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Executives

Edward McGregor

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

Thinh Q. Tran - Founder, Chief Executive Officer, President and Director

Kenneth Lowe - Vice President of Strategic Marketing

Ed McGregor - Director of Investor Relations

Analysts

Stephen Chin - UBS Investment Bank, Research Division

Hamed Khorsand - BWS Financial Inc.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Charles Iver Frumberg - Emancipation Capital LLC

Sigma Designs (SIGM) Q2 2013 Earnings Call September 5, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Sigma Designs Earnings Conference Call. My name is Regina, and I will be your conference operator for today. [Operator Instructions] Today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Ed McGregor, Director of Investor Relations. Please go ahead, Mr. McGregor.

Edward McGregor

Thank you, Regina, and welcome to Sigma Designs conference call to discuss financial results for our second fiscal quarter of 2013. I am Ed McGregor, Sigma's Director of Investor Relations. And with me today are Thinh Tran, Sigma's Chairman and CEO; Tom Gay, our CFO; and Ken Lowe, our Vice President of Strategic Marketing.

The press release containing the quarter results including selected income statement and balance sheet information was released after the market close today. If you did not receive the results, the release is available in the Investor section of our website.

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

Before we begin, I would like to remind everyone that today's call contains forward-looking information, including guidance we provide about our future revenue, gross margin and other financial measures and anticipated trends in our target markets. We caution you that the forward-looking information that we present today is based on our current beliefs, assumptions and expectations speak only as of today's date and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

Other risk factors that may affect our business and future results are detailed from time to time in Sigma's SEC reports, including Sigma's quarterly report on Form 10-Q as filed with the SEC on June 7, 2012. A partial list of these important risk factors is set forth at the end of today's earnings press release. Sigma undertakes no obligation to revise or update publicly any forward-looking statement, except as required by law.

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

And with that, I'll turn it over to Tom.

Thomas E. Gay

Thank you, Ed. For the second quarter of fiscal 2013, revenue was $68.3 million, an increase of $28 million or 70% compared to $40.3 million in the previous quarter. Compared to the year ago quarter, our revenue increased $21.6 million or 46% from $46.7 million. The increase in revenues was mostly due to $26.6 million of revenues added to Sigma's acquisition of the DTV business assets from Trident.

Our revenue breakouts for the quarter are as follows: by target market and percentage of total revenues for the quarter, DTV represented $26.6 million or 39% of the total; home networking, $22.4 million or 33%; IPTV media processors, $10.2 million or 15%; connected media player, $1.8 million or 3% of the total; and control and energy management products, $3.1 million or 5%; licensing revenue on -- from the home control and energy management segment recognized $1.4 million or 2% of the revenue for the quarter; and Prosumer, $2.7 million or 4% of the total for the quarter. During the second quarter, we had one customer that exceeded 10% of our net revenue. That was TDVision or $12.2 million or 18% of the total.

GAAP gross margins were 44.8% for the second quarter compared to 52.4% in the preceding quarter and 27.8% in the same period last year. Non-GAAP gross margins were 51% for the second quarter compared to 56.4% in the preceding quarter and 34% in the same period last year. One significant factor in our reduced gross margin was the sale of DTV inventory that was fired from Trident and marked up to a selling price in the valuation of the acquired assets. Without that adjustment, we would have realized $2.5 million more gross profit and an adjusted GAAP gross margin of 48.5%.

GAAP net loss for the second quarter of fiscal 2013 was $13.3 million or $0.40 per diluted share. This compares to GAAP net loss of $13.7 million or $0.42 per diluted share in the previous quarter and GAAP net loss of $22 million or $0.69 per diluted share in the year ago quarter. On a non-GAAP basis, net loss for the second quarter was $4.1 million or $0.12 per diluted share. This compares to a non-GAAP net loss of $8.5 million or $0.26 per diluted share in the previous quarter and non-GAAP net loss of $14 million or $0.44 per diluted share in the year ago quarter.

Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance. The reconciliation includes the following categories of differences for the second quarter: first, amortization of intangible assets allocated -- associated with acquisitions, a total of $2 million; second, stock-based compensation of $2.7 million; third, expenses related to our recent acquisition of Trident's DTV business, which totaled $3.5 million; fourth, the fair value markup on inventory purchased through acquisitions and sold during Q2 of $2.5 million; and fifth was a gain of $1.6 million we recognized as a result of the value of the DTV assets acquired with Trident.

Now I'd like to cover a few key areas from our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $106 million at the end of the quarter, a decrease of $44 million or $1.41 per share compared to the beginning of the fiscal year. Based on our shares outstanding at the end of the quarter, the total value of cash, cash equivalents, restricted cash and marketable securities equals $3.19 per share outstanding. The most significant items contributing to the year-to-date decrease in cash was the payment of $43 million to Trident or its DTV assets.

Cash provided by operations in the second quarter was $3.5 million. Net accounts receivable was $43.1 million at the end of the second quarter, an increase of $21.9 million compared to the beginning of the fiscal year. Most of the increase was attributable to the receivables added by the addition of the DTV customers. The average day sales outstanding for our receivables as of the end of the second quarter was 57 days, an increase of 4 days compared to the previous quarter. Net inventory was $33.2 million at the end of the quarter, an increase of $11.1 million compared to the beginning of the fiscal year. The increase in inventory brings our inventory turns for the quarter to 6x on an annualized basis.

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

Thinh Q. Tran

Thank you, Tom. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma. To begin with, I would like to discuss the change in our Board of Directors and what it means for the overall direction of the company. As a result of Sigma recent annual meeting of shareholders, which effectively elected a new 5-member board, shareholders have made their view very clear that ongoing profitability is top priority and therefore, change is essential.

Since this proxy election, Sigma management has been heavily engaged with the new board in an extensive effort to evaluate the fundamentals of our business segments, set a firm direction and align our costs with our revenue to generate profits moving forward. As we are currently in a negative cash flow position, our intention is to move ahead with this effort quickly. For example, we have already began to identify cost-cutting measures that can be taken upon further review, our recent DTV acquisition and some of the synergies that we can extract from overlaps in our business, particularly in our Media Processor business with the DTV business we recently acquired.

Since these efforts are ongoing, we will not have any further detail for this call, however, this will be a fruit [ph] process that will render decisions in real time, which in turn will be announced as it becomes available. I expect Sigma to be in a position to evaluate on these actions next quarter. The intent of this action would put -- would be to put Sigma in a position to have a cost structure existing in the fiscal year that would enable us to be cash flow positive at the sustainable revenue level and to be profitable at the revenue levels we expect to grow in the next fiscal year.

Speaking for Sigma management, we are proud of technologies and market positions we have developed. We understand the new -- renewed emphasis we must place on profitability and are excited to move forward under this new direction with our new directors and in alignment with our shareholders.

Now I would like to move on to review the results for the second quarter and discuss significant achievement and change. We are pleased to report $68 million of revenue for the second quarter, slightly above the upper end of our previous guidance. This is our first quarter to recognize revenue from our digital TV business, recently acquired from Trident, which accounted for over $26 million this quarter.

Home connectivity revenue increased, primarily due to emerging deployment in Latin America and extended deployment in North America. IPTV set-top box revenue was relatively stable, where we are maintaining our existing IPTV accounts while positioning ourselves for increased demand in the emerging hybrid IPTV space. Z-Wave home control opportunities are increasing as evidenced by our licensing of the Z-Wave software stack in exchange for an aggregate license fee for $16.8 million. Overall, we feel we are in exciting market and are confident in our ability to deliver technological innovation that will enable our future growth.

Our major accomplishment during the quarter was as follows: we announced that Sigma HiDTV Pros chipset has been select by VIZIO, America #1 LCD HDTV company for its new ultra wide Cinemawide HDTV. We also announced that Sigma HiDTV Fusion, the industry's only integrated 200/240 hertz frame rate conversion SmartTV SoC has been selected by using a wide range of SmartTV products from Metz in Germany, as well as other major European TV manufacturers.

We announced our next generation the HomePlug AV solution, configured as a wall-mount adapter device by Comptrend, will be used by Chunghwa Telecom, Taiwan's largest service provider, for delivering IPTV service in consumer homes. We announced our entry into XBMC media player arena with support on our SMP8656 media processor, which is expected to open the European developer market serving the installed base of XBMC users.

We announced that AOC, leading DTV manufacturer in Brazil, debuted a new line of DTV for the Latin America market based on Sigma Pro-SXL SoC. We also announced the debut of our 8672 media processor, a new platform delivering 3D video and graphics processing, other advanced feature and lower power for use in connected media player, IPTV and hybrid set-top boxes.

We announced the release of our 8674 media processor, which delivers solid performance and advanced features at an aggressive price point for OEM and ODM. We also announced the licensing of Z-Wave software stack to a strategic partner in exchange to aggregate license fee of $16.8 million. We announced the Sigma Z-Wave-based home control devices can be used in Japan without a need for radio station licensing as a result of new low-power RF device frequency range approvals by the Japanese government.

Now I would like to pass the call to Ken, who will discuss our strategic direction. Ken?

Kenneth Lowe

Thank you, Thinh. For this call, let's review our long-term strategy, the major trends that are shaping our markets and discuss our business situation in each area. From a long-term perspective, Sigma's overall strategy is to make intelligent media platforms, the core of our new product development, and to translate this leveraged investment along with our complementary connectivity offerings in the market share growth in the 2 major IP-connected video markets, namely IP-connected televisions or SmartTVs and IP-connected set-top boxes including hybrids. These were all intelligent media devices that require IP video streaming, Internet access and home connectivity for content sharing. What's more, they all share substantial similar silicon software elements enabling broad R&D leverage for efficient operation.

Let's now jump in to the connected digital TV market. During the second quarter, Sigma completed its acquisition of the Trident Digital TV business. The importance of which cannot be understated. First, the market for SmartTV is expanding rapidly, with demand projected to exceed 140 million internet-enabled televisions by the year 2015, providing the potential for high unit volumes. Second, we believe that our new SmartTV SoC product line offers certain distinctive advantages for differentiated products, including superior video quality based on award-winning algorithms, industry first integrated motion estimation, motion compensation, frame rate conversion of 240 hertz and advanced support of 2D, 3D format conversion with 21x9 Cinemascope technologies. Third, by taking over for Trident, we entered the market as the #3 player, serving a select set of Tier 1 OEM and ODM customers, including Philips, VISIO and TPV. As a result of the recent merger of the top 2 players, MediaTek and MStar, Sigma now has become the #2 worldwide independent supplier, with accompanying demand for second sourcing for many other major customers.

As a result of these forces, we anticipate the growth of our SmartTV product line over the next 2 years with the addition of 2 to 4 major TV manufacturers in Japan, Korea and Europe. Some of the key trends shaping the DTV market include: 120 hertz as the fastest-growing segment, expanding from 37 million units in 2011 to 88 million units in 2015. North America and Europe will see major adoption correlated to the panel size growth of 46-inch and above. 3D TV and 4k by 2k resolution are also seeing increasing demand, and 60 hertz connected TV is a fast-growing segment that requires a complete turnkey solution.

Moving forward, our goals within the digital TV business are: grow our overall market position in the DTV global market, obtain major design wins as the leader for differentiated SmartTV products, service a strong second source for MediaTek and MStar selected accounts, migrate our existing SoC accounts to our more advanced products to address the 120 hertz and 60 hertz connected market segments and manage the challenges and price pressure through optimal positioning of our products for low-end, mid-range and high-end demand.

Now let's move on to the IPTV hybrid market. As our core business, Sigma has established strong relationships and ongoing deployments with many top tier telcos operators around the world. In addition, many broadcast operators are beginning the transition to an IP delivery strategy within the home, which will eventually result in IPTV and hybrid IP set-top boxes becoming the dominant form of video delivery in the future. And finally, over-the-top delivery as an addition to set-top boxes is becoming a driving force.

Major trends in the market that are shaping our opportunity are as follows: pure IPTV deployments from operators are relatively flat year-over-year at just under 25 million units per year; broadcast deployments are in slight growth, led in growth by satellite that offset by declines in cable and flatness in terrestrial. Many operators are adding tuners to save on bandwidth for video-on-demand services. Many operators are adding over-the-top video to service catch-up TV offerings. Cord cutting to move away from pay TV is an emerging trend in the U.S. and Europe, enabled by over-the-top video but dampened by the limitations.

More consumers are accessing the Internet using graphic-rich applications, creating demand for much higher CPU and GPU performance. Moving forward, our goals within the IPTV hybrid space are: to deepen our penetration in the hybrid market with front-end bundles; to focus on emerging markets in Latin America and Asia and India, where the growth prospects are the highest; to drive rapid media room design wins across the U.S. and Latin America; to penetrate the emerging hybrid IPTV opportunities within the broadcast market with new SoCs using universal tuners; to capitalize on the convergence of connected media players and set-top boxes; and to offer turnkey solutions for Wi-Fi display market adoption with accessories for smartphones, tablets and laptops.

Now let's move on to our connectivity business. Home video networking is showing an ongoing growth in most regions around the world, driven by the presence of multiple televisions and the advent of whole home DVR capability. Sigma has been a pioneer in the space, having launched the HomePNA standard in 2004, which has grown into a prevalent standard amongst telcos in North and Latin America.

The major trend shaping our connectivity opportunity are: new standards such as G.hn Wi-Fi, offering sufficient bandwidth for most connected homes. So the battleground is shifted to the convenience of self installation and the robustness required to achieve QoS. HomePNA solutions continue to deploy in mass volumes for North America with major new rollouts ramping in Latin America and expected to extend its lifetime for several more years.

HomePlug AV solutions are widespread in Europe and gaining interest elsewhere. This has served to validate the concept of powerline networking and sets the stage for more rapid acceptance of G.hn. And G.hn solutions are now in field trials and are expected to begin deployments early next year, driven largely by robust powerline connectivity and self-installation capability. Wi-Fi solutions are making headway in North America and other select locations, playing into the convergence of mobile, laptop and consumer access. Home control automation is becoming an attractive addition to service providers as they look for methods of growing their average revenue per home.

Moving forward, our goals within the connectivity space are: to dominate the HomePNA market for IPTV to Americas deployments; to win the largest powerline providers in Europe and Asia with a mix of HomePlug AV and G.hn offerings; and to evangelize the G.hn standard as the long-term wired solution based on its bandwidth, QOS and self-installation capabilities. We're going to leverage the largest ecosystem of Z-Wave-enabled devices to enable Z-Wave demand and gain mass deployments for service providers.

As we collectively drive toward the goals we've outlined, Sigma will continue to make progress on its quest to become the leading provider of intelligent media platforms for IP-connected video markets.

Now I'd like to pass the call back over to Thinh to cover our forward guidance.

Thinh Q. Tran

Thank you, Ken. As we have indicated, we feel we are in exciting markets and are confident in our ability to deliver technological innovation that will enable future growth along with profitability. To build additional demand, we've been heavily engaged with service providers and OEMs to win new accounts for media processors, home networking and home control. As the digital TV market is new for Sigma, I would like to explain the normal cycles of this business.

Overall, the television business is heavily seasonal with about 50% of annual sales taking place during the holiday season. For semiconductors, this means that on a normal year, first quarter start out with modest demand; second quarter shows a slight increase; then the third quarter shows a large increase, reflective of the holiday production cycle; followed by decline in fourth quarter, where the majority of these units can be used on the first quarter delivery.

Sigma DTV demand this year will be roughly consistent with this model, with the exception that there were more advance purchases taking place in the second quarter as with the customer product position. Therefore, DTV demand in our third quarter will be relatively flat to our second quarter, followed by decline in the fourth quarter.

Moving to our formal guidance, we would like to shape the expectation for Sigma performance in the third quarter of this fiscal year. Given reasonable visibility at this time, we expect total revenues for the third quarter to be within $60 million to $64 million. We expect our third quarter gross margin on a pro forma basis to be in the 50% range. As you know, we have not historically provided guidance on our future operating expense or our future earnings per share. We do not intend to change that practice here, but I would like to underscore once again that we are intensely focused on our drive to profitability and anticipate changes to our expense level as soon as we are able to complete a comprehensive review of our business lines and potential cost-saving measures.

In summary, I would like to reinforce that we are reshaping our business to create a stronger, more profitable foundation upon which we will grow in the future. We would now like to open up the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today is from the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank, Research Division

Nice job on closing the acquisition. I know you guys aren't talking much about OpEx today, but just in terms of the comments that Thinh made earlier as far as from the general agreements that management probably had with the new shareholders on where -- qualitatively where some of the OpEx costs might be trimmed, especially in the overlapping areas. Can you talk a little bit more about whether or not there's -- whether or not there were actually new areas that were identified beyond what -- where the management team originally thought that there could be some cost-cutting? And as far as the new areas of cost-cutting goes, what kind of impact might that have for either the IPTV or the DTV business going forward, either in terms of reduced investment in products and so forth?

Thinh Q. Tran

Well, as I mentioned in my earlier comments, we've been -- that's one of the goal we always have. Our intent is always to -- when we first acquired Trident, we don't know what area that are complementarily overlap, but we have identified quite a few area that fairly -- that we can really leverage the synergy. And we are in the process of identifying them and see what we can do going forward. But that's always the intent when we acquired the Trident business, and we hope to be able to update you in the following quarters.

Stephen Chin - UBS Investment Bank, Research Division

But, Thinh, I'll just follow up on that real quick. Is it -- was the, I guess, relative lack of visibility early on, was that just the normal process of the acquisition? There's only so much due diligence you can do and a lot of these finer details was going to be held after the close? Is that the way to look at it or?

Thinh Q. Tran

That's very correct, yes.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And as far as just some of the few comments you made about how to rightsize the business for future growth, are you essentially saying that you're maintaining sort of the long-term revenue growth target that you had, that now you're talking about maybe pulling in the breakeven time frame with lower OpEx? Or are you also potentially lowering the top line target as well in parallel with OpEx?

Thinh Q. Tran

No, we intend to cut expense at the same time grow the revenue.

Stephen Chin - UBS Investment Bank, Research Division

Okay. And, I guess just one other question on products. For the Trident DTV business, any qualitative comments that you guys can provide regarding customer feedback as far as Sigma being a #2 supplier once -- after the MediaTek and MStar deal? That will be helpful.

Kenneth Lowe

Well I think in general, the DTV customers that are being called on by MediaTek and MStar are very anxious about having one supplier to now deal with in that space. So they have been actively seeking participation from Sigma in engagement efforts to look at second sourcing opportunities and to reduce the risk of having dependence on one conglomerated firm. So we really are in a position to take advantage of a windfall that comes with that and be able to supplement the growth that we were having already with the second sourcing opportunity.

Stephen Chin - UBS Investment Bank, Research Division

And, Ken, just one quick follow-up there. Is this -- or any potential share pickup by you guys now before next year's product cycle, is that correct? And do you have enough resources currently to capture that new business? And would any potential headcount reduction affect that?

Kenneth Lowe

Well, I think that's all part of the big process of betting out the expenses as they relate to the potential revenue streams. So I think that what we're looking at is, yes, trying to engage with this account as soon as we can to create new revenue streams. We do have a lot of support personnel in place to be able to jump on this if we get the opportunity. And certainly, there are opportunity costs associated with engaging here. So that would be part of the factoring. I think, as Thinh said, his intention is to grow the revenue and cut the expense in balance. So if we have more opportunities to grow the revenue when there are opportunities in hand, then that might mitigate some of the expense reduction as required.

Operator

Your next question is from the line of Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial Inc.

I just want to really focus here on your comments today compared to the last couple of earnings calls. It looks like you guys are trying to deviate away from the commentary you had made on the IPTV side in the past. You had been telling us to hold on, the IPTV business will come back later this year. You guys aren’t making that comments today. And then your guidance really says that IPTV is not doing anything at all in the current quarter. So I just wanted to understand where you guys see this IPTV.

Kenneth Lowe

It's a good question. It's a fair question. IPTV is a stable business for us right now. We have had a wide range of engagements in IPTV over the last year, and we've been basically subject to the timing of deployments within each of the Telcos accounts that we're engaged with. Many of these had stretched out between what we originally envisioned. So we're still very optimistic that we're going to see the emergence of deployments of our current generation products within several telcos over the next couple of quarters. But again, the timing of which is something that we are not in control of. So that's why we are basically -- we're talking about the growth of IPTV as we move throughout next year. But we're not trying to emphasize any growth in the next quarter or so.

Hamed Khorsand - BWS Financial Inc.

Okay. So that means, it's a complete change as far as what it seemed like you guys were indicating earlier this year. What will it take to change that for you and to gain market share in the IPTV space?

Kenneth Lowe

I think couple of things. I think that there's one part of it that -- an ongoing part of which, which is that we've established a stronger position in our product portfolio. And we just started to be able to try to leverage that as we move forward. And the second thing is, and I think the overriding factor is, is that we were kind of fighting a battle of transitions going on between earlier generation and new generation. And I think that caused a certain amount of delay within the operators in making selections. There were too many moving parts for them to assimilate too quickly. And so I think from their standpoint, they were extending their evaluation and decision making because of how many changes were taking place in -- across generations. And they're trying to also accommodate changes as to what sort of over-the-top support to offer. And many of them looking at hybrid opportunities, and can they wait a generation to move the hybrid or should they move right now? So I think that's -- there's been a lot of change in the provider area. So I think that's something that we were kind of caught in the middle of.

Hamed Khorsand - BWS Financial Inc.

Okay. And my last question is, does this proxy battle that you guys were involved in, did that have a material impact in the G&A expense line?

Thomas E. Gay

Yes, that added almost $1 million to the G&A line. And I did not speak that out in the pro forma is because it was real cash paid up.

Hamed Khorsand - BWS Financial Inc.

Okay. So we should expect that the G&A line decline $1 million from -- going forward?

Thomas E. Gay

Yes.

Operator

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

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Can you share with us some additional details regarding licensing of the Z-Wave technology? And if you can talk more specifically about whether this is a one-off opportunity? Is it tied to a specific region, tied to a specific end application and how will that license revenue be recognized over the next several quarters? And then my last question for Tom really relates to the targeted quarterly revenue breakeven level, just wanted to know what that is right now?

Thinh Q. Tran

Regarding the licensing, it's to one of our strategic partner and we licensed the software protocol stack of Z-Wave to that partner. And hopefully, this partner can help really leverage this and expand the Z-Wave market for us. That's the reason for licensing. In term of is there more licensing potential possible, yes. We always wanted Z-Wave to be open standard. And if the parties are interested in licensing, we'll be glad to discuss this opportunity as well. In term of revenue recognition, Tom, do you want to say something?

Thomas E. Gay

Yes. According to the revenue recognition rules, we're recognizing the first payment, $8.4 million, ratably over a 12-month period. So $1.4 million was recognized during Q2. $2.1 million per quarter over the next 3 quarters, and then the remainder on the subsequent period. There's a second payment due under this. And according to certain terms, it maybe recognized evenly over a second year or there may be a modification if certain things occur, which would actually accelerate the recognition of that.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Okay. And what about quarterly breakeven revenue?

Thomas E. Gay

Remarkably, with the addition of Trident TV business, we've seen the breakeven move down a little bit. We're now looking at other -- little under $80 million that's being the quarterly target based on the current mix. And this is part of what we're evaluating in building up our model of what works for Sigma and how the margins would be affected by various changes.

Operator

Your next question is from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company, LLC, Research Division

Just wanted to sort of get you to make some comments perhaps about CopperGate or other parts of the business. If I just did a rough math on your guidance of, I think you said, $60 million to $64 million sort of implies a $4 million to $8 million decline that you said the biggest business, DTV, will be roughly flat, given that's typically the strongest seasonal quarter for that business. So is CopperGate really the culprit that's leading to decline? I think in the past couple of quarters you've talked about Latin America starting to deploy and as a result, you might have seen some buildup ahead of those appointments. Wondering if now you're looking for a pause, or is there something else going on in another business that accounts for the revenue decline?

Thinh Q. Tran

That's very correct. As you can see from the last 2 quarters, we have quite a bit of growth in connectivity business section that's due to the surge in the Latin America adoption of technology. So in Q3 and Q4, you're going to see some decline because a lot of the shipment has been accelerated by the service provider who wants to launch in those markets. So the decrease in the next quarter is mainly due to the decrease in our connectivity business.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay, great. And a question for Tom. If I heard you, you said gross margin outlook for the fiscal third quarter would be approximately 50%, which I think back when you announced the DTV acquisition, it looked like the average might be more in the mid-40s. So certainly, it looks like you guys are doing better. Is that sort of a function of now that you've got Trident in-house, you've been able to realize better costs or better margins on that product? Or is the gross margin perhaps benefiting from this $2.1 million of licensing revenue that seems coming into the 100% gross margin because of software, and you just now have richer mix in other parts of the business and Trident margins are sort of coming as you would've previously thought.

Thomas E. Gay

There's a number of factors. The DTV business is actually made up of multiple product lines underneath it, and there is a mix of margins within that. And we're benefiting by a point or 2 by the -- a positive mix different from how we'd originally modeled it. Yes, we are getting some benefit from $2.1 million licensing, which has no associated costs to cost of goods sold. And then as we get to each quarter, we're able to more closely predict the actual product mix anticipated in the coming quarters so that we can be a bit more scientific than our longer-range estimates as we had previously discussed.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. And then lastly, not sure if this is for Thinh or for Ken. We're getting in to the peak of sort of the design cycle for model year '13 in the TV market really over the next few months. I think ahead of prototypes at CES. You talked about hoping to add customers in Korea, Japan and Europe. How confident or how far are you along in perhaps some of those engagements? And what level of confidence do you have about being able to add customers, especially since MediaTek and MStar are now one entity?

Thinh Q. Tran

Well, I think the way I would answer that is that we are -- we began engaging a quarter ago within -- in all the potentials and our sales force started calling on a wide range of customers not only shoring up the existing relationships, but also pressing into accounts that we haven't been doing business with. And as we did that, we -- again, we fell right into the throes of this merger that occurred, which raised an entirely different issue of becoming second source. And so that's a -- it depends on the accounts. Some of the telcos -- some of the TV accounts have a fairly rapid plans of wanting to move ahead. They -- either because they wanted to -- want to make sure they don't have any risk of supply controlled by MediaTek, MStar combined or in some cases because they had issues with their current situation with MediaTek or MStar. So it's a mixed bag. There -- I would say that there are definitely some potentials that we'd be able to gain deployments for the cycle that would put us in line with shipping for holiday season 2013. Now keep in mind what that means is typically the designs taking place in the first quarter of next year going into pilot phase in the second and in somewhere in the summertime being produced for holiday season. So there still is time if the alignment is correct. And fortunately, we've got good product position with a lot of the elements necessary. So I think the key thing is the customization for each of these accounts as far as timing goes.

Operator

Your next question is from the line of Daniel Amir with Lazard.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Can you give us an idea how you'd see the growth in the different parts of your business in the next couple of years? Maybe TV, IPTV and Connected Home kind of the 3 areas because it does look like you have the ASP decline issues and the IPTV has been sub growth at best, given the commentary that you said before. So if you can framework it better for us that would be great, given that your revenue growth is kind of stalled here.

Kenneth Lowe

So, Dan, you're looking for a framing of what is the business model going to look like from a revenue contribution standpoint?

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Yes, from a revenue contribution. And maybe you can rank us -- for us kind of where you see the higher growth areas compared to lower growth areas.

Kenneth Lowe

I think it's -- we're looking at our business a little bit more simplified right now, amazingly enough. We're looking at the 2 strong growth factors, being digital TV and set-top box. We're seeing a lot of convergence with the CMP players within the set-top box. And a lot of the SmartTVs are taking on all the capabilities built into a CMP. So we see CMP as kind of almost a subset of set-top box at this point. So we look at this as 2 big growth factors, both of which consume intelligent media platforms, one of which is the SmartTV. We see that as a large growth. That's going to somewhere in the range of 140 million SmartTVs by 2015. That's a fairly rapid growth over the next 3 years. And second would be the growth of the IPTV hybrid space. So while pure IPTV remains relatively flat, the combination of IPTV plus hybrid should be reaching in the neighborhood of 100 million units by 2015. So we have 2 7-figure markets that we are going after for -- by the time we get to 2015. I think everything else is complementary to that. We have communication technologies that help us capture positions in those markets and give us additional value-add for every unit that we get sold. But predominantly, those are the 2 main forces that are driving our revenue growth.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Okay. And a comment you made before, you said $80 million is kind of your breakeven number. You're running at kind of a low $60 million this quarter. Without expanding kind of on what you're going to be restructuring, is the goal of breakeven -- I mean, this is a pretty significant GAAP from where you're running right now to where your potential breakeven number is. So is this related to shutting businesses, or is this really very OpEx focused and is going to be deep on the OpEx side in order to be profitable?

Thomas E. Gay

At this point, we're considering all potential solutions. We believe there is some room for improvement in our expense levels. We're studying each of our product lines and the relative R&D expense that we’re making to support them, what their potential growth factors are in the near term. So we feel that every one of those factors can contribute to our goal of reaching that positive cash flow and profitability by the beginning of next year.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Okay. And then the final question is, I mean, just to reiterate kind of the IPTV site, so it looks like some of your expected rollouts, I guess, and some of your new customers are just not happening. It's just happening slower than expected. So just the IPTV, given that it’s now just 10% of your sales, is this no longer really a factor in terms of your growth, and it’s really more the focus on the set-top box TV convergence, et cetera?

Kenneth Lowe

I think it's both. I think we are still viewing set-top -- IPTV set-top box as a key segment of our business. I think we view as something that has a lot of growth opportunities over the next couple of years. I think that we've got into a situation where we're battling it out with some of the largest players out there. And I think that's something that took a while to get repositioned for. I think that we're hoping that the IPTV combination with hybrid is something that -- with our strategies for hybrid, is something that puts us right back in the game and puts us on the growth path because again, the growth in set-top box is not so much top line with the set-top box area but it's the hybrid mixture of that that's actually growing like smart -- like television sets are not growing in large amount, but SmartTV is growing within the television market space.

Operator

Your next question is from the line of Charles Frumberg with Emancipation Capital.

Charles Iver Frumberg - Emancipation Capital LLC

I would like to just follow up on both this question and the prior one. The $80 million breakeven number?

Thomas E. Gay

Yes, it's actually a bit -- a little lower than that.

Charles Iver Frumberg - Emancipation Capital LLC

Well, I would hope so. And I'm saying this is going to be more of a statement than a question. But the real essential question is the board, which is newly constituted, in agreement with that as a target breakeven point because your expense run rates there currently, which would imply not a lot more cutting from here, yet your R&D number is still 40% of current revenues. It doesn't look like there's been a lot of time since the board's been on board to now. So therefore, I would imagine there would be fair amount of time for more ruminating over what the rightsized business is. And I would say that while there was a proxy fight involved and whatever the end -- however it ended, there seems to have been a fairly clear mandate from a good number if not -- substantial majority of shareholders to rightsize the business to be profitable now and not turn now a war chest that's a fortress into a small jewelry box. It's -- I would urge, there seems to be substantial amount of cutting as opposed to just wishing to grow through prosperity. If you're telling me that the new board is on board with that breakeven plan, I'd be both shocked and disappointed.

Thomas E. Gay

Not at all. We are in a process of building models and finding ways to interpret all the driving factors of our expenses and our numbers. The breakeven I threw out was merely based on our current expense levels and as you noted, it's actually a bit below $80 million, a few million based on the current product mix and everything. So it's too premature in the process because we feel that doing it correctly and modeling all of the different driving factors of both our expenses and our market successes and product costs, et cetera, all of that needs to be viewed very thoroughly. And we've only had a few weeks to really turn the crank on that. We've made a preliminary presentation. We're starting to see some clear directions to go in, but it's nowhere as near the time to speak publicly as to where we're headed with this process.

Charles Iver Frumberg - Emancipation Capital LLC

Okay. That's great, and I appreciate the clarification because the way it came across was that that's sort of the number and that's the number going forward. Other people may have interpreted it differently, but that's how I heard it. So that's encouraging. So basically, the $80 million is where you are. Just to recap, the $80 million that's around that, around where you are now, everything is under review subject to revision downward? Is that a fair statement?

Thomas E. Gay

That is correct.

Operator

Ladies and gentlemen, that does conclude the question-and-answer portion of today's event. And we'd like to thank you for joining us for this broadcast today. Gentlemen, would you like to make any closing remarks?

Ed McGregor

Yes, Regina. This is Ed McGregor. I would just like to thank everybody for attending our conference call to discuss our second quarter results. We do appreciate your interest in Sigma. And we do look forward to our next call to discuss our third quarter results. Thank you.

Operator

And with that, ladies and gentlemen, you may now disconnect. Have a great night.

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