Sigma Stumbles, Gets Right Back to Business

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When the numbers don't look too good, you might as well talk about the business instead. That's what happened to Sigma Designs (Nasdaq: SIGM) last week.

The income statement frankly looked terrible. Revenue came in at $56.9 million, 58% above the year-ago quarter. On an absolute basis, that doesn't sound like such a disaster. But in the light of recent growth rates in the 150% range, it is. Pro forma earnings per share were $0.40, just half of the $0.80 per share seen last year.

CEO Thinh Tran said that he was "disappointed to begin this fiscal year on a negative note," but that the reason for the weak sales was an inventory problem at one of the company's largest IPTV customers, and out of the company's hands.

So management started talking about its business drivers instead, which is better than the usual "we're growing" commentary.

The market for IPTV set-top boxes is at a crossroads, said Thinh. Cisco's (Nasdaq: CSCO) Scientific-Atlanta subsidiary and Motorola (NYSE: MOT) currently have a virtual lock on cable boxes, but there are upgrades like the DOCSIS 3.0 cable network technology and CableCARD 2.0 on the horizon. Together, they enable user-friendly features like two-way communication and video on demand without a cable box provided by the likes of Comcast (Nasdaq: CMCSA) or Time Warner Cable (NYSE: TWC). The age of fully functional third-party interfaces to digital television feeds is fast approaching.

When TV sets and Blu-ray players can do what you currently must have the "official" cable box to do, Sigma expects an explosion in demand for its IPTV platforms and related technologies. The biggest competition comes from Texas Instruments (NYSE: TXN) and its DaVinci chips -- but TI also partners with Sigma Designs to provide DOCSIS 3.0 solutions for the networks. That's not a cutthroat threat in my book.

So the stock took a 16% fall on Friday and is down a staggering 75% from a December peak of $72.17 per share. But the company has $138 million in cash equivalents with no debt, just released a significantly faster version of its flagship product, and sees new markets opening up in early 2009. Exciting business and a massive discount on the stock -- what's not to love?

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