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Executives

Ed McGregor - Investor Relations Manager

Thomas Gay - Chief Financial Officer, Principal Accounting Officer and Secretary

Thinh Tran - Founder, Chairman, Chief Executive Officer and President

Kenneth Lowe - Vice President of Strategic Marketing

Analysts

Dunham Winoto - Avian Securities, LLC

Quinn Bolton - Needham & Company, LLC

Scott Hirleman - Robert W. Baird

Vahid Khorsand

Mark Sue - RBC Capital Markets Corporation

Sukhi Nagesh - Deutsche Bank AG

John Vinh - Collins Stewart LLC

Sigma Designs (SIGM) F1Q11 (Qtr End 05/01/2010) Earnings Call May 26, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Sigma Designs Earnings Conference Call. My name is Emety, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Ed McGregor, Manager of Investor Relations. Please proceed, sir.

Ed McGregor

Thank you. Welcome to Sigma Designs' conference call to discuss financial results for our first fiscal quarter of 2011. I am Ed McGregor, Sigma's Manager of Investor Relations and with me today are Thinh Tran, our Chairman and CEO; Tom Gay, our CFO; and Ken Lowe, our Vice President of Strategic Marketing.

A 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 will then open the call to questions from analysts and institutional investors, and 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 in our future revenue, gross margin and other financial measures and anticipated trends in our target markets. We caution you that the forward-looking information that we present today is based on our current beliefs, assumptions and expectations, speak only as of today's date and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

Specific factors that may affect our business and future results are discussed in the Risk Factor section of our annual report on Form 10-K filled with the SEC reports on April 1, 2010. A partial list of these important risk factors are 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 to today's call, we will be reporting certain financial results 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 on today's earnings press release, along with a detailed reconciliation of our GAAP to non-GAAP results.

And now, I'd like to turn the call over to Tom, who will discuss our financial results.

Thomas Gay

Thank you, Ed. For the first quarter of fiscal 2011, revenue was $65.2 million, a decrease of $2.9 million or 4% compared to the $68.1 million in the previous quarter. Compared to the year-ago quarter, our revenue increased $14 million or 27% from the $51.2 million that we reported.

Our revenue breakouts are as follows. By business segment and percentage of total revenues for the quarter, IPTV [internet protocol television] processors represented $31.1 million or 48% of the total; Connected Media Players came in at $9.9 million or 15%; Connected Home Technologies, $21 million even or 32%; and the Consumer Group came in at $3.2 million or 5% of the total.

By shipped to region, Asia represented $60.9 million or 93% of our total revenue for the quarter; Europe, $1.9 million or 3%; and North America, $2.4 million or 4% of the total.

During the first quarter, we had two customers that each exceeded 10% of our net revenue. It was with Motorola for $16.1 million or 25% and Gemtek at $12.4 million or 19%.

GAAP gross margins were 49.3% for the first quarter compared to 41.1% in the preceding quarter and 47.6% in the same period last year. Non-GAAP gross margins were 54.1% for the first quarter compared to 51.7% in the preceding quarter and 49.5% in the same period last year. GAAP net income for the first quarter of fiscal 2011 was $1.1 million or $0.04 per diluted share. This compares to a GAAP net loss of $2.8 million or $0.09 per share in the previous quarter, and GAAP net income of $2.7 million or $0.10 per diluted share in the year-ago quarter.

On a non-GAAP basis, net income was $9.2 million or $0.29 per diluted share compared to the previous quarter. This is a decrease of $2.1 million from non-GAAP income of $11.3 million or $0.37 per diluted share. Compared to the year-ago quarter, non-GAAP net income increased $0.8 million from $8.4 million or $0.31 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 first quarter. First was amortization of intangible assets associated with four acquisitions, a total of $4.6 million from Blue7, VXP, Zensys and CopperGate; share-based compensation of $3.1 million; and the fair value markup on inventory purchased through acquisitions and sold during Q1 of $0.4 million.

I'd now like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $156 million at the end of the quarter, an increase of $8 million or $0.23 per share outstanding compared to the beginning of the fiscal year. Based on our shares outstanding at the end of the quarter, the total value of cash, cash equivalents, restricted cash and marketable securities equals $5.02 per share outstanding.

Net accounts receivable was $34.4 million at the end of the first quarter, a decrease of $1.7 million compared to the beginning of the fiscal year. The average day sales outstanding for our receivables as of the end of the first quarter was 48 days, the same as in the previous quarter.

Net inventory was $17.9 million at the end of the quarter, a decrease of $0.3 million compared to the beginning of the fiscal year. This reduction brings our net inventory turns to 11x per year compared to 7.8x for the previous quarter. The primary reason for the increase was the tightness of wafer supplies from our foundry parter, which has held us back from building inventory to a more appropriate level.

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. Today's call, I would like to review the results of the first quarter and emphasize our achievement.

First off, we are pleased to report over $65 million in revenue for the first quarter, surpassing our guidance and achieving nearly the same level as our fourth quarter, having overcome some of the supply constraint that limited our growth.

Our IPTV markets sales remain strong though slightly dampened as a result of supply-side limitations. We believe that the fundamental IPTV market demand remain strong for the year. Connected Media Players continue to provide a substantial revenue contribution, reflecting the popularity of consumer products such as network players that enable Internet access for playback over-the-top content.

Finally, revenues from our Home Connectivity Business Group were up substantially, which accrues on it's leadership position in home audio/video network solutions, such as HomePNA. Moving forward, we are continuing to pursue major design wins in our current market segments with special initiative in penetrating the hybrid IPTV Cable set-top box industry and the increased adoption of Z-Wave-based home control solutions.

Now I would like to highlight some of the important business development we have achieved since our last conference call. First, we demonstrated a complete range of IPTV solutions at the IPTV World Forum held in London, showing how our products can be used to deliver entertainment and control throughout the digital world.

We also announced the new CG3310 [CG3310M], the first complete Ethernet over Coax solution on a single chip. The new chip reduce the number of external components needed to deliver affordable broadband access over existing coax infrastructure, opening up new market opportunities for our OEM partners. Furthermore, we announced that our online EoC products is now being deployed in with 14 different equipment makers and has won four new deployments.

We also demonstrate four of our leading technology at the NCTA's [National Cable & Telecommunication Association] The Cable Show, which include Sigma's 8652-based thin clients, high-quality 3D video processing, HomePlug AV connectivity and Z-Wave set-top box solutions.

Now I would like to talk about our new organization and what it means moving forward. As announced, we initiate a major reorganization of the company that includes the launch of two strategic business groups, the Media Processor Business Group and the Home Connectivity Business Group, as well as a Worldwide Sales Group. Today, Sigma has over 500 employees working in 10 countries and is a key technology provider for most of the industries largest set-top box manufacturers, consumer electronics companies and more than 40 service providers around the world. Our new organization structure was launched to maximize the strategic advantage of these complementary business while maintaining focus on our customers and their individual needs.

Our new Media Processor Business Group is headed by David Lynch, as its Vice President and General Manager. Most of you are aware that David was previously Vice President of Sales and Marketing. This group will have a mission to develop and market a wide range of system-on-chip solution for the set-top box, consumer electronics and home control markets. The Media Processor Business Group moves forward as a leading provider of IPTV set-top box solutions, DMA solutions and Z-Wave home control/smart energy solutions, along with an emerging position in the IP Cable set-top box market and other key initiatives.

Our new Home Connectivity Business is headed by Gabi Hilevitz, as its Vice President and General Manager. Gabi was formerly the CEO of CopperGate. This group will have the mission to develop and market industry-leading solutions for home entertainment connectivity solutions for residential gateways, set-top box, optical network terminals, bridges, consumer electronic equipment and MDU broadband access device. Sigma's Home Connectivity Business Group represents the leading provider for IPTV home connectivity solution over coax and phone lines, a leading player in Ethernet-over-Coax solutions for MDUs and an emerging player in the HomePlug AV and G.hn segments.

Our new Worldwide Sales and Business Development Group is headed by Sal Cobar, as its Vice President. As announced, Sal joined us from Silicon Image where he was filling a similar role as Vice President of Worldwide Sales. The new unified sales group will have the mission to take all products to the market to direct sales, distribution partners and business development teams. By integrating sales and business development into one central organization, this group has been formed to improve cross-selling, strengthen Sigma's relationship with key accounts globally and begin promoting integrated solutions.

As a result of this change, we have now multiple executives focused in incentive on the success of individual segment of our business. We are confident that this new organization, supplemented by new Corporate Development Department and in support by existing Operations and Finance group, will propel Sigma into a next wave of growth and profitability.

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

Kenneth Lowe

Thank you, Thinh. For this call, I'd like to provide an update on Sigma's market opportunities, technology developments and new potential that lies ahead for us. Let's start with a quick summary of the highlights affecting our demand outlook.

First, our overall business has become much more balanced as we now have a product portfolio that generate substantial demand from the home and conductivity market, the media player market and the IPTV market.

Second, all indications show that the IPTV market continues to remain strong with most telcos reporting good increases over the previous quarter and most industry analysts predicting strong double-digit growth through the year.

Third, Sigma is showing continued strength in next-generation IPTV deployments with an increasing number of consumer engagements for 8650 [SMP8650] series.

Forth, we continue to see expanding customer opportunities for home connectivity solutions in new regions and segments across both HomePNA-based and HomePlug-AV-based products.

Fifth, demand for digital media adapters remain strong as it ramp into a substantive revenue contribution

Now let's focus on 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. Industry analysts at iSuppli predict IPTV set-top boxes will increase by 48% this year, while MRG [Multimedia Research Group Inc.] stated that 6 million new subscribers have been added since October of 2009. We also believe that IPTV offers advantageous features and service costs that will drive its 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 in each of the three worldwide regions. In North America, AT&T continues to be bullish by its U-verse program. At the end of their first quarter, AT&T reiterated that their U-verse service continued a strong ramp with a net subscriber gain of 231,000 per total a date of 2.3 million. Additionally, AT&T indicated their U-verse TV deployment now reached 24 million living units and overall penetration exceeds 20%.

A total of 11 operators in North America currently deploy solutions based on Sigma silicon. Europe is starting to show more IPTV deployment growth in most countries, where the following is an update for some of the largest operators. Deutsche Telekom now reaches 896,000 subs in Germany, having added 96,000 last quarter; Belgacom added 62,000 subs last quarter to reach a total of 814,000; Telefónica added 49,000 IPTV subs last quarter, they reached a totaled 703,000; Swisscom added 44,000 subs last quarter and now reached a total of 230,000; T-Hrvatski Telekom added 46,000 subs and now reach a total of 36,000. A total of 15 operators in Europe currently deploy solutions based on Sigma silicon.

Asia is seeing increased deployment rates for IPTV growth, including China, who's forecasted double our subscriber this year and jumped to 8.5 million total by the year end according to iSuppli.

The following is an update for the region based on some of the larger operators. Korea Telecom now expects to reach 2 million subs by the end of this year, up from 1.1 million end of last year; SK Broadband added 95,000 live IPTV subs last quarter, reaching 498,000 total; SingTel reached a total of 200,000 subs by adding 45,000 since year end; LG Dacom added 57,000 subs last quarter, reaching 387,000 total. A total of 11 operators in Asia currently deploy solution based on Sigma silicon.

Now let's talk a bit about set-top boxes and our solutions. We are encouraged to see a continuing increasing number of engagements with our 8650 series of media processors. Under the Microsoft Mediaroom platform, the 8650 series currently provides the highest CPU performance available and is being ready for deployment by selected telcos. The 8652 specifically represents an exceptional value for low-cost set-top box solutions under either Mediaroom or Linux. Providing a substantial cost savings, it delivers 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 in the third quarter this year.

Now let's touch base on the continued demand we're seeing in the network player or DMA segment, in which Sigma enjoys a leading position. The momentum in the DMA market is fueled by increasing availability of content over the Internet, along with a number of new products that provide video library mobility. Many of these products can directly stream content from various paid, free and user-generated content locations. Several top main equipment makers are lined up to enter this market and exploit this demand, which will improve consumer visibility and retail channel promotions.

DMA equipment makers have traditionally come from an networking camp with some of the latest positions are top-named 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's continuing to work with more and more providers that are examining their eventual transition to IPTV-like technology for future video delivery. Each of these operators looks for ways to increase their subscriber base through service features such as expanded channels suite, more HD content, rolling out whole-home DVR capabilities and other advanced features. This traditional opportunity represents the market potential much larger than the current telco-based IPTV deployments.

To address this market, we're continuing to invest heavily in 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 in determining the route to deployment. We would expect to see revenue contributions when North American deployments begin to occur.

Z-Wave wireless home control is another steady revenue contributor to Sigma that has the potential to eventually ramp into a much larger business. This 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. As a result of the potential increase in the average revenue per user, many operators are issuing their new RFP [Request for Proposal] documents with home control as one of the desired elements.

Our new generation of Z-Wave wireless devices, referred to as the 3400 series, is making it even more compelling for new participants to jump in. 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 Connectivity Business Group previously operating as CopperGate. To start with, the Connectivity Business Group adds an substantial quarterly revenue stream that represented approximately $20 million in the first quarter. Not only has this added a strong boost to our top line, but has provided us with a more diverse portfolio of demand. As CopperGate was widely known and respected in IPTV and home networking markets, our Home Connectivity Business Group continues the strong momentum with many new customer engagements. Our HomePNA products provide the only commercially-available devices based on this ITU [ITU-T] standard which has been very successful in delivering IP content across existing coax cables and phone lines.

This segment continues to demonstrate strong demand, coupled heavily with North American IPTV deployments. And additionally, we are increasing our efforts to penetrate lucrative Asian markets where the MDU market provides many opportunities for low-cost solutions to Ethernet over coax for high-density housing and apartment buildings.

As a second thrust, our recently introduced HomePlug AV device is the latest generation of power line technology and provides a cost-effective, high-performance solution for triple-play home services over existing power lines. We are in the process of marketing the new HomePlug products into Europe and parts of Asia with the availability of coax is far more limited. We have already announced design wins for Asoka and Gigafast and have many other design announcements moving ahead to be in the coming months.

Additionally, Sigma's Connectivity Business Group 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 lines and power lines. This is a transformational technology that will move the industry to one global standard with data rates up to one gigabit per second and throughput of as much as 700 megabit per second or three times faster than today.

In summary, 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 with some largest consumer equipment makers in the world.

I'd now like to pass the call to Thinh to cover forward guidance.

Thinh Tran

Thank you, Ken. As we have indicated, we see a positive outlook for all of our major markets, including IPTV, home connectivity and media players. We also anticipate continued contributions from our smaller segments, including VXP processors and Z-Wave home controls. Before providing our forward guidance, I would like to provide some perspective on our expectation for upcoming business trends at AT&T.

As you are aware, we have continued to be the sole provider of media processors and HomePNA network chips for the OEM that ship into AT&T U-verse deployment, both products providing substantial revenue streams. While we believe the HomePNA network chip will continue to be sole source [ph] for the foreseeable future, at some point, we will be sharing delivery [ph] for media processing chips. We believe that this transition point would come in the second half of this year.

We suggest that there would a corresponding revenue adjustment, upon which our growth will continue. We are communicating this expectation, so that the overall revenue growth projection can be appropriately forecasted.

Moving on to our forward guidance. Our visibility is reasonable at this time, however, we remain conservative in our future revenue and profit projections. Given those conditions, our forward-looking guidance is as follows: We expect continued strength in our core business which will result in second quarter revenue above $70 million; we expect our gross margins on a pro forma basis to be similar to that of the first quarter.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets Corporation

AT&T has been trying to fill the source of the set-top boxes for quite some time, and I was wondering if you could help us kind of gauge the dynamics as they change set-top box makers or introduce someone else? And whether there or not there was an opportunity for Sigma to actually provide chipsets for the new set-top box maker within AT&T or it was just something that you were trying to just kind of had to factor in because that was a decision that was made prior?

Kenneth Lowe

Well, the perspective I would provide is this, that AT&T started in this business using Sigma Designs and two of the largest set-top box suppliers in the world, MOT [Motorola Inc.] and Cisco. And this was to ensure that they had dual sourcing at set-top box level and good quality assurance. As they're moving forward, as you would expect, they're examining wider portfolios of suppliers, both at chip and set-top box levels. We believe it's in their best interest to continue to use multiple suppliers. And as we move to the second generation, we are competing very heavily as we move through time with all second-generation opportunities and are positioning ourselves for third generation. So I guess the general response I'd give is that AT&T is a fairly normal business in the way that they go about this in terms of trying to balance their supply. And Sigma has a lot of product advantages that, as we come into second-generation move on to third, we expect this to remain a competitive account and to get our share.

Mark Sue - RBC Capital Markets Corporation

And then separately, Europe seems to be top of mind with investors. And so far, you're seeing these subscriber growth with IPTV, with some of the big ones in Spain and Germany and Belgium. Are you starting to see any hesitation with some of the service providers as it relates to the macro in Europe? Any thoughts there, please?

Kenneth Lowe

As it relates to the macroeconomic conditions there?

Mark Sue - RBC Capital Markets Corporation

Yes, slowing business down one way or another.

Kenneth Lowe

It hasn't really hit us anything concrete at this point in time. I think people maybe get a little bit rattled over some of the announcements and economic trends that are taking place. But at this point in time, we have not seen that translate to changing order rates.

Operator

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

Sukhi Nagesh - Deutsche Bank AG

I had a question on the IPTV business relative to your HPNA business. Seems like that HPNA business grew about 30% in the quarter while your IPTV business, they should decline 11%. Well, kind of figure out what the difference could be. If you're selling to the same set-top box provider and it's going to get [ph] the same telco service provider, why was there a differential between those two areas?

Kenneth Lowe

Well, while a lot of the HomePNA products go into AT&T, MOT [Motorola] and Cisco, a huge amount of their IPTV media processors go into a wide range. So you're going to see some vagaries there. You're also going to see a little bit different in ordering and stocking for the different types of parts. And in addition, the media processors have had to face capacity limitations which has limited our ability to fulfill demand. The HPNA didn't have such limitations.

Sukhi Nagesh - Deutsche Bank AG

And Ken, just one other question. If I think about AT&T as a percentage of your overall IPTV business, maybe it's roughly half of that, closer to half of that. And based on what Thinh just said, how should we look at that AT&T business from a run-rate perspective for the back half of this year? That would be very helpful.

Thomas Gay

We currently estimate that AT&T is in the range of about 10% of our overall revenue.

Kenneth Lowe

For the media processors, yes. So I guess the point is, the exposed part of the media processors feathering over to where we're sharing the business is somewhere in the 10% range.

Sukhi Nagesh - Deutsche Bank AG

How should that trend for the back half, I guess? I mean, would that 10% go to 5%? Is that the right way to look at it, or...

Thomas Gay

It's not really clear at this point. But that's the range of the risk that we're estimating at this point.

Operator

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

John Vinh - Collins Stewart LLC

First question is, what do you expect your market share to be on the AT&T platform in the second half of this year? And Ken, you had also made some comments that you're competing on second-generation Mediaroom boxes and also third-generation Mediaroom boxes. Can you clarify on what you mean by that? Do you have design wins and second-generation Mediaroom boxes that you expect to ramp in the second half at this point?

Kenneth Lowe

Let me see if I can answer it this way. We are competing for second-generation boxes. AT&T has a rather fluid way of managing the flow of set-top boxes into their install base even though they may have some types of distinctions, first gen, second gen, third gen, et cetera. Plans change because their generations are so long. So halfway into second gen, they're looking at different aspects of things. The Broadcom-type of an offering fulfills a certain aspect of what they thought was necessary. And then we've also got offerings now that fulfill other aspects. So we are finding very open-arms reception to the kind of advantages that we're presenting. Rather than answering your question about second half of this year, which is very hard to nail down in a short-term timeframe, I'll tell you that right now, based on the current momentum and thrust, we're very encouraged that we may end up with more than half of the second-generation business at AT&T over the long haul. So that's the way I'd rather answer the question.

John Vinh - Collins Stewart LLC

And then you have been talking about continued growth, double-digit growth, in the IPTV market over the last year or so. Tail it [ph] to the last couple of quarters, you actually appear having [ph] as you're predominant on a year-on-year basis. With kind of getting in, loosing your market share at AT&T, one, do you still expect to grow IPTV revenues this year?

Kenneth Lowe

That is our expectation. We believe that we can still deliver IPTV growth this year, irrespective of the fact that AT&T will be shifting some of their units around.

John Vinh - Collins Stewart LLC

So if you're down on a year-over-year basis over the first half of the year, then the expectation is that you would be growing above kind of their overall market in the back half of the year to get that double-digit growth?

Kenneth Lowe

That would be the expectation, yes.

John Vinh - Collins Stewart LLC

And can you maybe talk about some opportunities on where you'd expect that growth to come from?

Kenneth Lowe

We really can't talk about specific opportunities that we haven't announced yet. We have our irons in the fire in such a wide range. IPTV in the telco base has been penetrating across the world for quite some time. A lot of that growth comes from replacement of demand that's already out there. Renewal of the installed base, some of them comes from brand new territories, some of the Asian territories are just now being developed, Microsoft has a thrust into China, we're riding the curtails of that to a certain degree with our new low-cost offerings, and IPTV is spreading over to cable. So we have a lot of irons in the fire with IPTV. We expect to be a central part of that for the foreseeable future. So I guess that's the way I would put it.

John Vinh - Collins Stewart LLC

On the CopperGate revenues, those are up substantially in the quarter. Can you give us a little bit more color on where that upside came from? Was it primarily AT&T driven? And if it wasn't, maybe could you give some more color in terms of where that upside came from?

Kenneth Lowe

Yes, I think it was predominantly AT&T. I think it was led by that. And they're getting some additional contributions from it. They got a wide customer base. AT&T just happens to be the biggest. But I would say AT&T obviously didn't count as the major upside that they gained.

Operator

Your next question comes from the line of Vahid Khorsand with BWS Financial.

Vahid Khorsand

How is your sourcing going from manufacturers? And is it sustainable for the rest of the year?

Thinh Tran

I think as you know, the wafers supply still remains fairly tight, but I think the situation has been improving for us. We expect to remain tight through remaining of the year. But we expect to have, hopefully late on the year, to have majority of our needs fulfilled.

Vahid Khorsand

Have there been many customer complaints about the tightness in the supply?

Thinh Tran

Quite a bit.

Thomas Gay

Thus far, we've been able to reschedule things under a planned delivery schedule and keep them at least reasonably okay with it.

Vahid Khorsand

Do you have a gauge on what the typical lead times service you could share?

Thinh Tran

It's really not lead times. It's more the number of wafers allocations more than the lead times.

Vahid Khorsand

And could you give an inventory breakdown of 8634 chips compared to newer-generation chips?

Thomas Gay

Roughly, the mix of those two is: 2/3, the 8630 series and about 1/3, the 8650 series.

Vahid Khorsand

And are you deploying more 8654 chips as we speak?

Thomas Gay

The trend has been growing. We first shipped about a year ago.

Vahid Khorsand

And do you think Intel could become a formidable competitor compared to Broadcom?

Kenneth Lowe

Intel has a competitive position that's based on its strength which is large CPU and x86 compatibility. And it's been parlaying that into a position that appeals what we would refer to now as kind of a niche of the market out there, people that are trying to change the television paradigm in a very direct PC-like way. On the other hand, they struggle tremendously with trying to broach the cost barriers required to truly compete with Broadcom and Sigma. So on one hand, central processing and x86 gives them some advantages. But they're really still in a different category almost. So we still view Broadcom as a square on strategic competitor. We view Intel as a potential looming threat. We watch them closely, watch their adoptions. And obviously, we, with our technology development cycle, we do everything we can for the future to mitigate any advantages that they're building up.

Operator

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

Quinn Bolton - Needham & Company, LLC

I just wanted to ask first for more clarification on sort of the expected impact at AT&T, are you saying that you think the impact is really only 10% of your IPTV revenue or about $3 million? Because it would seem to me that historically, AT&T has been shipping about 200,000 to 250,000 subs a quarter in their multiple set-tops per home. You've been the sole source. And so it just seems the effect would be larger. I know you're not going to loose everything in one quarter, but I was hoping for a little bit more color on the impact.

Thomas Gay

What we're considering the risk to be is about 10% of our total revenue, so...

Quinn Bolton - Needham & Company, LLC

So about 20% of IPTV revenue then?

Thomas Gay

Yes, in that range. It's a little hard to be more exacting. And of course, the mix and other issues that you're referring to are part of the fuzziness of our estimations.

Quinn Bolton - Needham & Company, LLC

You talked about that impact in the second half. I mean, do you see sort of a stabilization in market share based on your comments, sort of as we approach the end of the calendar year or your fiscal year? Or do you think that, that impact may linger into fiscal 2012 or calendar 2011? Just not sure if it's -- is it kind of a second-half effect and then you kind of hit a new steady state from which you grow as the entire market grows? Or do you think that the share loss continues into 2011?

Thomas Gay

It's difficult to estimate the beginning and the ending of the window we are seeing that we can estimate, that the beginning of it will be in the latter half of the year. And about then, the impact of our second-generation products getting into the market and being assessed for their efficiency and readiness to be deployed at a competitive cost shouldn't start to be designed in and winning [ph]. And so we're thinking how that's going to roll out and ramp. After that is even harder to estimate.

Kenneth Lowe

The other way to look at this is, right now putting AT&T aside, our overall business is growing. We're doing relatively well. That growth we expect to continue. As regard to the AT&T portion of it, there will be some revenue adjustment. They are resulting from market share moving over from Ross to Broadcom in the second half of this year while the other growth continues. So once that adjustment is made, we should be on a continued growth trend from what we can see at this point.

Quinn Bolton - Needham & Company, LLC

Ken, just the last question on AT&T, it sounds like, and I think you've hinted at this in the past, that the opportunities at AT&T in second-generation boxes might actually for you to come first with the 8652 and some of the very cost-effective boxes. Is that still the right we should be thinking about, at least the initial second gen opportunities for Sigma? Or do you see now greater opportunity for 8654 and some of the higher-end boxes in the second generation?

Kenneth Lowe

I would say, you hit it the first time. I think it's an opportunity to go in there and establish, take our very efficient architecture and establish their position that helps them become more profitable with our set-top boxes based on our 8652 series. So that is one of the key thrusts that's going on right now.

Quinn Bolton - Needham & Company, LLC

And then just sort of outside AT&T on the Home Connectivity side, I know that AT&T was a big, big customer when you bought the CopperGate business. But it seems like there's potential [ph] opportunities beyond that other telcos and then the MDU business. Can you talk just how that diversification is going? I know that business was up nicely, but kind of curious how the diversification away from AT&T is progressing at this point.

Kenneth Lowe

You're saying diversification away from AT&T on the network controller side?

Quinn Bolton - Needham & Company, LLC

Yes, on the HomePlug business. It sounds like AT&T was a good part of the upside, and so I'm not trying to imply that anything is wrong in AT&T. But I think there are some Canadian telcos that they were in the process of rolling out HPNA. And then I think you've talked about the MDU opportunity for the CopperGate technologies. I'm just kind of wondering, in aggregate, the non-AT&T revenue, is that growing faster than the overall business? Are you diversifying that business away even as it grows from AT&T?

Kenneth Lowe

That is the thrust. The thrust is to take the HomePNA, continue to grow it out into, for instance, other North American telcos, as you mentioned Canada, to grow it into ethernet over coax which is something that's getting prolific in Asia, to grow it into the HomePlug AV devices that are very applicable over in Europe, and that's a part of a major marketing thrust to begin our penetration there, to come in alongside Intellon and basically, with the advantageous products we have, take market share away from them. So absolutely, the idea is that even within the Home Connectivity business, to balance that portfolio of business substantially so that AT&T becomes a smaller and smaller percent of the overall by growing the other piece of the pie.

Quinn Bolton - Needham & Company, LLC

But for the guidance for the third fiscal quarter, did you say that you thought that there would be no impact in the quarter from capacity constraints? Or do you still see capacity constraints as an issue into the fiscal third quarter?

Thomas Gay

We see it less of an issue as we get out there.

Operator

Your next question comes from the line of Tristan Gerra with Robert W. Baird.

Scott Hirleman - Robert W. Baird

This is Scott Hirleman calling in for Tristan. I was kind of wondering if you could talk a little bit about the potential silicon content per box in the cable market? Are you looking at trying to do more of just the 8652s? Or are you also trying to do the bigger 8654s and what you really think you can get from a per home standpoint, if you're talking about a standard home where it's three boxes per home? What you think is your real FEM [finite element method] that you can get in that market?

Kenneth Lowe

There's several ways to come at that answer. It's a developing market, a lot of things are going to happen. Generally speaking, from a supplier of media processors, the silicon content into these set-top boxes in Gateways is going to be somewhere roughly in the range of $10 to $25. It's going to remain within that range. You go after the thin-client-type boxes and you're pushing down on the $10 peg. And when you're going after the fully integrated gateway-type solutions, you start to push up into the 20-zone [ph] and maybe a little bit beyond. That's kind of where how much silicon content you can get out of the box. Cable is going to use both. They're going to use the Gateways, they're going to use the thin clients. That architecture that we brought out and introduced to the market about a year and a half ago has really been received very well. It's been replicated by their people. And we expect to go after both sides of it. We expect to be in position to take business at both sides. We may end up getting more business in one area than the other, but we're going to go after everything.

Scott Hirleman - Robert W. Baird

And do you anticipate that you're going to have better traction on the thin client side than on the kind of main set-top box side?

Kenneth Lowe

I think our expectation is that we have -- the Thin Client business is our Arsolu [ph]. We have a big advantage there. We have the IPTV expertise. These are simply IP-streaming boxes efficiently implemented within the context of DOCSIS and Tru2ways. So we're in the catbird seat when it comes to those thin client boxes, we believe. The gateway boxes, more heavily competitive. It's more of a -- there are more strength that Broadcom can draw on and other people can draw on in that area. So we would expect that to become much more competitive. So if we walk away with a more modest market share in that area, that would be more of a reasonable expectation.

Scott Hirleman - Robert W. Baird

And then have you guys talked at all about what your expectations are for box refresh rates rather than just new subscriber ads? Are you still talking about kind of a four-year box refresh cycle? Or did that change at all, given kind of all the different economic things that we've seen out there over the last couple of years?

Kenneth Lowe

I think it varies substantially. I think you take a look at somebody like AT&T and their box refresh is going to be a long cycle. That's a big inventory. They don't want -- that's customer premise equipment, it's distributed capital. They don't want to replace it. You look at somebody like Freebox, they've always had a habit of refreshing every time they get a chance. And it's a windfall for guys like us that they want to refresh their whole inventory base. So it really varies based on the type of business model that the operator has. Is four years an average? That's a tough question to answer. I'd say it's somewhere in that ballpark.

Scott Hirleman - Robert W. Baird

And then two quick ones on the income statement, one would be gross margin levels. We're at a four-plus-year high on a non-GAAP gross margin level. Should we be thinking about gross margins in the future being at this level? Or should we think about them trending kind of down to what you've talked about in the past of kind of a 50% level? And then also real quickly on the reorg, does that have any impact on OpEx? Or are we kind of at where we should think about it, kind of a steady-state type where it grows a little bit less than revenue for kind of the foreseeable future?

Thomas Gay

You see, on the gross margin question, our guidance was to expect next quarter-something comparable to the Q1 experience. In the long run, there's probably going to be some pressures that will push us back towards 50%. But so far, we're okay. The streamlining of our organization does not really have any impact on the overall expenses, just clarifies the responsibilities and helps to focus people's efforts. We're expecting the OpEx will probably come down a little bit in the G&A area because there's a slight bubble at the year end in Q4 and Q1. The other, sales, marketing and R&D are probably at their baseline numbers with a small growth expected over time.

Scott Hirleman - Robert W. Baird

And then just a real quick follow up on that gross margin comment, so there's nothing that you would expect coming this year that would kind of push you back down towards that level? It's maybe just trending over time that it kind of returns back to that level?

Thomas Gay

Yes. No specific foreseeable pressures, just the general one that's always out there.

Operator

[Operator Instructions] Your next question comes from the line of Dunham Winoto with Avian.

Dunham Winoto - Avian Securities, LLC

If we can just switch gears a little bit, Ken, maybe you can provide us with some update regarding what's going on with DMA? Where you guys are at? Where do you expect the business to trend in terms of growth on additional customer wins and so forth?

Kenneth Lowe

We have good traction in DMA. We continue to get new engagements. Some big names that we've been associating with recently in the consumer space, we hope to be able to name those names as we come into the second half of this year and perhaps announce some stuff. But we see the DMA as a solid revenue contributor. Our expectation for growth at this point is modest. Some of the people have come out and found a vein of good demand. But at the same time, it's a little bit early for us to tell how long that growth will continue robustly. So we see one or two quarters robust, then we see a little bit of a lag, and then we see another little growth. So we're waiting to see what the market really has to bear for us. But it's definitely a substantive contributor, and we expect that to continue.

Dunham Winoto - Avian Securities, LLC

So if you are to line-order the business, would you put it behind IPTV and AT&T then?

Kenneth Lowe

Yes.

Operator

[Operator Instructions] And you have no further questions at this time. I'd now like to turn the call over to Mr. Ed McGregor for closing remarks.

Ed McGregor

Thank you, and we would like to thank everybody for attending our conference call to discuss our results for first fiscal quarter of 2011. We do appreciate your interest in Sigma. And we look forward to our next scheduled conference call to discuss our second fiscal results of 2011. Thank you.

Operator

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

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