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SIGM earnings fail to inspire. It’s still a stalemate

August 29th, 2008 · No Comments

The earnings were solid, excluding one-time issues they were 7 cents above consensus estimate, but the problem is it’s key markets are not taking off as fast as previously thought.

Some key figures:

  • fiscal second-quarter profit rose 12 percent from a year ago, boosted by its gain in the IPTV (internet protocol TV) market.
  • For the three months ended Aug. 2, the company earned $9.6 million, or 35 cents per share. That was up 9 percent from $6.6 million, or 32 cents per share, a year earlier.
  • Excluding items such as amortization and stock-based compensation, income in the latest quarter came to $12.7 million, or 47 cents per share.
  • Revenue rose 37 percent to $58.2 million from $42.5 million a year ago.
  • Analysts, on average, were expecting a profit of 40 cents per share on revenue of $58.7 million, according to a poll by Thomson Financial. Analysts typically exclude one-time items from their estimates.

However:

  • On its post-earnings conference call with the Street, Sigma said that fiscal Q3 revenues would be flat with Q2’s $58.2 million; that would be well short of the Street consensus of $65.5 million. The company noted that IPTV growth has slowed in certain key markets, including Korea.
  • Sigma said it is encouraged about the future prospects for the business, but does not see strong growth near term. The company also said that Blu-Ray player demand will be somewhat lower for the year than expected, due to consumer satisfaction with standard DVD players as well as macro conditions.

That’s plainly disappointing. If you would want to make a bearish case, it would not be very hard:

  • Markets are flat, and when the growth comes through, the competition (Broadcom especially) will be ready to enchroach on their dominant position

Against that, one would be able to argue that:

  • SIGM is the leading IPTV and Blue-ray chip producer
  • These are growth markets
  • SIGM’s valuation does not reflect the combination of these two stylized facts, far from it. Take this in: the leading company in two growth markets trades at roughly 10 times earnings, it has no debt and $180M in cash
  • SIGM already has the answer to the competition that has yet to materialize, their new 8654 IPTV chip

We were not brave enough to provide a buy before earnings because we were somewhat afraid something like this might happen. The AT&T inventory problem was resolved, but the real take-off of IPTV and blue-ray is still not happening. Look around you. How many people do you know have one of these?

The bottom line: we have little doubt that both of these markets will take off, even if it might be a little less explosive than some people seem to think. The worst case scenario is already almost fully priced in.

You can paint dramatic scenarios of competition, but the fact remains that SIGM is dominant in both markets (and has some opportunity in a few others, cable and HDTV, for instance), and history has shown that it is not that easy to unseat the market leader, especially one that keeps rolling out better products.

We are still on the side of the bulls, but we’re also realists enough to know that for these shares to lift, they could have done without the flat prognostics for Q3 today, which has ensured that scepticism remains, and we will have to wait another quarter for any serous rally, we’re afraid.

Tags: SIGM