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Executives

Ed McGregor – IR Manager

Tom Gay – CFO

Thinh Tran – Chairman and CEO

Ken Lowe – VP, Strategic Marketing

Analysts

Joseph Longobardi [ph] – RBC Capital Markets

Sukhi Nagesh – Deutsche Bank

John Vinh – Collins Stewart

Daniel Amir – Lazard Capital Markets

Hamed Khorsand – BWS Financial

Stephen Chin – UBS

Dunham Winoto – Avian

Sigma Designs, Inc. (SIGM) F2Q2011 Earnings Call Transcript August 25, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Sigma Designs earnings conference call. My name is Alisha and I'll be your coordinator for today. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Ed McGregor, Manager of Investor Relations. Please proceed, sir.

Ed McGregor

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

The press release containing the quarter results, including selected income statement and balance sheet information, was released after the market closed today. If you did not receive the results, the release is available in the Investor Section of our website.

Today's agenda will begin with my brief introduction, a review of selected financials by Tom, an executive overview by Thinh, a market update by Ken and comments 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 about our future revenue, gross margins, and other financial measures and anticipated trends in our target markets. We caution you that the forward-looking information that we present today is based on our current beliefs, assumptions and expectations, speak only as of today's date and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

Other risk factors that may affect our business and future results are detailed from time to time in Sigma’s SEC reports, including Sigma’s quarterly report on Form 10-Q as filed with the SEC on June 9, 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 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 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 hand the call over to Tom, who will review our financial results.

Tom Gay

Thank you, Ed. For the second quarter of fiscal 2011, revenue was $73.3 million, an increase of $8.1 million or 12% compared to the $65.2 million reported in the previous quarter. Compared to the year-ago quarter, our revenue increased $22 million or 43% from $51.3 million.

Our revenue breakouts are as follows. By business segment and percentage of total revenues for the quarter, IPTV media processors represented $39.1 million or 53%; Connected Home Technologies, $21.7 million or 30%; Connected Media Players, $10.2 million or 14%; and the Consumer product line represented $2.3 million or 3% of the total.

By shipped to region, Asia represented $68.9 million or 94% of the total for the quarter; Europe, $1.3 million or 2%; and North America, $2.7 million or 4% of the total.

During the second quarter, we had two customers that each exceeded 10% of our net revenue. First was Motorola at $17.1 million or 23% of the total, and Gemtek at $16.7 million, also 23% of the total.

GAAP gross margins were 47.7% for the second quarter compared to 49.3% in the preceding quarter and 45.3% in the same period last year. Non-GAAP gross margins were 51.6% in the second quarter compared to 54.1% in the preceding quarter and 47.4% in the same period last year. A one-time event contributed to the lower margin in the second quarter, a reduction by 0.7% due to a write-down of obsolete inventory from a product that was discontinued during the quarter.

GAAP net income for the second quarter of fiscal 2011 was $0.5 million or $0.02 per diluted share. This compares to GAAP net income of $1.1 million or $0.04 per diluted share in the previous quarter, and GAAP net income of $4.8 million or $0.18 per diluted share in the year-ago quarter. During the second quarter we wrote off an investment of $5.2 million in a privately held company, which had a net impact after taxes of $0.10 per diluted share.

On a non-GAAP basis, net income for the second quarter was $8.2 million or $0.26 per diluted share. Compared to the previous quarter this is a decrease of $1 million from non-GAAP income of $9.2 million or $0.29 per diluted share. Compared to the year-ago quarter, non-GAAP net income increased $0.2 million from $8 million or $0.29 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 second quarter. First was amortization of intangible assets associated with four acquisitions, a total of $4.6 million from the Blue7, VXP, Zensys and CopperGate acquisitions. Second, a share-based compensation of $3.1 million; and third the fair value markup on inventory purchased through acquisitions and sold during Q2, which came in at $0.1 million.

I'd now like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $164 million at the end of the quarter, an increase of $16 million or $0.45 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 $5.24 per share.

Net accounts receivable was $38.8 million at the end of the second quarter, an increase of $2.7 million compared to the beginning of the fiscal year. The average day sales outstanding for our receivables as of the end of the second quarter was 48 days, the same as in the previous quarter.

Net inventory was $22.2 million at the end of the quarter, an increase of $4 million compared to the beginning of the fiscal year. With the increase in revenues, the increase in inventory holds our net inventory for the quarter steady at 11.2x per year, which is comparable to the previous quarter. We continue to see tightness of wafer supplies from our foundry partner, 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. In today's call, I would like to review the results of the second quarter and emphasize our achievement.

First off, we are pleased to report over $70 million in revenue for the second quarter, representing over 12% growth over our first quarter with contribution from all three of our primary business segments. Our largest increase came from sales in our IPTV segment representing the bulk of this quarter’s growth and reflecting a fundamentally strong market. Connected Media Players was also up this quarter, and continue to provide a substantial revenue contribution, demonstrating the popularity of consumer products such as network players that enable Internet access for playback of over-the-top content.

Likewise, revenues from our Home Connectivity Business Group were up largely a result of our continued leadership in all wired network solutions. Moving forward, we are continuing to pursue major design wins in our current market segments with special initiative for penetrating the hybrid IP 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 developments we have achieved since our last conference call. First, we announced the availability of the first low-cost Microsoft Mediaroom compatible set top box platform based on Sigma 8652 media processors. The 8652-based set top box designs have complete integration with Mediaroom client software and are anticipated to begin deployment with leading carriers in the second half of 2010.

This new certified platform extends Sigma 8650 series of binary compatible media room solutions available to OEMs. The first will be (inaudible) recently approved 8652 based set top box. We also announced the industry’s first MIMO features over power line communications chipset. Early MIMO functionality will first deploy in the Sigma 2110 HomePlug AV solution and later will deliver up to twice the performance of existing power line solutions when later used in conjunction with the new ITU standard, G.hn.

We also jointly announced that ViewSonic's new VMP74 and VMP75 Media Players, supporting a host of new entertainment features, are based on Sigma 8650 series media processor system-on-chip.

We announced a leading French broadband provider, Free Inc., using Sigma 8634 to delivering 3D broadcasts of World Cup soccer, which is the first 3D television broadcast in France and one of the first in Europe.

We announced that our HomePNA-based chips have been selected to deliver broadband networking solutions to MDU residents using Mototech equipment.

Now I would like to mention how our internal developments are also helping to shape our future success. Sigma has over 500 employees working in 10 countries, and these are key technology provider for most of the industry’s largest [ph] manufacturers, consumer electronics companies, and more than 40 service providers around the world.

This quarter, we are taking many steps in marketing development and operations to integrate all of our business group and acquisitions under one cohesive strategy. The end result will be an interesting combination of our technologies that play to the best advantage of Sigma and our customers. We are confident that this new acquisition will empower Sigma into the next wave of growth and productivity.

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

Ken Lowe

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

First, our overall business demand remains balanced with substantial demand coming from our top three segments, which are IPTV, home connectivity and media player markets.

Second, all indications show that the IPTV market continues to remain strong with new industry forecast each quarter indicating increasing growth potential.

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

Fourth, 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 continues to ramp, driven by the demand for ubiquitous media access.

Now let's focus in 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. Industry analysts at iSuppli predict IPTV set-top boxes will increase by 48% this year, while MRG stated that global IPTV subscribers is expected to reach $102 million in the year 2014.

Now let's look at the overall IPTV demand and Sigma's penetration in each of the three worldwide regions. As the leading IPTV deployment in North America, AT&T continues to exhibit strength in its U-verse program. At the end of their second quarter, AT&T reiterated that their U-verse service continued its ramp with a net subscriber gain of 209,000 for a total to date of 2.5 million. Additionally, AT&T indicated their U-verse TV deployments now passed 25 million living units.

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, and following is an update for some of the more noteworthy operators in the region. Deutsche Telekom now reaches 971,000 subs, having added 410,000 in the last 12 months; France Telecom reached 3.1 million subs for its pay TV service, up 30% year-over-year; Swisscom nearly doubled its subscribers over the last 12 months ending with 317,000 total; Belgacom added 54,000 subs last quarter to reach a total of 868,000; Portugal Telecom added 57,000 new subs last quarter to reach a total of 702,000. A total of 15 operators in Europe currently deploy solutions based on Sigma silicon.

Asia is seeing increased deployment rates for IPTV, including China, who are forecasted double our subscriber this year. Accordingly to latest figures from Informa Telecoms & Media Asia Pac now reaches 150 million digital TV homes and surpasses 10 million IPTV households.

The following is an update for some of the more noteworthy operators in the region. Korea Telecom added 277,000 subs last quarter, their second highest quarter add ever. SK Telecom reached a total of 890,000 subs last quarter; and LG Dacom added 66,000 subs, reaching a total of 447,000 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 continue to see more and more design engagements for new set-top boxes based on our value leading platform, the 8652. As was announced this quarter, Tatung is using this platform as part of their thrust to increase the share of Microsoft Mediaroom deployments, and furthermore at this point nearly every Mediaroom OEMs designing set-top box offering using the 8652, since it represents exceptional value for low-cost set-top box solutions under either Mediaroom or Linux. Providing substantial cost savings, the 8652 delivers the performance required to meet next-generation user experience in a very efficient manner. Based on current design activity, we expect to see active deployments begin in the second half of this year.

Now let's touch base on the continued demand we're seeing in Connected Media Players, in which Sigma enjoys a leading position. The momentum in the DMA market is fueled by increasing availability of content over the Internet. Many of the products can stream content directly from various paid, free and user-generated content locations, which is becoming increasingly popular. 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. These products will include many unique form factors over the top content capabilities, and eventually form thin client extensions of the set top box ecosystem. We expect to see continued revenue contribution from this segment, with demand modestly increasing over time.

Within the Cable segment, momentum continues to build towards hybrid IP cable services that use IPTV-like technology for future video delivery. This will provide operators with ways to increase their subscriber base through service features such as an expanded channel suite, more HD content, and whole-home DVR capabilities. Nearly all major US MSOs are experimenting with the new gateway client architectures, and the ability to interface with consumer products. This transitional opportunity represents a huge market potential that appears poised to turn into deployments during 2011.

To address this market, we're continuing to invest heavily into cable gateway platforms, thin clients and associated software to provide a complete solution and drive the transition. We will be shortly demonstrating updated versions of our cable solutions for strengthening our position in the market. While we recognize the future impact of Intel’s pending acquisition of the TI DOCSIS technology, we believe it will take at least two years for an Intel integrated offering. Furthermore, based on our own recent discussions, we do not anticipate any impact to our products that leverage the TI components for this generation of solutions.

Z-Wave wireless home control is another steady revenue contributor to Sigma that taps into the demand for energy and security management services, which are fast becoming a target for operators and set-top box makers. 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. More importantly, we are in the process of securing design wins at major telco accounts both in Europe and North America. We feel these movements when announced will begin a landslide of interest and activity that will eventually lead to an order of magnitude increase in demand for home control devices. In preparation for the coming opportunities, we are developing more targeted products for set-top boxes and RF remote controls while enhancing our offerings for home appliances.

Now let's turn our attention to the Connectivity Business Group. To start with, the Connectivity Business Group adds a substantial revenue stream that represented approximately $21 million in this quarter. Not only has this added a strong boost to our top line, but has provided us with a more diverse portfolio of demand. Our HomePNA products represent the largest portion of this revenue stream and continue to be the leading standard for delivering IP content across existing coax cables and phone wires.

This segment continues to demonstrate strong demand, coupled heavily to North American IPTV deployments. And furthermore, we are seeing signs of acceptance in the Latin American market with some new telco RFPs now mandating HomePNA for their set-top boxes. The YES, the Israeli satellite TV company, is now successfully deploying video on demand using HomePNA showcasing new ways to leverage the Sigma technology. Additionally, we are continuing our efforts to expand the market in Asia and parts of Eastern Europe, where MDU market provides many opportunities for low-cost solutions to Ethernet over coax for high-density housing and apartment buildings.

As our second thrust, the recently introduced HomePlug AV chipset 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. Over the past nine months since its introduction, Sigma has become a key player in the HomePlug AV market with over 10 design wins to date, including several Tier 1 OEMs. Furthering this goal, Sigma is now the first company to demonstrate power line technology, ClearPath, using all three wires in a standard power grid to achieve MIMO functionality. By using MIMO, Sigma’s ClearPath will enable connected media devices and IPTV set-tops to deliver multiple HD video stream simultaneously to over 95% of the power outlets in homes worldwide. We are aggressively marketing these new HomePlug products into Europe and parts of Asia, where the availability of coax is far more limited.

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. As many of you know, G.hn. was recently approved and is enjoying strong backing from leading operators, OEMs, and organizations such as HomeGrid [ph]. Sigma intends to be in the forefront in revolutionizing the home connectivity market with this G.hn. chipsets.

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 to some of the largest consumer equipment makers in the world.

I will now pass the call to Thinh to cover our 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 all smaller segments, including VXP processors and Z-Wave home control.

Moving on to our forward guidance, our visibility is reasonable at this time, however, we will 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 third quarter revenue similar to that of the second quarter; we expect our gross margins on a pro forma basis to remain similar to that of the second 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 our development efforts to strengthen our position moving forward. We now like to open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Mark Sue from RBC Capital Markets. Please proceed.

Joseph Longobardi – RBC Capital Markets

Hi, this is Joe [ph] for Mark Sue. From your vantage point, how do service providers feel about their set-top box inventories, and are you comfortable with your current inventory levels. Are there any indications from carrier customers that demand will resume?

Tom Gay

Well, from an external inventory standpoint, first of all we have limited visibility, and we typically engage in discussions to get anecdotal information, but – and based on that we would say that there are no current issues with external inventory that we’re aware of. As people get to a transitional point between generations, they typically make sure the inventory float goes down to a reasonable level, so that they are not exposed. So, we believe that as we are in the midst of first to second generation transition with many customers, we believe that inventories are fairly well controlled at this point externally.

Joseph Longobardi – RBC Capital Markets

Okay, thank you and good luck.

Operator

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

Sukhi Nagesh – Deutsche Bank

Hi, thanks for taking my question. I have a couple of questions here. Tom, your gross margin actually dropped about 250 basis points sequentially. I think, if I recall, you had actually guided that to be flat in the quarter in the beginning, could you help us – walk us through why it dropped so much?

Tom Gay

I am sure that wasn’t quite as precipitous as that. The one comment that I was making was the one-time write-off that contributed 0.7%. There was a product that was written off during the quarter that was not anticipated and a one-time event. So that was the most noticeable aberration from our expectation.

Sukhi Nagesh – Deutsche Bank

Okay.

Tom Gay

The other issues involved some slightly higher costs due to the constraints of our product line and production, and we also had some product mix things that contributed a little bit to that downfall.

Sukhi Nagesh – Deutsche Bank

Did you – I mean, I would guess, did you have to give any additional price discounts to gain – increase volume in the IPTV, or is there anything abnormal going on on the pricing front?

Tom Gay

No. Most of the usual trends continued as expected, just a few levels, so went against us little more than we would have expected.

Sukhi Nagesh – Deutsche Bank

Great. And congratulations on (inaudible) by the way, and that was pretty well done. Next on the Gemtech [ph] in particular, I think that revenues there increased 35% sequentially, is that mostly going into the Cisco set-top boxes?

Tom Gay

Yes, Cisco is the dominant customer in there, but not – it does also serve some other end markets.

Sukhi Nagesh – Deutsche Bank

Got it. Any comments there Thinh on how Cisco is ordering relative to Motorola and what you are seeing from those two customers?

Thinh Tran

You know as Tom mentioned, it is hard for us to see 100% visibility because lot of this Gemtech or a company like that, they do order parts for many customers, and it is very hard for us to know exactly how many for Cisco and how many for Motorola and so on. So, we kind of have an idea but we don’t have the exact – really, we’re not really at liberty to tell you exactly what they are.

Sukhi Nagesh – Deutsche Bank

Got it. And last question I had Tom could you provider us some indication of how OpEx should trend in the next couple of quarters?

Tom Gay

We expect mild increases, just a very small creep in the OpEx until the fourth quarter when G&A tends to pop-up a bit, the opposite of the decrease we saw from Q1 to Q2.

Sukhi Nagesh – Deutsche Bank

Great. Thank you, guys.

Operator

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

John Vinh – Collins Stewart

Hi. Thanks for taking my question. On the forward guidance, you guided flat, can you help us understand how do we think about of your three core segments, should we be thinking about each of them flat or some of them going to be up versus some of them going to be down going forward?

Tom Gay

Well, I think in general most of them are going to be relatively flattish. There are some minor trends within those segments, but what happens is we have various customers that push a little bit more in one quarter, and those that push a little bit more in another quarter, and it ends up that the second quarter and third quarter are going to be about even as the median as the forecast shows us.

John Vinh – Collins Stewart

I see. And then on the last quarter’s call, you had talked about potential share loss on the Mediaroom front, it seems like may be one of your competitors is maybe slightly delayed there, can you give us an update in terms of kind of the timing of that and how do we think about kind of modeling that going forward in terms of timing?

Tom Gay

Well to a certain extent we’re pretty confident with the way things are going right now, and there is a situation out there that as far as transition goes from first to second generation, where we are very competitively pursuing all second-generation designs and the situation does have a lot of change to it on a quarter-on-quarter basis. And so, when we issued that notice previously, we were indicating that there was a potential to that. Now, some of that is being pushed out to our knowledge, and that is positively affecting us, it is positively affecting our ability to continue revenue for the next couple of quarters without any impact.

So, we’re looking at that as positive and furthermore as things like that push out often companies will reconsider how they are planning their transition and whether or not they even want to choose a different path, and that could be very beneficial to Sigma as well.

John Vinh – Collins Stewart

So, given the delay, you believe that they potentially could revisit that so it is possible that you could regain the share before your competitor even ships is that what you are suggesting?

Tom Gay

Yes, aspects of that are being reconsidered and yes, we are at this point in time as we said, we remain very heavily engaged for every telco’s second generation deployments, and slips like this can create opportunities and those opportunities are what we are preparing ourselves for.

John Vinh – Collins Stewart

What would be the timing if such a decision were to be made?

Tom Gay

We can’t really comment. It is a decision being made by an external entity. So, you know, I think that there are various forces at work and those decisions, I think as I have mentioned before, because of the changes that happen one quarter-by-quarter some of those decisions are revisited. So what really is a decision when it is made and then unmade. So, I can’t really comment as to when the final decision will be made.

John Vinh – Collins Stewart

And last question from me, a follow up to you Tom on gross margins, you had guided gross margins flat assuming the 0.7% write-off kind of goes away, assuming kind of a similar mix based on your guidance, and maybe you address some of these constraint issues, why wouldn’t margins be higher in the next quarter?

Tom Gay

Well, the 0.7% it is likely that that will be a positive difference.

John Vinh – Collins Stewart

Great. Okay, thanks.

Operator

Your next question comes from the line of Daniel Amir from Lazard Capital. Please proceed.

Daniel Amir – Lazard Capital Markets

Thanks a lot. Just to focus a little more on the guidance here. Can you just try to give us a bit of more visibility whether the guidance on the – the flat guidance is more related to the IPTV side or is it really the connectivity group or is it the combination of both, because it kind of sounded that in your commentary that you feel that business is quite strong so just trying to gauge whether it's still related to the fact that maybe you can't get enough wafers or is it really, there is something else going on?

Ken Lowe

You know, I’m not sure we can provide much more clarity. I guess, another way perhaps to provide some insight is that there is within that demand, there are – if you want to split it this way there are two relative components, there are – one component is the current generation, and one is the next generation. The next generation demand is building up nicely and we are happy about the way that is developing. And current generation demand has to do with products that are on the cusp of technology transitions and we are looking at that as something that – as I mentioned, in some cases some of our customers get more robust in one quarter and less in another.

So, we had some flip-flop back and forth between second quarter and third and that kind of evens it out. Obviously, when we provide guidance we are well aware that we have upsides that go well beyond that guidance. But we are trying to provide a relatively conservative outlook.

Daniel Amir – Lazard Capital Markets

Okay, and in terms of when do you expect to have an integrated HomePNA chip? Is that on your road map and if so, when should we expect that?

Thinh Tran

You know, I think it is a natural conclusion and something that we obviously are looking at, the idea of integrating together the HomePNA with the media processors, the moment towards system-on-chip is continuing along those lines, and obviously that is one of the key strategic reasons that we made that acquisition, but there are other decisions that are being examined as to exactly what level of capability, and which all standards we would want to support in that integration.

So, the analysis is a little bit more involved, there is a lot of customers that we are trying to make sure that anchor us – anchor homes for that. So we really would prefer to put that off until we’re a little bit more solid on that.

Daniel Amir – Lazard Capital Markets

Okay, thanks a lot.

Operator

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

Hamed Khorsand – BWS Financial

Hi guys. Just a couple of questions here. The first one is, recently your commentary on the last few calls have been very positive on IPTV but the mix continues to not to show that. Your IPTV revenues remain at sub-$40 million. I'm just trying to get an understanding as to if you're saying it's strong, why hasn't revenues shown that as far as figures go?

Ken Lowe

Well, I mean, we have been showing some growth, yes, it is not breaking through any huge barriers this year, but what our expectation is every indication externally is that the market is looking strong over the next 12 months, and every indication that we have is that our business is continuing to benefit from that strength. So, understandably, it is a reasonable question in a quarter where our guidance is providing relatively flatness between now and next quarter.

We don’t expect that trend to continue in IPTV. We expect IPTV to show growth. So in spite of second to third quarter guidance, we do expect IPTV to continue along its growth path.

Hamed Khorsand – BWS Financial

As far as IPTV is concerned, on the chip model basis, the revenue you're recording now, is that just from your legacy 8634 processor, or are the 8650s selling into that now?

Tom Gay

There is some presence of the 8650 series, but the 8634 still dominates the processor shipments at this time.

Hamed Khorsand – BWS Financial

Okay, and then just a question on the guidance, the theme for the call, are you guys dependent on any large orders this quarter or is visibility pretty good right now?

Tom Gay

Our guidance is based on the combination of backlog and forecast that we consider to be fairly dependable.

Hamed Khorsand – BWS Financial

Okay, one last question. When you mentioned the subscription additions from Korea Telecom, how much of that is yours and how much of that is your competitor?

Ken Lowe

Well, at this point in time, we are not receiving the majority of that demand from Korea Telecom. So there is competitive forces involved.

Hamed Khorsand – BWS Financial

Okay, is there any area where you're focusing on getting that subscriber trend back from the competitor?

Ken Lowe

Absolutely. We are continuing to remain engaged. When an account like that turns over, we generally redouble efforts to recapture that account, and understand in many cases, there are some very specific niche capabilities that a certain telco needs that we are working on that perhaps somebody had a little bit earlier than us, but they generally prefer our solution. And so when we come out with those specific needs, they will look again at our solution to recontinue their line with. We are certainly engaged – we are engaged with Korea Telecom with that hope.

Hamed Khorsand – BWS Financial

Okay, and are you guys updating your guidance as far as the DOCSIS deployment goes? Last year you guys were saying the end of 2010 into early 2011.

Ken Lowe

You know, the DOCSIS deployments have been on the cusp for a while. They remain locked to some fairly impactful transitions that would have to be made by cable companies. Our information is no better than what we’re fed by the partners that we are working with. So the answer is, we’re watching it quarter-by-quarter like you do.

Obviously, we are in deep discussions. There are a number of people that are engaged to the level that it will happen, but again some of the stuff is so impactful that they are being ultra-cautious. It does, as I mentioned in my presentation, it does look like this is going to start happening sometime next year. It probably won’t happen across the board, it will probably happen with one or two people first, and that will start a larger trend I believe. Once the first couple of them come out of the gates, I think many of the other ones will shake out.

Hamed Khorsand – BWS Financial

Okay, that's all for me, thank you.

Operator

Your next question comes from the line of Stephen Chin from UBS. Please proceed.

Stephen Chin – UBS

Thank you. First question I had was actually just if we revisit the supply-related comments earlier in the call, for the current quarter, if you can comment on what supply availability looks like from wafer standpoint relative to your current revenue guidance? That would be great.

Tom Gay

Well, we’re pretty much meeting our needs in most areas on the wafer supply, but it is tight. We would be much more comfortable with a bit more inventory on hand, and be able to react to some turns orders and other revenue opportunities, but so far we are doing okay with that. But in general, we’re able to manage fairly well against the forecast that we get from our customers, and do not have any significant pressures on our inventory supply chain at this time.

Stephen Chin – UBS

Okay, and Tom, you also mentioned that it was a factor in the gross margins being impacted along with the higher wafer costs. Just given that the 8634 is still the majority of your IPTV volumes, what kind of mix issue is going on there, if you can elaborate?

Tom Gay

In order to get some capacity, we needed to work up some alternative lines, which had a slightly higher cost to deal with, and so as we meet the demand with some of this additional foundry supply, we’re getting a small impact on our gross margin because of that. There is also in some of our other product areas in the media processor some mix changes between the combination of products that actually shipped during the quarter.

Stephen Chin – UBS

Okay, great, thanks. And I think the other question I had was related to the 8652 being certified for the Mediaroom and as you mentioned, you do expect some revenues to materialize in the back half of this year. I guess could you help us understand just where the – how quickly or how with the low and high end of the rollout time could be for various hardware customers or service providers in terms of taking these boxes and certifying the networks or fully validating them? What would be the low to high end of the range from a testing perspective and being at the door deployed?

Ken Lowe

So, I will give you the single ended range, and kind of some caveats. The 8652 is at this point in time certified within a set-top box to be delivered to any customer that wants it. So, the gates are open now. The initial target for that delivery was a customer in Asia. And as we mentioned in the press release, Tatung has the first set-top box that is fully qualified and ready to go.

That being the case, the deployment is expected to start in the second half and anything can happen as you have seen delays in other things. So, we can’t put any guarantees on that. But this was pushed through with some relative expedition in order to make sure that it was available in this timeframe. So we would be surprised if it is not going to be taken advantage of fairly quickly.

Stephen Chin – UBS

Great. Thank you.

Operator

Your next question comes from the line of Dunham Winoto from Avian. Please proceed.

Dunham Winoto – Avian

Hi. Thanks for taking my questions. Most of my questions have already been answered but, Ken, maybe you can give us an update. I was just curious on the CopperGate front, is there anything recently that you guys can share with us in terms of maybe new customer deployment or trials or anything like that?

Ken Lowe

You know, they have been adding a lot of customers, lot of design wins I should say in the HomePlug AV product. They have got 10 new customers over the 9 or 10 months since that product was introduced. So they are running at about a rate of – an average rate of about one customer a month there. Many of these are top tier guys and you will notice that when we finally start putting out the announcements that they are deploying, HomePNA has been gaining some smaller customer accounts in the Asian area, and they expect that to continue. It is a good solution for that, and obviously there are no G.hn. deployments to talk about at this point in time. So that is pretty much what is going on with the connectivity side.

Dunham Winoto – Avian

When do you expect that you'd be able to share some of these announcements with us?

Ken Lowe

We are hoping between now and the end of the year that we can put together a number of these. Again some of these are just waiting to be introduced and so our timing of acknowledging those is tied up against the public launch times from the customers themselves. But it does appear as though we should be able to put out a few of them between now and the end of the year.

Dunham Winoto – Avian

Okay. So most of these deployments would you say in which geography, Asia, Europe, North America?

Ken Lowe

Asia and Europe. That is predominantly where we are focusing right now. That is where the differential advantage has been as a reason.

Dunham Winoto – Avian

Okay, got you. That's all I have. Thank you, good luck.

Operator

(Operator instructions) there are no further questions at this time. This does conclude the question-and-answer portion of the call. I will now turn the call back over to Ed McGregor for closing remarks.

Ed McGregor

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

Operator

Ladies and gentlemen, 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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