hand to mouth with what we are doing.

Analyst for Tristan Gerra - Robert W. Baird

Were you capacity constrained in the January quarter as well? Could you have shipped more?

Kenneth Lowe

Perhaps a little bit more.

Analyst for Tristan Gerra - Robert W. Baird

What do you think if you weren’t constrained is there any area where you think you could hit? Could it be 70-75 if you weren’t capacity constrained?

Thomas Gay

That would be a rather optimistic number.

Analyst for Tristan Gerra - Robert W. Baird

Fiscal 2011 tax rate and April quarter share count now that we are going to hopefully be moving back into GAAP profitability?

Thomas Gay

We are using a 10% rate at this point. We still have to work out some of the puts and takes of each country to come up with a finer number but less than 10% would be our hope. Then on the share count what you are seeing in the fourth quarter is coming close to what we would expect going forward. So we are around 30.5 million would be a reasonable number for the basic shares average to use in the first quarter.

Analyst for Tristan Gerra - Robert W. Baird

Then add maybe one million on the diluted?

Thomas Gay

Something like that. Between half million and a million.

Analyst for Tristan Gerra - Robert W. Baird

You were saying there was a lot of expedite. What was the linearity like in the quarter? The accounts receivable obviously went up quite a bit because of the big increase in revenue. What was the linearity? Did you feel it was much more back end loaded or were the expedites coming as soon as you really got more into the quarter?

Kenneth Lowe

The returns business popped up after the conference call we had for the third quarter. Some of those opportunities were easy to fill relatively quickly as we had the dye bank to support it. So once it got to the increased level it was somewhat linear. As you saw the DSO didn’t go up much. It wasn’t really a strong spike at the very end of the quarter.

Analyst for Tristan Gerra - Robert W. Baird

You talked about 8652 hitting mid this year when we could start to see shipment from that. Can you talk about what that might impact on the gross margin line and kind of your long-term model when are you looking to have a longer-term 50% type gross margin when you exclude the stock compensation and amortization costs. You obviously hit it this last quarter. Should we expect it to be you are back within that model of around 50% now or is that again kind of pushed out until 2011 is when you would expect that to run on a longer term basis?

Kenneth Lowe

We were very glad to see some of our cost cutting initiatives did have the effect of bringing the pro forma gross margin back over 50%. As we move to the next generation we also will continue to stress cost cutting measures to be more efficient in the supply chain and in an effort to maintain that 50% range as our target.

Operator

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

Mark Sue - RBC Capital Markets

In terms of normalizing the quarters should we think about $50 million per quarter for Sigma and then another $15 million for the CopperGate business and then grow that each and every quarter going forward? Maybe if you could just talk about how the business reach steady state and how we should think about seasonality going forward for fiscal 2011?

Thomas Gay

Well we have talked about the fact we have strength in each one of our markets. We have also talked about the fact we have a lot of synergy between the lines of products. Right now we have indicated what CopperGate is as an entity and their products. As we move forward obviously we will be combining on the same set top boxes with our chips in various markets. We don’t necessarily model the market that way. We may report that way but we don’t necessarily model it that way. We look at strength in IPTV. That is going to benefit both CopperGate and Sigma products. We look at strength in DMA. That is more the Sigma products. MDU that is a CopperGate area they are effectively penetrating. Then the Prosumer area that is again a Sigma product so I am not sure how to answer your normalization other than that.

Mark Sue - RBC Capital Markets

What about for the full-year the way you think about it? Should we think about maybe $300 million for the full fiscal year in January? Is that a reasonable number considering the carriers are resuming a lot of their projects and the pent up demand?

Kenneth Lowe

We hesitate to predict a whole year. We feel our visibility is pretty much limited to one quarter out with maybe flattish expectations beyond that. It is limited.

Mark Sue - RBC Capital Markets

Are there any specific carrier projects that will really accelerate things in terms of chip set demand in the near-term or any carrier concentration we should look for similar to what we saw in the past with [Hanaro] or [Korea Telecom]?

Kenneth Lowe

That is one of the strengths we are looking to bring as we have broadened the market segments we have served. We have strengthened the ability to counterbalance demand from several segments. If you look at the percentages now we are down to the 50% IPTV, 23% in connective media players and another 20% in the connected home technologies. We are looking at continuing that balance rather than any one area. I would say each one are showing its own signs of strength. We really wouldn’t point to one overbearing the other.

Mark Sue - RBC Capital Markets

Thoughts on Broadcom competition?

Kenneth Lowe

We think about them all the time. They are strategic competition. We look at every product they introduce. There is no change. Broadcom is still working very hard at getting their first Media Room deployments. We have not seen them be able to muster resources over in the Linux area so we really don’t see them as heavy competitors on the Linux area yet. It is a very good sign for us that says they are doing everything they can to keep their own with what they are doing. So while we look at them as very strategic, and the competitor to continue to keep under wraps everybody is still in the same game.

Operator

The next question comes from the line of Uche Orji – UBS.

Uche Orji - UBS

Let me just ask about the hybrid set top boxes. You mentioned that and can you give us an update on the design wins and how much revenue you think this segment will contribute? I am talking about the [inaudible] hybrid boxes.

Kenneth Lowe

We are engaged with a handful of cable providers to gain design wins for hybrid IP set top boxes. We look forward to being able to announce specific design wins over the course of this year. We are in the process of several of them in the deep engagement planning phase where we are moving toward that goal but at this point in time we don’t have any names we could pass you or even definitive timeframes. Keep in mind this is a very, very strategic transition for them. It exposes a lot of capital that they are going to have to lay out to make these transitions so it is something they are very carefully weighing how they roll this out. The good news is they see a lot of merit in the technological solution we are providing them and that is what has caused them to be working very closely with us.

Uche Orji - UBS

Intel has made some inroads in this market. They have announced some relationships with [Orange] and today they announced a new software relationship with [inaudible]. To what extent do you see Intel’s approach with the chip and specifically the challenge to your position? Is there any leverage that is being…to what extent do you think their software strategy as well with all the apps, is there [inaudible] strategy a threat to your business model?

Kenneth Lowe

Intel promotes a certain brand of kool aid when they take their products to the market. They promote strongly the X86 instructions had compatibility, the range of applications it brings with it and to a certain extent the performance of their main CPU. But for years the entire ecosystem of set top box and other consumer products has been supported with system on chip products that have a balanced portfolio of hardware systems that give them a very cost effective, very tightly power controlled environment.

These are not the advantages of Intel. So while Intel is coming out there with a new angle on things and they do have appeal to certain types of people because of that application extensibility. I wouldn’t say yet they have any broad appeal. They are cutting their teeth in the market right now. They still have a lot to go before they really mature in this area.

Uche Orji - UBS

In terms of the number of [inaudible] penetration I remember it was running at a rate of three [per home]. What is the current run rate and in terms of home penetration there?

Kenneth Lowe

I think the numbers we have been hearing has moved down slightly from maybe in the 2.8 range to maybe the 2.7 range. That is really carrier dependent. It depends on some carriers’ focus on the more premium type of subscriber. So they tend to get a greater boxes per sub and some tend to focus on low rent offerings, better deals than the other carrier and so they tend to get a lower number of set top boxes per sub. Right now 2.7 is probably a reasonable number to use.

Uche Orji - UBS

When you speak to your foundry customers or suppliers what is your sense, what are they telling you as to when capacity should start to become easier to obtain?

Thinh Tran

I don’t think they have a really clear picture. At least we know from the rest of this year capacity constraints for the rest of this year. The surprise for most of us is how strongly the business came back. Everybody asks is that sustainable or not. So that is the main question. I don’t think any of us will have a clear view of what the future implies but for sure the rest of this year it is going to be very tight.

Uche Orji - UBS

When you say that, in terms of sustainability of demand what sort of early warning signals do you have to sense where the market is going? Share with us your thoughts on when you [inaudible] on sustainability? What are the early warning signals you look at for your business?

Kenneth Lowe

Are you talking about supply or demand?

Uche Orji - UBS

Demand.

Kenneth Lowe

Demand we look at the providers that are a second order of customer to our consumption. That is the primary area we look at the set top box for consumer I think we look at the same indexes that everybody does to see what sort of consumer buying patterns are taking place and whether or not that portends an upswing or downswing in general spending. Those are the indicators we look for long-term.

Operator

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

Hamed Khorsand - BWS Financial

Were there any new customers in the quarter?

Kenneth Lowe

New customers specifically? We announced design wins as we indicated for people like Osaka and Gigifast. Yes, the satellite provider. So those were the new customer announcements. The shipments, however, were obviously dominated by the existing accounts that just continued to order.

Hamed Khorsand - BWS Financial

Could you provide a little more clarity here, you outsource your manufacturing capacity. So I am a little surprised that you are hitting capacity from an allocation standpoint. Why can’t the manufacturers provide you with more allocation?

Thinh Tran

First is the lead time. The demand came back so quick and faster than the lead time provided that caused problems for us. Second is currently the whole industry wide capacity demand in wafer. Most foundries are running at 100% utilization. It is very hard for them to handle excess new business. That is an industry wide situation.

Kenneth Lowe

I think one of the ramifications as we went through the year of downturn I think most of the semiconductor manufacturers were rebuilding new capacity very cautiously because that is expensive. Unused capacity means capital costs that are just sitting there. I think we are finding ourselves in that environment right now where they didn’t necessarily build as aggressively as the ordinarily would.

Hamed Khorsand - BWS Financial

How are you adjusting for business right now? Before you had too much inventory issues and now it looks like inventory is too low and there are issues and it sounds like you are going to be doing a little bit more purchasing on the inventory end. How are you adjusting the business so we don’t have a repeat of a couple of quarters ago?

Thomas Gay

A year ago we were clearly over-inventoried. Some of that was strategic and done in reaction to some of the signals from our foundry providers. The lower inventory we are now reporting has much more to do with the very short-term surge in demand from our customers. That is why we have a dye bank to buffer this out in between. We are currently below our target inventory levels now and we will try and do our best to predict future demand and find a level that is higher but not over-inventoried as we were before.

Hamed Khorsand - BWS Financial

Can you change the manufacturing split so you can fill more IPTV orders versus lower [ASP] silicon?

Thomas Gay

Well, we continue to have media processors as the dominant revenue factor for us. It is the same silicon that is supplying most of our major markets from the Sigma side. So at least in that way we are relatively lucky with our planning.

Hamed Khorsand - BWS Financial

Given what is going on with the inventory side what is the pricing like for your IPTV silicon right now?

Thomas Gay

Relatively stable. Shifts due to customer mix but from customer to customer pretty much stable.

Hamed Khorsand - BWS Financial

Do you think you have pricing power?

Thomas Gay

We don’t believe it would be in our best interest to drive prices up but we do our best to resist lowering price if our costs are not also coming down.

Operator

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

Dunham Winoto - Avian Securities

I got on the call late so I apologize if there is any repeat. Can you give us an idea of what you think expenses should be, how we should be modeling going forward on a dollar basis?

Thomas Gay

In general if you look at our pro forma operating expenses for the fourth quarter we currently believe that should be a relatively good benchmark that pro forma takes out some of the CopperGate acquisition expenses and should give you a fairly good indicator.

Dunham Winoto - Avian Securities

What do you think would be the opportunity for driving costs somewhere say 3-4 quarters out as you integrate CopperGate a lot better with the rest of Sigma?

Thomas Gay

We believe we have a pretty good headcount on board now. Some of the synergies we will be looking for have more to do with getting that headcount redeployed more efficiently. We don’t believe any reductions would be in our best interest but we don’t believe any strong hiring would be predictable at this point either.

Dunham Winoto - Avian Securities

What is your headcount right now?

Thomas Gay

499.

Dunham Winoto - Avian Securities

And you expect that to be fairly stable?

Thomas Gay

Yes.

Dunham Winoto - Avian Securities

I know that Broadcom is probably the biggest competition that you have down the road in next generation IPTV boxes. How about guys like ST Micro? Have you heard of them maybe getting back in the game?

Kenneth Lowe

They have been making an attempt at rejuvenating themselves and getting back in the market. We see them in a few accounts. I would not say we consider them at the same level as Broadcom but every one of our competitors we continue to monitor for the angle they are taking. If they have certain successes in certain cases in getting their message known we take a look at that. We wouldn’t say ST Micro is having any market success with the message they are bringing in.

Dunham Winoto - Avian Securities

So outside of Broadcom who else would you be worried about?

Kenneth Lowe

Well we watch Intel very closely. We are not dismissing them at all. Comments are not to be construed that way. We certainly monitor their activity very closely as we do Broadcom, ST Micro and some of the other competitors in our other product lines. But I would say that again based on my comments before about Intel they are somebody that brings their own advantage in. They have their own brand of kool aid. So far that has had a selected appeal.

Dunham Winoto - Avian Securities

Let’s talk about DMA for a little bit here. I know you are in the second [generation] of the DMA boxes from both [WDC] and Seagate. Can you give us an idea what is the design cycle for these products?

Kenneth Lowe

Well it is certainly quicker than set top boxes. I would say the DMA was some of the more aggressive people they hit their new DMAs out in a cycle of 4-5 months and some of the larger market consumer companies take a bit longer than that. It tends to move pretty quick. We have some pretty tight turnkey designs that help people to market quickly so that is one of the things we try to bring as a value add to market.

Dunham Winoto - Avian Securities

I guess the question I am trying to answer here is with the wins you have right now how long do you think you will be in those sockets? Are we talking about 12 months out? Six months out? 18 months out?

Kenneth Walker

You mean for added sockets?

Dunham Winoto - Avian Securities

I mean for existing and design wins.

Kenneth Lowe

We actually have a few new design wins we are hoping to get ready to announce in the next quarter or so. We are continuing to add to the energy and strength of that market so we hope to continue to add to that as we go throughout the year.

Dunham Winoto - Avian Securities

I have heard there is some chatter that ST is also interested in pursuing the DMA market. Can you share with us your thoughts on that?

Kenneth Lowe

I wouldn’t say they are one of our strongest competitors there but again ST is a broad based semiconductor supplier. When they roll a product out they have a broad sales channel. They do appear in many different areas. It doesn’t necessarily mean they are gaining any traction. I wouldn’t say they are gaining any particular traction in DMA but they are there.

Operator

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

Quinn Bolton - Needham & Co.

I wanted to follow-up first on your comments obviously you are capacity constrained for the April quarter guidance. Again I wanted to come back if you weren’t capacity constrained at something closer to flat would that have been a more reasonable expectation and if that is the case can you help reconcile that with some of your comments earlier in the script about seeing generally pretty good demand for both the DMA products as well as the set top box products?

Thomas Gay

It gets a little difficult to communicate because we have also been pushing back on our customers a little bit in view of the constraints we are seeing on the supply side. Were we to be able to get further capacity in the current quarter the upside would be somewhat limited. It would be optimistic to think we could equal Q4. If some of those things went in our favor because we have already pushed back on some of the customers.

Quinn Bolton - Needham & Co.

A clarification, you talked about seeing good design engagements for the 8654. I wasn’t sure if you meant with the various set top box manufacturers or is this more pertaining to the design you have with Samsung and this is really for the Samsung set top box product? A second related question you talked about production mid-year and I wasn’t sure if you were referring to the 8652 with that target date or whether that was 8654 on the Microsoft Video Platform?

Kenneth Lowe

The 8650 series in joint is making its way into a pretty full range of applications we service. There are definitely set top boxes being designed in both Media Room and Linux. Samsung as you mentioned is one of the flagship account taking the 54 into the Media Room realm. We have other people taking the 8652 into the Media Room. We also have Linux based designs going on with both of those chips. They range into the DMA activity going on with the 8652. The mid-year is the indication that is when we should be seeing the ramping of some of these things. Our second generation products, the 50 series is showing a lot of traction.

Quinn Bolton - Needham & Co.

So that was generally a comment about both the 52 and the 54, that kind of midyear ramp?

Kenneth Lowe

Yes. I think so. They both will ramp in the second half.

Operator

Ladies and gentlemen this concludes the question and answer portion of the call. I will turn the call back over to Edward McGregor for closing remarks. Please proceed.

Edward McGregor

We would like to thank everybody for attending this conference call to discuss our fourth quarter 2010 results. We do appreciate your interest in Sigma Designs and we do look forward to our next scheduled conference call to discuss the results for our first fiscal quarter 2011.

Operator

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

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Source: Sigma Designs Inc. F4Q10 (Qtr End 01/30/10) Earnings Call Transcript
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