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This Chip Stock Beat the Street, but That's Not Good Enough!

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Sigma Designs (Nasdaq: SIGM  ) CEO Thinh Tran says that returning to profitability is priority No. 1. Looking at last night's second-quarter report, I must say that I believe him -- and that the profit focus is paying off.

Now, it's not like Tran has much of a choice in the matter. The designer of multimedia processors is working under a revamped board of directors. Two out of five seats are controlled by activist investor group Potomac Capital Partners, and the fifth member is another newcomer -- former MIPS Technologies (Nasdaq: MIPS  ) CFO Maury Austin. Longtime board member Lung Tsai -- appointed chairman over the summer -- and Tran fill out the last two spots of the five-member board, so a controlling share of the board's votes now sit in the hands of new blood.

Sigma fought Potomac's bid for board seats hard, issuing press releases that showed how well the existing business plan was working. But Potomac was supported by several independent corporate governance experts. Advisory firm Institutional Shareholder Services backed the insurgent proxy card, saying that board-level strategy changes at Sigma were both "warranted" and "necessary." So Sigma cut a deal and came up with the current board structure. There's no going back, so Tran might as well throw his weight behind the new direction.

So the new Sigma Designs is a leaner, meaner beast with an eye to heavy cost-cutting. In particular, management is exploring ways to reduce overlap and inefficiencies that arose from Sigma's recent acquisition of bankrupt rival Trident Microsystems. Tran hopes to make his company cash-flow positive by the end of this fiscal year.

All that being said, the second quarter shows that Sigma really did have a good thing going before this massive strategic overhaul. The board changes fell after the quarter closed, and had no effect on these results at all. And with a $0.12 adjusted loss per share on $68.3 million in revenue, Sigma beat Wall Street's revenue targets by 15% and delivered a 60% smaller loss than expected.

Even so, there's plenty of room for improvement -- Sigma's surprise was still a net loss, and the current cost structure would need nearly $80 million of quarterly revenue before it could spit out a reliable profit. Management's third-quarter guidance range tops out at just $64 million, so that's not a sustainable model. Note that analysts currently project $73.5 million in third-quarter sales, and you'll see why Sigma's shares crashed hard in spite of strong second-quarter results.

That cost profile stands in stark contrast to hugely profitable rivals Broadcom (Nasdaq: BRCM  ) and Marvell Technology (Nasdaq: MRVL  ) , who can often muscle Sigma out of deals by sheer economies of scale. Tread lightly around this stock until we know more about Sigma's restructuring moves. This is a risky ticker until further notice.

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Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool has a disclosure policy.

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Related Tickers

10/28/2016 2:21 PM
SIGM $7.33 Down -0.02 -0.27%
Sigma Designs CAPS Rating: **
BRCM.DL $0.00 Down +0.00 +0.00%
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MIPS.DL $0.00 Down +0.00 +0.00%
MIPS Technologies,… CAPS Rating: ***
MRVL $13.10 Down -0.02 -0.15%
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