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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

Stephen Chin - UBS Investment Bank

Daniel Amir - Lazard Capital Markets LLC

Gary Mobley - The Benchmark Company, LLC

John Vinh - Collins Stewart LLC

Quinn Bolton - Needham & Company, LLC

Sigma Designs (SIGM) Q2 2012 Earnings Call August 24, 2011 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Sigma Designs, Inc. Earnings Conference Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Edward McGregor, Manager of Investor Relations. Please proceed, sir.

Edward McGregor

Thank you, Melanie. Welcome to Sigma Designs' conference call to discuss financial results for our second fiscal quarter 2012. I'm Ed McGregor, Sigma's Manager, Investor Relations. And with me today are Thinh Tran, our Chairman and CEO; Tom Gay, our CFO; 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 will then open the call to questions from analysts and institutional investors, and we expect to conclude the call within 1 hour.

Before we begin, I would like to remind everyone that this today's call contains forward-looking information, including guidance we provide about our future revenue, gross margin, and other financial measures and anticipated trends in our target markets. We caution you that the forward-looking information that we present today is based on our current beliefs, assumptions, and expectations, speaks only as of today's date and involves 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 report, including Sigma's quarterly report on Form 10-Q as filed with the SEC on June 9, 2011. 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 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.

And now, I'd like to turn the call over to Tom.

Thomas Gay

Thank you, Ed. For the second quarter of fiscal 2012, revenue was $46.7 million, a decrease of $13.9 million or 23% compared to $60.6 million in the previous quarter. Compared to the year-ago quarter, our revenue decreased $26.6 million or 36% from $73.3 million.

Our revenue breakouts for the quarter are as follows: By target market and percentage of total revenues for the quarter, IPTV Media Processors represented $18.3 million or 39% of the total; Connected Home Technologies, $19.4 million or 42%; Connected Media Players, $5.6 million or 12% of the total; and Prosumer, $3.3 million or 7% of the total. During the second quarter, we had 2 customers that each exceeded 10% of our net revenue. Gemtek, $13.3 million or 28%; and Motorola, $8.1 million or 17% of the total.

GAAP gross margins were 27.8% for the second quarter compared to 49.1% in the preceding quarter, and 47.7% in the same period last year. Non-GAAP gross margins were 34% for the second quarter compared to 53.7% in the preceding quarter, and 51.6% in the same period last year. A major factor causing this quarter's lower gross margin was a write-down of excess inventory valued at $7.8 million, which equals a gross margin decrease of 16.7%. Without the non-recurring inventory adjustment, our GAAP gross margin would've been 44.5% and the non-GAAP gross margin, 50.7%.

GAAP net loss for the second quarter of fiscal 2012 was $22 million or $0.69 per diluted share. This compares to GAAP net loss of $5.7 million or $0.18 per diluted share in the previous quarter and GAAP net income of $0.5 million or $0.02 per diluted share in the year-ago quarter.

On a non-GAAP basis, net loss for the second quarter was $14 million, or $0.44 per diluted share. Compared to the previous quarter, this was a decrease of $16.3 million from non-GAAP income of $2.3 million or $0.07 per diluted share. Compared to the year-ago quarter, non-GAAP net income decreased $22.2 million from income of $8.2 million, or $0.26 per share that we reported.

Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance. The reconciliation includes the following 3 categories of differences for the second quarter. First, amortization of intangible assets associated with acquisitions, a total of $4.8 million; second, stock-based compensation of $3.1 million; and third, the fair value markup on inventory purchased through acquisitions and sold during Q2 of $0.1 million.

I'd now like to go over a few key areas on our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $166 million at the end of the quarter, a decrease of $2.8 million or $0.14 per share outstanding compared to the beginning of the fiscal quarter.

Based on our shares outstanding at the end of the quarter, the total value of cash, cash equivalents, restricted cash and marketable securities equals $5.17 per share outstanding. Significant items contributing to the year-to-date decrease in cash include payments for capital and other assets of $12 million and a long-term investment of $2 million. Cash generated by operations in the second quarter was $8.4 million.

Net accounts receivable was $30.4 million at the end of the second quarter, a decrease of $7 million compared to the beginning of the fiscal quarter. The average days sales outstanding for our receivables at the end of the second quarter was 59 days, an increase of 3 days compared to the previous quarter. The increased DSO for the quarter was a reflection of our customer scheduling product deliveries much later in the quarter than usual.

Net inventory was $23.4 million at the end of the quarter, a decrease of $15 million compared to the beginning of the fiscal quarter. The decrease in inventory brings our inventory turns for the quarter up to 4.3x per year. The increase was attributable to the write-down of inventory totaling $7.8 million as well as decreased purchases of newer products to support our sales forecast.

Now I will turn the call over to Thinh for an executive overview.

Thinh Tran

Thank you, Tom. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma. In today's call, I would like to review the results of the second quarter and emphasize our achievements.

First off, we are disappointed to report $46.7 million in revenue for the second quarter. This sequential decrease is primarily due to a more significant ramp down of first-generation deployment incorporating our IPTV media processors than we anticipated. While certain second-generation telco rollout will push to later in the year.

Overall, we remain heavily engaged with service providers and OEMs and are securing future business for media processors, home networking and home control. We continue to invest in new technologies and are confident that our long-term strategy to build a leading connected media platform company will result in strong growth for Sigma.

During Q1, we continue to make progress in many business segments. We unveiled an ultrathin set-top box reference design that integrate media processing, Home Connectivity, and home control technologies. This new class of integrated set top box enables plug-and-play simplicity for home screening or high-definition content via networking to AC power wiring. We also announced that our Z-Wave technology has been integrated into the Best Buy Insignia brand new ZTV line of broadband connected televisions. The new Insignia televisions will provide Best Buy customers with an exceptional, intuitive, user experience for controlling their TV by utilizing the latest Z-Wave technology.

We announced that our SMP8653 secure media processors has been selected by D-Link for use in its main stage for Intel wireless display TV adopter, allowing consumers to wirelessly project content up to 1080p from Intel wireless display notebook PC to big screen HDTV.

We also announced that our G.hn home networking technology has been awarded Connected Home Global Summit Petitions Award for best enabling product technology for the Connected Home. As G.hn technology was selected by a panel of experts from close to 100 technology covering every home networking category.

We demonstrate a full line of hybrid IP set-top box solutions for cable, satellite and the Brazilian international standard digital broadcast television, also called SBTVD. This solution we have service providers deliver the best combination of broadcast services over cable, satellite, or terrestrial over Sigma world renowned IP optimized media processors. As a result of this progress, we feel that we are in better position to take advantage of several new business.

Moving forward, our vision for Sigma to become the leading provider of connected media platform at the highest level integration possible. Towards this goal, over the past several years, Sigma had grown the breadth of its business and technology portfolio through acquisitions, which complement our internal development or system-on-a-chip media processors.

At this time, we thought it would be insightful to report on the overall contribution from this acquisition. First, the acquisition of Zensys is giving us the Z-Wave home control product line which has resulted in a new segment of differentiation of product demand is growing at a strong rate. Taking advantage of marketing synergies, successful penetration of providers and channel partners has resulted in design win taking place at accounts such as Verizon, ADT Security, and Best Buy.

Further, the synergistic leverage to sell within set-top box had begun to occur as well. We expect Z-Wave technology and product line to account for our substantial revenues within 2 years.

The acquisition of the VXP product line has result in stable source of added revenue as well as an elite video technology that has made its way into our premium media processors products. By repurposing this technology for enhancing over-the-top content, we expect to achieve a differential quality advantage in future SoC products.

The acquisition of CopperGate is giving us our Home Connectivity Business Group, one of the world's leading providers of wired entertainment network solutions and a substantial source of ongoing revenue for Sigma. The existing HomePNA product line created a foundation of strength at telco operators that paved the way for our award-winning G.hn products. Further, the roadmaps we were to integrate the connectivity within our SOC solution to provide future differentiation and leverage.

I'd now like to pass the call over to Ken who will discuss the long-term significance of this technology and the market we play into. Ken?

Kenneth Lowe

Thank you, Thinh. Sigma continues to make substantial investments toward becoming the long-term leader in effective media platforms. For this call, let's take a broad look at Sigma's future through the trends in our target markets and technology developments.

First, that we're going through an expected revenue trough at this time, we continue to make strategic gains in many areas that will not become externally visible for quite some time.

Second, the outlook of our target markets is positive. We remain confident that we'll grow into a leadership position as a result of our differentiated technology and the synergies between our product lines.

Third, Sigma's long-term position with both SoC and home networking solutions for the telco IPTV market is strong, the significant new engagements of key OEMs and service providers that we have yet to be publicly announced.

Fourth, our Z-Wave product line continues to outperform our expectations and is expected to become a significant revenue producer within the next 2 years.

And fifth, our ultrathin set-top-box design that integrates media processing, home connectivity and home control technologies demonstrates our strategy to offer complete platforms will result in greater synergies between our technologies, as well as faster time-to-market.

The world of video delivery services is steadily moving toward 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 is the leading provider of IP-based solutions and remains well-positioned in the telco provider segment, with an active customer base of over 40 telco providers. About a year ago, we resourced an intensive business development program to remain constantly engaged with the large portion of these providers. This has benefited us by providing in-depth visibility for our future needs, influence on their specifications, and inclusion in all the relevant RFQs. As a result, we have several new programs in the works for future deployments in Europe, Latin America, North America and parts of Asia.

We are well-positioned for Mediaroom Generation 2. Led by 865x Media Processor family which combines the highest performance, lowest power and lowest [indiscernible] cost of any Mediaroom SoC. Due to the Mediaroom distribution model, during the first generation, we gained a large number of provider accounts. Many of which then shifted to our rival Broadcom at the start of the second generation and now many of which we believe will shift back to Sigma during the next several quarters due to the advantages of our 865x family. As a result, we expect to see substantial deployments begin at many providers during calendar 2012.

We're also beginning to participate in opportunities for hybrid set-top boxes that combine IP with satellite, terrestrial, or cable broadcast reception. We have a key platform technologies to become a leading player in this segment and we anticipated this to be one of our strongest area of growth for Sigma.

The cable market and 16 million annual set-top-box shipment is poised for transition to hybrid IP Cable solutions, creating strong future revenue potential for Sigma as well.

Sigma has been engaged for over 2 years with major cable providers, demonstrating leading hybrid gateway client solutions and helping them plan their transition. Though the timing of these transitions have remained somewhat elusive, we are in limited field trials and our product positions for cable solutions ahs improved with time. At this point, we have an especially strong position for thin client set-top boxes based on our Value Line media processors.

The market for Home control seems to be rapidly expanding. As many initiatives are taking place with some of the largest providers for energy management and Security Services. As a result, major design wins have been emerging over the last year, with Sigma becoming a leader in many applications. These design wins include Verizon's Home Services, new security services from ADP, Vivint, and Best Buy's Insignia CTV products.

Furthermore, these design wins work synergistically with the development of our industry-leading ecosystem, which now supports over 500 interoperable consumer devices on the market today. We expect Z-Wave to continue with strong growth in the foreseeable future, as well as provide value-added leverage to our position within set-top boxes and operator deployment plans.

The market for Connected Media Players continues to expand and involve new product classes. As a leading player, Sigma strong class of Value Line processors that are optimal for these consumer applications. As a major thrust, Sigma is investing heavily on the dozens of over the top soft such as Netflix, Pandora and YouTube, that will enable these products to tap into a vast array of Internet content and grow the overall market. As our software portfolio expands, so did the barriers to entry for other rivals in this space.

As a leader in IPTV video networking over coax and phone lines, seeing that Sigma also continues to win new deployments and is well positioned to continue its growth in residential gateways and routers. To develop a stronger presence in Europe, Sigma's patented award-winning ClearPath technology has excited the market and positions the company for growth and powerline-based IPTV and consumer device market opportunities.

Each quarter, we continue to grow our network presence globally with deployments in Latin America, China, India, Russia and Eastern Europe. Operators and OEMs worldwide are also showing high interest in G.hn while its momentum continues to build as demonstrated by AT&T plus 2 silicon vendors joining the HomeGrid Forum this quarter. Sigma's G.hn technology was awarded the Connected Home Global Summits award for Best Enabling Product Technology for the Connected Home, and Sigma has successfully participated in the first G.hn Plugfest. As a result of this positive momentum, Sigma has signed up initial partners for its G.hn solution.

Finally, Sigma's product Prosumer offerings provide studio quality video for a host of professional and high-end consumer applications. This market serves to drive our video processing technology and has grown into a highly profitable segment of around $15 million annual revenue. Videoconferencing applications is the leading driver of his growth, with shipments taking place by Polycom and others, and other applications that are fueling this segment including front projection displays, professional broadcast products and high-end consumer video.

As a long-term goal, Sigma is developing differentiated technology for consumer entertainment products that's delivered with the connected media platform. These platforms combine 5 technology areas into application-specific solutions for each of our target markets. These technology areas consist of audio video decoding and encoding, video display processing, home network connectivity, media input processing and system core elements. Each quarter, Sigma invests in the progress of technology for each of these areas, most of it remains hidden until our product announcements revealed their underlying features.

In summary, Sigma continues to invest in the future and develop complete technology platforms to enable products for the way consumers want to live. And now I'd like to pass the call to Thinh to cover our forward guidance.

Thinh Tran

Thank you, Ken. As indicated, we are confident that our long-term strategy to build the leading connected media platform company will eventually result in strong future growth. Overall, we remain heavily engaged with service providers and OEMs, and continue to win new accounts for media processors, home networking and home control.

Moving on to our forward guidance, we would like to shape the expectation for Sigma performance for the remainder of this year, and provide specific guidance for our next quarter. Given reasonable visibility at this time, we expect revenue at the second half of fiscal 2012 to remain in the trough, as we await an impending second-generation deployment at our telco accounts. We expect revenue for the third quarter to be between $40 million to $45 million, we expect to resume sequential growth in our fourth fiscal quarter, and we expect our third quarter gross margin on a pro forma basis to recover about 50%.

In summary, I would like to reinforce that we believe we are in store strong growth market -- we are still in the infancy. Our fundamentals remain 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 John Vinh with Collins Stewart.

John Vinh - Collins Stewart LLC

My first question is, I was hoping you could give us a little bit more color of what was going on when you mentioned that you saw a greater than expected decline in your first-generation set-top boxes. If I look at your Motorola revenues, it looks like it was down 35%. I assume that was the OEM where you saw the drop. Are you losing? Is it more share that you're losing than you had anticipated to Broadcom or there are other competitor entrants that are coming into the field?

Kenneth Lowe

So John, it's really more focused than that. One of our largest telco accounts is going through a transition. That transition includes first to second-generation products. As they go through this transition, first generation is going to drop down, which it has done now. And second-generation is going to take off. The Sigma portion of that second-generation has been delayed for factors outside of our control. And so unfortunately, that delay then pushes this trough wider. So we're in an unexpectedly wide trough at this point in time.

John Vinh - Collins Stewart LLC

Can you give us some additional color on why the ramp of the second generation rollouts has been unexpected and delayed?

Kenneth Lowe

Yes, it's basically connected to the outside factors involved in testing and qualifying us getting it ready for deployment. Various things including allocation of resources, et cetera that end up sometimes impacting these things that nobody foresaw.

John Vinh - Collins Stewart LLC

And on the competitive front, are there additional competitive entrants here? Are we talking about the same competitor here?

Kenneth Lowe

No, not really. We're still talking about primarily Broadcom.

John Vinh - Collins Stewart LLC

And then going forward, just last 2 questions, do we think about this level of revenues around $20 million as kind of your new baseline of IPTV revenues going forward until you get recovery of share and you guys continue to sound very confident that you're going to be able to regain the share in 2012. Anything else you could offer in terms of giving us visibility and confidence that that's actually going to happen?

Kenneth Lowe

As far as baselining it, it's like we described. It's dropped into a trough. It will come back out of the trough. We do expect 2012 to show a lot better growth than what we've had, a lot better numbers than what we've had in this calendar year, 2011. I think that as we get into 2012, some of the initiatives we're participating in now, barring other changes, is going to contribute very, very nicely to the revenue ramp that we should see that year. We're very confident that our position in IPTV is going to come back up, especially in Mediaroom. We've got a strong position.

Operator

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

Gary Mobley - The Benchmark Company, LLC

If I punch in your non-GAAP gross margin, assuming no write-down of inventory, you're still losing on an operating basis, non-GAAP about $3.5 million for the quarter. And I'm just curious, given that this trough level of revenue is going to continue for the next quarter or 2, what sort of actions are you going to take to write the operating expenses?

Thomas Gay

We are not going to be increasing our R&D at the rate that we have been previously, although we do have initiatives that we need to continue to fund and pursue. So maybe at a similar level, one thing to point out is that from operations, we did have positive cash flow of $8.4 million during the quarter. So things on an overall basis are still steady as it goes. And we still have a lot of faith in what we are working on and the future results of that.

Gary Mobley - The Benchmark Company, LLC

Which specific product did you write-down in the quarter, and are those products truly obsolete and if there was any, perhaps, intention to run those things to the future income statements, will you break that out?

Thomas Gay

Let's see. Actually the description we used should accessed products and some of the first-generation end of life forecast and things cost a fraction of a quarters worth of our consumption to be excess. And so, that was the proper accounting treatment to do. We do breakout in our cash flow the pluses and minuses of inventory reserve movement, so that if there is a future release, it will be detailed in those statements.

Gary Mobley - The Benchmark Company, LLC

And how much of the sequential decrease in the HomePNA or Connected Home segment was a function of inventory depletion at the AT&T channel? And how much was a function of the shift to the single die solution and the relating ASP reduction?

Kenneth Lowe

A large portion of it was due to over stocking in the first quarter and so that basically sucked out a lot of our potential for second quarter a little bit was...

Gary Mobley - The Benchmark Company, LLC

What is your take on the inventory now at the AT&T channel for the HPNA products?

Thomas Gay

Pardon, would you re-ask that question, please?

Gary Mobley - The Benchmark Company, LLC

What is your take on how the inventories are through the AT&T channel for the HPNA products?

Kenneth Lowe

We don't track it at that level. Again, it still goes through OEMs. So we don't think there's substantive inventory. We think what happened is there was a bump up on first quarter in order to make sure that they had product on hand for their own management of their flow, and this was mainly by the OEMs. We don't know that there is an AT&T factor really involved.

Operator

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

Quinn Bolton - Needham & Company, LLC

I just want a follow-up on Gary's question about the Connected Media Player. Looks like that was the biggest drop sequentially, Q2 versus Q1, and you sort of explained most of that was due to inventory overstocking in Q1. If you look at the third fiscal quarter, you guys are guiding down at the top line. So just wondered if you could help us breakout by segment, are we going to see declines across all of the major business lines, or where do you think you are in that connected inventory or connected home inventory burn down?

Thomas Gay

One correction, you had mentioned connected media players as being the inventory correction...

Quinn Bolton - Needham & Company, LLC

I'm sorry, connected home, not media players.

Thomas Gay

Okay, connected media players was down a bit more than we had expected during the current period as the next-generation rollout. It was delayed a little bit. We're hoping to see that come to fruition in the next quarter so that, that will establish a baseline and growth from there.

Quinn Bolton - Needham & Company, LLC

Sorry, that was -- talking about connected media players that you just we're talking about, how about the connected home? Looking into the [indiscernible] help us rank order, what areas will be relatively strongest, what will be relatively weakest, and how much of that is inventory burn in the Connected Home business? It sounds like inventory burn was a big part of the reason for the drop in Q2. It sounds like that continues in Q3 for connected home, specifically the HPNA business.

Kenneth Lowe

Yes, I think what we see going on in Q3 is we see strength in the Connected Media Player area. We see strength in the Z-Wave area. We see the home technologies are going to be relatively flattish to slightly down, and then a little bit down on the Media Processor products, IPTV Media Processor.

Operator

Our next question comes from the line of Daniel Amir with Lazard Capital Markets.

Daniel Amir - Lazard Capital Markets LLC

With regards to -- just a clarification, did you say 50% gross margins for the next quarter?

Thomas Gay

Yes, on a pro forma basis.

Daniel Amir - Lazard Capital Markets LLC

Now do you feel comfortable that this is -- is it the level we should be modeling forward around 50%?

Thomas Gay

Well, after you adjust for the inventory -- that's write off during the quarter, it came in at 50.7% in Q2. So we've actually maintained above 50% up until now, but feel that the predicted revenue level that 50% will be our, at least temporary, expected target.

Daniel Amir - Lazard Capital Markets LLC

Okay and then with regards to the fact that you believe that you'll see your fourth quarter being up, I mean is this back to the level that you were a couple of quarters about, or is it just a slight bump up to level that you were last quarter? I mean how should we be looking about in terms of what the visibility you have in your business for that quarter?

Thomas Gay

It's a bit early to quantify it. We really won't be able to get the kind of guidance that we can for Q3. But all the indicators from the forecast that we get for the next 6 months indicate that the fourth quarter will be up to some degree. But we're less trustful of the exact numbers that we're getting.

Daniel Amir - Lazard Capital Markets LLC

Is it up in the IPTV business or the Connected Home? I mean how should we be looking at that?

Thomas Gay

Actually, both of them are currently indicating some upward trend.

Daniel Amir - Lazard Capital Markets LLC

Okay, now in terms of the OpEx, obviously your level of R&D to sales is somewhat unsustainable for a fab-less company the level that you're running right now. What is the right number? It used to be historically in the 20% to 25% range in the past number of quarters, you're basically way above that. What's the thought process here and how should we be looking at that going forward as you revenue starts recovering a bit?

Thomas Gay

Traditionally, we've been expressing our R&D spending targets in terms of dollars.

Daniel Amir - Lazard Capital Markets LLC

But that's not the way to run a business, right? If your revenues are dropping 30%, 40%, you can't sustain R&D at the same level.

Thomas Gay

In the long run, that is correct. However, when you've got products under development that will create future revenues, you need to have some faith that what you're working on will create those future revenues and the payback will more than justify the investment that you've made. To cut back now would delay some of those future opportunities. So part of our level of confidence is being expressed in our willingness to continue investing in the R&D. And so the idea though is that we are going to be more conservative in our R&D spending. We do not expect to see the kinds of increases that we've been funding in the past, and should be toning that down a bit. But we don't plan on having any actual headcount reductions at this point. We feel that we need all the talent that we've got and we need to continue pursuing the investments.

Daniel Amir - Lazard Capital Markets LLC

Okay, then one final question on the Z-Wave. Anyway, can you quantify the revenue opportunity that you see for this year and potentially what type of growth rates range we could see for next year for this product?

Kenneth Lowe

Right now, it's moving up to the $3.5 million a quarter range and growing from there. We're expecting a lot of good things from it over the next 2 years, continued strong ramp in those products. And as we mentioned on the call, we expect in 2 years it's a standalone product line. It holds its head up with the other major product groups that we have. So we see a lot of growth out of that. So and the types of customers we're securing with that, people with Verizon and Best Buy would feel like there's a whole new class of growth going on here.

Operator

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

Stephen Chin - UBS Investment Bank

First question I had was on business at Verizon in particular. I was wondering if some of the recent union strikes at Verizon, if that had any impact on fiscal Q2 and also the guidance for fiscal Q3 either in particular the U-verse products or any other video related products first of all?

Kenneth Lowe

To our knowledge, there's been no derivative effect on our demand.

Stephen Chin - UBS Investment Bank

And then as far as gross margins go, with the 50% pro forma -- you're only down I guess 70 basis points from Q2 but then your revenues are coming down a lot more than that. I was wondering if you'll be building up inventories during the quarter and so it's basically, pulling off that level because of harsh coverage on products you're receiving?

Thomas Gay

Actually the revenue decrease shouldn't significantly change the equation of our fixed overhead, that's the reason that we believe that our gross margin shouldn't be coming down too significantly. Inventory levels we're pretty comfortable that the over 4 turns per quarter rate that we just achieved, and I think that we should be in a similar range next quarter.

Stephen Chin - UBS Investment Bank

And then looking at the OpEx side again, I guess in terms of some of the product areas where the R&D investments have been taking place so far, can you talk about whether or not there's a more consumer related products that have a 2 to 3 quarter development period and the market or is much of this development centered around products that need to go through a carrier or certain product qualifications before they generate revenues?

Thomas Gay

Those are all ongoing activities for us as we constantly come up with newer and improved platforms, as well as the software to fit our customer specifications. All of those things are just constantly going on. One of the things that happens with us is we have a very long design win cycle between introducing a platform, working with key customers to specify a software, getting it certified, and then to revenue. And that's one of the frustrating parts of the delayed gratification of our business. However, once we make those design wins, the models do tend to have a pretty long life. So there's sort of a mixed blessing in the whole process. In the meantime, other territory like the Connected Media Players, very software intensive and have more rapid model turnover. And so we're constantly finding new additions to the portfolio of software that we need to support, especially with the new Over the Top items that seem to be coming up every month. So all of those are part of our ongoing support investments.

Stephen Chin - UBS Investment Bank

And last question, looking at Connected Home Technologies, I know you guys are talking about G.hn. Can you talk about how you view your competitive position relative to other vendors of technologies that's currently also selling to the G.hn market and also how G.hn outlook is compared to [indiscernible] at this point?

Kenneth Lowe

Well G.hn is picking up a lot of momentum. It has signed on big carriers, AT&T, British Telecom. I believe Telefónica has recently joined. I think you're going to see G.hn starting to form a strong hold over the next couple of years and supplanting what's been going on across the various types of wires. I think that MoCA is a strong solution in the North American Cable business and North American Satellite, but I think it really is not spread beyond there. So it's a region specific solution, but that's a major region. The Americas, the North American cable and satellite is a big market. So that's kind of how we would compare the 2 of them. We think that wire cut solutions continue to form the backbone of video distribution across the world. And HPNA has been gaining momentum in Latin America, as well as North America. So that means a larger potential market for potential shift to G.hn, which is obviously one of our bigger investments. We feel that we're on the leading edge of bringing that technology to market. So we feel that we're in a stronger position than anybody else. We have the capability of also offering HPNA, which again, we feel puts us kind of in a unique situation. So we are pulling for G.hn and we have strong belief that it's going to be a major force.

Stephen Chin - UBS Investment Bank

One quick follow-up on that. In terms of G.hn and adoption in the [indiscernible] market, any thoughts on whether or not we'll see adapters for G.hn terminal adapters for example show up in the holidays for this coming holiday season?

Kenneth Lowe

Yes, I think it probably will be more next year than this year. There are so many layers to the G.hn technology. That's really, I think, is going to take us into next year before you see any real consumerized products.

Operator

Our next question is a follow-up from the line of Quinn Bolton with Needham.

Quinn Bolton - Needham & Company, LLC

I just wanted to ask a quick couple of follow ups. On the HPNA business, can you give us a rough sense where you are in the transition from the 2-chip solution to the single die solution? And then Tom, in your comments about the Connected Media Player business, you mentioned the product transition. I wasn't sure if that was a Sigma product transition or whether that was product transition at one of your major customers. So I was hoping you can provide a little bit more detail.

Kenneth Lowe

On the HPNA, what we're doing is we're providing a stable technology solution, and we're following a path that we've negotiated with some of the largest providers that we deal with. So we're -- at this point in time, we have migrated from 1 generation of 2-chip solution to another generation of 2-chip solution and at this point in time, there's no public plans of moving to a single chip. It's really not necessary with this level of integration. So right now, that's where the state-of-the-art sits.

Thomas Gay

Concerning the Connected Media Player question, most of that market has already transitioned to the 865x product lines. And it's more of our customer’s successive model generations that I was referring to.

Operator

Ladies and gentlemen, that does conclude the time that we have available for questions today. I'd like to turn the call back over to Ed McGregor for closing remarks. Please proceed.

Edward McGregor

Thanks, Melanie. I would like to thank everybody for attending our conference call to discuss our second quarter 2012 results today. We do appreciate your interest in Sigma, and we do look forward to our next scheduled conference call to discuss our third quarter results. Thank you.

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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