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Sigma Designs, Inc. (NASDAQ:SIGM)

Q1 2015 Results Earnings Conference Call

June 11, 2014; 05:00 p.m. ET

Executives

Thinh Tran - Chief Executive Officer

Elias Nader - Chief Financial Officer

Mustafa Ozgen - Vice President & General Manager of Home Multimedia Products

Ken Lowe - Vice President of Strategic Marketing

Analysts

Quinn Bolton - Needham & Co.

Hamed Khorsand - BWS Financial

Robert Strobel - Deutsche Bank

Dan Scovel - Edison Group

Orin Hirschman - AIGH Investments

Blaine Marter - Lobe Financial

Operator

Good day ladies and gentlemen and welcome to the Q1, 2015, Sigma Designs earnings conference call. My name is Whitney and I’ll be your operator for today.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Ken Lowe, Vice President of Strategic Marketing. Please proceed.

Ken Lowe

Thank you. Welcome to Sigma Designs conference call to discuss financial results for our first fiscal quarter of 2015. I’m Ken Lowe, Sigma's Vice President of Strategic Marketing. With me today are Thinh Tran, Sigma's CEO; Elias Nader, Sigma's CFO; and Mustafa Ozgen, the Vice President and General Manager of Home Multimedia Products.

The press release containing the quarterly results including selected net income statement and balance sheet information was released after the market close 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 Elias, an executive overview by Thinh, and finally our forward guidance by Elias. We’ll 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'd like to remind everybody that today's call contains forward-looking information, including guidance we provide about future revenue, gross margin and other financial measures, and anticipated trends in our target markets.

We caution you that the forward-looking information we present today is based on our current beliefs, assumptions and expectations speaking only 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 Form 10-K as filed with the SEC on April 17, 2014. 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’ll 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 the detailed reconciliation of our GAAP to non-GAAP results.

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

Elias Nader

Thank you, Ken. Good afternoon ladies and gentlemen.

Net revenues for the first quarter of fiscal 2015 was $36.9 million, a decrease of $1.6 million or 4.2% compared to $38.5 million in the previous quarter. Compared to the year ago quarter, our revenue decreased $15.7 million or 29.8% from $52.5 million

Our revenue breakout for the quarter are as follows: I'll cover this by target markets and percentage of total revenues. DTV, $6.1 million or 16%; set-top box $5.7 million or 15%; Home networking $16.1 million or 44%; home control $6.1 million or 16%; license and other $2.9 million or 9%.

Revenues declined in the first quarter by $1.6 million, primarily due to a decrease in sales of set-top box by $2.4 million, a decrease in license and order by $3.4 million, which was offset by an increase on home networking by $2.3 million and home control by $2 million. The year-to-year revenue decline was mainly driven by the sales of legacy products that declined faster than the ramp up of new products.

Gross margins. GAAP gross margins were 54.9% for the first quarter compared to 57.3% in the preceding quarter and 51.3 % in the same quarter last year. Non-GAAP gross margins were 58.1% for the first quarter, compared to 61.1% in the preceding quarter and 54.7% in the same period last year.

Our gross margins will fluctuate over time due to a variety of factors, including product mix, the initial yields of new products and the contribution of IP licensing revenues. Our gross margin in the first quarter of fiscal 2015 was particularly strong primarily as a result of increased shipments of home networking products with higher margins and strong IP licensing revenue.

The new products across our entire target markets that we have introduced over the past six months have positioned us to secure increasing customer deployments, which we expect to begin to realize in the second quarter of fiscal 2015, with a stronger momentum in the second half of fiscal 2015. I will cover our forward guidance in more detail towards the end of our call.

Operating expenses; we have stabilized our operating expenses and in the first quarter of fiscal ’15 our non-GAAP operating expenses were in line with our guidance of $25.5 million. GAAP net loss and non-GAAP net loss on earnings. The GAAP net loss for the first quarter of fiscal ’15 was $9.9 million or $0.29 per share. This compares to a GAAP net income of $1.3 million or $0.04 per share in the previous quarter and a GAAP net loss of $4.5 million or $0.13 per share in the year ago quarter.

The non-GAAP net loss in the first quarter was $5 million or $0.14 per share. This compares to a non-GAAP net loss of $4.5 million of $0.13 per share in the previous quarter and a non-GAAP net income of $300,000 or $0.01 per share in the year ago quarter. Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance.

Now, I’d like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $81.8 million at the end of the first quarter, a decrease of $7.6 million compared to the end of last quarter. The decrease in cash was primary due to $8.6 million of new loss adjusted for non-cash items of $6.4 million, stock based comp, amortization and depreciation being including in there. A $3.9 million decrease in AR, a $900,000 decrease in inventory, $800,000 decrease in prepaid expenses and other current assets.

The use of cash for the period was about $1.1 billion used for purchases of IP and a $9.9 million decrease in accounts payable and accrued liabilities.

Net accounts receivable was $23.8 million at the end of the first quarter, a decrease of $3.9 million compared to the previous quarter, primarily due to better collection efforts and lower revenues for the first quarter of ’15.

The average day sales outstanding, which is our DSO for receivables, the end of the first quarter was 59 days, which decreased by six days compared to the previous quarter.

Net inventory was $19.5 million at the end of the quarter, compared to $20.4 million in the previous quarter, a decrease of $900,000. The decrease in inventory was due to reduced inventories for the set-top box business. This brings our inventory total for the quarter to 4.2 on an annualized basis, compared to 4.5 in the previous quarter.

Trade payable was $11.6 million at the end of the quarter compared to $16.2 million in the previous quarter, a decrease of $4.6 million. The decrease in trade payables was mainly due to a timing of payments of certain items

This concludes my presentation and I will discuss the forward guidance at the end of the call. Now I’ll turn the call over to Thinh. Thank you very much.

Thinh Tran

Thank you, Elias. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma.

As Elias has indicated, we achieved first quarter guidance on revenues, gross margins and operating expenses, although our result indicate that we are in the transaction low period. We entered this quarter with a goal of positioning ourselves of future growth and furthering the design wins in our pipeline. We feel strongly that the new product we have launched over the past six months put us in a position to secure increase in customer deployment in the quarters ahead.

I want to emphasize the following two points about financial performance for the quarter. Our $36.9 million in revenue is expected to be our lowest point of revenue for the foreseeable future, due to the issued reliance on older legacy products and the anticipated ramp of our newer trend setting products.

Our continued achievement of gross margin well above 50% demonstrate yet again the value of our product that we offer in the market. Our operating expense has now been stabilized, and are focused in our shift to growing our top line.

Now lets revenue our accomplishment and future expectation by product line. First on Digital TV; our Digital TV product line constitutes $6.1 million of revenue this quarter, a minor decrease of 200,000 over the previous quarter.

The overall multimedia business continues to be driven by several major trends, the most important being 4K Ultra High Definition video, where we are currently a technology leader and are introducing a series of new high performance single-chip SoC products to tap into this growing demand.

This quarter we enter production with our SX6, our latest generation Digital TV SoC. This product includes the new HEVC decoding technologies that enable a wide range of feature rich SmartTV products to be introduced at a competitive price performance level.

We also entered production this quarter with our latest generation FRCX processor, which allows our customers to launch new 4K TV with improved video quality along with BOM cost reduction. This chip positions Sigma to be a complete SoC platform supplier for 4K TV, with the combination of a TV SoC and a same rate conversion processor.

Based on these advantages, we are currently working to get our top tier customers into production for their upcoming summer product launches. This includes our ongoing work with U.S. television leader VIZIO, a major Japanese TV brand and two Asia based TV manufacturer who are building the first Roku Streaming TV.

The latter opportunity is a result of our unique technology partnership with U.S. streaming leader Roku to provide the chip for the first Roku TV models, a newest class of SmartTV that featured the Roku OS and are fully Internet streaming ready.

As a result we remain confident that the strength of our new DTV product will create a realm of success over the next few quarters. Although we will only begin to see the impact of these design wins late in Q2, we will experience the benefit of these designs wins for the full quarter in Q3.

Consistent with typical seasonality in TV we will also begin to see an increase in orders in Q3 and this is typically the strongest quarter of the year for this end market.

On set-top box; our set-top box product line contribute $5.7 million of revenue this quarter, a decrease of $2.4 million over our previous quarter, primarily as a result of delays in orders as customers transaction to new generation platform.

The set-top box market is being driven by the simultaneous movement to cloud based architectures, HEVC decoding, 4K resolution, all of which are existing technologies within Sigma and all of which are being designed to new high performance single-chip SoC processors.

This quarter we began sampling our latest 8700 Series of chipset that feature HEVC decoding ARM CPU, 3D Graphics supported by HTML5 software stack under Linux and Android operating systems. This new generation of SoC with its like of competitive solution, with the added advantage of Sigma in the expertise in IPTV, and now pathways to Digital TV conversion.

Resulting from the appeal of this new SoC solution, we achieved a strategic platform design win with our 8,700 Series chipset associated with a major service provider and that transaction to the next generation middleware. We believe that this platform will become the basis for a wider range of provider adoption and that will lead to a broad range of next generation set-top box business that will start to emerge towards the end of the 2015 timeframe.

In the near term we are placing all efforts on the sales of our previous generation Silicon. We continue to be supported by several set-top box manufacturers who have the most aggressive selling efforts to gain additional deployments from service providers. As a result we believe that our set-top box product will actually go into deployment during the next few quarters.

In home control, our Z-Wave home control product line contributes $6.3 million of revenue this quarter, an increase of $2 million over our previous quarter, due to continued customer adoption in this Security and Telco sectors.

The home control market is currently being driven by Security and Telco providers looking to increase the subscriber revenue per unit by offering remote monitoring services. Simultaneously the larger overall market for the Internet of Things is being driven by industry shipping initiatives from Google, Apple, Cisco and other major players. In combination, these movements serve to both validate the future potential of the market as well as gain consumer attention, all of which will enforce the value of Z-Wave.

The recent announcement by Apple the Home Kit develop package is an example of a trend that will be benefit all participants. We believe it will spur application developers to create a common user interface for all form of home based device, resulting in greater attention from the larger consumer market and will validate the market potential for remotely controlling our homes through mobile device.

This quarter we entered production of our Z-Wave 500 Series Transceiver, the latest addition to the Z-Wave product family that leads the market for remote home monitoring and control and offers the smallest footprint in the history to meet the physical challenges of many device within the Internet of Things.

This transceivers are complemented by our vastly improved suite of software, to create one of the most dependable certified connectivity solution in the industry. Based on the strength of this solution, our shipment continued to increase due to demand for our design win at AT&T Digital Life, ATD, Vivint and many other service providers. As a result we believe that our Z-Wave home control product will continue to ramp through our next few quarters, as deployment at major providers continue to ramp.

In home networking; our home networking business contributes $16.1 million in revenue this quarter, an increase of $2.3 million over our previous quarter, as a result of a sequential increase in HomePNA and HomePlugAV deployment.

The Video Home Networking market is being driven by the need to bring video service to multiple set-top boxes or television in the home, in a manner that lowers instillation cost and increased bandwidth available.

G.hn is one of the new standards that enable this through its all wire connectivity and inherent use of instillation. We have established HomePNA products in customers that continue to account for over 80% of our product line revenue. This revenue remains relatively stable to the long life cycle that deploy connectivity and its emerging use in markets such as Latin American.

We also have future growth potential in the HomePlugAV and G.hn products, both of which emphasize the use of the Powerline technology, which is positioned to share widespread use in future video distribution along with WiFi.

We remain heavily engaged with the market as our sales force continues its aggressive effort to gain adoption to our G.hn solution. The specific focus in North American and China service provider is amazing.

This quarter we announced that our G.hn chipset was selected by networking supplier Tecom and said they must make a prime electronics, both of who will expect to take advantage of the all-wire transmission and ease-of-installation offered by our G.hn solution. As a result we leave our home networking product line where we experience relatively stability throughout the next few quarters.

IP licensing. Beyond our normal product line operations, our IP licensing program contribute over $2.7 million in margin rich revenue this quarter, which we pursue opportunistically.

In summary, we continue to focus on growing our top line, winning new design and return to profitability.

Now, we will turn the call over to Elias for formal guidance. Elias.

Elias Nader

Thank you Thinh. I’ll go over the guidance. Though we are confident with our strategy and long term prospects of our growth, we are still being effected by product transitions in the near term.

You will begin to see the impact that Thinh discussed late in the second quarter and with stronger momentum in the second half of this year. Our outlook for the major product lines in the second quarter are as follows: In set-top boxes, we expect demand to increase due to continued ramp in second generation media room deployments.

In DTV we are expect demand to increase due to new product ramp for this years TV models. In home networking we expect demand will remain flat due to stable market conditions. In home control we expect demand to increase from continued adoption by security and Telco customers.

Translating this into formal guidance for the second quarter, we expect total revenues to grow in the second quarter of fiscal 2015, to be between $41 million to $43 million as we being to rollout and deployments of our new products, which will continue throughout our second half driving further growth.

We expect pro forma gross margins for quarter to be between 51% to 53% because of product mix and our expected initial yield cost of our new products. We expect pro forma operating expenses for the second quarter of fiscal 2015 to be between $25 million and $25.5 million.

We would like to underscore our progress on growing our top-line over the fiscal year by retuning to profitability in the third quarter. While we were not able to achieve profitability in the first quarter and we do not anticipate being profitable in the second quarter, we believe our operating expense is at an appropriate run-rate to support our growing business.

We invested in our business in the first half of this year in order to maintain our opportunities and deliver on our commitments to customers, which we can now see with tangible results as a foundation for our success in the second half of the year. We are excited to return to a profitable and growing business in the second half of the year.

That concludes my guidance and I thank everybody and now I would like to open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Quinn Bolton with Needham & Co. Please proceed.

Quinn Bolton – Needham & Co.

Hey guys. Nice job on the quarterly results, here in the guidance and then obviously with the new product ramps. I wanted to start on TV, because it sounds like that’s where a lot of the revenue growth comes from in the next couple of quarters. Can you give us some sense, it sounds like you start to enter production on the new TV models from VIZIO the Japanese OEM, as well as a couple of the Taiwanese ODM’s for Roku late in the quarter and then probably see a full quarter in 3Q. Is that the right way to think about the timing of those new TV product ramps?

Thinh Tran

Yes, go ahead.

Quinn Bolton – Needham & Co.

Okay. And then as you work with your current set of customers, can you give us some sense, how broadly penetrated are you in these suppliers next generation TV lines. I mean are you in just a couple of SKUs or are you across certain product families. Can you give us some sense of how broadly you are penetrating these accounts?

Mustafa Ozgen

Yes, this is Mustafa speaking. We have mostly in the higher end 4K and the high-end fruition segment of the product lines. So its in the segment of the product line and of the customers not only one SKU. So as long as we executive well we expect this to continue to next generations.

Quinn Bolton – Needham & Co.

Okay, and on those ultra high def TV models, can you give us some sense of what your dollar content is if you have both the SX6 and the FRCX solution?

Mustafa Ozgen

North of $20.

Quinn Bolton – Needham & Co.

North of $20. Okay, great. And then just switching over to the Z-wave business, it sounds like you expect continued sequential growth in that business. Is that just better penetration at the existing operators or do you see additional operators coming online over the next couple of quarters?

Ken Lowe

Well I think we actually hit that up quite a bit in last call where we talked about the fact that we already are engaged with five to six Telco’s at this point in time for this year and we’re expecting to double that number as we move into next year. So there’s a wide range of Telcos that we are engaged with. It’s just going to continue to expand.

Quinn Bolton – Needham & Co.

Sorry Ken, just in the next couple of quarters are any of those new operators coming online or is it really some of the existing guys, AT&T Digital Life, ADT?

Ken Lowe

I think the ones you just hit on will dominate what drives the next few quarters. And as we get into the fourth quarter this year, we’ll start to incrementally hit the additional ones that we begun engaging with. What happened is that the largest guys that you’re talking about here has spurred interest from the mid sized and smaller ones and then they are going to follow on. So we’ll have a double wave of growth, one now and then when those small ones pick up.

Quinn Bolton – Needham & Co.

Great and then just lastly for Elias, Elias can you give us some sense on the IP licensing business. What you expect to see over the couple of quarters and if I remember I think there was a fairly large multi media license that hit revenues over the past couple of quarters, but that maybe tailing off. Do you expect new either Z-Wave or multimedia licenses in the next couple of quarters or do you think that declines over the next couple of quarters.

Elias Nader

Well, in the next quarter I expect license of IP revenue to be flat over this quarter, then it tails off, but we are also expect while it’s sporadic and earl to tell, we are expecting other license revenue to happen sometime, just can predict when.

Quinn Bolton – Needham & Co.

Okay, but flat for the next quarter and then some continued IP licensing but tends to be lumpy.

Elias Nader

Yes.

Quinn Bolton – Needham & Co.

Great. Okay thank you.

Thinh Tran

You’re welcome.

Operator

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

Hamed Khorsand – BWS Financial

Hi. First, could you address how confidant are you in the guidance you’re providing for the second quarter and the rest of the year.

Elias Nader

We are very confident Hamed. Basically for Q2 for example we have visibility of 94% into out backlog and for Q3 we have about 54% visibility at this stage, so we are quite confident of our guidance.

Hamed Khorsand – BWS Financial

You said 94% for the second quarter?

Elias Nader

Yes.

Hamed Khorsand – BWS Financial

And then 54% for the third quarter?

Elias Nader

Yes, at this stage. You got to remember we’re still in Q2 right.

Hamed Khorsand – BWS Financial

And the design wins at the set top box level, how real is that, meaning are they signed, are they ready to go. I mean what stage are you at at that design win for the set top box.

Thinh Tran

Generally speaking, the boxes are designed. They are into the Telco’s. Deployments have started and it’s a matter of them basically adjusting their take rates to how much deployment they can get.

Hamed Khorsand – BWS Financial

Okay. So what do you see as being the biggest headwind for the rest of the year, I mean if you see any?

Thinh Tran

Your continuing to secure the additional design wins that will start driving growth in the fourth quarter, first quarter, etcetera. So as we go throughout the year, we’ve got to take the engagements to actual production designs. We got to get the production designs out into the deployment. So there’s a certain amount of mechanics to continue following up on and then there’s the identifying opportunities that will create additional growth for next year.

Hamed Khorsand – BWS Financial

Are you getting any push back at any level for the design wins from the set top, from customers?

Thinh Tran

No, there’s no specific push back. I mean we have competitive products at this point for the generation of set top box they are looking at, so we’re finding receptivity to the new types of chips.

Again, I think we tried to emphasize this last quarter. The market is moving in an overall trend towards higher performance shipped to the ARM based processors and three GPUs. Its moving to an HEVC, its moving towards 4K. Sigma is actually leading in a lot of those trends, so we actually feel very solid about our new line of products.

Hamed Khorsand – BWS Financial

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Robert Strobel. Please proceed.

Robert Strobel - Deutsche Bank

Gentlemen, congratulations! I see you doing better, but in the fourth quarter of fiscal 2014 you announced a $20 million share repurchase program which you announced you used $2.3 million in the fourth quarter.

You also indicated that the share repurchase program reflects the confidence in the long term strength of the company, as well as our commitment to returning value to shareholders. Well since then the stock has gone down quite a bit. Today its gone up $0.20, but its 4.03 with a market cap of the entire company of $138 million, even though we have gone up $0.50 a share recently that raised the market cap quite a bit.

The question I have is, you indicated you had $89.4 million in that prior press release sitting there in cash and cash equivalents, marketable security, restricted cash and you said that remains strong. I’d like to get your comment about what are you doing in the way of buying back stock? What your doing with the $89.4 million and what is your position as far as buying back previously and buying back in the future, stock at these very low levels.

The last thing I would like to add is despite your optimism you would knock down the S&P 500. I think if the outlook was that good; you might have been able to convince them to keep you in that index. You have a comment on that? Thank you.

Thinh Tran

Let me answer them slowly, one by one if you don’t mind. The buy back was voted on in Q4 of last year for $20 million. We spent $2.3 million, because we had one week in terms of open window to do our trading, so it was not the intention to lower $2.3 million. We just bought what we could and we now have left over $17.7 million. Since then we haven’t had an open window do to any repurchasing and repurchases are usually done when the management and the board have decided that the entry point is feasible.

So at this stage the repurchase of additional shares is being evaluated continuously, so we may or may not do any buybacks, but we have the option to do buybacks, so that’s the answer on the buyback.

On the cash, we were very strong in Q4 about $89.4 million. We burned some cash in Q1, mainly because we had to buy certain IP stuff and inventory ramp up and a couple of big payments to our vendors and if you look at our payables, it went down drastically by about $4.6 million. So it tells you that our prepayable is very low. So hopefully that answers your AP question.

Being dropped from the Russell 500 is not – the only control I have over it or the company has over it is once your market cap hits a certain number, it’s a system. It automatically basically kicks you off the list and if I could do something about it, believe me, I could have done it the same day and basically thrown myself back in the mix, but I have to wait to grow the market cap and that’s our job.

Our job is to return value to the shareholders. We work for you and for the rest of the shareholders and we believe that we will do what it takes to get Sigma back from the Russell 500 and even better.

So hopefully I’ve answered your questions sir.

Robert Strobel - Deutsche Bank

Well, you’ve done a pretty good job of answering, but I still have some questions concerning – is the company still interested in buying back its stock. Was it intending to buy back its stock when it has an opportunity and are you trying to say, and I haven’t heard it from any other company that in the entire quarter you weren’t able to buy your stock back when your not undergoing a merger or some other proceeding. Its hard for me to understand that you haven’t been able to buy back any stock when it went down to under $3.50 a share when you said it was a buy of $5.50 and $6 a share.

Thinh Tran

We are only allowed to buy back during the open window. We’ve had a closed window for a while.

Robert Strobel - Deutsche Bank

The window that’s been opened is the window that’s been opened in the last quarter?

Elias Nader

No, we didn’t have that opened last quarter for basic reasons such as our earnings call for Q4 was very late in the quarter, so it happened on April 11. It was also because – well, to answer your second part of your question, our open window is on Monday, 16.

As I said, I just cannot get up in the morning and decide to buy back shares and no company CFO will tell you to buy back shares without consulting with the board and agreeing between board and management that it’s the right entry point.

Robert Strobel - Deutsche Bank

Well, nobody’s bought back any stock on the inside Eric or try and bought back stock, although one owns 1 million shares and the other one’s 464,000. I think you want 464,000 right now. Nobody’s bought back anything since 12/20. In fact there was a sale on 12/20 at $5.50.

But the point I’m trying to make is, if the stock is selling to value, don’t forget you were once $50 a share many, many years ago and your talking about tremendous prospects in the future. Why isn’t the company buying back some shares and why aren’t insiders buying some shares? Are you precluded the insiders from buying shares too?

Elias Nader

No, no one is precluded. In fact as I said, we will look at all available tools at our disposal to buy back shares. Its being evaluated right now. I told you, we already spent $2.3 million. We have $17.7 million to play with and most likely, many of our internal management team will buy back shares as well. It just depends on the people. I cannot ask people to buy back shares. They have to use their own resources and monitor thinking tool to pull the trigger. So hopefully that will happen this quarter.

Robert Strobel - Deutsche Bank

Well, I hope so, because the stock is really been hammered and…

Elias Nader

But we’re doing our best Robert and I can assure you that we’re not stopping.

Operator

Our next question comes from the line of Quinn Bolton with Needham & Co. Please proceed.

Quinn Bolton - Needham & Co.

Hi guys. I just wanted to ask you a follow-up question. I think on the last quarterly conference call as you looked out to sort of fiscal ’15 in aggregate, you were targeting growth on a year-on-year basis. You kind of hit guidance for Q1. It looks like guidance for Q2 kind of falls in line with analysts’ estimates. Are you still pretty comfortable with achieving growth in fiscal ’15 over fiscal ’14 or can you share any updated thoughts on the fiscal ’15 aggregate?

Elias Nader

At this stage Quinn we’re really looking at a more than 10% growth in Q2 with a robust second half that we are very comfortable with. We believe we will be profitable in Q3 and Q4. At this time its purely to predict whether we’ll be profitable for the whole year, but it still remains our goal to be profitable and we’re doing what it takes to get there. So at this stage I’m very confident about the next few quarters and basically like I said earlier to you and to several others, that’s our goal.

Quinn Bolton - Needham & Co.

Okay, great. Thank you.

Elias Nader

Sure.

Operator

Our next question comes from the line of Dan Scovel, Edison. Please proceed.

Dan Scovel - Edison Group

Yes, thank you. A similar vein there. I’m clear your giving, your posting some growth this quarter on three of your four product lines and that seems like it should continue for the longer term. Obviously you have some seasonality there. I was wondering, on the home networking front, do you see that as kind of a trough now or there might be some cross over in the product transition to restore that piece of it to grow.

Thinh Tran

Well, at least the home networking is stable at this point in time. The HPNA is continuing to be deployed in high volumes. We don’t see a substantive growth for that. That constitutes the majority of the deployments, we don’t see substantive growth, but we don’t see substantive erosion at all this year. As we go beyond the edge of this year, we do know we are going to be hit by a certain amount of infiltration of WiFi and to a certain extent powerline. We hope to gain back a little bit of that share loss with our powerline offering from HomePlugAV and G.hn, but that’s as much visibility as we have at this point.

Dan Scovel - Edison Group

Okay, so that’s fairly stable at this point, although there’s some longer-term erosion is possible there?

Thinh Tran

Right.

Dan Scovel - Edison Group

Okay, and then the other three product lines, obviously you hit an inflection point and you’ve got some seasonality and newer products in the longer term. I would expect all three of those on a fiscal year basis will support your expectations for growth there.

Thinh Tran

Right.

Dan Scovel - Edison Group

Okay, thank you.

Operator

Our next question comes from the line of Arup Das from Loeb. Please proceed.

Blaine Marter - Lobe Financial

Hi guys. Its Blaine Marter and Arup Das from Loeb. I just want to respond and we look forward to talking to you later this week, but I had to respond to a previous call in regards to the share repurchase. And we are a fairly new institutional holder to your company. We’ve been trading distressed securities here for 20 years and I got to tell you, that previous caller must not be aware of capital markets or has ever traded distressed securities.

In our opinion your company needs to preserve the value of this company and that’s by holding cash, not by using cash to buy back your stock. If you burned I mean about eight or nine, however much cash you burn in this quarter, you don’t plan to be profitable in the next quarter, until this company can generate cash and has confidence that they continue to generate cash. You should be preserving cash in terms of not buying back your stock, lowering your operating expenses and not doing any acquisitions and that’s how you preserve the value of the stock.

Lets play this out. You have to project confidence in the balance sheet of this company. You burn another $8 million or $9 million and if you were to spend say $10 million on a share repurchase, well then $20 million just disappeared off the balance sheet. We’ve seen these downward cycles and the graveyard is filled with $3 and $4 tech stocks in your same industry, one who you just bought some assets out of bankruptcy just recently.

So I don’t know what that guy is talking about, but for the current time period this company should we preserving cash, preserving the value of our option going forward. And thank you for preserving that option and we’ll look forward to speaking with you later in the week.

Thinh Tran

I look forward to it too. Thank you, yes.

Operator

Your next question comes from the line of Orin Hirschman with AIGH Investments. Please proceed.

Orin Hirschman - AIGH Investments

Hi, this really wasn’t on my schedule of questions or comments, but just in terms of the last two callers, you know there is a balance for the strike if the company needs $50 million or $60 million on their balance sheet and by all means there’s additional liquidity and this is the kind of company that do swing around profitability, lowering your share count by 5 million shares or 6 million or 7 million shares is very meaningful to your EPS, so there is a balance.

I don’t agree with the last caller at all. There is a balance here. There is a balance here, so if you use up none of your liquidity on a buyback here, to me it doesn't seem such a prudent or to be shareholder friendly as well. I think the board needs to continue to evaluate and to do what is prudent at that moment.

In terms of the questions, one of the prior questions was focused on HPNA. The picture that you painted is that it's a stable business here and it will drop off a little bit. There is some additional tweaks and new products in the technology that you're hoping will stem the tide. But as you did mention, the different flavors of WiFi coming in addition to the existing WiFi and that people are reaching out more to stream.

As I look at the design win activity and with the existing design wins, what keeps you based on that design pipeline/existing designs? What gives you confidence that it's just not going to come to a point in the next few quarters where it does fall off a cliff? Having said that, it maybe a manageable cliff, but what gives you confidence it's not going to fall off the cliff at some point here?

Thinh Tran

Well, you know there is some erosion expected as we go past the end of this year and the service providers overall though move slowly; that’s one of the issues. The other issue that slows this thing down is the fact that as initiatives have been made in the past to look at WiFi and other alternatives, they end up moving part of their align over to the VAT for some of the set top boxes peripheral in the home.

But typically often between the gateway and the main box, they continue to maintain a very strong wired connection such as HPNA, because its going for instance from the end of the garage into the living room and you really don’t have WiFi coverage there. So we may loose a couple of sockets, but we keep a couple, that type of thing. So there’s certain mitigating factors that make it look like, yes there’s erosion, but the erosion is mitigated by some of these other factors, so.

Orin Hirschman - AIGH Investments

Thanks. In terms of on a longer-term basis, part of the strategy here is to sell more and more content within the box or within the TV. If you have it all it becomes a one-stop shop, which is what the customers want and that has worked for you in the past and hopefully it's working for you now as you begin to climb out of the trough.

Aren't you going to need though, just again on the networking types, aren't you going to need the wireless aspect of it for the streaming content? You're going to need to have that or doesn't it say you have it in your bag of tricks in order to sell more of the whole system package?

Thinh Tran

I think your right. I think what’s important for us is that we’re able to offer a competitive overall solution. So what we’re doing has got a compound effect. We want to offer the central SoC in the set top box that forms the brains behind the operation. We want to either offer the connectivity solution, our sales or partner with somebody that’s strategic, that can help us offer a connectivity solution that keeps that SoC in the market and then furthermore we’re able to sell additional value add to the home control. So we can’t afford to focus on every single type of device, but what we can afford to do is create the overall solution, at least in partnership that includes everything they need.

Orin Hirschman - AIGH Investments

On that note, do you ever reference designs with partners that you can mention for the wireless streaming?

Thinh Tran

Yes, we worked very closely with – Quantanna has become one of the leading providers of high performance WiFi for the telco space. We’ve also worked with Qualcomm Atheros on other programs. We generally speaking don’t work as closely with Broadcom for obvious reasons, but that’s pretty much you know – that’s where we’re at at this point.

Orin Hirschman - AIGH Investments

Okay, just one additional question if I may on the SoC side for the television market. Obviously packing more in there as what you want to do and is what you are doing. Just talk about the competition for a minute where MediaTek, Morningstar and anybody else surfacing. What are they up to in terms of being able to pack so much together and just mention a few hedge differentiating…

(Cross Talk)

Thinh Tran

We’ll continue to answer the question. Sorry Orin.

Operator

Sorry, there was an interruption in the line. I am the operator. I apologize for that.

Orin Hirschman - AIGH Investments

No problem.

Thinh Tran

You were asking a question about DTV competition and the MStar penetration and them offering to pack in more.

Orin Hirschman - AIGH Investments

Right, and then what differentiation in terms of any features that are stand out features or that's not what it's about; it's about being competitive on the overall feature set. In other words, how do you define and pack more into the SoC to be more complete -- give a complete solution, high-def TV on a chip, HD TV on a chip. Are there differentiating features that you have or will be producing next that are parts of the package of the region on the competition from MediaTek Morningstar, etcetera.

Mustafa Ozgen

This is Mustafa speaking. First of all, yes, we do have differentiating features in terms of which processing, video processing. As the display side is getting larger, these kind of processing outboard and capabilities help customers still opt for a much better looking TV and then you go to the retail that start to buy a TV today, all you see is the actual image processing capability. The consumer just looks at the picture to really decide on what product looks better.

So the image processing quality is really important. That’s what we have the technology and capability that came through the Trident acquisition and also we have the 120 Htz MEMC technology, although other competitors they do have it as well, but the Trident, the legacy of the Philips that was sold to Trident has created inventive MEMC that is now part of Sigma’s offering.

So we have a fundamental technology in the 120 Htz MEMC that’s well recognized in the market and really offers the capability and the image improvement performance to the products and this is valid for full HD TVs and also valid for UV TVs. In UV TV, the resolution goes up four times. Therefore doing these algorithms in four times more resolution, its more challenging. That’s where we bring capability and differentiation.

Orin Hirschman - AIGH Investments

On that note, do you need 240 or that’s only for a tiny sliver of the market, that’s not where mainstream is right now.

Mustafa Ozgen

Can you repeat please?

Orin Hirschman - AIGH Investments

Instead of 120 you need 240 where the customer is asking for something like that or that’s such a sliver of the market right now, its not important to you.

Mustafa Ozgen

240 at this moment is very, sort of I would say, less than 1% of the market, very niche. Just mostly for getting some press coverage purposes than an actual product in the line up.

Orin Hirschman - AIGH Investments

Okay, thank you. And just in general on the competitions, if you can address that for a moment?

Thinh Tran

Yes, I think first of all from an integration and packing everything into one silicon point of view, us versus the competition, we’re all at the same sort of level and the importance in the market today, the software component is increasing in these TV’s, especially with streaming services, OTC services becoming really a part of I would say broadcast TV if you will.

So working with the Netflix’s and Amazons of the world here in Silicon Valley is helping us in terms of offering solution to our customers. They are not only just the chips, but have software integration and then sort of a local support is helping us, especially in the North American market.

And also definitely MediaTek and Morningstar are going to merge within the next two years. We are seeing some positive impact of that merger progressing and we see a less aggressive price competition in the market at the moment. It doesn’t mean that its not going to happen six months or one year from now, but definitely the market is a little bit more consolidated, in a better situation than say two or three years ago.

Orin Hirschman - AIGH Investments

Okay, thanks so much.

Operator

Our next question comes from the line of Quinn Bolton with Needham & Co. Please proceed.

Quinn Bolton - Needham & Co.

Hey guys, sorry one last follow-up from this topic. Can you just give us your opinion on for these ultra high-def TVs as they are rolling out, where the content comes from or where you see the content coming from? Is it mostly the over the top guys we referred to with UHD or HEVC content or do you see some of the broadcasters moving in that direction?

And then a second sort of related question, do you guys have a thought on whether you need to be 10-bit capable, HEVC 10-bit or is most of the content you see just 8-bit color depth. Thanks.

Thinh Tran

You’re welcome. So maybe I’ll start from with the last question. Yes, 10-bit is a must. That’s I think no discussion regardless of TV or set top box. That’s the industry decision; its going to be 10-bits.

And in terms of content, yes over the top is the one driving it. Its available today commercially. If you have a UHD TV you can string 4K content at a real movie and not test content like it historically happened. So you can enjoy the 4K today, you can stream it.

And the broadcast, the traditional broadcast networks, either in Europe, the DVB committee or the semi broadcasters, they are moving into 4K, they are setting up their infrastructure and as you can see in the media today with the World Cup Soccer, I sense that there will be some test work, yes. But mostly I think the industry is more in the investment mode in terms of acquiring the cameras and setting up the infrastructure. I expect within 2016 we should be seeing broadcast happening in the 4K space, potentially we’ll start from Europe first.

Quinn Bolton - Needham & Co.

Okay, and then just to clarify this up, do you guys support 10-bit color today on ultra high-def or is that something that is added through FTGA or somebody else’s ASIC.

Thinh Tran

We do support. Its native 10-bit, our processes today, the ones that are going through mass production.

Quinn Bolton - Needham & Co.

Great, thank you.

Thinh Tran

You’re welcome.

Operator

That concludes our Q&A. I’ll now turn the conference back over to management for further remarks.

Ken Lowe

Thank you very much for your participation in this quarter’s call. We look forward to next quarter where we can host our second quarter call. Thank you very much.

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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Source: Sigma Designs (SIGM) CEO Thinh Tran on Q1 2015 Results - Earnings Call Transcript
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