There are many ways to flay a feline, or to run a business. Sigma Designs (Nasdaq: SIGM) runs a very unusual business model, and I'm not sure that's a good thing.
The designer of chips for processing media streams missed analyst targets in the fourth quarter. Adjusted net losses of $0.43 per share on $35.6 million in revenue fell far short of the consensus targets at ($0.28) per share and $37.7 million, respectively. It's also a serious step down from $70.6 million of sales and a $0.32 net profit per share a year ago.
CEO Thinh Tran guided first-quarter revenue on the low end of Street expectations. Looking further ahead, the second quarter should see somewhat stronger sales.
And stronger sales are the name of the game for Sigma. Under current operating expenses, the company breaks even at roughly $65 million in quarterly sales. As you can see, the company is coasting far below that goal.
But Sigma insists that this is a healthy model. "The question about are we in markets big enough to support this kind of expenditure, I think the answer is absolutely yes," said CFO Ken Lowe. "I think the issue is purely market share and us climbing back up on top of the spaces that we've been dominant in before."
But that might be easier said than done. Keep in mind that Sigma's management has misjudged their market opportunities quite spectacularly before. A year ago, Tran said that the second half of the fiscal year that just ended would be "a significant improvement over the first half." In reality, the second half saw 30% lower total sales than the first half and a much larger net loss.
I'm sure that the IPTV market is large enough to support several healthy processor providers, but Sigma's formerly rock-steady grip on this market is slipping. Once you start losing market share to Broadcom (Nasdaq: BRCM) and Intel (Nasdaq: INTC), getting it back is no small feat. Media boxes are a small diversion for Intel today but that attitude is changing; Broadcom competes head-to-head with nearly everything Sigma does, and it has the resources to do it better.
That's why I just closed my bullish CAPScall on Sigma Designs, locking in a hefty negative score. It can't be helped, because I see more risks than opportunities here. We've seen media chip experts go to to zero before, and it could happen to Sigma, too.
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