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Sigma Designs, Inc. (NASDAQ:SIGM)

Q3 2010 Earnings Call Transcript

December 1, 2010 5:00 pm ET

Executives

Ed McGregor – Manager, IR

Tom Gay – CFO

Thinh Tran – Chairman and CEO

Ken Lowe – VP, Strategic Marketing

Analysts

Hamed Khorsand – BWS Financial

Mark Sue – RBC Capital Markets

John Vinh – Collins Stewart

Sukhi Nagesh – Deutsche Bank

Gary Mobley – Benchmark

Dan Amir – Lazard Capital Markets

Dunham Winoto – Avian

Stephen Chin – UBS

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2011 Sigma Designs earnings conference call. My name is Keith and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Ed McGregor, Manager of Investor Relations. Please proceed, sir.

Ed McGregor

Thank you, Keith. Welcome to Sigma Designs’ conference call to discuss financial results for our third fiscal quarter of 2011. As Keith said, I am Ed McGregor, 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.

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 result – release is available in the Investor section of our website.

Today’s agenda, we’ll begin with my brief introduction, a review of selected financials by Tom, an executive overview by Thinh, a market update by Ken, and comments on guidance by Thinh. We’ll then open the call to questions from analysts and institutional investors, 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 September 8, 2010. A partial list of these important risk factors is set forth at the end of today’s earnings press release.

Sigma undertakes no obligation to revise or publicly update any forward-looking statement except as required by law. In addition, during today’s call, we will be reporting certain financial information on a non-GAAP basis such as non-GAAP net income, which excludes certain costs and expenses. These excluded items are described in more detail in today’s earnings press release along with a detailed reconciliation of our GAAP to non-GAAP results.

Now, I’d like to hand the call over to Tom who will review our financial results.

Tom Gay

Thank you, Ed. For the third quarter of fiscal 2011, revenue was $77.8 million, an increase of $4.5 million or 6% compared to 73.3 million in the previous quarter. Compared to the year ago quarter, our revenue increased $42.3 million or 119% from 35.5 million.

Our revenue breakouts are as follows. By business segment and percentage of total revenues for the quarter, IPTV media processors came in at $35.8 million or 46% of the total, connected home technologies is 28 million even or 36%, connected media players, $9 million even or 12% of the total, and prosumer $5 million even or 6% of the total. By ship to region, Asia represented 71.5 million or 92% of the total, Europe 1.8 million or 2% and North America 4 million even or 5% of the total.

During the third quarter, we had two customers that each exceeded 10% of our net revenue. Those were Gemtech at 22.4 million or 29% of the total and Motorola 18.7 million or 24%.

GAAP gross margins were 49.6% for the third quarter compared to 47.7% in the preceding quarter and 45.3% in the same period last year. Non-GAAP gross margins were 53.2% for the third quarter compared to 51.6% in the preceding quarter, and 48.5% in the same period last year.

GAAP net income for the third quarter of fiscal 2011 was $5.1 million or $0.16 per diluted share. This compares to GAAP net income of 0.5 million or $0.02 per share in the previous quarter and GAAP net loss of $2.3 million or $0.09 per diluted share in the year ago quarter.

On a non-GAAP basis, net income for the third quarter was $13 million (inaudible) or $0.41 per diluted share. Compared to the previous quarter, this is an increase of $4.8 million from non-GAAP income of 8.2 million or $0.26 per diluted share. Compared to the year ago quarter, non-GAAP net income increased $10.2 million from 2.8 million or $0.10 per share that we reported then.

Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance. The reconciliation includes the following three categories of differences for the third quarter. First, amortization of intangible assets associated with four acquisitions, a total of $4.6 million from the Blue7, VXP, Zensys, and CopperGate acquisitions. Second, share-based compensation of $3.3 million, and third, the fair value markup on inventory purchased through acquisitions and sold during Q3 of $0.1 million.

I’d now like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted stock, and marketable securities totaled $175 million at the end of the quarter, an increase of $27 million or $0.80 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 $5.59 per share outstanding.

Net accounts receivable was $38.2 million at the end of the third quarter, an increase of $2.1 million compared to the beginning of the fiscal year. The average days sales outstanding for our receivables as of the end of the third quarter was 45 days, a decrease of 3 days compared to the previous quarter.

Net inventory was $32 million at the end of the quarter, an increase of 13.8 million compared to the beginning of the fiscal year. The increase in inventory brings our inventory turns for the quarter down to 5.8 times per year, a ratio more in line with our expectations.

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 third quarter and emphasize our achievement. First off, we are pleased to report over 77 million in revenue for the third quarter, representing approximately 6% growth over our second quarter.

Our largest increase come from sales in our Home Connectivity segment in addition to a large increase from our prosumer segment both reflecting fundamentally strong markets. In the IPTV market, many accounts are beginning their transition to our new generation 8650 media processors, which represent a growing opportunity. Likewise, connected media players and other consumer products are undergoing a similar transition, which further validates these market opportunities and Sigma’s strong position.

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.

During Q3, we continued to gain market strength in each of our core business segments. In media processors, we announced that the 8633 secure media processor is the first and only media processor powering wireless PC-to-TV display device, which are being used in NETGEAR Push2TV adapter. We also jointly announced along with TDVision Systems, the first support of TDVision System Full HD stereoscopic video decoding technology.

We announced that our 8656 Media Processor will enable the new Android-based Over the Top media player by Dvico. We announced our first low cost RVU thin client for use in all cable and satellite implementation. In home entertainment networking, we achieved a major milestone having sold over 20 million HPNA chipsets. This technology is becoming more broadly adopted and represents a strong foundation for our home connectivity solutions.

We announced that our HomePlug AVHomePlug AV 2100 ClearPath solution has won the prestigious CES Innovations 2011 Design Award evidencing our technology leadership in powerline solutions. We announced that our CG5110, the industry’s first G.hn chipset for home entertainment networking. This next generation standard represents the last step forward in performance and ease of deployment. In prosumer products, we announced that our VXP video processing technology using the First True Cinemascope Format DLP Projector by avielo achieving a new industry standard for video quality.

In home control, we continue to gain traction in the market. Z-Wave, our home control technology is now deploying over 450 interoperable products. Customers such as Schlage, ADT and APX have begun rolling our home monitoring solution based on our Z-Wave making us a leading provider amongst security service providers.

Sigma has been at the forefront of this market. We develop the essential elements that result in IPTV becoming a viable market. We created some of the core home networking technologies that made connected entertainment possible and we have build an ecosystem or interactive home control solutions that are the envy of the industry. We are confident in our ability to win a sizable portion of IP connected home entertainment market as it matures.

Now, I would like to discuss how our key initial – internal initiatives are helping us to become more productive and competitive to achieve our future success. One of Sigma’s key initiatives is to be the first to market with the latest technologies and innovation that enable our customer to achieve the maximum success. To achieve this goal, we are currently executing on a four-point strategy which include creating an advanced technology group to develop innovation well ahead of market need, extending more intimate relationship with carriers and OEM to establish a solid basis for future market requirement, moving to highly disciplined new product introduction process, and lastly improve our back-end chipset design process.

We are confident that our new organization and process will propel Sigma into our next wave of growth and profitability.

Now, I would like to pass 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 development and new potential that lies ahead for us. Let’s start with a quick summary of highlights affecting our current demand outlook.

First, our overall business remains balanced with substantial demand coming from our top three segments, which are IPTV, home connectivity, and media player markets. Second, the outlook for the IPTV market is strong over the next several years with new industry forecasts each quarter indicating increasing growth potential. Third, we are encouraged by the successes we’re having for next generation IPTV media processor design wins based on our 8650 series, including several leading set-top box providers. Fourth, our home connectivity business continues to see renewed growth in HomePNA solutions, as well as wide spread opportunities for our newer HomePlug AV and G.hn-based products. Fifth, we are announcing our first market successes as a result of promoting the combination of media processor and connectivity solutions.

Now, let’s focus on the IPTV market specifically. Most indications are that the IPTV market remains strong with nearly every industry forecast showing the IPTV market growing over the next several years as indicated by the following statements. Informa Telecoms & Media estimates that the market for IPTV will double between now and 2015 to over 66 million households worldwide. Point-Topic says global IPTV subscribers have passed 38.5 million households by June this year. The Broadband Forum unveiled that broadband subscriber lines passed the 500 million mark in July this year with IPTV growth tracking overall broadband growth with a 7.7% adoption ratio. Future IPTV growth is expected to be led by the Asia Pacific region, which will become the largest volume region by 2014, followed by the U.S., then Europe, which is more mature and expected to slow in the coming years.

Let’s now look at some of the specific carrier trends within each of the three regions. As the leading IPTV deployment in North America, AT&T continues to exhibit strength in the U-verse program. At the end of their third quarter, AT&T reported a net subscriber gain of 236,000 for a total to-date of 2.7 million. Additionally, AT&T indicated that their U-verse TV deployments now passed 26 million living units. A total of 11 operators in North America currently deploy solutions based on Sigma silicon.

Europe is showing modest growth across the board with certain countries seeing increased take rates. Deutsche Telekom now reaches 1 million subs having added nearly 100,000 subs last quarter. Belgacom now reaches 920,000 subs, up 39% from the previous year. Portugal Telecom now reaches 769,000 subs having added 67,000 subs last quarter. 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 have forecasted to double their subscribers this year. And the following an update is – is an update for some of the more noteworthy operators in this region. China Telecom now boasts nearly 5.4 million subscribers, SingTel has reached 240,000 subs having added 25,000 new subs last quarter, and LG Dacom subscribers increased to 630,000 from 447,000 in the first quarter. A total of 11 operators in Asia currently deploy solutions based on Sigma silicon.

Now, let’s talk a little bit about the set-top boxes and our solutions. We continue to see more set-top box opportunities for 8650 series, which features leadership and performance, value and low power. These fourth generation SoCs are gaining design wins with several of the top set-top box manufacturers for a combination of Mediaroom and Linux deployments. Our leading product is 8652, which not only delivers the performance required to meet next generation user experience, but also represents a substantial cost savings.

Furthermore, as the Mediaroom platform the 8650 series offers the highest performance, lowest power, lowest system cost and the most product breadth in a binary compatible family. Deployments of our 8650 series are currently taking place and many other carriers are in the process of transitioning to this new generation of media processors, with increased deployment growth expected throughout next year.

Just based on the continuing demand we are seeing in the connected media player in which Sigma enjoys the leading position. The momentum in the media player market is fueled by increasing availability of content over the Internet, which is becoming increasingly popular. As a result more top named equipment makers are lining up to enter this market and exploit the demand. We would expect to see continued revenue contributions from this segment with the announcement of more major CE brand design wins in the future.

Our prosumer market segment has recently taken off, more than doubling its revenue contribution during the third quarter to reach 6% of Sigma’s total revenue. This recent trend largely reflects the success of the VXP video processor family in two primary applications. First is the growth of the video conferencing demand for our 9450 product from customers such as Polycom. Second is the growth of 3D projection and video wall applications using the latest video processing technology contained in our 9452 product. Each of these applications is expected to continue with modest growth for the foreseeable future.

Within the cable segment, momentum continues to build toward hybrid IP cable services that use IPTV like technology for future video delivery. Nearly all major U.S. MSOs are experimenting with new gateway client architectures and the ability to interface with consumer products. This transitional opportunity represents a huge market potential that appears poised returning to early deployments during the second half of 2011.

To address this market, we are continuing to invest heavily in the cable platforms and especially thin clients with associated software to provide complete solutions and drive the transition. We believe that this transition plays directly into Sigma’s strengths and that we are positioned for success as the market takes off.

Z-Wave wireless home control is another steady revenue contributor to Sigma that taps into the demand for security and energy management services, which are fast becoming a target for operators and set-top box makers. More importantly, we’re in the process of securing design wins at major telco accounts in Europe, North America and most recently, Asia.

We feel that 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 our remote controls, while enhancing our offering for home appliances. And as a result we expect to see increase in revenue contributions towards the middle of next year.

Now, let’s turn our attention to the Connectivity Business Group. Our HomePNA product represents the industry’s 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, which are now expanding to include carriers such as Bell Canada, CenturyLink, Telus, and others. Furthermore, we are making substantial progress toward deployments in the Latin American market and continue our efforts to expand our footprint in Asia and Eastern Europe, where the MDU market provides opportunities for low cost solutions.

As the second thrust, our 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. Adding innovation to power line standards, we have introduced our patented ClearPath technology that uses all three wires of the standard power outlet to achieve MIMO functionality. As a result, Sigma’s has taken over technology leadership for powerline as being deployed in field trials with several providers across Europe and North America.

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. G.hn is enjoying strong backing from leading operators, OEMs and organizations. With our recently announced 5110 silicon, Sigma intends to be in the forefront of the G.hn revolution with early silicon and added innovations such as our ClearPath and MIMO technologies.

In summary, Sigma has become a complete technology provider for the way consumers want to live. Now with four distinct, but inter-related 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.

Now, I’d like to pass the call back to Thinh to cover our forward guidance.

Thinh Tran

Thank you, Ken. As we have indicated, we see a positive outlook for our markets and are very encouraged with the success we are having at a number of major customer engagements. Our IPTV media processor segment is beyond the wide customer base and we expect to remain relatively stable in the short term as our customers’ transition from previous generation products to our next generation products.

Our Home Connectivity segment experienced a surge last quarter due to customer product transitions and inventory adjustment, which is expect to return its normal growth trend line next quarter.

Our connected media player segment is expected to resume modest growth next quarter. Finally, our prosumer segment is expect to continue on a modest growth trend, those base level will be a bit lower than the third quarter surge achieved.

Moving on to our formal 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 fourth quarter revenue to be approximately 70 million. We expect our gross margins to remain similar to that of the third quarter.

In summary, I would like to reinforce that we believe we’re in a strong growth market, which are still in their infancy. We hold large market shares and demonstrate technology leadership at each core segment. Our fundamentals remain strong, our team is in place and our processors are being optimized to maximize our long-term success.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Hamed Khorsand with BWS Financial. Please proceed.

Hamed Khorsand – BWS Financial

Hi, guys, I apologize in advance for the background noise. Just want to get an understanding, the increase you saw in the HPNA market, was that just one-time purchases, do you think that – that continues?

Tom Gay

There was a surge, they’re – part of the surge was due to not necessarily one-time purchases, but transitioning going on within our customer base. And so there was a certain amount of over ordering to manage that transition. So I think we’re going to see that move back down a little bit for next quarter.

Hamed Khorsand – BWS Financial

Okay. And then on the IPTV side, you guys are talking about demand, but we’re not really seeing a big increase on the sequential basis from a revenue line. Could you just explain that for me a little bit because I mean you guys have been very positive as far as the outlook goes, but the revenue is not adding up?

Tom Gay

No, understood, that’s a very good question. What we see is a market whose volume has been growing modestly over the last year or so. But at the same time, what we’ve seen is a market that as it matures has been sprouting new segments and one of the new segments, one of the more active new segments is that of low-cost set-top boxes.

And in order to position ourselves for that demand, we have had to bifurcate our product line between the high performance offerings and the more cost effective offerings, and as a result some of those more aggressively positioned chipsets have been taking off, and we have been doing very well in some of those segments and as a result, we are achieving a little bit less revenue for each units shipped for some of those – for a lot of that – lot of good percentage of that volume. And so I think that’s the reason for a lot of the limited growth we have been seeing in IPTV.

Hamed Khorsand – BWS Financial

Okay. And then my last question just being as far as OpEx goes, there was a significant increase sequentially. Going forward should we just assume that, that’s what the rate will be or will there be some sort of decline going into fiscal fourth quarter?

Tom Gay

Actually about half of the increase was one-time adjustment catch-up things, and the base line should be about half of the increase of Q3 over Q2 in both R&D and sales and marketing. However, in G&A we’ll have our usual Q4 year-end audits and plus expenses that will make it similar to slightly up from the Q3 level.

Hamed Khorsand – BWS Financial

Okay, thank you.

Operator

Your next question is from the line of Mark Sue with RBC Capital Markets. Please proceed.

Mark Sue – RBC Capital Markets

Thank you. Just in terms of set-top boxes, is there something going on in terms of one particular vendor leading with price and that’s kind of driving things down at the moment, or is it just a general downward move or just a sub-segment that’s growing a little bit faster, if we can start there?

Tom Gay

Not really, it’s really what’s happening in the market overall. The development of the Asian market, the development of the Latin American market, the emergence of second generation products at large carriers like AT&T, Deutsche Telekom etcetera, it’s all basically pressing on the need to not only provide a little bit of a performance increase, but more substantially to lower their ARPU – or excuse me, their cost the customer premise equipment.

So this is something that, that obviously to play in the demand that exist, we would like to have products that are positioned aggressively. So what we continue to do is innovate on the feature set. But at every stage of the game, we take the previous generation and figure out a way to lower the cost, which translates into some demand coming at the high end and a lot of demand coming at the lower end. And so, we think we’ve – at this point in time we think we’ve got a reasonable split of that business and what we would hope to see is a stabilizing that as volume improves, our revenue goes right along with it.

Mark Sue – RBC Capital Markets

Okay, got it. And then maybe just on the cable opportunity, the cable opportunity as it relates to IPTV, any thoughts on how we can frame that where you might be having the early discussions, indications of deployment, markets and is it a zero-sum game. For example, when you sell a chip to a new cable MSO, does that mean you sell one less to a telco?

Tom Gay

Well, let’s reverse out the answers to that, that would probably be the case if we were – one of our competitors selling into cable. Since Sigma has a zero stake in cable at this point of the game, every chip we sell into cable is an expansion of our market space. I guess the best way to look at the model of this market is to imagine that IP is continuing to grow and is basically eating into cable and satellite, much of that in the next three or four years will become hybrid IP with cable, IP with satellite. And then eventually, IP will continue to grow and become IP only dominant amount of those carriers. So that’s kind of the long-term picture we see.

In the shorter term, we’re working with quite a number of carriers if you combine both North America and Asia and a little bit of Europe. So we’re – we feel very good about our knowledge of the trend and where we’re positioned on this thing. We don’t believe – we’re not – we’re in a position where we feel like it’s going to expand the market size for us dramatically and it’s going to expand the amount of revenue that we can tap into from IP-related set-top boxes.

Mark Sue – RBC Capital Markets

Got it. And recognizing it’s still very early, should there be any meaningful ASP difference between cable and telco for you?

Ken Lowe

You know, only in the sense that most of cable right now is looking at the gateway client type of an architecture. The chips that go into gateway will be a relative premium compared to some of the IPTV chips. The chips that go into the thin clients will be more like a very aggressive chip price. So the revenue per unit that we ship to cable will probably in the mix be about similar to IPTV.

Mark Sue – RBC Capital Markets

Okay. That’s helpful. Thank you and good luck gentlemen.

Tom Gay

Thanks.

Operator

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

John Vinh – Collins Stewart

Hey good afternoon. Thanks for taking my question. You previously have talked about U-verse trying to second-source another vendor earlier this year, can you give us an update in terms of where we are with that ramp of a second-source vendor or something there could some delays out there?

Ken Lowe

Well, I think we had talked earlier about the fact that during this year we really don’t expect to see any deployment of the second source and we still feel consistent with that, there won’t be any deployments this fiscal year for us – for this calendar year either way you want to look at it. And AT&T like a lot of other vendors out there are making the move from first generation deployments to second generation. And AT&T like all the other vendors, they are looking at alternate solutions, looking at new platforms and we do believe that there will be sharing as we move forward, but Sigma remains pretty confident that we will remain active with some of the larger – most of the larger operators that we’ve been dealing with, AT&T and everybody else. We are very confident that as we move forward we are not going to lose these accounts so much as we are going to begin sharing some with them.

John Vinh – Collins Stewart

I wonder can you give us an update on when you would expect to start sharing kind of your count at AT&T going forward, should we think about it as first half of ‘11, second half?

Ken Lowe

Yeah, without pinning this down very carefully and without making any indications of what AT&T’s plans are, our expectation is probably second half of next year where we’ll see a – we will see some of this take place and with AT&T and others.

John Vinh – Collins Stewart

Great, thanks. And then just moving on to – you talked earlier about the ramp of some of these lower cost set-top boxes. Can you remind us again what is the ASP differential between kind of the lower cost media processor and is there any sort of meaningful gross margin difference between the two?

Tom Gay

Cost differential in general is about a 10% difference and margin wise they are fairly similar.

John Vinh – Collins Stewart

Great, okay. And then my last question is just a follow-up on the IP cable opportunity. We are starting to hear that some of the MSOs are going to start going into some early field trials at the beginning of next year. Where are you – can you give us some more details in terms of where you are positioned? Do you have any design wins right now and if – and if not, when would you expect to start getting some visibility in terms of kind of design wins in this area?

Ken Lowe

So let’s be distinct about where we are at and how we refer to it. We are designed into a number of current trials that are going on, and there is a handful of carriers that we are working with in that regard. Design win for us is when actual deployment plan has already been committed to and we are simply in the process of ramping up for production. So these design-ins that we have are very active and their support ongoing and – but they are being very careful about their planning, about their trials and because there is a large dollar exposure they have.

So it’s been hard to predict exactly how long it will take at each of the stages. We still believe somewhere in the second half of next year, we will see some of the early deployments begin to trickle out. We don’t believe it will necessarily end up with material revenue contribution in the second half of next year though. But we hope that to see announcements of early deployments of these things second half of next year.

John Vinh – Collins Stewart

Great. Thanks very much.

Operator

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

Sukhi Nagesh – Deutsche Bank

Yes, thank you for taking my question. Couple of questions on the revenue side, if I could. For the January quarter guidance that you provided of 70 million, I think if I remember – if you just walk through what you just provided on your different segments. Is it fair to assume that your Connected Home business will decline maybe 15% to 20% sequentially while your IPTV business will probably decline maybe around 10% to match what you’ve guided for the overall sales to be around 70 million?

Ken Lowe

Yeah, we don’t see a sequential decline really in IPTV. We think it will be flattish.

Sukhi Nagesh – Deutsche Bank

Okay. And that would entail given that your connected media and prosumer business is expected to grow modestly, that would mean majority of the decline is coming from the Connected Home. Is that fair?

Ken Lowe

That is correct.

Sukhi Nagesh – Deutsche Bank

Okay. Okay. Then in the current quarter that you just reported, your IPTV business declined 8%. Could you give us any color in terms of how units did?

Ken Lowe

Yeah, I think the units track that. This is basically product transitioning, it’s again this preparation for moving from generations and frankly if there is – there are inconsistencies in some cases in the inventory management, in some cases there is pre-orders made in order to prepare for the new generation, in some cases there are ramp downs of inventory in order to get ready to deplete inventories of the older generation. So it depends on the quarterly ordering cycle and where you hit this.

Sukhi Nagesh – Deutsche Bank

Got it.

Ken Lowe

We just happened at a time where it basically we were getting some ramp downs in anticipation of ramping up the next generation.

Sukhi Nagesh – Deutsche Bank

Understood, that’s helpful. And then, Ken, and one last question for you. If you look at next fiscal year and if you would take a stab at your different big buckets of – or segments that you have, IPTV, Connected Home, connected media and prosumer, can you give us a rough idea of how you – what you guys expect each of these segments to do next year on a year-over-year basis?

Ken Lowe

Hard to say, we really don’t want to provide an annual projection sort of the fact that what we would like to tell you is that we believe that each one of them will deliver some growth to us next year, hard to pin down. We habit – we – we have not been in a habit of trying to project out the following year. But they’re all – they all – the markets all appear strong, everything that’s coming to us indicates that opportunities are growing. Everything that comes into us indicates that we are winning sockets today that if they will start deploying at some point in time in next year, so or towards the end of next year in some cases. So yeah, that’s about the best I can do for you right now.

Sukhi Nagesh – Deutsche Bank

Okay. Well, maybe if not for revenues at least could you may be provide us some kind of color in terms of unit – units for the IPTV market for this fiscal year and for next fiscal year at least from your estimates, what do you expect the market do?

Ken Lowe

The whole market?

Sukhi Nagesh – Deutsche Bank

Yes.

Ken Lowe

Well, we expect the whole market probably to go up in the 40% to 50% range. Some of the forecasters are more robust in this. At this point in time though, there is not necessarily any indications that we see that it’s going to exceed that type of 40% to 50% that we’re currently seeing now in the aggregate. That may change as we hit the second half of next year, but–

Sukhi Nagesh – Deutsche Bank

Okay, great. Thanks very much.

Operator

Your next question is from the line of Gary Mobley with Benchmark. Please proceed.

Gary Mobley – Benchmark

Hi, guys, congratulations on the good quarter. Your Connected Home technology group was up about 29% sequentially. And I was hoping that you could provide some more detail as to what drove that growth, was it all specific to AT&T, was it non-AT&T customers for HomePNA chips, and then as well did HomePlug AV contributed any revenue in the quarter?

Ken Lowe

And we’ll start backwards. HomePlug AV is not yet producing any material revenues, so it didn’t account for any of that. The HomePNA units have started to spread out. As we mentioned there, we’ve gotten active with some of the other North American carriers like Bell Canada, Telus etcetera. So that did add some to the mix, but a large majority of that did come from ordering adjustments where our customers began to again make transition in their own products. And again in some cases, they end up double ordering, they end up ordering for the current generation product and make sure they don’t run their pipeline dry, and then they order for the next generation that they need to start ramping up. Obviously, when they do that, it means that they’re pulling a little bit out of the next cycle. So that’s why correspondingly we expect the – a lot of that surge to drop back down next quarter.

Gary Mobley – Benchmark

Okay. A question for, Tom, on the gross margin. I’m assuming the sequential increase in gross margin was driven by mix, with the heavier mix coming from Connected Home. I guess on the flip side of it you’re expecting the Connected Home business to be down quite a bit sequentially in Q4, therefore how do you expect gross margins to remain sequentially flat?

Tom Gay

The two product areas that came up most sharply are the Connected Home and the prosumer segment, both of which are above our overall margin average. So, they both contributed. We believe that some of our cost controls and other economies of the scale will still be pretty effective in the next quarter so that even though there will be a little bit of downward pressure on margins just because of the changing mix, we think it will still be fairly similar.

Gary Mobley – Benchmark

Okay. And just a point of clarification, on previous response that you provided on the operating expense numbers, just to be clear, in the fourth quarter and going forward you expect the operating margin to grow on the – the operating expenses to grow on the Q3 basis, is that correct?

Tom Gay

Well, what I was talking about was the idea that the significant increase over Q2 was about double what we considered the baseline for going forward in R&D and in sales and marketing. Also, the same is true in G&A, but the other factor that needs to be taken into account is the year-end expenses that run a few hundred thousand dollars per quarter that show up in Q4 and Q1.

Gary Mobley – Benchmark

Okay, all right. Great, thanks guys.

Operator

Your next question is from the line of Daniel Amir with Lazard Capital Markets. Please proceed.

Dan Amir – Lazard Capital Markets

Yeah, thanks a lot. Couple of questions here. Can you give us an idea with this change of low-cost set-top boxes, what would be the potential blended ASP decline next year in IPTV?

Ken Lowe

That’s an interesting question because one of the byproducts of having new segments emerge like that is that you take the middle segment and you split into more of a high end that goes with more of a gateway type design and then more of a low end that goes with the thin client. And the blending ASP will depend on the volume mix, so it will be a little bit lower than what we are doing right now, but it will be pushed upward by the gateway type chips, it will be pushed downward by the low cost chip. So, there are forces in both directions. But because the volume shift will be more toward the lower ones, you’ll probably get a little bit of decline. But we don’t believe it’s going to be hugely substantive in that sense. So that’s about – qualitatively that’s how we would look at it right now.

Dan Amir – Lazard Capital Markets

Okay. Now in terms of a – follow-up question to a question that earlier you talked about IPTV and kind of your competitors etcetera, what’s your best guess and kind of what type of share should you have in the IPTV market next year?

Ken Lowe

That’s a good question and we continue to maintain a long-term goal that we would like to be 50% or more of the IPTV market as it matures, grows and becomes much larger than it is. Next year, we will simply be incremental from this year, we don’t believe we’ve suffered any substantive share loss at this point that would be in double-digits or anything, we believe that we are still holding fairly well. We’re – we are – we have competitors, they are making some design wins, but as far as deployments go, we still feel like we’re – we’re well above 50%. So, we would like to believe that we’ll still be reasonably well above 50% next year.

Dan Amir – Lazard Capital Markets

Okay. And then my final question is, can you just give us an update on kind of where your thoughts are on potential integrated chip of HomePNA and IPTV?

Ken Lowe

We continue to work on integrating all of our technology, so it’s not just the HomePNA and media processors, it’s an overall trend towards system-on-chip. We look at integration with connectivity; we look at integration with home control. Certainly the first of the integration that’s taking place right now for next generation is the VXP video processing, which richens the video quality that we’ve put out and differentiates us from our competitors.

Looking at the road map, we should – we will be having connectivity – right now we are already marketing the combination of the two in the way that they seamlessly integrate together on a board to get a singularly integrated chip. We probably will be announcing something like that somewhere – perhaps a year from now or so.

Dan Amir – Lazard Capital Markets

Okay, so end of 2011?

Ken Lowe

Yeah, I think that’s fair for when we might be announcing something in that neighborhood.

Dan Amir – Lazard Capital Markets

Okay, all right. And then on – finally on HomePlug, when do you think you’ll have meaningful revenues in this segment?

Ken Lowe

We actually believe it’s probably – it’s first half of next year, probably closer to the second quarter.

Dan Amir – Lazard Capital Markets

Okay, all right. Thanks a lot.

Operator

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

Dunham Winoto – Avian

Hi, guys, how are you doing? Couple of questions from me. I guess first off, if I can pick your brain a little bit. Can you give us some of your thoughts as to what you feel will help re-explore the demand for IPTV (inaudible) regards to carriers, what did they have to do in your mind, did they have to maybe invest a little bit more in infrastructure or maybe a little bit better pricing (inaudible) you can provide would be helpful?

Ken Lowe

Okay. So we accelerate their demand. Essentially I think it boils down to two things. Number one is in the developing countries. Putting in the – putting up the rollouts – there’s a little bit of infrastructure, but it’s mainly pushing forward with their initiatives in IPTV as a lot of developing countries that don’t have a solid pay TV base distribution video distribution. So that’s a huge area that we look at. There is Eastern Europe; there is Latin America; there is Asia, India. There is a lot of areas that are yet to be tapped into. And that’s probably number one.

And then number two, in the more established area, it’s eating market share into the cable and satellite providers. Certainly in the U.S., AT&T and the other IPTV movements have captured the interest of the cable and satellite providers. It’s eating into real amounts of their market share now. So I think that – and that’s just the telco IPTV, and then the technology of IP is going to spread out and be adopted by most of the cable providers and as well as satellite guys. So we are pretty confident that this is the technology of the future. So short-term wise, the demand would go as just what I mentioned.

Dunham Winoto – Avian

Right, but the hybrid solution like you’ve mentioned won’t probably you start deploying until the second half of next year, right?

Ken Lowe

Right, in the short term, yes.

Dunham Winoto – Avian

Okay. The other thing I wanted to – if you can provide some update as -what’s the number of boxes that are being deployed with new subscribers now in the U.S. and maybe the rest of the world, is it still below plus minus 2 or so?

Ken Lowe

You mean per household?

Dunham Winoto – Avian

Yes.

Ken Lowe

Okay, yeah, it’s vastly different in the U.S. than abroad. In the U.S. it’s somewhere in the 2.5 range, and abroad it’s just over 1 if you aggregate everything together. Asia is very close to 1, Europe is maybe at 1.1, 1.2. The paradigm within the home of TV use is just very, very different outside of the U.S.

Dunham Winoto – Avian

The number in Europe, is that pretty much across the board or is it skewed by maybe Eastern Europe?

Ken Lowe

Yeah, it’s probably less in Eastern Europe, but frankly even – most of the Continental Western European countries still don’t look at the same paradigm as we have over here that every kid should have a TV. So we are trying to promote the idea, but hasn’t taken off yet.

Dunham Winoto – Avian

Okay. Last question has to do with inventories. I know that probably you talked about it a little bit in your prepared remarks, but can you help us understand what happened. I know the pure numbers went up by – I think it’s 44% and the turns went down, but can you help us understand how to think about that going forward?

Tom Gay

Yeah. Well, as our inventory has been below our goals as we’ve been discussing for several quarters now, we’ve always indicated that it’s – we’ve been looking forward to seeing little less pressure in the supply chain and actually getting a higher inventory level. And in this quarter you’ll see the results of that effort. We still are tightly managing the supply chain, but we have brought more units into the die bank, where we can more readily – if we got a lower cost supply chain going internally and with the turns where they are now we feel that this is a more appropriate level for the revenue level that we are at.

Dunham Winoto – Avian

Would you expect that turns number to stay fairly constant at that level or maybe decline going forward here?

Tom Gay

It should be similar.

Dunham Winoto – Avian

Okay, thanks a lot.

Operator

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

Stephen Chin – UBS

Hi, thanks for taking my questions. The first one I had was on your IPTV business and just more on the demand side on Asia and perhaps if you could offer a little more color on the China market, with China Telecom and maybe some other major telcos in that area perhaps participating in some deployment tenders right now?

Ken Lowe

You mean with regard to the expansion of the development of the market over there and expansion of demand.

Stephen Chin – UBS

That’s correct. Yeah, just given your – basically you gave earlier if China Telecom reaching 5.4 million subs right now and also right now I think there is some new tenders for China Telecom to offer more or expand its footprint. I was wondering if you see that as a (inaudible) for your business.

Ken Lowe

Well, China has been a region – a country that has had on and off development for the last three or four years, and it’s been a little bit in fits and starts. More recently it’s had more of a consistent trend of growth. And I think it’s due to a couple of things, one of which is that they’ve – I think they’ve – they have started to perfect the delivery systems and so they’ve gotten more consistent quality of what they are putting out there.

And secondly, the ability to put out set-top boxes at lower and lower prices has really benefited China more than just about anywhere else. They do have a growing amount of affluence in the urban populous, and so that seize the ability to get enough revenue per unit assuming that set-top box prices fell down a little bit and that’s what exactly what’s been happening. So that’s why the forecasts are for them to double this year, the confluence of those is just about the right time.

Secondly, they’re – we work with people like several carriers who try to tap into China, tapped on this probably one of the main guys and I think the thrust there is very similar to what we see in some of the other regions. It’s a little bit more pressure on the cost, but it’s a high definition press up in quality and over the – well, not so much over the top, but other features that -the DVR features and things like this. So I think demand is bringing shape there just similarly to everywhere else, kind of hard to put it in numbers, but that’s kind of the trend.

Stephen Chin – UBS

Okay, thanks, that’s helpful. And the other question I had is in regards to – I guess other Linux based IPTV deployments, in particular just with the Google TV platform having launched recently, and I know you guys had an announcement about a year ago with MIPS on advancing your solution where Google Android (inaudible). I guess at this point what do you see as the opportunity for Google TV type platforms and what is Sigma’s participation in that particular operating system giving your technology and the timeline for enabling your new technology?

Ken Lowe

Well, Android is certainly on the rise, lot of demand in Asia for Android systems. If you go into any of the countries over there, China, Taiwan etcetera, you will find a hot bed of developments surrounding Android. The model that Google came up with – for that seems to match very well with what they are looking for and we are seeing it across a wide range of consumer products. It’s creeping over into set-top boxes. And so right now we are seeing that’s a – another way to split up the market is now by operating system. So – and what Sigma is doing to position ourselves is two things, one of which is we’re – as we put out in several announcements, we’re an early developer of Android-based products. We’re announcing – we continue to announce the newest Android tools and other applications that run with Android. We support this much over the top content as possible through the various different website venues, and that’s how we are supporting that infrastructure. And I think that’s simply going to spread out over time. It’s really becoming a hot wave right now.

Stephen Chin – UBS

Just a couple of follow-ups on that last point. In terms of which products in your portfolio that you expect to benefit, is this more of a low-cost IPTV solutions that would benefit from (inaudible) demand, and also would you see any HPNA or G.hn connectivity that’s associated with it?

Ken Lowe

I’m not sure you would connect it to definitively low cost; we’re seeing a lot of media player development that wants Android there. There is cash aid to marketing an Android-based box in the consumer market. And I think that’s something that we were enabling and that our customers are tapping into. So, if it means that – is it tied to low cost, is it tied to any high performance anything particular, I don’t think so, it’s just different product classes are going after it differently. So I can’t tell you that I – that we see a trend there yet.

Stephen Chin – UBS

And the last part to that is between from cost of base solutions versus mix that you guys design on. Any – is there any preference that’s (inaudible) checking out or evolving right now in that portion of the world?

Ken Lowe

Not really. I mean, Android kind of makes it transparent somewhat which one you’re using, which (inaudible) I don’t know that again, we – I don’t have any trend information that would be revealing it all in that sense.

Stephen Chin – UBS

Okay, thanks.

Operator

And gentlemen, you have no other questions at this time. So, I’d like to turn it back over to Mr. McGregor.

Ed McGregor

Thank you, Keith. Well, we’d like to thank everybody for attending our conference call to discuss our third quarter results for 2011. We do appreciate your interest in Sigma and we look forward to our next scheduled conference call to discuss our fourth fiscal results 2011. Thank you.

Operator

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

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