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Executives

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

Edward McGregor - Manager, Investor Relations

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

Kenneth Lowe - Vice President of Strategic Marketing

Analysts

Dunham Winoto - Avian Securities, LLC

Stephen Chin - UBS Investment Bank

Gary Mobley - The Benchmark Company, LLC

Hamed Khorsand - Beating Wall Street, Inc.

Quinn Bolton - Needham & Company, LLC

Sukhi Nagesh - Deutsche Bank AG

Sigma Designs (SIGM) Q4 2011 Earnings Call March 2, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Sigma Designs Earnings Conference Call. My name is Melanie, and I will be your coordinator today. [Operator Instructions] I would now like to turn the call over to Mr. Ed McGregor, Manager of Investor Relations. Please proceed.

Edward McGregor

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

The press release containing the quarter results including selected income statement and balance sheet information was released after the market closed today. If you did not receive the results, the release is available in the Investors section of our website. Today's agenda will begin with my brief introduction, a review of selected financials by Tom, an executive overview by Thinh, a market update by Ken and comments on guidance by Thinh. We'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 margin and other financial measures and anticipated trends on 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 December 7, 2010. A partial list of these important risk factors are set forth at the today's earnings press release. Sigma undertakes no obligation to revise or update publicly any forward-looking statement except as required by law.

In addition, during today's call, we will be reporting certain financial information on a non-GAAP basis such as non-GAAP net income, which excludes certain costs and expenses. These excluded items are described in more detail in today's earnings press release, along with a detailed reconciliation of our GAAP to non-GAAP results.

Before I hand the call over to Tom, who will review our financial results, I would like to let everyone know that Sigma Designs will be holding an Investor Day in New York City on Tuesday, March 15. Investors, analysts and members of the media are welcome to join us that day and meet our management team, experience live product demonstrations and learn more about industry trends and new projects that are underway. A press release providing further details of this event will be forthcoming.

And now we'll hear from Tom.

Thomas Gay

Thank you, Ed. For the fourth quarter of fiscal 2011, revenue was $70.6 million, a decrease of $7.2 million or 9% compared to $77.8 million in the previous quarter. Compared with the year-ago quarter, our revenue increased $2.5 million or 4% from $68.1 million.

Net revenue for fiscal 2011 was $286.9 million, an increase of $80.8 million or 39% from $206.1 million reported for the previous year. Our revenue breakouts for the quarter are as follows: By business segment and percentage of total revenues for the quarter, IPTV media processors came in at $31.3 million or 44% of the total; Connected Home Technologies $24.1 million or 34%; Connected Media Players, $10.6 million or 15% of the total; and Prosumer, $4.5 million or 6%.

By shipped to region, Asia represented $64.7 million or 92% of the total. Europe, $2.1 million or 3%; and North America, $3.3 million or 5%. The high concentration in Asia is caused by the fact that the largest contract manufacturers in the world are located in that region. The end products are distributed worldwide.

During the fourth quarter, we had two customers that each exceeded 10% of our net revenue. Motorola came in at $16 million or 23% of the total, and Gemtek at $15.2 million or 21%. We would like to note that our largest customers are purchasing multiple products and represent a supply chain to more than 10 service providers each.

GAAP gross margins were 49.4% for the fourth quarter, compared to 49.6% in the preceding quarter and 41.1% in the same period last year. Non-GAAP gross margins were 53.3% for the fourth quarter compared to 53.2 in the preceding quarter and 51.7% in the same period last year.

GAAP gross margins were 49.0% for fiscal 2011 compared to 44.5% for the previous year. GAAP net income for the fourth quarter of fiscal 2011 was $2.5 million or $0.08 per diluted share. This compares to GAAP net income of $5.1 million or $0.16 per share in the previous quarter, and GAAP net loss of $2.8 million or $0.09 per diluted share in the year-ago quarter.

GAAP net income for fiscal 2011 was $9.1 million or $0.29 per diluted share compared to $2.5 million or $0.09 per diluted share for the previous year. On a non-GAAP basis, net income for the fourth quarter was $10.1 million or $0.32 per diluted share. Compared to the previous quarter, this is a decrease of $2.9 million from non-GAAP income of $13.0 million or $0.41 per diluted share. Compared to the year-ago quarter, non-GAAP net income decreased $1.2 million from $11.3 million or $0.37 per share that we reported.

Our non-GAAP net income for fiscal 2011 was $40.6 million or $1.28 per share compared to $30.6 million or $1.08 per diluted share for the previous year. Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance. The reconciliation includes the two following categories of differences for the fourth quarter: First, amortization of intangible assets associated with acquisitions, a total of $4.6 million; and second, stock-based compensation of $3.1 million. Our tax rate for the quarter includes the benefit of the U.S. R&D tax credit legislation being retroactively restored by Congress during the quarter.

I would now like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $179 million at the end of the quarter, an increase of $31 million or $0.87 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 $5.66 per share outstanding.

Net Accounts Receivable was $31.3 million at the end of the fourth quarter, a decrease of $4.8 million compared to the beginning of the fiscal year. The average days sales outstanding for our receivables as of the end of the fourth quarter was 40 days, a decrease of five days compared to the previous quarter. Net inventory was $37.7 million at the end of the quarter an increase of $19.5 million compared to the beginning of the fiscal year. The increase in inventory brings our inventory turns for the quarter down to 4.1x per year.

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 for the fourth quarter and emphasize our achievements.

First off, we report over $70 million of revenue in the fourth quarter, matching the guidance provided at last quarter earnings call. This 9% fourth quarter decrease in revenue was a result of moderate declines in three of our market segments, namely IPTV, Connected Home Technology and VXP Video Processors.

In the larger context, we believe that this revenue decline is more than offset by the position gains that we made this quarter. Our key position gains include the launch of a new premium line of differentiated media processors starting with the 8910, the expansion of our value line of media processors with the SMP8670 and the successful demonstration on our new CG5110, which positions us as a technology leader for G.hn or wired connectivity solutions.

Moving forward, we are continuing to pursue major design wins in our current market segments with special initiatives for penetrating the hybrid IP Cable set-top box market, developing powerline accounts and the increased adoption of Z-Wave-based home control solutions.

During Q3, we continued to make progress at each of our core business segments. In media processors, we announced the SMP8910, the first chip to integrate VXP 2 [ph] studio quality video processing and the most flexible 3D video processing into a high-performance media processor, forming the genesis of our premium line of set-top box media processors. We demonstrated Sigma's new SMP8670, which gives OEMs and ODMs the ultimate solution for connected media players with 40% more performance and 30% less power consumption and lower overall BOM costs compared to its predecessors.

We also announced support for five exciting new TV development environments, Adobe AIR for TV, Espial Browser with support for Adobe Flash Player, the Hardware Accelerated Open GL 3D UI Framework, Skype TV HD video conferencing and XMBC Media Center for delivering easy access to Internet-based video content and games.

We also announced that our 8652 Secure Media Processor is being used inside Verismo's Broadband TV set top box, and overall, we continue to see high interest in our low-cost thin client solutions.

In Connected Home, we were the first to announce and demonstrate a working G.hn solution, the CG5110 G.hn chipset. This solution delivers substantially higher performance than every wired home entertainment networking solution on the market today. We announced that our HomePlug AV with ClearPath technology has won the TV Innovation Award in the category of Home Networking, bringing the total to three awards for this innovative new offering.

Verizon indicates that they plan to use Sigma Z-Wave technology in their newly-introduced home monitoring and control device services. In addition, ADT began rolling out the new Pulse of this using Z-Wave. Also, Best Buy began rolling out Z-Wave product in their retail stores.

To summarize, Sigma has been at the forefront of these emerging markets. We developed the essential elements that result in IPTV becoming a viable market. We create some of the core home networking technologies that make connected entertainment possible, and we have built an ecosystem of interactive home control solutions that are the envy of the industry. We are confident in our ability to win a sizable portion of the IP connected home entertainment market as it matures.

Our vision for the future is for Sigma to become the leading provider of connected media platform at the highest level of integration possible. This means continued advancement in each of our five core technology areas, as well as ongoing penetration in our new markets.

So now, I'd like to pass over the call to Ken, who will discuss the long term significant technologies and the market they play into. Ken?

Kenneth Lowe

Thank you, Thinh. First off, Sigma continues to make strides in becoming a leader in connected media platforms. In this call, I'd like to take a step back and take a broad look at Sigma's future through the trends in our target markets and technology developments, starting with the summary of highlights.

First, our overall business continues to become more balanced with contributions coming from each of our target market segments. Second, the outlook for each of our market segments is positive, we're a leading provider in many of them, largely as a result of our differentiated technology and synergies between our product lines. Third, Sigma's long-term position in the Telco IPTV market is improving, with significant future enhancements -- engagements yet to be announced.

Fourth, our connectivity, Prosumer and Z-Wave, products continue to receive steady revenue demand during periods of Media Processor IPTV variability.

Finally, we are investing in several critical technologies that will enable world-class solutions that will fortify our position in these markets over the long term.

The world of video delivery services is steadily moving towards IP-based distribution across all types of network providers and geographies. As a result, the market for all forms of IP and hybrid IP set-top boxes is projected to offer strong unit growth over the next several years by nearly all industry analysts. Sigma's a leading worldwide provider of IP-based solutions well-positioned in the Telco Provider segment. As cable and satellite industry move towards hybrid IP architectures, Sigma offers the breadth of technologies and depth of experience to become a key supplier in these areas.

The Telco IPTV segment remains strong and is forecasted to grow from 29 million units in 2010 to 58 million units in 2014 according to iSuppli. As emerging markets such as Latin America, China and India move from Standard Definition-based IPTV to high-definition solutions, Sigma's well-positioned to tap into their growth.

Sigma's the market leader that helps power a customer base of over 40 telco providers. Additionally, our key OEM customers include Motorola, Cisco, Samsung, Tatung, Netgem and many others. We're well-positioned for Mediaroom Generation 2 and new Linux opportunities, where a wide range of technologies are creating increasing demand with features such as 3D video output, Android support, studio quality video, Z-Wave home control and home video networks based on HomePNA, HomePlug and G.hn standards. We feel that our technology portfolio enables us to provide offerings that are competitive with any vendor in the industry.

The cable market and its 60 million annual set-top box shipments is poised to transition to hybrid IP cable solutions, creating strong future revenue potential for Sigma. While the transition is still nascent at this time, nearly all major U.S. MSOs are experimenting with a new Gateway client architecture and the ability to interface with Consumer Products. Sigma's been engaged for over two years with major cable providers, demonstrating the leading hybrid Gateway client solution, helping them plan their transitions. Though Sigma's developing the technology to provide a complete solution, we have an especially strong position for thin client set-top boxes based on our value line media processors.

The market for home control, including energy management, security service and health services, is expected to become a new growth segment as service providers play an increasing role in their adoption. Sigma's Z-Wave devices are the world's leading standard for home control applications with over 450 interoperable consumer devices on the market today. Major design wins have been emerging over the last year, with Sigma becoming a leader in many applications such as Verizon's Home Services and the new line of Security Services from ADT and Vivint.

The market for connected media players continues to expand and evolve new product classes. Sigma is a leading player in this market, with volume design wins at WD, NETGEAR, and many others. Sigma offers a strong class of value line media processors that are optimal for these consumer applications, and is investing heavily in over-the-top software such as Netflix, Pandora and YouTube, and that will enable these products to tap into a vast array of Internet content.

Let's take a look at the market for connectivity of video inside the home. As the leader in IPTV video networking over coax and phone lines, Sigma continues to win new deployments and is well positioned to continue its growth in residential gateways and routers. Our broad list of OEMs include leaders of residential gateways, Ethernet bridges and ONTs such as Pace, ActionTec, Alcatel/Lucent, Cisco, Motorola, Sitel, Comtrend and many more.

Sigma's patented and award-winning ClearPath technology has excited the market, and positions the company for growth in powerline-based IPTV and consumer device market opportunities. We continue to grow our network presence globally, with deployments in Latin America, China, India, Russia and Eastern Europe. Going forward, Sigma's well-positioned for the future opportunities with the introduction of our G.hn solution.

Finally, Sigma provides studio quality video for a host of professional and prosumer applications. This market serves to drive our video processing technology and has grown into a highly profitable segment of over $15 million annual revenue. Video conferencing applications is the leading driver of this growth, with shipments taking place by Polycom and others. Other applications that are fueling this growth includes front projection displays, professional broadcast products and high-end consumer video.

As a long-term goal, Sigma's developing differentiated technology for consumer entertainment products that's delivered as a complete platform-level solution. These platform-level solutions or PLS, take technology integration to the highest level, combining the digital processing power of system-on-chip silicon, with the convenience of realtime interaction software and the real-world connectivity of analog RF front ends. The PLS approach enables consumer entertainment products to be conceived of as a total technology platform, with an optimum blend of performance, time-to-market and reliability. Sigma's PLS offerings combine five technology areas into application-specific solutions for our target markets.

First is audio video decoding and encoding. As a core technology, Sigma has long been an industry leader in video decoding, being the first to demonstrate a high-definition multi-codec video decoder, which was the key to the first-generation media room set-top boxes, Blu-ray players and later for media players. Complementing our silicon designs, we've provided a differentiated suite of in-depth software for realtime audio/video playback control that's been hardened through nearly 10 years of field deployments. As we evolve our core decode and encode technology, our roadmap includes major new innovations and flexibility in performance for next-generation solutions.

Second is video display processing. Sigma, through prior acquisition of the VXP product line, offers industry-leading studio level video quality. This technology encompasses image scaling, de-interlacing, noise reduction, image enhancement, 3D video processing, HDMI display link, and analog video output. With its roots in professional applications, this technology is being migrated to our premium media processors for differential value in set-top box and consumer applications. This highly differentiated technology will enable Sigma to deliver the highest quality video AC output, with DVD that looks like HD and over-the-top content that looks like DVD. The first of these integrated offerings, our new 8910 was announced at CES in January and will ship later this year.

Third is network connectivity. Sigma, through prior acquisition of CopperGate and Zensys, offers the widest range of technologies for Home Entertainment and control networks, covering every wire in the air in between. Our current network technologies include HomePNA, which represents the industry leading standard for delivering IP content across existing coax cables and phone wires; HomePlug AV, which is the latest powerline technology and uniquely combining the interoperability of the HomePlug standard with the innovation of our patented ClearPath technology; and G.hn for which Sigma is the leading innovator for the future all-wire solution for home entertainment networks.

Moving down to the low bit rate, low-power, low-cost spectrum, Sigma's Z-Wave technology provides an optimum RF solution for home energy, security and entertainment control. As Sigma is in the standard diagnostic, we're investing in additional connectivity technologies as we move forward.

Fourth is media input processing. Sigma has embraced the media convergence occurring around the Internet, television and consumer electronics. As a result, we're heavily investing in a new range of media input processing technologies that enable ubiquitous access to content from IP streaming networks, the Internet, broadcast and disk storage. This breaks down into three essential areas: First, is our input processing circuits comprising demultiplexers, demodulators and decryption. Each of which are tailored for specific markets. Second, is our media security system, which forms an essential subsystem on chip based on its own processor and operating system that controls access to all code changes and media requests. Third, is our over-the-top software suite, which interacts with the fast-growing range of content and applications that consumers want access to anytime, anywhere.

The fifth technology array for us is system core elements. Delivering a complete solution with all the aforementioned media power requires packaging all this into a combined hardware and software platform that conforms to industry standards. Sigma's core system elements in the hardware side include a powerful CPU, 2D and 3D graphics processing, high-speed memory controller and system peripherals. Our core system elements on the software side represent the ongoing support of industry operating systems and tools, which encompass Linux, Android and WinCE. Together, these core system elements enable our customers to tap into and control the power of our media technology and deliver industry-leading products.

In summary, Sigma has become a complete technology provider for the connected media platforms. I'll now pass the call to Thinh to cover our forward guidance.

Thinh Tran

Thank you, Ken. As indicated, we continue to build a leading connected media platform company with strength in connectivity, media playback, video optimization and control. Overall, our engagement for upcoming design wins remains strong, and we continue to introduce compelling new solutions. We continue to win new service provider accounts for media processors, home networking and home control, and interest in our solutions across all business area remains high.

Moving on to our formal guidance, we would like to shape the expectations for Sigma's performance over the course of this coming year in order to understand the context of our next quarter guidance. Given reasonable visibility at this time, we expect our first half of fiscal 2012 will be a temporary dip in revenue. We expect first quarter revenue to be in the $60 million, $65 million range. We expect our second half of fiscal 2012 to be a significant improvement over the first half. We expect our gross margin on a pro forma basis to remain similar to that of the fourth quarter.

In summary, I would like to reinforce that we believe we have strong markets, we hold large market shares in technology leadership in each core segment. Our fundamental remains strong, our team is in place and our processes 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] And our first question comes from the line of Sukhi Nagesh with Deutsche Bank.

Sukhi Nagesh - Deutsche Bank AG

Thinh, just to follow up on your guidance there, you talked about second half being significantly above your first half. Your first quarter guidance here, it looks pretty weak. Can you maybe comment on what you're seeing the different segments in the first quarter, how do you see that playing out for the second quarter? And what it is that gives you confidence that your second half will be significantly about for each of those segments?

Thinh Tran

I think we can say in the first half, we experienced some inventory adjustments. And also a lot of our customers transitioned to a new generation of chipset that has lower ASP compared to our previous generation of products. But we think in the second half, we can be able to recover from that, and I think a lot of our new products that we just introduced are going to be shipping in high volume; and therefore, we expect the second half to be much better than the first half.

Sukhi Nagesh - Deutsche Bank AG

Are you expecting at this point then for the second -- fiscal second quarter to be below that of the fiscal first quarter?

Thinh Tran

We only give guidance one quarter at a time, but we'd expect it to be in a similar range.

Sukhi Nagesh - Deutsche Bank AG

Got it. And then what are you seeing in terms of -- I mean, obviously, your IPTV business, at the beginning of the quarter, you talked about that being stable. I guess it was down 13% sequentially. I was a little surprised by that and maybe you can comment on what happened to the quarter for that to be down so much.

Kenneth Lowe

Just to explore some of the product transitions Thinh is talking about, we're moving from a first-generation, as a matter of fact, the industry is moving from first generation products to second generation. Part of that movement is moving from more universal products that basically represented a compromise between performance and value. As we move into the future, we've got bifurcation going on between our value line and our premium line of products. The value line is more popular and as such, what were seeing is we're seeing a higher quantity go into parts that are positioned more aggressively. So that fundamental split is going to allow us to target specific markets, is going to allow us to bracket competition between performance factors such as our great studio quality video that they can't match and the low-cost platforms that we can offer and the value-line products that really, they have a difficult time keeping up with. Our strategy is paying off. We're getting a lot of traction with the 8650 series, which is the beginning of our value line. That value line then gets expanded with the 8675 we just introduced. So the good news is that we are winning more and more sockets as a result of having this bifurcated strategy. The negative part of it is that you go through a little bit of a transition effect, which is what we saw starting to see little bits of, we're seeing more and more in the first and then second quarter.

Sukhi Nagesh - Deutsche Bank AG

A couple of more questions I had. Your inventory, Tom, I see grew quite a bit, 18% sequentially here. This is the third consecutive quarter of pretty high inventory growth. How should we look at inventory going forward?

Thomas Gay

We feel that this is probably a peak. It's part of the transition factors that Ken has been talking about. So we need to be stocked up to be able to quickly answer any last-minute demands. So we've built up a bit of a die bank and believe that, that should work its way down as customers complete their transitions. And therefore, tests get more solidified.

Sukhi Nagesh - Deutsche Bank AG

What are the target days?

Thomas Gay

We wanted to be somewhere around five turns per year in general. So between four and six would be our target.

Sukhi Nagesh - Deutsche Bank AG

And then in terms of your OpEx for fiscal year 2012, Tom, how should we be looking at OpEx in a sequential basis?

Thomas Gay

G&A is once again seeing that bit of a surge that we get in Q4, and Q1 will be similar with a drop off in the Q2 and Q3. R&D continues to grow in a controlled manner as we continue to do some hiring and develop the next generation products. Sales and marketing probably gets a little higher in the fourth quarter with some of the concentration of trade shows at year end. And we expect that to come down a little bit in the next few quarters.

Operator

Our next question comes from the line of Gary Mobley with Benchmark.

Gary Mobley - The Benchmark Company, LLC

I'm assuming that your Connected Home division is not getting caught up in the first-half revenue decline you're expecting for fiscal year '12. First, I was just hoping you can confirm that; but as well, I was hoping you could maybe highlight why that revenue hasn't been trending better given that AT&T U-verse net adds have been turning higher for each of the past three quarters?

Kenneth Lowe

Well, I think there's a minor trend up in AT&T's net adds, but you combine that with inventory shifting that's going on both in the channel that reaches AT&T, which means the suppliers like Motorola and Cisco, they manage their own inventories. And then you have AT&T's management of inventory. So you have a lot of slush that can go on, that can put the ups and downs a little bit out of sync with their deployments. So I don't think the connectivity -- I guess the other answer that you were looking for is the Connected Home Technologies is not getting caught up in similar types of transitions at this point, although they have their own transitions they're dealing with between generations as well.

Gary Mobley - The Benchmark Company, LLC

And in terms of IPTV Media Processor market share you transitioned from Gen 1 to Gen 2, how do you expect it to shake out for Sigma Designs?

Thomas Gay

For transition between Gen 1 and Gen 2?

Dunham Winoto - Avian Securities, LLC

That's correct.

Thomas Gay

We actually look at it very positively. You go back a couple of years and Sigma found itself slightly out of position because of timing of some of our developments. Didn't meet schedule. So we found ourselves a little bit out of position and I think that's one of the reasons that we're having this pattern that we're going through. Ordinarily, it would be our plan that we would have new revenue growth patterns occur before the existing growth stems on a given generation. So we have a little bit of a trough here because of the trough effect because of that. And I think that as we move forward, we're going to have -- we're much more strongly positioned with the kinds of products, the technology diversity we're putting on these chips, the kind of software we're bringing to bear on it. I think we feel a lot stronger. We studied our competition. We believe that we're in great shape compared to them as we move forward from this point in time. That's where our confidence in second half comes from. You and somebody earlier had asked that.

Gary Mobley - The Benchmark Company, LLC

Final question for me and I'll hop in the queue. Could you speak or mention any carrier deployments for your HomePlug AV product at this point in time?

Kenneth Lowe

Carrier deployments for what?

Gary Mobley - The Benchmark Company, LLC

HomePlug AV.

Kenneth Lowe

HomePlug AV, we have not begun any carrier deployments yet.

Operator

Our next question comes from the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank

My first question is also related to the IPTV business at AT&T. Previously, I think you guys have mentioned target of 50% market share once the second gen transition is fully up and going. Is that still your target understanding or has that target changed?

Kenneth Lowe

I think our overall target in the IPTV market is to retain 50% market share on an overall basis. And certainly with our major accounts, we helped pioneer most of these trails. So it's our goal to at least retain, to at least split the business, as they move forward. Many of them are moving toward dual supplier models. So as they do that and try to get the advantage of supplier diversity, we certainly expect to retain half the business.

Stephen Chin - UBS Investment Bank

Just referring to some of the revenue programs in the second half of this year, how much of that is from some of these value-priced TV products versus other connectivity products that were mentioned earlier in the call?

Kenneth Lowe

You know, it's a sum total of all of them. I think that's one of the strengths that we're trying to indicate at that point in time. Our diversity is improving substantially at this point in time. We have more market spaces now that we're penetrating that are yielding steady revenue streams with good profitably. We have more technologies that we're bringing to bear. So for the larger accounts, we can offer a higher value proposition. I think that goes into the strength of the second half. So the actual answer is, we expect to see the new connectivity solutions starting to ramp. We also expect to see ramps with both the premium line of processors and the value line. Between the value and the premium line. The value line is going to be more popular. There's many more sockets that prefer to go the price performance rather than the all features and best over. It kind of mirrors that of the consumer environment.

Stephen Chin - UBS Investment Bank

And last question, in terms of the margin structure for some of the new price mapping in the second half, I guess are you looking for value products? Can you speak to what process that has impacted, the manufacture line or is the gross margins expected to be in-line with current chipset margins or is that [indiscernible](0:25.8)? Help me out?

Thomas Gay

We continue to target 50% overall gross margin and have been very happy to stay above that for a while now.

Kenneth Lowe

So the other half of that question is that as we move ahead with what I refer to as value line processors, these things are positioned through architecturally lowered costs. This is not a pricing play. So we would not expect that to be a reason for margin erosion.

Operator

Our next question comes from the line of Hamed Khorsand with BWS Financial.

Hamed Khorsand - Beating Wall Street, Inc.

Just a couple of questions there. First off, on your R&D, it seems like on a non-GAAP basis, it was up more than 50% last year. I'm just trying to get understanding, what is it that from a product standpoint, do you expect to come out that you needed that incremental increase in R&D spending, that we just haven't seen in the product lines?

Thomas Gay

Well, year-over-year, the enormous difference was the addition of CopperGate, which is clearly concentrated in R&D headcount. As you know, they've in the last year, introduced both the HomePlug and the G.hn technologies, both of which we look forward to seeing the pay off later this year. And the further initiatives that are well worth pursuing that we continue to invest in.

Hamed Khorsand - Beating Wall Street, Inc.

So what I'm trying to get to, can R&D come down from here or are you just going to keep scaling it up?

Kenneth Lowe

We continue to see more opportunities ahead of us and believe that the technologies that you're aware of as well as new ones are combining into even more opportunities ahead of us. So we think that what we foresee is good pay back for what we're investing now.

Hamed Khorsand - Beating Wall Street, Inc.

And then on the IPTV market, how much of the decline you saw in revenue this past quarter was associated with just market share erosion?

Thomas Gay

We think the dominant factor was the supply-chain adjusting for the transition as we were talking about before.

Hamed Khorsand - Beating Wall Street, Inc.

But this transition, the 2.0, you guys have been talking about this for a while. What caused it to all of a sudden surprise you guys?

Thomas Gay

I'm not sure it's a surprise. The revenue came in where we indicated.

Kenneth Lowe

Also, there's a lot of moving parts out in the market and the timing of the transitions and the planning of those has been going on for a while. So we have been talking about it for a while, because quite frankly, several of our customers have been putting things in place to make the transitions and then some of them have delayed substantially, which is not negative news to us because we've had these sockets in the first generation. So I guess the bottom line is that right now, we have a confluence of effects happening right now. So I think that's what's leading to the revenue dip.

Operator

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

Quinn Bolton - Needham & Company, LLC

Hey guys, just wanted to clarify sort of a follow up on Gary's question. In the Home Connectivity with the CopperGate business, is that also going through a sort of Gen 1 to Gen 2 transition that results in lower ASPs? Or was the comment about lower ASPs really the ramp of the value media processors for ITT set -- IPTV set-top boxes?

Kenneth Lowe

Well, there wasn't -- the fourth quarter results don't reflect any sort of transitional effect of the connectivity technologies. But they will have their Gen 1 to Gen 2 so to speak. Actually, they're on Gen 2 already. It will be Gen 2 to Gen 3 with -- if it's HomePNA and if it's -- HomePlug, will -- it'll have its generations, as well as G.hn. But the answer is that, yes, some time during this year, we'll start to see some transitioning there. That transitioning will have an impact on ASPs, but I don't think that's any -- and fiscal 2011 was not impacted by that.

Quinn Bolton - Needham & Company, LLC

But it sounds like most of the comments that you referred to on ASPs is just sort of a bifurcation of the IPTV set-top box processor line.

Kenneth Lowe

It's one of the largest effects. That, and as Tom continues to mention, the supply-chain effects of inventory adjustments and tightening up Gen 1 while they start to slowly reel out for Gen 2, that's where some of that comes in.

Quinn Bolton - Needham & Company, LLC

And then just a question about the design wins for the second half, are those mostly 8652-based or are you starting to see the new 8670? Can we see the 8670 starting there to ramp production in that timeframe?

Kenneth Lowe

We've seen lots and lots of design wins take place in the 8652 and because essentially, the 8670 is the follow on of that, we've got a lot of migration plans in place for customers to move to that. That will transition at a relatively similar revenue for us. It won't impact the revenue at all, the ASP. What it will do is it will further secure our position in those accounts. So what we're doing is we're catching up to a point where we're giving customers their next-generation transition before they're demanding it from us as opposed the other way around.

Quinn Bolton - Needham & Company, LLC

With the 8670 you mean?

Kenneth Lowe

Exactly.

Quinn Bolton - Needham & Company, LLC

And then just lastly, the high-end 8910, what kind of demand are you seeing? That's obviously a very high-end device that merges some of the TV processes with your core set-top box process or capabilities. I mean, is that really targeting the high-end gateways or could you actually go see that design into some of the high-end connected TVs or that may just be the main processor in the TV itself?

Kenneth Lowe

It can go in all of the above. Frankly, it can service a wide range of apps because it has the higher performance, the studio quality video. I think based on the features and pricing though, we expect it to go into gateways and some of the premium set-top boxes. There are some of our partners that do like to have a premium line. They pitch this as a differentiated offering, or often you'll have a PVR-based unit that's a higher performing unit because they want to use it for other functions as well. And then they'll run the regular set-top boxes, which is the value line.

Operator

[Operator Instructions] And I show no further questions at this time. I'd like to turn the call back over to Mr. McGregor for any closing remarks. Please proceed.

Edward McGregor

Thank you, Melanie. This is Ed again, and we'd like to thank everybody for attending our conference call to discuss our fourth fiscal quarter 2011 results. We do appreciate your interest in Sigma, and we do look forward to our next scheduled conference call to discuss our first fiscal quarter 2012.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect, have a wonderful day.

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