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SIGM > SEC Filings for SIGM > Form 10-Q on 12-Jun-2014All Recent SEC Filings

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Form 10-Q for SIGMA DESIGNS INC


12-Jun-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes in this Form 10-Q. Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements. These forward-looking statements, include, but are not limited to, statements about our capital resources and needs, including the adequacy of our current cash reserves, revenue, anticipated deployments and design wins in the set-top box market, anticipated seasonality associated with our DTV business and our expectations that our gross margin will vary from period to period. These forward-looking statements involve risks and uncertainties. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those discussed under Part II, Item 1A "Risk Factors" in this Form 10-Q as well as other information found in the documents we file from time to time with the Securities and Exchange Commission. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

Overview

Our goal is to be a leader in intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world's leading consumer products, including televisions, set-top boxes and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control market. We derive a portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Our chipset products and target markets

We consider all of our semiconductor products to be chipsets because each of our products is comprised of multiple semiconductors. We believe our chipsets enable our customers to efficiently bring consumer multimedia devices to market. We design our highly integrated products to significantly improve performance, lower power consumption, and reduce cost.

We derive nearly all of our operating net revenue from sales of chipset products and we sell our chipsets into four primary target markets, plus licensing. We separately report revenues that we derive from sales into each of these target markets.

DTV Market

We have defined the DTV market to include all products that are sold into digital televisions or "SmartTVs" as well as other adjacent markets using chipset products that are designed for video post-processing. We believe DTV products complement our existing set-top box products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the connected home. We serve this market with our media processor SoCs and dedicated post-processing products.

Set-top Box Market

We have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products. We serve this market primarily with our media processor products.

Home Networking Market

The home networking market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We serve the home networking market with our wired home networking controllers that are designed to provide the most reliable connectivity solutions between various home entertainment products and incoming video streams.


Home Control Market

We define the home control market to include all the gateways and interconnected appliances that provide home monitoring and control for the management of security, safety, energy, health, and convenience. Our home control product line consists of our wireless Z-Wave modules and chipsets, which consist of wireless transceiver devices along with a mesh networking protocol.

License and Other Markets

This market includes other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Restructuring program

In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable.

During the quarter ended May 3, 2014, as part of our continuing efforts to reduce expenses, we incurred restructuring charges of $1.0 million, all of which was related to workforce reductions of 29 employees across several geographic regions, the majority of which were in our operations in Israel. Of the total restructuring charges recorded in the first fiscal quarter, approximately $0.1 million was reflected in cost of revenue and $0.9 million was reflected in operating expenses.

During the quarter ended May 4, 2013, we incurred restructuring charges of $0.3 million, all of which was related to workforce reductions of 17 employees across several geographic regions and substantially all reflected in operating expenses.

Expenses recognized for restructuring activities impacting our operating expenses are included in "Restructuring and impairment charges" in the condensed consolidated statements of operations. Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell existing products.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies during the three months ended May 3, 2014, as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended February 1, 2014. For a complete summary of our significant accounting policies, refer to Note 1, "Organization and Summary of Significant Accounting Policies", in Part II, Item 8 of our fiscal 2014 Annual Report.


Results of operations

The following table is derived from our unaudited condensed consolidated financial statements and sets forth our historical operating results as a percentage of net revenue for each of the periods indicated (in thousands, except percentages):

                                                                        Three Months Ended
                                            May 3, 2014      % of Net Revenue        May 4, 2013      % of Net Revenue
Net revenue                                $      36,873                   100 %    $      52,540                   100 %
Cost of revenue                                   16,648                    45 %           25,594                    49 %
Gross profit                                      20,225                    55 %           26,946                    51 %
Operating expenses
Research and development                          17,103                    46 %           20,204                    39 %
Sales and marketing                                5,450                    15 %            5,682                    11 %
General and administrative                         5,031                    14 %            4,762                     9 %
Restructuring and impairment charges               1,084                     3 %              398                     0 %
Total operating expenses                          28,668                    78 %           31,046                    59 %
Loss from operations                              (8,443 )                 (23 %)          (4,100 )                  (8 %)
Gain on sale of development project                    -                     - %            1,079                     2 %
Interest and other (expense) income, net             (52 )                   0 %              691                     2 %
Loss before income taxes                          (8,495 )                 (23 %)          (2,330 )                  (4 %)
Provision for income taxes                         1,419                     4 %            2,203                     4 %
Net loss                                   $      (9,914 )                 (27 %)   $      (4,533 )                  (8 %)

Net revenue

Our net revenue for the three months ended May 3, 2014 decreased $15.7 million, or 30%, compared to the corresponding period in the prior fiscal year. Net revenue decreased primarily due to a $9.8 million decrease within the DTV market, a decrease in the home networking market of $4.1 million, and a decrease of $3.6 million in the set-top box market, partially offset by an increase in sales into the home control market of $1.6 million.

Net revenue by target market

We sell our products into four primary target markets, which are: the DTV market, home networking market, set-top box market, and home control market. We also have license revenue included in the license and other market, which we receive from the license of our technology to third parties.

The following table sets forth our net revenue by target market and the percentage of net revenue represented by our product sales to each target market (in thousands, except percentages):

                                                                  Three Months Ended
                                       May 3, 2014      % of Net Revenue       May 4, 2013      % of Net Revenue
DTV                                   $       6,063                    16 %   $      15,842                    30 %
Home networking                              16,120                    44 %          20,181                    38 %
Set-top box                                   5,689                    15 %           9,315                    18 %
Home control                                  6,140                    17 %           4,589                     9 %
License and other                             2,861                     8 %           2,613                     5 %
Net revenue                           $      36,873                   100 %   $      52,540                   100 %


DTV market: For the three months ended May 3, 2014, net revenue from sales of our products into the DTV market decreased by $9.8 million, or 62%, compared to the corresponding period in the prior fiscal year. The overall decline was a result of a shift away from legacy products as we continue to focus on the development of our new products resulting in a decline of 23% in average selling price and a 50% decrease in units shipped. Our DTV revenue was derived mainly from our Europe and Asia regions. As expected, our DTV business experienced seasonality common to consumer electronics markets with slower DTV sales during the three months ended May 3, 2014. We typically expect our strongest DTV sales in the third calendar quarter and slower DTV sales in the first and fourth quarter of each calendar year. We expect our revenue from the DTV market to continue to be a significant percentage of net revenues but will fluctuate in future periods as we develop and introduce new products for this market.

Home networking market: For the three months ended May 3, 2014, net revenue from sales of our products into the home networking market decreased $4.1 million, or 20%, compared to the corresponding period in the prior fiscal year. The decrease was primarily the result of a decline of 21% in average selling price and contract manufacturers' inventory adjustments. We expect our revenue from the home networking market to fluctuate in future periods based on changes in inventory levels at contract manufacturers who manufacture equipment incorporating our products for deployment by telecommunication providers and as a result of transitions to next generation technologies.

Set-top box market: For the three months ended May 3, 2014, net revenue from sales of our products into the set-top box market decreased $3.6 million, or 39%, compared to the corresponding period in the prior fiscal year. This decrease in set-top box market net revenue was attributable to our operators customers' pending transitions to newer generations of set-top box products resulting in a decline of 21% in average selling price and a 22% decrease in units shipped on legacy products some operators continue to use. IPTV service providers deploy set-top boxes for many years and take a long time to evaluate potential new platforms, which results in long cycles between design wins and actual revenue. As such, the overall decline in revenue is a result of design losses that took place over a year ago. We expect our revenue from the set-top box market to fluctuate in future periods as this revenue is dependent on IPTV service deployments by telecommunication service providers, adoption of newer and future generations of our technology, changes in inventory levels at the contract manufacturers that supply them and competitive market pressures.

Home control market: For the three months ended May 3, 2014, net revenue from sales of our products into the home control market increased $1.6 million, or 34%, compared to the corresponding period in the prior fiscal year. The increase was primarily the result of increased demand in the home control market, evidenced by a 55% increase in unit shipments primarily to the United States and Europe. We have compelling products for our home control market and we continue to target large operators who are introducing home control products primarily in the North America and European regions. We expect our revenue from the home control market to continue to increase in the foreseeable future.

License and other markets: Our license and other market consist primarily of technology license revenue and revenue from other ancillary markets. The license revenue is attributable to two license agreements pursuant to which we license our technology to third parties for which we were able to recognize revenue. Our obligations under the aforementioned license arrangements are expected to be completed during the three months ended August 2, 2014. We expect license revenue to fluctuate in future periods.

Net revenue by geographic region

The following table sets forth net revenue for each geographic region based on the ship-to location of customers (in thousands, except percentages):

                                            Three Months Ended
                 May 3, 2014      % of Net Revenue       May4, 2013      % of Net Revenue
Asia            $      29,246                    79 %   $     38,039                    72 %
North America           4,336                    12 %          5,030                    10 %
Europe                  2,302                     6 %          7,990                    15 %
Other Regions             989                     3 %          1,481                     3 %
Net revenue     $      36,873                   100 %   $     52,540                   100 %


Asia: Our net revenue from Asia decreased $8.8 million, or 23%, for the three months ended May 3, 2014, compared to the corresponding period in the prior fiscal year. This decrease was primarily attributable to lower demand and consequently lower average selling prices for some legacy products in the DTV, home networking and set-top box markets due to a shift in consumers' preferences. Net revenue as a percentage of our total net revenue for the three months ended May 3, 2014 increased seven percentage points compared to the corresponding period in the prior fiscal year. This increase is primarily due to the significant reduction in revenue in Europe.

North America: Our net revenue from North America decreased $0.7 million, or 14%, for the three months ended May 3, 2014 compared to the corresponding period in the prior fiscal year. The decrease was primarily due to the continuing shift away from legacy products with our operators' pending transitions into newer generation products within the DTV and set-top box markets, partially offset by increases in our home control market as demand for our products continue to rise. Net revenue as a percentage of our total net revenue for the three months ended May 3, 2014 increased two percentage points compared to the corresponding period in the prior fiscal year.

Europe: Our net revenue from Europe decreased $5.7 million, or 71%, for the three months ended May 3, 2014, compared to the corresponding period in the prior fiscal year. Net revenue as a percentage of our total net revenue for the three months ended May 3, 2014 decreased nine percentage points compared to the corresponding period in the prior fiscal year. The decrease is primarily the result of a decrease in shipments to our DTV market, primarily in Hungary, as we continue to experience a shift away from legacy products.

Other regions: Our net revenue from other regions decreased $0.5 million, or 33%, for the three months ended May 3, 2014 compared to the corresponding period in the prior fiscal year. The decrease was primarily the result of a decrease in demand for our products in the home networking market in Brazil.

Major customers

During the three months ended May 3, 2014, Benchmark Electronics accounted for 11% of our net revenue. During the three months ended May 4, 2013, Flextronics and TP Vision accounted for 14% and 11% of our net revenue, respectively.

As of May 3, 2014, Benchmark Electronics and Nanning Fugui Precision accounted for approximately 19% and 13% of net accounts receivable, respectively. As of May 4, 2013, no customer exceeded more than 10% of net accounts receivable.

Gross profit and gross margin

The following table sets forth our gross profit and gross margin (in thousands, except percentages):

Three Months Ended

                  May 3, 2014       May 4, 2013
Gross profit     $      20,225     $      26,946
Gross margin %            54.9 %            51.3 %

Gross profit decreased $6.7 million, or 25%, for the three months ended May 3, 2014, compared to the corresponding period in the prior fiscal year. The decrease was primarily due to declines in product sales from the DTV market and average selling price decreases within the home networking and set-top box markets. The gross profit impact associated with declines in these aforementioned markets was $8.0 million, or 39% of gross profit, partially offset by the increase of $1.3 million from the home control market due to a rise in product sales.

Our gross margin rose 3.6 percentage points for the three months ended May 3, 2014, compared to the corresponding period in the prior fiscal year. The increase was primarily due to an increase in shipments of our home control products with reduced average cost per unit, or ACU and changes in product mix. Although average selling prices, or ASP, declined across most of our target markets, we continued our significant efforts to reduce ACU across our markets. These improvements were partially offset by the decline in ASP of our home networking market. The decrease in ACUs was primarily due to cost reduction efforts through restructuring and other activities targeting fixed costs. Our fixed costs include items such as depreciation and amortization and compensation costs for operations.


Research and development expense

Research and development expense consists of compensation and benefits, including variable compensation expense, such as profit sharing, development and design costs (i.e., mask, prototyping, testing and subcontracting costs), depreciation and amortization (i.e., engineering design tools and equipment costs), stock-based compensation expense and other expenses which include costs for facilities and travel.

Our research and development expense is summarized as follows (in thousands, except percentages):

                                            Three Months Ended
                                       May 3, 2014       May 4, 2013       $ Change        % Change
Research and development expense      $      17,103     $      20,204     $    (3,101 )           -15 %
Percent of net revenue                         46.4 %            38.5 %

The decrease in research and development expense is primarily due to a decrease in headcount by 14% from May 4, 2013 to May 3, 2014, primarily in Israel and North America, due to reductions in force as part of our restructuring efforts.

Sales and marketing expense

Sales and marketing expense consists primarily of compensation and benefits costs, including commissions to our direct sales force, stock-based compensation expense, trade shows, travel and entertainment expenses and external commissions.

Our sales and marketing expense is summarized as follows (in thousands, except percentages):

                                     Three Months Ended
                               May 3, 2014        May 4, 2013       $ Change       % Change
Sales and marketing expense   $       5,450      $       5,682     $     (232 )           -4 %
Percent of net revenue                 14.8 %             10.8 %

The decrease in sales and marketing expense was primarily due to a decrease in headcount from May 4, 2013 to May 3, 2014, primarily in Israel and the Netherlands, due to reductions in force as part of our restructuring efforts. These cost reductions were partially offset by increased tradeshow costs of $0.2 million.

General and administrative expense

General and administrative expense consists primarily of compensation and benefits costs, stock-based compensation expense, legal, accounting and other professional fees and facilities expenses.

Our general and administrative expense is summarized as follows (in thousands, except percentages):

                                             Three Months Ended
                                       May 3, 2014        May 4, 2013       $ Change         % Change
General and administrative expense    $       5,031      $       4,762     $       269                 6 %
Percent of net revenue                         13.6 %              9.1 %

The increase in general and administrative expense was primarily due to higher professional fees of $0.6 million associated with legal and audit activities. Other cost reduction measures reduced our general and administrative expenses by $0.2 million primarily related to compensation and benefits, facilities and information technology.


Impairment of IP, mask sets and design tools

We test long-lived assets, including our purchased intangible assets, for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable. If indicators of impairment exist, we determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows that the assets are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long-lived assets and purchased intangible assets. We also periodically review our current assets for other-than-temporary declines in fair-value based on the specific identification method and write-down the carrying value when an other-than temporary decline has occurred. During the three months ended May 3, 2014 and May 4, 2013, we recorded an impairment of intangible assets of $0.1 million and $0.2 million, respectively.

Restructuring costs

In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable.

During the quarter ended May 3, 2014, as part of our continuing efforts to reduce expenses, we incurred restructuring charges of $1.0 million, all of which was related to workforce reductions of 29 employees across several geographic regions, the majority of which were in our operations in Israel. Of the total restructuring charges recorded in the first fiscal quarter, approximately $0.1 million was reflected in cost of revenue and $0.9 million was reflected in operating expenses.

During the quarter ended May 4, 2013, we incurred restructuring charges of $0.3 million, all of which was related to workforce reductions of 17 employees across several geographic regions and substantially all reflected in operating expenses.

Expenses recognized for restructuring activities impacting our operating expenses are included in "Restructuring and impairment charges" in the condensed consolidated statements of operations. Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell our products.

A combined summary of the recent activity of the restructuring plans initiated . . .

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