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Sigma Designs, Inc. (NASDAQ:SIGM)

F4Q08 Earnings Call

March 11, 2008 5:00 pm ET

Executives

Ed McGregor – Investor Relations Manager

Thinh Q. Tran – Chairman, President & Chief Executive Officer

Thomas E. Gay, III – Chief Financial Officer & Secretary

Kenneth Lowe – Vice President Strategic Marketing

Analysts

Sukhi Nagesh – Deutsche Bank Securities

Uche Orji – UBS

Jay Srivatsa – Roth Capital Partners, LLC

Mark Sue – RBC Capital Markets

John Vinh – Collins Stuart, LLC

Daniel Amir – Lazard Capital Markets

Anton Wahlman – Thinkequity Partners

Scott [Hertleman] – Robert W. Baird & Co., Inc.

James Schneider – Goldman Sachs

Quinn Bolton - Needham & Company

Gary Mobley - Piper Jaffray

Craig Berger - Friedman, Billings, Ramsey & Co.

Daniel Ernst - Soleil-Hudson Square Research

Gil [Kobieski] - TCS Financial

Robert Sussman – Bentley Capital

Operator

Good day ladies and gentlemen and welcome to the Q4 2008 Sigma Designs earnings conference call. My name Andrea and I will be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to Mr. Ed McGregor, Investor Relations Manager. Please proceed sir.

Ed McGregor

Welcome to Sigma Design’s conference call to discuss financial results for our fourth quarter and full fiscal year 2008. I’m Ed McGregor Sigma’s manager of investor relations. With me are Thinh Tran, Sigma’s chairman and CEO, Tom Gay our chief financial officer and Ken Lowe our vice president of strategic marketing.

A press release containing the quarter and financial results including selected income statement and balance sheet information was released after the market closed today. If you did not received the results, the results is available in the investor relations section on our website. Today’s agenda will begin with my brief presentation, a review of selected financials by Tom, an executive overview by Thinh, a market update by Ken and return to Thinh for the company’s guidance. We will then open the call for questions from analysts and institutional investors. We expect to conclude the call within one hour.

Before we begin I would like to read our cautionary disclosure regarding forward-looking statements and non-GAAP information. This conference call contains forward-looking statements including statements regarding Sigma’s expected financial performance in future periods, anticipated trends in Sigma’s target markets and the anticipated activities of Sigma’s competitors. Actual results may vary materially due to a number of factors including but not limited to the risks that the SEC disagrees with the manner for which Sigma has accounted for or reported or not reported the financial impact of past stock option grants, actions by other regulatory agencies as a result of Sigma’s past stock option practices, derivative litigation, a determination upon completion of further financial closing and audit procedures that the financial results for the fourth quarter and full fiscal year 2008 are different than the results set forth in this call, general economic conditions including continuance of the current economic conditions specific to the semiconductor industry, the rate of growth of IPTV, high definition DVD and HDTV markets, the ramp in demand from our set top box customers, our ability to deploy and achieve market acceptance for Sigma’s products in these markets, the ability of our SOCs to compete with other technologies and products in emerging markets and other risks that are detailed from time-to-time in our SEC reports including our Form 10Q filed with the SEC on December 13, 2007.

Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Sigma undertakes no obligation to publically release or otherwise disclose the results of any revision to these forward looking statements that may be made as a result of events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. In addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, we report non-GAAP net income which excludes amortization of acquired intangibles and with respect for the second quarter 2008 non-GAAP results, non-recurring expenses associated with a tender offer to employees to resolve potential personal income tax exposure, stock-based compensation calculated under APB No. 25 and FAS No. 123R with respect to the second fiscal quarter of 2007, with the second fiscal quarter 2008 non-GAAP results non-recurring expenses associated with the company’s review of historical stock option granted practices and related financial restatements for prior periods and with respect to the fourth quarter 2008 the benefit of income tax reevaluation reserve release. We believe that our non-GAAP net income provides useful information to management and investors regarding financial and business trends related to our financial conditions and the results of operations. We also believe that non-GAAP measures provide useful supplemental information for investors to evaluate our operating results in the same manner as the research analysts that follow us, all of whom present non-GAAP projections in their published reports. We caution investors however not to place undue reliance on non-GAAP measures and to read them in connection with our GAAP results. You can find a detailed reconciliation between our GAAP and non-GAAP results in the financial tables included in our written earnings release which is currently posted on our website.

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

Thomas E. Gay, III

For the fourth quarter of fiscal 2008 net revenues grew to $76.4 million up $10.2 million or 15% from $66.2 million for the third quarter of fiscal 2008. Compared to the fourth quarter of fiscal 2007 when we reported $31.2 million in revenues our revenues increased $45.2 million or 145%. Our revenue breakouts are as follows: by market segment and percentage of total revenues for the quarter IPTV was $60.3 million or 79%, High def DVD and other media players represented $14.6 million or 19% of the quarter’s total revenue and other products represented $1.5 million or 2% of the total. Breakdown by billing region where Asia represented $54 million or 71% of the total, Europe $19.3 million or 25% and North America $3.1 million or 4% of the total for the quarter.

During the fourth quarter we had four customers that each exceed 10% of our revenue. The highest was Motorola Singapore or MTC which represented $21.2 million or 29% of the quarter’s total revenue, UniQuest our distributor in Korea had revenues of $15.4 million or 20% of the total, Cisco Systems $9.1 million or 12% and [Macknika] our distributor in Japan represented $8.1 million or 11% of the total for the quarter. GAAP net income for the fourth quarter grew $35.3 million or $1.12 per diluted share up $14.3 million or 68% from $21 million or $0.72 per diluted share for the third quarter of fiscal 2008. Compared to the fourth quarter of fiscal 2007 GAAP net income increased $30.7 million or 667% from $4.6 million. Gross margins were 49% for the fourth quarter compared to 53.2% in the preceding quarter and 51.3% in the same period last year. We expect cost reduction efforts and product and customer mix in the future quarters to continue to support our gross margin target of 50% plus or minus two points.

Operating expenses on a GAAP basis were $16.6 million or 22% of revenue in the fourth quarter compared to $12.8 million or 19% in the previous quarter and $11.4 million or 36% of revenue in the same period last quarter. The operating expenses for our fourth quarter included the following notable items: in R&D the fourth quarter included $1.2 million of expenses associated with development of new products such as developmental assets, prototype silicon and onetime IP licenses. G&A included $.6 million of legal and other expense associated with the settlement of the shareholders derivative lawsuit, $.2 million associated with implementation of our international tax strategy and $.8 million for yearend SOXs compliance expenses. You can find a copy of our press release with a detailed reconciliation of our GAAP to non-GAAP performance on our website. The reconciliation includes the following categories of differences for the fourth quarter: amortization of intangible assets associated with the acquisition of [Blue 7] totaled $.3 million, stock-based compensation represented $2.5 million and reduction of our tax expense for the quarter of $12.7 million from the release of our remaining valuation allowance.

On a non-GAAP basis net income for the fourth quarter was $25.4 million or $0.80 per diluted share an increase of $2.4 million or 11% from $23 million or $0.79 per diluted share in the previous quarter and an increase of $18.3 million or 258% from $7.1 million or $0.27 per diluted share for the non-GAAP net income for the fourth quarter of fiscal 2007.

In the fourth quarter our provision for income taxes included a benefit of $12.7 million from the release of our valuation allowance. The release was entered in accordance with SFAS. 109 and was triggered by our recent history of sustained profitability and expectation of profit in future on quarters. Excluding this benefit our income tax expense for the fourth quarter was $1.9 million or a rate of 8%. As a result of depleting the majority of our tax loss carry forwards during fiscal 2008 Sigma has become looking into strategies that could be utilized to reduce our effective income tax rate in future fiscal years from the full statutory rate of 41%. Based on our most recent estimates we currently expect to see an income tax rate of less than 35% in fiscal 2009.

Now, I’d like to cover a few key areas from our balance sheet. Cash, cash equivalents and investments totaled $275.7 million, an increase of $12.7 million from the previous quarter. Of that amount $57.2 million is classified as long term securities. This breaks down into $13.3 million of securities with maturities longer than one year from our yearend and $43.9 million of auction rate securities that have limited liquidity. Net accounts receivable was $40.2 million an increase of $9.8 million over the previous quarter. The average days sales outstanding for our receivables as of the end of the fourth quarter was 48 days compared to 42 in the previous quarter. Inventory was $26.3 million an increase of $7.4 million over the previous quarter primarily due to the increase in our manufacturing throughput. Accounts payable was $18.5 million an increase of $3 million over the previous quarter also due to the growth in our business. Shareholders’ equity was $345.6 million an increase of $43.3 million over the previous quarter principally due to our earnings for the quarter.

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

Thinh Q. Tran

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, emphasis the significance of our activities and address our direction for the quarters ahead. First off, we are pleased to report another record setting quarter for the company in terms of revenue and profitability capping off a year of phenomenal growth. In our fourth quarter we achieved a revenue increase of 15%, we reached $76.4 million, our ninth consecutive quarter of double digit signature revenue growth and brought $35.3 million of that down to our GAAP net income line. Our standing revenue increase is a result of increased demand from our IPTV set top box market as well as the increased contributions from blu-ray players. The ramp of continued IPTV deployment coupled with clear leadership position has resulted in strong demand from our worldwide base of set top and telco customers. Our current leadership in blu-ray players now taking on increased significance due to the withdrawal of HD DVD is also contributing significantly to our top line.

Initially we are encouraged by the potential opportunities by our strategic initiatives anchored in penetration into the HDTV market, ultra wide band connectivity market anddigital media adapted products. On the profitability side we are very pleased with our spending returns we are achieving in terms of both margins and earnings per share. Our gross margin of 49% remained within our guidance but declined for the fourth quarter due to volume and discount break points reached by a few of our top customers. Further, as we are now sampling some next generation chips we are preparing for transition to a product design for lower production costs.

Our GAAP operating margin for the quarter was 32.1% of revenue reflecting strong efficiency as a result of our growth. Therefore as a result of both gross margin stability and op ex control we would continue to expect much of revenue to reach the net income line.

Now, I would like to highlight some of the important business developments we have achieved since our last conference call. We announced our highly integrated 8634 media processor was selected by Sharp to power its new line of blu-ray disc players and recorders. Sharp’s new products include the BD-AV1 and AV10 series for the Japanese market and the recently introduced slim profile AQUOS BD player, Sharp’s first blu-ray offering in the US market. We also announced that our 8634 processor was selected by Samsung to power its new line of HTBD2 home theater in a box, the first home theater product to combine blu-ray player and sound system into one product offering. We demonstrate a wide range of consumer technology solution at CES 2008 including our next generation SOC media processor that show a 50% increase in system performance, our latest blu-ray player software supporting profile 1.1, our VXP image processing and several digital TV reference designs.

We also announced a collaboration with Fujitsu to deliver wireless HDAV technology solutions for consumer electronics manufacturer serving the high definition AV cable replacement market. Wireless HDAV is the first technology to leverage H.264 and WiMedia standards for streaming high definition content without cables.

We received the Outstanding Financial Performance by a Public Fabless Company award given by the Global Semiconductor Alliance for outstanding financial performance over eight consecutive quarters. We established a share repurchase program under which our board of directors authorized the repurchase of up to 2 million shares of common stock. We acquired certain assets of the VXP Group from Gennum Corporation. The VXP imagine processing technology and skilled VXP design team will allow us to expand into the professional market and add broadcast studio quality to our product offering for high volume consumer applications in set top box for IPTV, high definition disc players and digital television.

We announced an agreement to settled shareholders derivative litigation that had been filed in connection with historic stock option grants. The settlement will result in dismissal of both federal and state derivative lawsuits.

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

Kenneth Lowe

On this call I’d like to focus primarily on the market trends for IPTV and blu-ray then briefly discuss our outlook for future contributions from our other segments. As usual, let’s start with an update to the IPTV market. In general, we feel that the IPTV market is ramping nicely and from all external indications it appears that most telcos are experiencing increasing deployments as we move into 2008. What follows is a review of Sigma powered IPTV deployment activity by major telco which is based primarily on public statements made by either the carrier or their primary set top box provider.

That said, let’s start with carries in North America. AT&T continues to forecast larger deployment numbers as they wrap up each quarter. Results from AT&T’s fourth quarter of operations include the following highlights: U-verse is ramping well its continuously increasing its subscriber base. At the end of 2007 they had achieved 231,000 total subscribers and a run rate of 12,000 new installed per week. Their fourth quarter alone accounted for 105,000 additions. Looking forward they updated their stated goal of reaching 1 million subscribers by the end of this year with a run rate of 40,000 per week by the fourth quarter. Achieving this goal would call for the equivalent of more than a 25% sequential increase in new subscribers each quarter. As you evaluate the potential of this substantial opportunity keep in mind the following: first, that AT&T delivers nearly three set top boxes per subscriber on the average and that next AT&T uses a Microsoft TV platform which requires a lengthy qualification test phase and therefore we do not feel that any next generation designs would be likely to be deployed until sometime in 2009. Other active North American deployments include leading Canadian telcos Telus, Bell Aliant and SaskTel, also continuing to increase their subscribers.

Now, let’s move to the major carriers in Europe Deutsche Telekom set an aggressive tone recently by setting a target of 500,000 customers by the end of 2008. As of the end of 2007 they had achieved 150,000 orders which would result in an expectation of 350,000 new subscribers for 2008, annual growth rate of over 130%. As a long term goal Deutsche Telekom is targeting 1.5 million IPTV customers by the end of 2010. [Free] France continues to be one of those prolific deployments of IPTV services in Europe [Free] achieved a record year in 2007 which ended with 2.9 million total subscribers, a 100,000 over their annual target of 2.8 million which is nearly 20% of the market in France. Net adds for the fourth quarter were 137,000 and their objective is to acquire 4 million broadband subscribers from now until the end of 2010. [Free] delivers a complete triple play set top box solution for every subscriber. British Telecom who is using the Microsoft TV platform has been modestly increasing its deployments and as of the end of 2007 stood at approximately 100,000 subscribers. [Belcacom] was doing very well against local cable competition steadily ramping their installations and ended 2007 with approximately 300,000 IPTV subscribers. They added 165,000 subscribers during the year, 56,000 of which were in the fourth quarter. [Nersavigtel] who owns Club Internet as well now had a substantial increase in its total broadband clients as well as strongly ramped their IPTV subscribers during 2007. Total DSL customers grew from 2.2 to 3.2 million given them around a 20% share of the French broadband market. Tapping into this broadband customer base they added 150,000 IPTV customers going from 600,000 to 750,000. Other active European deployments include Swisscom, Portugal Telecom, [Yadarcom], Telecom Italia, Denmark, [Tescali] and Wind.

Now, let’s move on to carriers in Asia, China Telecom the largest telco carrier in China is actively deploying IPTV services as well as participating in a joint development program called best TV launched in conjunction with the Shanghai Media Group. As of June, 2007 China Telecom had approximately 310,000 IPTV subscribers and has yet to release their numbers for the second half. China Telecom has the potential to continue ramping its IPTV business as it has more than 35 million broadband subscribers and Best TV is also set to have 2 million total viewers by the end of this year. Currently Sigma powered UT Starcom set top boxes are a large portion of their IPTV deployments. China Netcom the second largest telco carrier in China also remains active in deploying IPTV services, moving along towards a long term target of 6 million IPTV users in five to seven years. China Netcom also uses Sigma power UT Starcom set top boxes in a portion of their deployments. Hanaro launched their Hana TV service in Korea and ramped strongly in their first 18 months of operation. Hana TV has the leading share in Korea with 850,000 subscribers as of the end of December, 2007 and expects to add another 500,000 during 2008. Korea Telecom began deployment of their Mega TV service in the middle of last year and achieved 400,000 subscribers in the second half of 2007. Korean IPTV market in total is expected to continue to grow strong with total subscribers reportedly growing at a rate of more than 100,000 per month. Reliance Infocom is one of the largest telco providers in India and is moving ahead with plans to roll out IPTV services to the top 30 cities during 2008 using the Microsoft TV platform. The final set top box has not yet been selected and no volume deployments have yet taken place. Other active telco deployments in Asia include [Ucent] in Japan, Chunghwa Telecom in Taiwan, SingTel and [MT&L] in India.

So let’s recap where we’re at in the IPTV market. We have 24 major telcos in active deployment using Sigma’s media processors as the heart of their hardware technology. Based on our research and external public statements each of the major worldwide regions is expecting strong IPTV growth this year. From this basis we believe the market for media processors into IPTV set top boxes will increase from 8 million units in 2007 to 14 million units in 2008. Nine of these telcos are based on the Microsoft media room platform while 14 use a customized LINUX based platform. For the Microsoft media room platform we believe this will remain 100% Sigma based during the rest of 2008. For the LINUX based platforms we also expect to retain our share of the market during this year. These telcos are being supplied with set top boxes from the top set top manufacturers in the world namely Motorola, Cisco, Free Box, UT Starcom, Celrun, [Dayson], Netgem, [Tatong] and Pace who recently bought the Phillips set top box division. Beyond this list we are actively courting the potential IPTV business at the other substantial telco accounts that have not yet launched a high definition IPTV service and may do so in the future. These include France Telecom, Telefonica and Verizon.

Finally, although we can never be absolutely certain of our competitors positions, assessing the current competitive threats at this point is relatively straight forward. The only vendor that holds material market share today in the IPTV market is ST Micro and this based on legacy standard def chip sets and who appears to be struggling to win any substantial business in high definition. We believe that the only vendor that looms as a serious new entrant is Broadcom who has yet to achieve their first commercial deployment and who we understand is still working on their basic software suite and who doesn’t appear to have material volume opportunities during the year. Meanwhile, Sigma is already sampling our next generation IPTV chips to our major accounts and intend to secure design wins for next generation platforms which will move into production in 2009. In short, it appears that we will gain market share during this year and remain the clear leader in IPTV during 2008 and hopefully well beyond.

Let’s move on to our next major segment. I’m pleased at this point to introduce this as the blu-ray player segment since that defines the high definition DVD market now that HD DVD camp has withdrawn. From our viewpoint we see the blu-ray player market gaining modest volume increases during the first half of this year followed by a more dramatic increase in overall demand in the second half driven by the Christmas selling season. Only this year there will be three major differences by Christmas time. First, there will be no confusion or doubt as there will be only one high definition DVD standard which will be highly promoted to consumers by the time we reach Christmas. Second, there will be many more players coming on the market supplied by a large number of new manufacturers joining in including a number from China and Taiwan. As the market matures you can expect consumer demand to be highest for the lower priced models as was the case with DVD players. As a result the manufactures from China and Taiwan could account for up to half of the volume during this Christmas selling season and beyond. Finally, this added competition will drive prices below $200 for the aggressively positioned players by this Christmas. In looking forward we agree with the range of industry forecast that indicate that blu-ray players should go from around 1 million units in 2007 to around 5 million units in 2008.

As this market moves to new heights it will of course draw an increasing amount of competition from both captive and merchant suppliers which will result in a more fragmented market. Panasonic has developed their own chip which is developed primarily for their recorder products. NEC has refocused its chip efforts from HD DVD to blu-ray and will attempt to win business with Japanese CE companies. Broadcom is pushing their chips but has only had limited success to date and beyond this there are the usual cast of characters that claim to have solutions coming this year including Zoran, Media Tech and ST Micro most of which we believe will arrive too late to gain design wins that could impact this year. That said, Sigma has been in the process of securing many new designs from Taiwan and China which will become increasingly important as we move forward. Recapping, as we access our position in the fast growing blu-ray market we are optimistic that we’ll see a continued ramp in revenue from this segment as we move through 2008.

Beyond our top two markets there are encouraging signs of activity in our other market segments. Ultra wide band technology continues to experience increased interest from a widening array of market segments. Various forms of cable replacement demand from retailers and manufacturers could result in shipments beginning in the second half of this year. This includes wireless cable replacements for HDMI, remote speakers and other audio video connections. Meanwhile, owing to its advantageous ability to support both coax and over air transmission ultra wide band could also possibly become a successful basis for future home entertainment networks in the US market.

We are also very excited about the strategic initiative to develop a world class line of chips for the HDTV market. This strategy moves forward on four pillars of support. First, it leverages our existing relationships and working knowledge for demand within our current television customers. Second, it takes advantage of the new VXP technology we recently acquired to bring studio quality video to consumer televisions. Third, it utilizes our current strengths in connected or media center ready solutions. Fourth, it layers these capabilities on top of one of the most powerful SOC architectures in the industry. In short, we are optimistic about the opportunities to penetrate a greater portion of this market in the future.

Finally, the market for digital media adapters continues to show promise for the future as evidenced by the number of home products that emphasis ubiquitous home access to audio video and Internet on every TV such as [inaudible] Home PDR devices, the Apple TV offering and Microsoft Media Extender thrust. If all goes well this segment could begin to increase its revenue contributions later this year.

We hope this analysis provided you with some insight about our target market and the opportunities that lay ahead for Sigma. We feel bullish about our market position, leading technologies, top tier accounts and look forward to building on this foundation. I’d now like to pass this call over to Thinh to cover our forward guidance.

Thinh Q. Tran

As Ken has indicated we are very encouraged with the fundamental demands coming from both IPTV and blu-ray and our ability to continue revenue growth throughout this year based on the strength of our position. However, there was a problem in our recent orders that resulted in us shipping more products than the actual telco demand which I will now explain. One of the largest telco accounts placed orders with our set top box customers which were apparently well above actual deployment. As a result the order during our first quarter will be much smaller than normal and the order rate for the second quarter should then resume at the ongoing rate of deployment. Again, let me be clear this was only one account and this impact should be limited to our first fiscal quarter only.

So, looking ahead, this is what we would expect. We expect first quarter revenue to be approximately $60 million as a result of the onetime adjusted demand that I just described. We expect between $300 to $350 million in annual revenue for our fiscal year 2009. We expect our gross margin to remain with 200 basis points of 50%. In summary I would like to reinforce that we believe our fundamentals are very strong. Our top two markets are experiencing strong growth this year. We have an excellent competitive position and we are fortifying our disposition with ongoing development as well as strategic acquisitions.

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

Ed McGregor

We will now open the call to questions from analysts and institutional investors only due to high call volume already. Please limit yourself to two questions or one question and a follow on and then you may re-enter the queue and ask a follow up question after other callers have had their chance to participate.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sukhi Nagesh with Deutsche Bank.

Sukhi Nagesh – Deutsche Bank Securities

On your guidance what gives you any confidence that you’ll be able to see a pick up in the second quarter of this year after this down quarter, the first quarter?

Kenneth Lowe

We do have the visibility, giving forecasts and things like that into the general expectations. Obviously when there’s a major adjustment like this there’s a considerable amount of conversation that takes place and an amount of analysis that goes into understanding exactly where you’re at. We’ve looked into this, we feel confident that this is an anomalous event like we said. This is a single, onetime event and we’re pretty confident that this market is just going to continue to grow as normal.

Sukhi Nagesh – Deutsche Bank Securities

What was your backlog at the end of the quarter? What’s your turns requirement for you to meet the April quarter guidance?

Kenneth Lowe

We usually don’t discuss backlog and go into that depth.

Kenneth Lowe

We did do our standard quarterly assessment last week to assess what we were expecting in turns business in addition to what had already been shipped plus our existing backlog and our current prediction doesn’t have any factor for any turns business.

Operator

Your next question comes from the line of Uche Orji with UBS. Please proceed.

Uche Orji – UBS

First of all if I look at your guidance I’m a bit surprised you’re able to maintain your gross margin guidance with this kind of revenue outlook. Can you just give us a little more insight as to how that will work and also if you can talk a little bit about what’s happening with Blu-ray? Is this just now decline and with the resolution of the HD issue is becoming in demand and design wins for Blu-ray?

Thomas E. Gay, III

I’ll address the gross margin question and as I had said in my part of the talk, we had said that we do expect some cost reduction efforts to have their effects in coming quarters and we also believe that product and customer mixes will benefit us and allow us to continue to believe that our target of the 50% plus or minus two is a reasonable one.

Kenneth Lowe

And then the second half of your question was about the Blu-ray and about declines there. We basically, in looking backwards, what happened is the Blu-ray manufacturers essentially entered the Christmas selling season with a large question mark as to how much they were going to do. In the third quarter they ordered an ample amount to make sure they could make it through the Christmas selling season. As they went into the fourth quarter they had just a little bit extra so their fourth quarter dropped down a little bit. We see continuing increases from some manufacturers, some people are staying the same. So all in all at this point in time we see Blu-ray as still a strengthening market as we move throughout the year.

Operator

Your next question comes from the line of Jay Srivatsa with Roth Capital Partners. Please proceed.

Jay Srivatsa – Roth Capital Partners, LLC

Could you comment on ASPs, how is it trending, is it down as you look forward, how do you see that shaping up?

Kenneth Lowe

ASP was a little bit off for the quarter but as we were talking earlier that’s due to a product and customer mix that we don’t believe is an ongoing trend.

Operator

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

Mark Sue – RBC Capital Markets

Does the guidance assume you will see sequential growth from all except your current largest customer and along those lines does your largest customer decrease from 29% to about 10% next quarter or is the drop off less steep?

Thinh Q. Tran

I think we explained to you we think this is only a onetime event, it’s more like inventory correction for that particular customer. But I think the growth will resume and we see growth being forecast by most of our customers. We don’t see any decrease in our IPTV customers. And this particular one we think it’s just a onetime event that just happened.

Operator

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

John Vinh – Collins Stuart, LLC

Just a couple questions, if you look at your guidance it’s assuming that you guys are going to be kind of at an $88 million run rate in the last three quarters of the year. Can you give us some color in terms of what you expect kind of the recovery ramp to be after the April quarter? And then my second question is I’m wondering if you can maybe give us a little bit more color in terms of what’s going on with the inventory adjustment at one of your customers that’s causing the sequential die down in revenue guidance as it related to the ramp of a second source box provider there?

Thomas E. Gay, III

In terms of our outlook for the coming year it generally grows quarterly starting at a low at the beginning and building for the remainder of the year.

Kenneth Lowe

And then with regard to the correction and any inventory visibility, obviously this is - we don’t have constant visibility inventory. Something like this that caused a disruption, obviously there’s a number of conversations, we get to understand what the situation is and I think it was very simply an excess amount being ordered primarily in the fourth quarter and that being basically pulled out of the first quarter therefore to offset that and it’s very simple, one account just got over-ordered with what they didn’t, more than what they needed.

Operator

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

Daniel Amir – Lazard Capital Markets

Couple questions, first of all can you give a bit about what the op ex should look like here for the next couple quarters, I guess you had some one time issues here in the current quarter and how should we look at that?

Thomas E. Gay, III

We believe that there was a flurry of developmental expenses in R&D in Q4. There will be some portion of that ongoing but as we move into production of those products those costs will be amortized over the actual revenue streams. EXP will be added in Q1 and throughout the year to the tune of about $1 million per quarter but we don’t see that total increase in the R&D expense per quarter because some of these onetime expenses in Q4. Then in the G&A area I laid out several that we don’t believe we will be seeing again such as the legal expenses and the SOX 404 expenses were probably about double what they should be on an ongoing basis.

Operator

Your next question comes from the line of Anton Wahlman with Thinkequity. Please proceed.

Anton Wahlman – Thinkequity Partners

Very quickly, Tom, for you on those expenses, did I hear the legal was $1.6 million?

Thomas E. Gay, III

No, I said $0.6 million.

Anton Wahlman – Thinkequity Partners

And the $200,000 for the tax strategy?

Thomas E. Gay, III

Yes, that’s part of how we’re developing the ability to have a lower than standard tax rate going forward in our guidance that we will not be suffering from the 41% rate that would be normally imposed on us because of the release of our valuation allowance.

Anton Wahlman – Thinkequity Partners

And the SOX compliance cost I didn’t hear at all.

Thomas E. Gay, III

It was $0.8 million in the fourth quarter. It turns out that the activity there was much more intense in the fourth quarter and that should be at least half of that going forward.

Operator

Your next question comes from the line of Tristan Gerra with Robert W. Baird. Please proceed.

Scott [Hertleman] – Robert W. Baird & Co., Inc.

First, what is your current order of visibility versus one month ago and what feedback are you getting from your key customers and then I’ve got a follow up.

Kenneth Lowe

Visibility is the same, there is no change in visibility from what it always has been. We continue with our largest customers to get six months rolling forecast, we continue to get lock in at 90 days out. So this is something that isn’t really changing especially with the largest set top box accounts that we’re dealing with. What was the other half of the question, Scott?

Operator

Your next question comes from the line of James Schneider with Goldman Sachs. Please proceed.

James Schneider – Goldman Sachs

Could you talk about what Blu-ray demand looks like right now and what’s your view on inventories at your customers and in the retail general please?

Thinh Q. Tran

I think one of the things that caught a lot of people by surprise is how fast HDTV withdrew from the market so we see fairly stable orders from existing customers but the second tier guy will take a little more time to ramp up because I don’t think they expect to win the war that fast and we see a lot of design activities now but we don’t see these turning to real revenue until June-July timeframe from these second tier manufacturers. We think the second tier guy with assembly in China, Taiwan very active in design and we see some of these things will start ramping in the June-July timeframe in anticipation for a lot of volume for Christmas.

Operator

Your next question comes from the line of Quinn Bolton with Needham & Company. Please proceed.

Quinn Bolton - Needham & Company

Two questions, first just with regard to the inventory situation at your largest customer, it looks like they about $19 million of product in this fiscal third quarter and about $21 million I believe you mentioned earlier on this call in Q4. You’ve talked them over ordering, can you give us some sense as to how much you think they’ve over ordered or as we look out to the second quarter when you say demand should snap back to kind of end consumption, could you give us a sense of what you think the end consumption was in the last couple of quarters so we can try and get a better handle on how much excess inventory was ordered?

Kenneth Lowe

To be honest it was substantive but we really can’t go into any quantification of it on a customer by customer basis, kind of really dig a little deeper into the customer specifics than we’re comfortable going into and I think the bottom line there is that our revenue that we’re projected for first quarter which is in the $60 million range really encapsulates what’s happening here.

Quinn Bolton - Needham & Company

And then the second question was just on the Blu-ray side, a number of your competitors have talked about developing front end chip sets so that they have both the front end and back end solution. Can you talk about your strategy for introducing a front end chip to support your back end decoder in the Blu-ray market?

Thinh Q. Tran

That’s in our roadmap and we have our own solution for that and we expect to have something in the early part of 2009.

Operator

Your next question is a follow up from the line Tristan Gerra with Robert W. Baird. Please proceed.

Scott [Hertleman] – Robert W. Baird & Co., Inc.

What I was looking for is on the Blu-ray side, what are you guys expecting for your market share this year kind of exiting 2008 compared to exiting 2007 and how have you seen – you said some of the competitors aren’t really looking that strong out there right now, what are you seeing in the competitive landscape for the end of the year?

Kenneth Lowe

Let’s go ahead and address that. I would say that we feel strong out there in the market, it doesn’t mean that the other competitors aren’t going to take some little pieces as they move along. Our expectation our goal is to sustain as much of this business as we can but in practicality as you get this much flood of competitors out there it does cause the market to get fragmented so as we look out our expectation long term is told onto 30% to 40% of the market over the long term. Now how much it turns out to be this year is a little bit harder to say. There’s a lot of dynamics in play. There’s a lot of competitors that are out there trying to get a design win to stick but quite frankly sometimes that bounces back to us because they really didn’t have the full solution baked out as well as they thought. It’s really hard to say at this point in time.

Operator

Your next question comes from the line of Gary Mobley with Piper Jaffray. Please proceed.

Gary Mobley - Piper Jaffray

I had a couple questions relating to your market opportunities, starting out with Blu-ray I was wondering might there be an opportunity with one of the major game consol companies to supply some Blu-ray silicon as an attempt to quickly address the standard?

Kenneth Lowe

We’ve traditionally not participated in the game counsel area because in the last couple of years both the PS3 and the X-Box 360 are based on such a massively powerful architecture that they really don’t need a separate media processor to do the decoding.

Gary Mobley - Piper Jaffray

Sure but the X-Box 360 wasn’t the high def drive an add on external device and –

Kenneth Lowe

It was, but that was just a drive only. In other words, the decoding for the HD DVD was being done inside the X-Box itself.

Gary Mobley - Piper Jaffray

And there’s no in change there for the new drive?

Kenneth Lowe

Exactly.

Gary Mobley - Piper Jaffray

And relating to AT&T’s roll out of multi-room DVR and the whole P&A standard, how do you see that impacting the attach rate of Sigma based boxes and as well Sigma media processors in those boxes?

Kenneth Lowe

Actually we see it as a positive impact for AT&T’s ability to achieve and possibly exceed its goals because it’s a fantastic increase in feature set, our chip being able to service that kind of feature is something that just continues to solidify our position and also just keeps pushing the bar higher for anybody else to come in. For us as they push their features up and those features are all based on what you can do in the A634 that keeps strengthening Sigma’s position.

Operator

Your next question comes from the line of Craig Berger with FBR Capital Markets. Please proceed.

Craig Berger - Friedman, Billings, Ramsey & Co.

Can you guys tell me why the share count went up so much and what you expect for the remainder of the year?

Thomas E. Gay, III

That was the follow on offering that we did in the middle of the third quarter hitting full stride, that was an actual total of 4.6 million shares and if you look back over two quarters you’ll see that was the primary driver. There was also quite a few stock option exercises which added to the total outstanding shares. Going forward dilution should be standard stock option exercise types, less anything that we do in the share repurchase strategy that we’ve announced.

Operator

Your next question comes from the line of Daniel Ernst with Hudson Square Research. Please proceed.

Daniel Ernst - Soleil-Hudson Square Research

Two questions, revisiting the average selling price, I think you mentioned that it declined sequentially. Can you give us a sense of where the ASP lies now and where do you think it’ll trend as Blu-ray goes mass market, late in the year into 2009 and then secondly on the share repurchase program, have you yet participated in the market in buying back shares?

Thinh Q. Tran

In terms of product cost I think we have it’s really customer dependent and how much volume to purchase. We expect the price of our current product line to pretty much stabilize because it’s a fairly mature product but we expect cost reduction to come in play when we announce our future products. Therefore we have more features and lower costs going forward. We expect the current product line, we expect pretty much the price stabilize right now at this level.

Thomas E. Gay, III

On the share repurchase we don’t announce any details on there, we really can’t signal in advance when, where and how we plan on participating in the market. We are evaluating quite a few strategies and we’ll execute them and advise you once they have been completed.

Operator

Your next question comes from the line of Gil [Kobieski] with TCS Financial. Please proceed.

Gil [Kobieski] - TCS Financial

I’m not sure if you just answered my question, I was going to ask you about the buyback program. Is that something that you guys have started yet or do you have to wait until two days after this announcement today?

Thomas E. Gay, III

It is limited to activity during an open window but once that’s done there are ways of continuing it, whether there is or is not an open window once it’s been put in place. So what we’re doing now is evaluating numerous strategies and we’ll go ahead and executive and announce after the fact what we have done.

Gil [Kobieski] - TCS Financial

Can you say when the first open window starts?

Thomas E. Gay, III

Friday would be the first open day.

Operator

Your next question comes from the line of Uche Orji with UBS Financial. Please proceed.

Uche Orji – UBS

Just a couple of follow up questions, if I look at the DSOs the number quite spikes toward the end of the quarter and I presume it is related also to multi imbedded location you were talking about, I’d like to just see if there’s any more insight you can throw into that? And then I think, Tom, you alluded to the fact also that some customers had volume discounts, can you talk maybe as to how this really works and just give us a sense on how to model these going forward?

Thomas E. Gay, III

In terms of the DSO, yes we saw a spike in the most recent quarter, the 48 days. We think that’s an anomaly that we should be closer to the average that we’ve experienced in the past and it also has to do with some customer mix because some do have longer terms than others. But we don’t expect it to climb and it should come down from there. In terms of pricing, what we do with our largest customers is set forward pricing and as they achieve certain milestones in volume they do achieve a lower ASP from that point forward. So we have various customers at various points along that ladder and we plan on offsetting that with cost reductions when we can turn those same volumes into pricing arrangements with our vendors.

Uche Orji – UBS

Can you give us any how a typical situation as to how this works just for us to make sure we understand. I know for competitive reasons you do not go into specifics but should we assume fees drop 10%, 15% every couple of million units, it’s hard for us to model this if you have such a situation going on. So is there any way you can just guide us on how to think about it?

Kenneth Lowe

It’s not really like that, it’s kind of a combination of what we tried to explain, what Tom said and what Thinh said earlier. So first of all as Tom said we do forward pricing which means generally as a customer ramps its volume we’ve got forward pricing that kicks at different timeframes, but as Thinh said earlier these products are approaching maturity. So the amount of those decreases is really getting down to where it’s very minor as we move to the future. I think that we’re in a situation where as we’ve mentioned we did have some ASP drop due to a couple larger accounts kicking into volume break points, but I think moving forward we’re not going to see as much of that. So we’re not projecting any rampant changes as we move into this year.

Operator

Your next question is a follow up of the line from Jay Srivatsa with Roth Capital Partners. Please proceed.

Jay Srivatsa – Roth Capital Partners, LLC

If I look at your full year, midpoint of affiliate guidance it implies that you’re going to be running at an average run rate of about $88 million for the next three quarters. That is quite a bit higher from what you had in the January quarter, so could you share with us, are you seeing it just a bounce back from this specific customer or are you seeing new customers come on board, is it Blu-ray, can you kind of highlight how you see the rest of the year shaping up?

Kenneth Lowe

It’s kind of all the above, we take a look at what we’re looking at IPTV alone and we’re looking at a market that we believe will go from 8 million units deployed last year to 14 million this year and that’s a differential of 6 million and you discount a little bit of that that may have been pre-shipped into last year but beyond that you still have a pretty good multiple on top of that number of millions of units of additional demand and we don’t believe we’re going to lose any of the market share that we have. And then it doesn’t take much Blu-ray business to layer on top of that to make it into the range of what we’re talking about. Again, we’ve indicated that we’ll lose some market share this year in Blu-ray but we expect to continue to retain a strong position. With IPTV we think we’re going to get every bit of the business that our market share will eke out of it and that’s going to be quite a bit of growth this year.

Operator

Your next question comes from the line of Robert Sussman with Bentley Capital. Please proceed.

Robert Sussman – Bentley Capital

I’m a little bit confused about the first quarter shortfall, is the issue with this large customer that he over ordered in the fourth quarter and therefore took too much product or has he overestimated his needs or did he order properly but overestimate his needs and now he’s got to let the volume catch up with his inventory?

Kenneth Lowe

So the Telco account has continued to stay at increasing deployments each quarter and continue to project out large quantities of deployments and increases throughout the year. But what happened is in the previous quarter they ended up with an order rate that was disjoint from their deployments. And so it resulted in an excess build. And the excess build was the demand was placed on us by the set top box manufacturer, we shipped the chips, the set top box manufacturer produced the goods but instead of going into actual deployments, it went into the service center and it wasn’t until apparently it built up to a certain point that somebody caught it and said let’s readjust.

Robert Sussman – Bentley Capital

So had the customer in fact overestimated his needs and therefore the deployment was slower than they expected?

Kenneth Lowe

No, it wasn’t slower than they expected. There was a hiccup in the whole process that resulted in what numbers were being used.

Operator

At this time I would like to turn the presentation back over to Mr. Ed McGregor for closing remarks.

Ed McGregor

We thank you all for attending our conference call to discuss Sigma Design’s financial results for the fourth quarter and full fiscal year 2008. We appreciate your interest in Sigma Designs and we look forward to our next scheduled conference call to discuss our results for the first quarter of fiscal 2009.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Sigma Designs, Inc. F4Q08 (Quarter End 1/31/2008) Earnings Call Transcript
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