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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

John Vinh – Collins Stuart, LLC

Sukhi Nagesh – Deutsche Bank Securities

Analyst for Uche Orji – UBS

Jay Srivasta – Roth Capital Partners, LLC

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

[Hamed Crowson – BWS Financial]

Analyst for Mark Sue – RBC Capital Markets

James Schneider – Goldman Sachs

Sigma Designs (SIGM) F1Q09 Earnings Call May 29, 2008 5:00 PM ET

Operator

Welcome to the Sigma Designs first quarter earnings conference call. (Operator Instructions) Now, I’d like to turn the presentation over to your host for today’s call Ed McGregor, Director of Investor Relations.

Ed McGregor

Welcome to Sigma Designs’ conference call to discuss financial results for our first fiscal quarter 2009. I’m Ed McGregor, Sigma’s Manager of Investor Relations. With me today 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 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 on our website.

Today’s agenda will begin with this brief introduction, a review of selected financials by Tom, an executive overview by Thinh, a market update by Ken and a forward guidance statement by Thinh. We will then open the call to questions from the analysts and institutional investors. We expect to conclude the call within one hour.

Before we begin I would like to read our statements about Safe Harbor and non-GAAP information. This conference call contains forward-looking statements including statements regarding Sigma’s expectation of sequential growth in net revenues for the second fiscal quarter, anticipated gross margins and anticipated trends in Sigma’s target markets.

Actual results may vary materially due to a number of factors including but not limited to the risk that the SEC disagrees with the manner in which Sigma has accounted for and 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, ongoing derivative litigation, determination upon completion of further quarterly closing and review procedures that the financial results for the first quarter of fiscal 2009 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 in 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 products in these markets, the ability of our SOCs to compete with other technologies or products in emerging markets, the risk that such products will not gain widespread acceptance or will be rendered obsolete by product offerings of competitors or by alternative technologies, the risks that anticipated design wins will not materialize and that actual design wins will not translate in to launch product offerings and other risks including delays in manufacturers deployment of set top boxes or consumer products.

Other risk factors are detailed from time-to-time in our SEC reports including our Form 10K filed with the SEC on April 2, 2008. Readers are cautioned to not place undue reliance on these forward-looking statements which speak only as of the date hereof. Sigma undertake no obligation to publically release or otherwise disclose the results of any revisions 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 stock-based compensation calculated under APB No. 25 and SFAS No. 123. 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 results of operation.

We also believe the non-GAAP measure provides 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 our financial tables included in our written earnings release which is currently posted on our website.

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

Thomas E. Gay, III

For the first quarter of fiscal 2009, net revenue decreased to $56.9 million, down $19.5 million or 26% from $76.4 million for the fourth quarter of fiscal 2008 compared to the first quarter of fiscal 2008 when we reported $36 million. Our revenues increased $20.9 million or 48%.

Our revenue break outs are as follows: by market segment and percentage of total revenues for the quarter, the IPTV segment represented $43 million or 76% of the total; high definition DVD and other media players $11.5 million or 20%; and the other category came in at $2.4 million or 4%. Broken down by billing region: in Asia we had $31.1 million or 55% of the total; in Europe $22.1 million or 39%; and North America $3.7 million or 6% of the total.

During the first quarter we had four customers that each exceeded 10% of our revenue. Highest was Cisco Systems at $8.9 million or 16%, Motorola Singapore $8.5 million or 15%; [Macknika], our distributor in Japan, $6.5 million or 11%; and Freebox $6 million or 11%.

GAAP net income for the first quarter decreased to $4.7 million or $0.16 per diluted share, down $30.6 million or 87% from $35.3 million or $1.12 per diluted share for the fourth quarter of fiscal 2008. Compared to the first quarter of fiscal 2008, GAAP net income decreased $.7 million or 13% from $5.4 million. Gross margins were 45.1% for the first quarter compared to 49% in the preceding quarter and 49.5% in the same period last year.

Several factors contributed to the lower gross margin for the quarter including intangible cost amortizations of $541,000 from our two most recent acquisitions, charges of $712,000 from a provision for excess inventory and approximately $600,000 of margin associated with inventory acquired in the VXP purchase. These factors total $1.9 million or a 3.2% impact on our gross margin. To a lesser extent, our gross margin was also impacted by previously negotiated volume pricing.

Operating expenses on a GAAP basis were $21.5 million or 38% of revenue in the first quarter compared to $16.6 million or 22% in the previous quarter and $12.6 million or 35% of revenue in the same period last year. The operating expenses for our first quarter included the following notable items: $1.6 million was expensed in the quarter as the value of the in process development costs included in the VXP acquisition. This is a one-time expense recognized during the quarter of closing the VXP acquisition.

In R&D the increase of $1.4 million of expenses over the previous quarter is equal to the additional expenses associated with the VXP group. G&A included a $2.1 million expense as the Black-Scholes value of the stock option grant of 100,000 shares to our CEO which was immediately vested.

You can find a copy of our press release with the detailed reconciliation of our GAAP to non-GAAP performance on our website. The reconciliation includes the following categories of differences for the first quarter: the one-time write off of $1.6 million for the in process R&D from the VXP acquisition; amortization of intangible assets associated with two acquisitions; $.3 million from [Blue 7] and $.4 million from VXP; and stock-based compensation expense of $4.8 million. On a non-GAAP basis, net income for the first quarter was $11.7 million or $0.40 per diluted share, a decrease of $13.7 million or 54% from $25.4 million or $0.80 per diluted share in the previous quarter and an increase of $3 million or 38% from $8.5 million or $0.32 per diluted share for the non-GAAP net income in the first quarter of fiscal 2008.

In the first quarter the provision for income taxes was $1.6 million or 26% of income before taxes. The rate is better than the full statutory rate of 41% due to our establishment of an operation center in Singapore during the quarter to better serve our international customers. Based on our most recent estimates, we expect to see a similar income tax rate for the balance of 2009.

Now, I’d like to cover a few key areas from our balance sheet. Cash, cash equivalents and marketable securities totaled $190.1 million, a decrease of $85.6 million from the previous quarter. Of that amount, $52.1 million is classified as long term securities. That number breaks down in to $9.1 million of securities with maturities longer than one year from the date of purchase and $43 million of auction rate securities that have limited liquidity. The overall decrease of $85.6 million is primarily due to stock repurchases of $80.6 million and the purchase of the VXP assets for $18 million. These decreases were partially offset by cash from operations and the exercise of stock options.

Net accounts receivable was $33.7 million, a decrease of $6.5 million over the previous quarter. The average days sales outstanding for our receivables as of the end of the first quarter was 54 days as compared to 47 in the previous quarter. The increase was principally caused by an increase in shipments towards the end of the first quarter. If the DSO was calculated based on days of shipments, this metric would have decreased slightly from the previous quarter. Inventory was $34.5 million, an increase of $8.2 million over the previous quarter primarily due to the decrease in our shipment and the purchased VXP inventory. Accounts payable was $17.5 million, a decrease of $1 million from the previous quarter due to decreased inventory purchases towards the end of the quarter. Shareholders’ equity was $277.2 million, a decrease of $68.4 million from the previous quarter principally due to $80.6 million in stock repurchases during 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 of the first quarter and emphasize the significant activities and achievements. First off, we are disappointed to begin this fiscal year on a negative note hosting our first down quarter after nine quarters of strong sequential growth. However, this was primarily due to an inventory correction and we continue to maintain our strong position in the IPTV market.

Our SMP 8630 Series represent the defacto standard in the IP set top box industry and our recently launched 8654 looks to be its direct successor. Already the 8654 has secured a position in the next generation Microsoft Mediaroom platform and also has garnished support from four major OEMs.

Several new products in the wings to interest next generation Blu-ray players and take advantage of future growth the market has to offer. Additionally, we are encouraged by the potential opportunities emerging from our strategic initiatives including penetration in to the HDTV market, the ultra wideband connectivity market, the [inaudible] video processing products as well as the penetration of the cable set top box market.

On the profitability side, we are managing the elements that are under our control. Though a portion of gross margin slippage was due to negotiated volume pricing, we intend to hold the line on future pricing and taking advantage of minor cost declines in order to stabilize our returns. Furthermore, as we move forward set top box [inaudible] on our next generation IPTV chips, we eventually expect to see a rebound in our gross margin. Additionally, our operating margin continues to reflect our profitable operations and relatively stable ongoing operating expense outside the one-time expense related to the VXP acquisition.

Now, I would like to highlight some of the important business developments we have achieved since our last conference call. We announced that Sigma has began sampling of its new 8654 media processor designed for the next generation IP set top box. The product demonstration held at the 2008 NAP Show. 8654 provides a 50% improvement in performance along with lower overall system costs to provide a substantially improved value proposition for the burgeoning IPTV market.

We also jointly announced a collaboration with Microsoft to enable the Microsoft Mediaroom IPTV and multimedia platform to operate on the next generation set top box using our new 8654. The solution will provide high performance, cost effective design that will give service providers the ability to offer innovative connect TV service such as PCTV to TV photo and music sharing and also DVR anywhere which gives consumers the flexibility to watch their recorded programs on any TV in their home.

We announced the Sigma 8654 media processor is being used by Pirelli’s broadband solutions to power their line of IPTV set top boxes which are currently being deployed by two major European operators. We also announced that a new VXP9452 processor [inaudible] video imagining processor that offers two fully separable video processing channels each featuring full [inaudible] and output support intended for the use by the leading digital broadcast TV, cinema studio and home theater manufacturer.

We also announced the at the company’s new 8622 media processor was selected by Panasonic to power the new ANYPLAY DVR being jointly developed with Comcast Corporation a national leading provider entertainer. We also announced the DOCSIS 3.0 multi-channel and TRU2WAY set top box reference designed jointly developed using Texas Instruments [inaudible] cable technology and VividLogic comprehensive TRU2WAY software which was unveiled at the NCTA Cable Show.

Now, I would like to pass the call to Ken who will discuss current market trend.

Kenneth Lowe

For this call I’d like to discus focused primarily on the market trends for IPTV. Then, briefly discuss our outlook for future contributions from other segments. In general, we feel the IPTV market is continuing to ramp around the world though there are some regions of demand that are currently flat, it appears that most telcos are indeed experiencing increasing deployments as we move throughout 2008. We continue to believe, as we have stated, that the available market for IPTV set top boxes this year will be around 14 million units based on our own internal analysis.

Let’s now discuss the current IPTV landscape, the subscriber base model that leads to that projection, then conclude with some market share expectations. In North America, there are four active telcos in active deployment at this time where AT&T dominates the scene with the stated goal of reaching one million subscribers this year and a run rate of 40,000 installed per week by the fourth quarter. Based on their public comments, it would appear that AT&T is on target for this level of deployment. Other active North American deployments include leading Canadian telcos, Telus, Bell Aliant and Sasktel and the expectation that Bell Canada will start deploying later this year as well.

From a platform basis, AT&T and Bell Canada are based on the Microsoft platform while others used independent LINUX based systems. Adding up the anticipated new subscribers for each telco, multiplying by the average number of set top boxes per household and adjusting for the typical lead time of component and box shipments, we estimate that the total North American demand for IPTV media processors this year should be about 4.2 million units.

In Europe, there are 16 telcos in active deployment at this time where major carriers in France dominate the scene followed by Germany and the UK. Major carriers in a rear deployment are [Free] France Telecom, [inaudible], Deutsche Telekom, and British Telecom. Most of these carriers that we deal with appear to be on target for their deployments this year.

These major carriers are followed in turn by a wide array of smaller carriers that include [Belcacom], Portugal Telecom, Swiss Com, Telefonica, [Yadotcom], TVC, Telecom Italia, [Tescali], FastWeb, Wind and TCom affiliates. From a platform basis these carriers are evenly split with eight each based on the Microsoft platform and LINUX platforms. Again, adding up the net new subscribers for each telco and adjusting for the set top boxes per household and shipment lead times, we estimate that the total European demand for IPTV media processors this year should be about five million units.

In Asia, there’s a total of 10 telcos in active deployment at this time where the major carriers in Korean and China dominate the volume. In order of volume, the largest telcos are Korea Telecom, Hanaro, China Telecom and China Netcom and these are followed by smaller deployments for [Ucent], KDDI, Chunghwa Telecom, PCCW, SingTel and MT&L. Reliance is also expected to begin deployment sometime later this year.

From a platform basis, nearly all these carriers are based on LINUX systems with the exception of Reliance and potentially a switch by Chunghwa Telecom. Again, adding up the net new subscribers for each telco and adjusting for the set top boxes per household and ship and lead times, we estimate that the total Asian demand for IPTV media processors should be about 4.8 million units this year.

The IPTV market is begin supplied with Sigma powered set top boxes from Motorola, Cisco, Free Box, UT Starcom, Celrun, [Dayson], Netgem, [Tatong], Pirelli and Pace. As the market grows, the largest suppliers of set top boxes will need to take advantage of multiple sources of media processor chips to achieve maximum supply assurance, price negotiation and other advantages. To the extent they can leverage these chips across multiple market segments including IPTV, cable, satellite, etc., it will increase their leverage.

It would therefore be logical to expect that the set top box vendors will evaluate new chips from their suppliers and potentially create prototype platforms. In the end, it’s the telcos and key middleware suppliers like Microsoft that will determine most of the fate of the chip vendors with regard to selection. Furthermore, the next generation set top box deployment cycle will not likely begin to mid 2009 and it’s probably premature to project the general chip landscape keeping in mind that Sigma remains the single dominate supplier in the low risk solution with the most proven track record.

Examining the IPTV market from a platform standpoint, you find that 12 telcos are using the Microsoft Mediaroom platform while 20 use a customized LINUX based platform. For the Microsoft Mediaroom platform, we’re confident in our belief that this will remain 100% Sigma based during the rest of 2008.

For the LINUX based platforms we also expect to retain our estimated 75% share of the market for the foreseeable future. As the Microsoft based telcos are growing rapidly as a group, Sigma believes its overall IPTV market share will rise to about 85% by volume during this calendar year. Although there are a number of assumptions here that are outside of Sigma’s control, we feel confident that these are reasonable targets given our current market position, customer relationships and leading technology.

Now, let’s move on to the Blu-ray market. Although it appears that Blu-ray is in for an increase in overall demand this year, there are a number of a factors that indicate that this will be both smaller in magnitude and later than initially expected. Since the format war came to a conclusion far sooner than the industry had anticipated, the Blu-ray camp has been somewhat caught off guard which has created issues with the level of component supply, the continued transition to format and the state of promotional campaigns.

Specifically, there appears to be a limitation of Blu-ray drives available for the next several months as manufacturing plants gear up for a shift in magnitude. Secondly, most vendors will not be initiating aggressive pricing or promotional campaigns until later this year when their supply catches up. Third, the upcoming second tier vendors face certification hurdles that will likely take them until late summer to surpass. And finally, the evolution of Profile 2 players is not expected until the early fall timeframe. As a result, any large upswing in Blu-ray demand is not anticipated until the middle of Christmas selling season or potentially later.

As we move in to the second half of this year, there is also an increased amount of competition and the expectation of more market fragmentation to come. As most of you have seen, Panasonic offers a range of new Blu-ray chips that will certainly be used for the majority of their future players. Additionally, NEC has been aggressively courting other Japanese Blu-ray accounts and as a result of these competitive forces and the delays that we suffered in the development of our next generation Blu-ray chip, Sigma will likely experience a decrease in market share during the second half of this year. Specifically, we expect many of our current customers to add a second source of chip supply to fulfill part of the road map.

However, based on our strong relationships and positive reputation, we expect to regain much of this ground next year as our new chips become available and our customers move in to their next design cycle. Additionally, we expect to secure many new design wins from Taiwan and China this year which will become increasingly important as we move in to this Christmas selling season and beyond. In total, we do not expect to see significant growth in our Blu-ray business this year, though we remain optimistic that we will be back on this growth trend as we move in to next year.

For the television market, we’re very excited about our strategic initiative to develop a world class line of HDTV chips. 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 television; third, it utilizes our current strengths in connect or media center ready solutions; and fourth, it layers these capabilities on top of one of the most positive SOC architectures in the industry.

As an adjunct to our primary HDTV strategy, we are now in the process of penetrating the projector TV market which should begin to pay dividends early next year. Furthermore, for high end consumer video processors, our VXP line is already contributing revenues and our recently announced VXP 9452 is taking us further in to digital broadcast TV, cinema studios and home theater applications. In short, we are optimistic about the opportunities to penetrate a greater portion of this market as we exit this year.

Ultra wideband technology also continues to experience increased interest from a widening array of market segments. We continue to see the potential for various forms of cable replacement demand from retailers and manufacturers that 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 we are still actively pursuing ultra wideband solutions for future home entertainment networks in the US market. By the end of this year we expect to be receiving contributions from chips designed for each individual market segment, namely cable replacement, home entertainment networks and wireless USB.

Finally as evidenced by our most recent press release we have entered the market for the next generation cable set-top box market. This market is at a juncture as it nears the transition from the carrier specific boxes controlled by the duopoly of Motorola Scientific Atlanta to the merchant market boxes enabled by the open cable consortium as well as a second transition from the quam based digital broadcast scheme to an IPTV multicast mechanism using DOCSIS 3.0. These transitions are opening up the market to a wide array of manufacturers at all levels over the next several years.

Sigma is currently partnering with Texas Instruments to offer one of the industry’s first solutions to feature DOCSIS 3.0 in OCAP software. We’re very encouraged with our future business prospects in this segment based on the substantial interest we’ve received since this was unveiled in the first of the year.

We hope this analysis provided you with some insight about our target markets and the opportunities that lie ahead for Sigma Designs. We feel bullish about our market position, leading technologies and top tier accounts and look forward to building on this foundation.

I’d like to now pass the call to Thinh to cover our forward guidance.

Thinh Q. Tran

As Ken has indicated we are very encouraged with the fundamental demand coming from IPTV and our ability to continuous revenue flow throughout this year based on the strength in our position. The external channel inventory problem we experienced at one of our largest IPTV accounts has resulted in revenue shortfall in our first quarter and we also have a minor impact on our results for Q2. Though the overall IPTV market should continue to ramp throughout this year our at this time we appear relatively lackluster.

Additionally due to the short term issue in our Blu-ray business that we recently began to experience there will be more challenges this year in achieving the type of growth we had expected. While we are making rapid progress toward our new Blu-ray offerings it has become apparent that we could lose some market share at our Japanese Blu-ray customers, [inaudible] to capture supply of other new Japanese suppliers.

Keep in mind that most of our consumer electronic products go through an initial movement to capture suppliers then back to merchant supply as a normal part of their life cycle as occurred several years in the DVD player market. However we are starting to receive demand from the aggressive new second tier accounts coming to the market later this year and we believe that our new Blu-ray chip will enable us to retain most of our top tier accounts.

So looking ahead this is what we would expect. We expect second quarter revenue to be slightly above first quarter revenue. We expect sequential revenue growth to continue in the second half though we are reluctant to specifically quantify this growth due to a number of variables affecting demand which are outside of our control. We expect our gross margins to remain relatively stable for the next few quarters at approximately 47 +/- 200 basis points until our new generation chip begin to ship in volume.

In summary I would like to enforce that we believe our fundamentals remain strong, our target market should experience material growth this year and we remain dominantly IPTV market in that we redoubling our efforts in development to strengthen our position moving forward.

I would like to open up the call for Q&A.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from John Vinh – Collins Stuart, LLC.

John Vinh – Collins Stuart, LLC

First question is on the IPTV front it appears that we’re starting to see some level of maturity in the European LINUX market for seeing growth out of the Microsoft market. I was wondering if you could talk about the overall growth trends that you see within Microsoft versus LINUX given that LINUX has been the majority of your mix and we’re starting to see more of a slowing down in the growth there. Could you see an accelerating of growth driven by Microsoft at this point given that it still represents a smaller percentage of your overall mix at this point?

Kenneth Lowe

I think that’s consistent with our view. We believe that the carriers that are deploying Microsoft based solutions are accelerating at this point. That’s reinforced by Microsoft’s own expectation of a fairly strong growth year and we believe at the same time that many of the LINUX based carriers as a class are in a phase where they are as you put it in some cases mature and they are receiving lower growth figures although we find that in Asia some of that is counter to that trend that many of the Asian vendors are also on a fairly good growth clip.

John Vinh – Collins Stuart, LLC

The second question is on Blu-ray, can you talk a little bit about the delays of your Blu-ray chip when you expect to have it out in production and also you talked about the competitive nature of the Blu-ray market and obviously you talked about the ability to regain market share going into next year. Can you give us a little bit more color of how you expect to regain market share given that the market is probably going to get even more competitive going into the back half of the year at this point?

Thinh Q. Tran

On the Blu-ray chip we have first silicon since late December last year, we are expecting to have production silicon this coming July. But most of the design now they’re going to be shipping this year will be based on our current chip revision, CUR chip. I think the main impact is more or less the delay of the whole Blu-ray thing as Ken mentioned in his script a lot of our customers got surprised by how fast Blu-ray won the war and did not really ready to take advantage of the situation so you see a lot of that delay going on and also this Blu-ray has gone through many format change, the latest requirement is one has to ship for 5.1 or 2.0 by October of this year.

All the new manufacturers are geared towards delaying their production and they want to ship with the latest profile so that creates the whole delay the whole market. But we also see some Japanese vendors getting more aggressive like Panasonic for example but we believe that our new offering that we have already in production in July has performing surpassed most of these existing Japanese vendors and we already have very good reception from our current customers that our future product will incorporate the new Sigma silicon. Currently as of now we feel supply to the big boys like Sony, the Pioneer and so on. Maybe except for Panasonic who has their own but we still supply to them not as a big volume as we have expected.

John Vinh – Collins Stuart, LLC

Last question is can you talk about you’ve said you’re going to lose some share in the Blu-ray space can you talk about what you would expect your overall share in Blu-ray is in 08 and can you also give us an update on pricing in IPTV versus Blu-ray at this point?

Kenneth Lowe

John, we’re really not in a position to project our share forward at this point in time. The market size is quite variable for this year. There’s a lot of people retracting on what they expected for this year as far as market size and also our level of deployments although they continue with 8634 it’s uncertain as to how long that will continue before it switches to a next generation. So there’s a lot of variables in play so we’re not going to be able to net that out to a market share expectation. The only thing we can say is that it continues to be our goal to control about a third of this market or so as we move into the future.

John Vinh – Collins Stuart, LLC

And pricing?

Thomas E. Gay, III

We don’t have a specific break down by market. We only do it by chip. But in general we believe that Blu-ray area is probably a little lower pricing as we’re positioning ourselves to continue our market penetration there.

Operator

Your next question comes from Sukhi Nagesh – Deutsche Bank Securities.

Sukhi Nagesh – Deutsche Bank Securities

Just in terms of the mix in the quarter $57 million in revenues really show guidance of $60 million. Can you give us an idea of where that shortfall was and again on the margin front how much of that shortfall contributed to your margin decline from your guidance?

Thomas E. Gay, III

In general we did see a little more pressure on the pricing than we had anticipated and that was roughly equal to the revenue shortfall that you’re referring to. That’s part of why our guidance on the gross profit going forward is a little softer than it had been previously. But as we indicated we think that we’re going to be able to hold the line at the pricing levels that we saw in Q1.

Sukhi Nagesh – Deutsche Bank Securities

On the guidance that you gave for the July quarter you said it’s going to be up slightly. Any additional color, is it up 5%, 10%? How should we look at that and the OpEx for the rest of the year?

Kenneth Lowe

I think we’re being intentionally vague by using the term slightly. Again even in the short term there remains a lot of question within the Blu-ray segment certainly as to how robust to project and there still is as we indicated some spillover of the inventory build out there that we have uncertainty about how much that’s going to affect as we get into the latter part of the quarter. So it’s really the latter part of the quarter that still remains vague. We see slight growth but we’re not sure exactly how much.

Sukhi Nagesh – Deutsche Bank Securities

Last question I had on the inventory side, this is from Tom. Tom, your inventory went up substantially in the quarter. What do you expect it to do at the end of the July quarter? Are you expecting it to go down? How should we look at that?

Thomas E. Gay, III

Almost half of that increase was due to the VXP acquisition so we pretty much took over the existing inventory situation as part of that purchase. The other half was left over buildup from our previous revenue levels. We’re pretty comfortable with the stuff that we’re going to have on hand and believe that we’ve adjusted our ordering patterns to bring that inventory probably down slightly from where it is now.

Operator

Your next question comes from Analyst for Uche Orji – UBS.

Analyst for Uche Orji – UBS

Coming back to your margins you said that you’re going to hold the line on pricing. Just wondering what gives you confidence that you can hold the line on pricing given that you will see continued ordering from Motorola and does it mean that you’re not going to get any more volume discount or if you could elaborate on the dynamics of the pricing?

Thinh Q. Tran

We have some pre-negotiated pricing with them depending on bridging and volume. We think we’re at the end of that pricing curve now. The product is fairly mature so we don’t expect any further [inaudible] beyond this level and we expect our new product to come in and hopefully that will also help our margin moving upwards.

Analyst for Uche Orji – UBS

When should we expect the margins to turn up for us when the new production is going to come on? Any timeline on that?

Thinh Q. Tran

I hope to start seeing some significant volume toward Q4, Q1 next year.

Uche Orji – UBS

Coming to your operating margins how should we think of your operating margins going forward given that they was a sharp increase in this quarter and would it be fair to assume that with the new products underway, your R&D expenses are going to increase going forward?

Thomas E. Gay, III

We’ve been increasing our R&D pretty sharply in the last two quarters. It actually leveled off quarter-over-quarter and we believe it will be in the similar level. Sales and marketing is at a comfortable level. G&A is still up from year end expenses and some of the international tax developments and things. So we believe that further growth won’t be foreseen for most of the rest of this fiscal year.

Operator

Your next question comes from Jay Srivasta – Roth Capital Partners, LLC.

Jay Srivasta – Roth Capital Partners, LLC

Couple questions, on the full year guidance you had a $300 million to $350 million number. Are you in a position to give us another number now or are you holding that range?

Kenneth Lowe

I think as a result of this call and what we indicated we’re pulling away from that range. I think we indicated earlier about a month and a half ago that we felt that the $300 million was an upside range and now we are waiting. We’re basically going to pause a little bit here before we reassess exactly what this year could be. Again there are a lot of variables outside of our control we’re waiting to gel. So we don’t want to provide an off indication again. I think at this point in time we’re going to pull that guidance.

Jay Srivasta – Roth Capital Partners, LLC

In terms of your gross margins previously you had a 50 +/- 200, now you’re taking it down to 47 +/- 200. The question I have is do you have any opportunities in your manufacturing to get some cost efficiencies from your fab to ultimately improve margins or is this a long term margin range for you?

Thomas E. Gay, III

For the current products we do have some slight improvements in our roadmap but don’t feel that that’s going to be a significant factor. There’s still product mix issues and things like that that make it hard to pin it down too carefully. We do believe as we move forward the future generations will have opportunities to increase that margin.

Jay Srivasta – Roth Capital Partners, LLC

In terms of the newer products that you’re introduced, the TV products and the DOCSIS products, when do you expect to start to get some meaningful revenues? Is it later part of this year or is it more of a fiscal 10 story?

Thinh Q. Tran

I think it’s based on the cable side we hope to see that in the beginning of next year, calendar next year.

Jay Srivasta – Roth Capital Partners, LLC

And on the TV side?

Thinh Q. Tran

TV side probably more in the second half of next year. Any significant number.

Jay Srivasta – Roth Capital Partners, LLC

Last question for you Tom, what is the share count for next quarter?

Thomas E. Gay, III

We should see the full impact of the buyback coming in because that was about mid-quarter last quarter and so I’m looking at about a 26 million base and similar dilution to what we had in the numbers.

Operator

Your next question comes from Scott Hertleman – Robert W. Baird & Co., Inc.

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

I’m trying to get a little bit more visibility. Thinh said that there was an impact from your largest customer cutting orders in the last quarter and there might be a little bit of an impact this quarter. Have you seen them already return to a normal order pattern or is there still some lingering things did that maybe impact early in the quarter? Can I get a little bit more color around that comment?

Kenneth Lowe

In general what we’ve indicated in the last call and I believe this call is that we really don’t have a lot of visibility into that inventory. We believe that we’ve gone through the bulk of the impact that it’s had on our order rate and again if you look at our order rate our top two customers were Motorola and Scientific Atlanta so they continue to order at fairly substantive rates. And outside of that we believe that there possibly is some dampening of that second quarter number we’re receiving from that inventory but it’s much more minor than in the first quarter. Mostly it’s major manufacturers who have a tendency to do line leveling in terms of production output rather than jerking their lines way up and way down, they’ll tend to level it out over a number of quarters and therefore it won’t be as visible to us when exactly that impact is. But the net of the total impact is there.

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

So would you expect them to return to an order rate that we saw in the second half of 07 or was that too much of an elevated run rate and we should look for them to be at more of a 70 % to 80% of that going forward?

Kenneth Lowe

I think the latter, more like the 70% to 80% of what they had gotten to in that second half. It’s probably more like what they would be on now.

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

What is your order visibility right now in terms of weeks and how does that compare to last year? And, where are lead times as well?

Kenneth Lowe

Our order visibility still fairly good out 10 weeks or so but the issue is that in many cases we’re getting some upside orders coming back in from people that started in with some fairly low numbers and in some cases you get a little bit of push out. So we get a little bit of both sides. Even though people have to lock in at 12 weeks out in general for the largest of customers there are terms and conditions that allow them to push out a little better, pull in a little bit. They can’t cancel but they do have some manipulation ability.

Thomas E. Gay, III

We have also maintained a bit of a die bank which is capable of doing some fairly quick turns if the opportunities and pricing will support it.

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

You did a big chunk of the buy back. You still have I believe 1.2 million shares authorized. Would we expect that to be any time in the next quarter and once you go through that would we expect to see a further buy back initiated if you think the opportunity is correct?

Thomas E. Gay, III

We can’t really discuss our strategy but you see what we’ve done so far.

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

Just a quick modeling question is where should we be looking at for the interest income?

Thomas E. Gay, III

That’s come down sharply as a result of the diminished cash position and some just from market conditions as we’re bottoming out. I’m now looking at currently something around 2% on our earning cash and I can hope that we can maintain or even better that.

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

You had talked longer term about bringing your gross margin level back up to that 50% type level. Is that still the long term target and when should we really start to see some improvement? Is it when we start to see the Blu-ray chips starting to ship or is it once we see more mass shipments of the 8654? When should we really start to see a catalyst for gross margins?

Thinh Q. Tran

I think we answered that earlier with [inaudible]. We expect that hopefully that new product shipping and volume in Q4, Q1 next year that we’ll see something.

Operator

Your next question comes from Hamed Crowson – BWS Financial.

Hamed Crowson – BWS Financial

How fast can you make the change to Asics 54 chip on a full scale basis? How fast can you make the turnaround if you’re going to start volume shipments towards the end of this year?

Thinh Q. Tran

It really depends on the customer, it’s really not us. Some of the big ones will have long qualification cycles, the smaller customer will have more flexibility and the larger one will take more time to go through the qualification. But we expect our current 34 will be shipping for another two to three years because it’s designed to many products and many markets, we’ll be shipping the same part of request time. So we expect some of the LINUX set-top box will change first later this year. Some of the MSTV probably sometime next year.

Hamed Crowson – BWS Financial

The other question is how much of a benefit does the VXP revenues have to the second quarter? Is VXP the sole basis for the sequential growth in Q2?

Thinh Q. Tran

It’s fairly small. This quarter it’s about $1 million, next quarter we expect it be maybe a couple million.

Hamed Crowson – BWS Financial

Given the guidance that you’re saying why was so much inventory taken on then? Are you going to write that down if your sales are only $1 million, $2 million and your inventories have gone up by about $4 million or $5 million from the VXP side?

Thomas E. Gay, III

Some of that is reserved. We’ve already adjusted for whatever that needs to be. One of the interesting issues is that we do not realize a margin on the inventory that we purchased in the acquisition. We book it at its selling value and that was one of the adjustments that I explained to our gross margin. There’s about a $700k gross margin miss or unrealized amount associated the VXP sales during Q1. As we sell through the purchased inventory we’ll begin to get new inventory in that will actually have a gross margin and that will be another positive affect on our gross margin.

Operator

Your next question comes from Analyst for Mark Sue – RBC Capital Markets.

Analyst for Mark Sue – RBC Capital Markets

Can you talk about your competition as it relates to BroadComm and what you’re experiencing in the marketplace?

Kenneth Lowe

If you look at the IPTV side BroadComm at this point in time we would have to view them as our primary strategic competitor obviously because they’re working on collaboration with Microsoft to come out with a second platform offering there. But even in that segment they’re going to have to fight to convince anybody to move over and use their chip and that will be a battle. It’ll be fought sometime within the next year as a result of that. That’s when these transitions will occur. We haven’t seen them gain any significant traction in any specific accounts. They have not deployed to date. We have reason to believe that it will take them to early next year to likely start any deployments and then we believe it’ll be a slow and grow to get themselves into the market. Nevertheless we’re not discounting them as a competitor.

We believe ST Micro on the other hand is quite de-positioned at this point in time and will take them quite a bit of effort if they wanted to get back into a good stead in the market. We don’t believe there’s any other significant competitors at this point in time that we are concerned with. If you look at BroadComm in the Blu-ray segment they’ve had very little impact on that segment to date. We continue to share the Samsung account with BroadComm and to our knowledge we haven’t lost any accounts in Japanese customer segment to BroadComm at all. The BroadComm impact that was anticipated I think has not really shown itself at all.

Analyst for Mark Sue – RBC Capital Markets

If you can comment on demand and sustainability of units with some of your Asian carriers?

Thomas E. Gay, III

In the IPTV segment?

Analyst for Mark Sue – RBC Capital Markets

Yes.

Thomas E. Gay, III

Generally speaking once you become selected the platform is perfected and put into production deployment. These things typically stay in deployment without abatement for at least a year and a half to two years. So we believe that we are in good stead with the vast majority of our Asian suppliers. We continue to meet with them on a regular basis. We continue to keep them competitively priced. We continue to receive feedback from them about the advantages of our solution and the upcoming chips, the [Asic] 54 series that will offer them. We feel very solid in that regard.

Operator

Your next question comes from James Schneider – Goldman Sachs.

James Schneider – Goldman Sachs

Can you give us a little more color in terms of the Blu-ray market and what you’ve been seeing from competition in terms of NEC and Toshiba? Secondly do you think you can maintain your 30% to 40% market share in Blu-ray this year?

Thomas E. Gay, III

I’ll start with the end and work back to the middle. Again we’re not going to put a specific number on this year to just say that is our target to get 30% to 40% of the market. On an ongoing basis this year will be a bigger challenge than any other time because we’ve found ourselves a little bit depositioned as a temporary situation.

But, to your first question, we did indicate on the call that outside Panasonic having a captive supply of chips for their own Blu-ray players that NEC has probably been the second most aggressive player and provider of chips in Japan and obviously with a good relationship with other Japanese accounts they’re able to get the ear of some of the people that we’ve been working with and will pick up some portion of the product line from some of the Japanese vendors in the second half of this year. You mentioned Toshiba, we have not seen them as a supplier of parts, they’re most likely going to be a consumer of parts as they move to eventually come out with a Blu-ray player as we expect they will.

James Schneider – Goldman Sachs

Secondly, maybe I missed this before, but what level of turns does your guidance assume?

Thomas E. Gay, III

If we can bring revenues to the level that we’re planning on, it will start coming down a bit and we’ll actually see some improvement in the turns. But, we haven’t got a specific target for you.

Operator

At this time, we do not have any more questions in queue and I would like to turn the presentation back to management for closing remarks.

Ed McGregor

We thank you all for attending our conference call to discuss Sigma Designs’ financial results for our first fiscal quarter of 2009. We appreciate your interest in Sigma Designs and look forward to our next scheduled conference call to discuss our second quarter results.

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Source: Sigma Designs F1Q09 (Quarter End 04/30/2008) Earnings Call Transcript
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