Sigma Designs Management Discusses Q1 2014 Results - Earnings Call Transcript

| About: Sigma Designs, (SIGM)

Sigma Designs (NASDAQ:SIGM)

Q1 2014 Earnings Call

June 12, 2013 5:00 pm ET


Kenneth Lowe - Vice President of Strategic Marketing

Elias N. Nader - Interim Chief Financial Officer, Principal Accounting Officer, Principal Compliance Officer, Corporate Controller and Secretary

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

Mustafa Ozgen - Vice President and General Manager

Gabi Hilevitz - Chief Executive Officer and Executive Director


Quinn Bolton - Needham & Company, LLC, Research Division


[Audio Gap]

You may begin.

Kenneth Lowe

Thank you. Welcome to Sigma Designs' conference call to discuss the financial results for our first fiscal quarter of 2014. I'm Ken Lowe, Sigma's Vice President of Strategic Marketing. With me today are Thinh Tran, Sigma's CEO; Elias Nader, Sigma's Interim CFO; Mustafa Ozgen, our Vice President and General Manager of our Home Multimedia Products; and Gabi Hilevitz, our Vice President and General Manager of our Home Connectivity Products. The press release containing the quarter results, including selected income statement and balance sheet information, was released after the market closed today. If you did not receive the results, the release is available in the Investors section of our website.

Today's agenda will begin with my brief introduction; a review of the selected financials by Elias; an executive overview by Thinh; a business update by Mustafa and Gabi on their respective business units; and finally our forward guidance by Thinh. We'll then open the call to questions from analysts and institutional investors, and we expect to conclude the call within 1 hour.

Before we begin, I'd like to remind everybody that today's call contains forward-looking information, including guidance we provide about future revenues, 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 and 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 SEC reports, including Sigma's Form 10-K as filed with the SEC on April 12, 2013. A partial list of these important risk factors is set forth at the end of today's earnings press release. Sigma undertakes no obligation to revise or update publicly any forward-looking statement except as required by law.

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

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

Elias N. Nader

Thank you, Ken. Hello, everyone. For the first quarter of fiscal 2014, revenue was $52.5 million, an increase of $8.3 million or 19% compared to $44.2 million in the previous quarter. Compared to the year-ago quarter, our revenues increased $12.3 million or 31% from $40.3 million. Our revenue breakouts for the quarter are as follows: DTV, $15.8 million, or 30%; set-top box, $9.3 million, or 18%; home networking, $20.1 million, or 38%; home control, $4.6 million, or 9%; license and other, $2.6 million, or 5%. During the first quarter, we had 2 customers that exceeded 10% of our net revenue. They were Flextronics, $7.3 million, or 14%; TP Vision, $5.6 million, or 11%.

Gross margins. GAAP gross margins were 51.3% for the first quarter compared to 31.5% in the preceding quarter and 52.4% in the same period last year. Non-GAAP gross margins were 54.7% for the first quarter compared to 46.2% in the preceding quarter and 56.4% for the same period last year. During the first quarter, we had $600,000 write-down of inventory that negatively impacted our margins. The primary factor in our improved non-GAAP gross margin in Q1 was product mix.

Operating expenses and cost reduction program. Sigma remains focused on continued profitability in the remainder of FY '14, as well as executing on the $45 million cost reduction plan into FY 2014. Our non-GAAP operating expenses decreased by approximately $9 million to $28.3 million compared to the previous quarter. The main drivers were labor and labor-related expense reductions of approximately $6.7 million and a decrease in other variable operating expenses of $2.3 million.

GAAP and non-GAAP net loss. The GAAP net loss for the first quarter of fiscal 2014 was $4.5 million, or $0.13 per share. This compares to a GAAP net loss of $35.2 million, or $1.05 per share in the previous quarter and a GAAP net loss of $13.7 million, or $0.42 per share in the year-ago quarter. On a non-GAAP basis, the net income in the first quarter was $300,000, or $0.01 per share. This compares to a non-GAAP net loss of $16.8 million, or $0.50 per share in the previous quarter and a non-GAAP net loss of $8.5 million, or $0.26 per share in the year-ago quarter. Please refer to our press release for a detailed reconciliation of our GAAP to non-GAAP performance.

Now I'd like to cover a few key areas on our balance sheet. Cash, cash equivalents, restricted cash and marketable securities totaled $87 million at the end of the quarter, an increase of $2.3 million compared to the end of last quarter. The increase in cash was mainly due to $5.6 million cash generated by operating activities and $2 million proceeds from the sale of an R&D development project. The increase in cash was partially offset by purchases of approximately $5.3 million in IP, software and equipment during the quarter. Looking forward to our second fiscal quarter, we currently expect to receive the final tranche payment of an $8.4 million from our home control technology license. We have been recognizing revenue from this license ratably over the term of the agreement, but are scheduled to receive the second of 2 lump sum license fee payments in Q2. Net accounts receivable was $26.3 million at the end of the first quarter, an increase of $4.6 million compared to the previous quarter. The average days sales outstanding for our receivables as of the end of the first quarter was 46 days, representing an improvement of 2 days compared to the previous quarter. Net inventory was $19 million at the end of the quarter compared to $24.9 million in the previous quarter, a decrease of $5.9 million. The decrease in inventory brings our inventory turns for the quarter to 7 on an annualized basis compared to 5.3 in the previous quarter. Now, I will turn the call over to Thinh for an executive overview. Thank you.

Thinh Q. Tran

Thank you, Elias. I would like to start by thanking all of you for joining us today and for your continued interest in Sigma. Before I review our first quarterly results, I would, again, like to emphasize that Sigma remains focused on profitability as well as achieving incremental revenue growth throughout this fiscal year. In the first quarter of fiscal '14, we achieved $52.5 million in revenue and a 54.7% non-GAAP gross margin. We are very pleased about reaching profitability in the first quarter and are continuing to execute on our plan to achieve our target, $45 million cost reduction plan into fiscal 2014. This cost reduction efforts were challenging in many respects, but our focus was to streamline our business without sacrificing future revenue opportunities and our culture of innovation. With that said, we will continue our focus on sustaining and attempting to grow our profitability. Furthermore, we are continuing to monitor expense closely and look for ways to streamline our operation.

Now let's review the result of first quarter and current business trends. For the first quarter, we report $52.5 million in revenue, an increase of 19% from our previous quarter. The Home Multimedia business unit contribute $25.3 million for this quarter, resulting from increase in both DTV and set-top box market, the details of which will be covered later by Mustafa. Our Home Connectivity business contribute $24.1 million for this quarter, resulting from increase in both home networking and home control, the details of which will be covered later by Gabi. Overall, we are confident that the long-term demand for our primary market is strong, and that our challenge is to increase our market share through continued innovation and efficient execution.

Now let's review our major accomplishment during the quarter. We issued a multipart series of announcement about our revolutionary next-generation Z-Wave product portfolio, which features a number of new elements, including Z-Wave software, reference design, Z-Wave Next Gen 500 series SoC and modules, which feature 50% longer-range, 250% higher data rate and 60% lower standby power. We began shipment of HomePlug AV and Z-Wave component in support of AT&T announced deployment of the AT&T Digital Life program. We also began shipping our Mediaroom-certified 8652 SoC to key OEM and service providers in support of the transition to next-generation platforms. We announced that ZTE, T&W and ZyXEL have selected our 5200 device for their powerline network adapters.

In summary, we are very proud of the technologies and market position we have developed and are excited to move forward with a continued emphasis on profitability.

Now, I would like to pass the call to Mustafa and then to Gabi, who will cover the progress of our Home Multimedia and Home Connectivity business units, respectively. Mustafa?

Mustafa Ozgen

Thank you, Thinh. For this call, let's review our business progress and outlook by segment for the Multimedia business unit. Overall, our revenues came in sequentially higher this quarter as anticipated, due to an increase in set-top box and DTV shipments. Our combined set-top box and digital TV organization is focused on developing SoCs and software for the new era of intelligent consumer entertainment devices. As a result, we are now starting to see an increased amount of technology sharing and the associated resource efficiency and cost savings and time-to-market improvements.

During the quarter, we received working silicon that include our nearest ARM CPU-based SoCs for both set-top box and DTV segments. These SoCs will advance our position in the market by featuring dramatically improved software application performance, raw software ecosystem compatibility and support for Android operating system and a premium audio and video experience.

As we mentioned last time, our set-top box business is being driven by 3 major trends, which include support for the new ultra HD or 4K x 2K display resolution, more over-the-top Internet content access capabilities and a broadening array of IPTV hybrid set-top box configurations. These trends are shared between set-top box and DTV segments, which is creating more product commonality for us as key technology provider and is also enabling service providers to leverage both set-top boxes and television sets to deliver their services to the consumers.

We are also continuing to experience renewed success in second-generation Microsoft Mediaroom-based set-top box deployments. We have begun shipments to our Tier-1 OEM partners for their deployment of Mediaroom-certified set-top boxes to the operators during the quarter. We are experiencing increased new design engagements in the hybrid IPTV set-top box space that should lead to future deployments in emerging markets. For example, our OEM partners started their pilot shipments to various operators in Vietnam. We believe we will win in this space because of our more optimal SoC designs, front-end solutions and mature software stack. Our unique video streaming software stack that includes Wi-Fi Miracast and advanced video content protection features and our fully optimized SoCs are also enabling us winning new designs in digital media adapter segment, which should lead to deployments in the coming quarters.

Moving over to digital TV. This business is also being driven by the pursuit of next-generation display resolution, as well as the over-the-top software capabilities and picture quality differentiation. As such, these technologies are being developed by one integrated team and will be leveraged across both product lines. We are moving forward with new projects at our existing DTV accounts and also aggressively working to enable new target accounts to develop SmartTVs using our fully integrated TV SoCs and frame rate conversion chips. Towards this goal, we are positioned as 1 of the 2 suppliers in the market with a full end-to-end hardware and software technology portfolio and market presence. We offer products with different price points and feature set to enable our customers to deploy our technology in various segments of their product lineups. One of the unique capabilities that sets Sigma apart is our frame rate conversion and video processing technologies that are very critical for LCD TVs. Top TV OEMs recognize and value these differential advantages, including up to 4K x 2K display resolution support, motion compensation to smoothen the video, super resolution filtering, high-precision video noise reduction and other video technologies to achieve the highest picture quality possible.

We are continually driving our R&D team to come up with innovative ways to support these new capabilities in the upcoming products, to allow our customers to introduce more powerful and cost-effective TVs to the consumers. In summary, I'd like to reiterate that within Home Multimedia business unit, we mirror our overall corporate objective of achieving profitability while driving future revenue growth with innovative products. I will now pass the call to Gabi to cover our Home Connectivity business unit.

Gabi Hilevitz

Thank you, Mustafa. For this call, I will first like to review our business progress and outlook by segment for Home Connectivity group. Our revenues came in sequentially higher this quarter as anticipated due primarily to increasing demand for HomePNA and Z-Wave products. Throughout Q1, the company continued to see a relatively stable HomePNA demand in North America with increasing demand coming from Latin America. Our HomePlug AV product with ClearPath and with native TR-069 have succeeded to position ourselves as a leader in several RFPs in Europe and Middle East, which we believe will materialize in the second half of the year. AT&T launched the Digital Life program with multiple Sigma HomePlug AV with ClearPath and TR-069 and Z-Wave-enabled devices for home control. We are looking forward to improve the revenue growth for these 2 products originating from successful deployments of Digital Life in the U.S. and other markets.

We recently announced our second-generation chipset and this device is already undergoing field trials by major operators around the world. Amplifying this momentum, we announced that Sigma's new 5200 family has already selected -- been selected by T&W and ZTE for their advanced home networking adapters.

Moving over to home control. We generated a great deal of excitement in the market with our announcement of the Z-Wave Next Gen product portfolio. The new Z-Wave portfolio includes a number of new elements. The Z-Wave Next Gen 500 Series SoCs and modules will support longer-range, larger memory footprint, higher data rate and lower power consumption. Plus, the Z-Wave software reference suite, which features middleware, customizable user interface and the Z Power [ph] translation utility, plus the Z-Wave hardware reference suite for gateways and end products. We believe that all these will enable Sigma's partners to bring new and higher performance products to the market substantially faster and at a lower cost. Adding to this momentum, our industry-leading Z-Wave ecosystem now has over 800 certified and interoperable products, which is the most important selection factor for any new adopter for home control solutions. Overall, the Home Connectivity business unit had a good first quarter of fiscal year 2014, with growth and stability in all markets and product segments. I will now pass the call to Thinh to cover forward guidance.

Thinh Q. Tran

Thank you, Gabi. 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 continued profitability. Moving on to our guidance, which is based on our visibility at this time, we expect total revenue for the second quarter to be between $52 million and $54 million. We expect pro forma gross margin for the second quarter to be between 52% and 53%. We expect pro forma operating expense to be lower compared to Q1. In summary, we would like to underscore our commitment to continued profitability. Towards this goal, we are closely monitoring our revenues and expenses against our operating plans and we'll make adjustment as required.

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

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Quinn Bolton with Needham.

Quinn Bolton - Needham & Company, LLC, Research Division

Guys, let me first say congratulations on returning to non-GAAP profitability. I guess I wanted to start there. It looks like on the OpEx side, you guys obviously have taken a lot of cost out of the business, but you said that there's room for more cost reduction activities and you guided OpEx to come down again in the July quarter. Can you give us a sense of how much more OpEx can come out of the business?

Elias N. Nader

Quinn, it's Elias. Basically, we're looking at every venue in the company and we're not going to comment on the amount that we could cut, but everything is open for reduction. Basically, we -- as you saw, we took $9 million out from the first quarter compared to Q4, and I don't believe we're going to repeat another $9 million because that would be cutting to the bones but we are going to continue looking at cost reduction across the globe.

Quinn Bolton - Needham & Company, LLC, Research Division

If I take the $9 million annualized, that would give me $36 million. You've talked about $45 million. I mean, it sounds like there may be another $2 million or $3 million that could come out. Is that about the right ballpark?

Elias N. Nader

Yes, you're right on the ballpark there. Yes.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay, great. And then perhaps for Mustafa, you'd mentioned -- if I heard the prepared comments right, that you have started or you have silicon back on the next-generation platform. I was wondering if you could comment, is that a platform that will support the 4K x 2K resolution and the ability to receive over-the-top content?

Mustafa Ozgen

Yes. The family of products will support -- it's actually a family of products. Some of them will support the traditional full HD, some of them will support 4K x 2K at the various types of products.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. And is that something -- it sounds like silicon back -- is that something you expect to be sampling then in the second half of the calendar year or can you give us some sense when that might start sampling to customers?

Mustafa Ozgen

Yes, we will start sampling to customers second half of the year. We have lead customers that we're working together at the moment and we plan to start shipping in the next fiscal year.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay, great. And then just lastly on the Mediaroom, it sounds like -- you said that you had started to deliver some of the new media processors for new Mediaroom ramps. Can you just give us sort of an update on what your visibility is into that Mediaroom set-top box business?

Mustafa Ozgen

You're asking about in terms of our visibility with our customers and service providers, or you're talking about the general Mediaroom market per se?

Quinn Bolton - Needham & Company, LLC, Research Division

Sort of more your specific, the Sigma-specific customer ramp. I think we've been sort of waiting for a return to that Mediaroom as you switch to sort of the second-generation platforms. And I'm wondering is this -- are you starting to see the ramp now in that second-generation platforms and is that something that sets you up now for perhaps multiple quarters of growth in the set-top box business?

Mustafa Ozgen

Yes, so we started initial deployments in our -- in other words, our partners, the OEMs start deploying with their service provider partners. We have various Tier-1 OEMs and they have been -- all the 4, 5 operators that are using Mediaroom start deploying these products. They are either DVR type of set-top box and there will be new-generation boxes in the Gen 2 also being certified and coming to the market as we move on. So we are going basically, I would say, month-to-month new certifications being done for various configurations of these boxes and our OEM partners start deploying or they start building up the channel, so we should be able to see growth from this point on forward in Q2, Q3 and Q4.


[Operator Instructions] At this time, there are no further questions.

Kenneth Lowe

Okay, Sigma would like to thank you for your participation on our call this quarter and we look forward to talking to you at the same time next quarter. Thank you, again.


Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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