I attended Sigma Designs Inc.’s (SIGM) shareholder meeting yesterday, July 30, 2009. About eleven people attended, mostly company employees. The company offered shareholders juice, soda, mineral water, cookies, and cherries. CFO Thomas Gay handled the formal portion of the meeting and then turned the meeting over to Kenneth Lowe, VP of Business Development and Strategic Marketing. Founder, CEO and Chairman Thinh Q. Tran played a more reserved role in the meeting, helping Mr. Gay and Mr. Lowe answer some of the more technical questions.
Sigma Designs provides system-on-chip solutions (SoCs) for third parties, primarily in the home entertainment area. It dominates in the area of IPTV set-top boxes, where, according to Mr. Gay, it controls approximately 80% of the market. Its main competitors are STMicroelectronics NV (STM) and Broadcom (BRCM).
Here are the highlights from Mr. Lowe’s presentation.
1. Internet Protocol Television, otherwise known as IPTV, is a technology by which video is delivered to the home. It relies on broadband rather than more traditional formats.
2. Some of Sigma’s customers include Motorola, Cisco, Samsung, Sony, Celrun, Dasan, WD/Cowin, UT Starcom, and Netgem.
3. Sigma provides its SoCs to numerous telecommunication service companies, including the major players in the home broadband market.
4. For fiscal year 2009, Sigma had $209 million in revenue, with a net income of $26.4 million.
I asked several questions, and Mr. Lowe, Mr. Gay, and Mr. Tran answered all of my questions thoroughly.
I mentioned that 94% of Sigma’s revenue was from outside the United States, and asked why they did not hedge their currency risk. [10K: pages 18-19]. Mr. Gay said it was unnecessary to hedge any currency risk because all billings/prices were in U.S. dollars. Billing in American dollars may help Sigma compete with Swiss-based ST Micro (STM), which currently reports earnings based on the stronger Swiss franc. (Mr. Gay said he believed the company was French, but Yahoo Finance lists STM as headquartered in Geneva, Switzerland.)
I mentioned Sigma’s relatively small net income and asked Sigma whether it would be better served if it went private. As a private company, it would not have to comply with regulations imposed on public-traded companies and could better focus on its core business. Mr. Gay said that having publicly available stock allowed the company to “compete for talent”--in Silicon Valley, where companies have to compete for talent, employees will favor companies with publicly-traded shares. Mr. Gay also explained that Sigma’s publicly available stock could be used for acquisitions (which would allow Sigma to conserve its cash).
I asked what gave Sigma’s products an advantage in the marketplace, i.e., what constituted Sigma’s “wide moat.” Mr. Lowe told me that Sigma provided “full solutions” in the IPTV streaming business and Sigma’s technology was more “resilient” than competitors’ products. He indicated that Sigma’s products minimize data “packet loss” and disturbances (more so than the competition). He also told me that Sigma had “deeper roots” in the hi-def area than any other competitor. For example, he said, Sigma adopted the Windows Media Standard before anyone else.
I asked a question about Sigma’s financial restatements. Mr. Gay told me “those issues are behind us” and the last time the SEC had contacted Sigma about its financial restatements was in 2006.
Another shareholder criticized the smaller board of directors and the presence of the same three board members on three different committees. The shareholder also asked why insiders were selling shares. Mr. Gay said that insiders were selling shares primarily because of option expiration dates, and Sigma would be using more restricted stock grants to encourage long-term investing. Mr. Gay also said he regretted the company’s stock buyback plan, which was now completed and which caused the company to buy its own shares at the relatively high price of $20.50 per share (SIGM now trades at around $16/share).
The same shareholder pointed out that Sigma was focused on discretionary consumer products, which are being affected most severely in the current recession. Mr. Gay responded that telecommunications companies have not suffered as much as other companies, and despite the recession, some studies projected 30% growth in IPTV sales.
After the meeting, Mary Miller, Director of Marketing, treated shareholders to a product demonstration. It was fascinating to see the technology come alive. Basically, Sigma partners with other companies like Schlage to provide home control products. Sigma supplies the chips in the set top boxes and other devices, which allow third parties to offer unique consumer products. For example, for under $500 (not including the television), you can set up a home that Bill Gates would be proud to own. When we walked into the demonstration room, Ms. Miller adjusted the light, blinds, and temperature using just a few buttons on a remote control. Within seconds, the room went from regular lighting to the perfect movie and TV-watching environment. I had only seen such home entertainment options in movies like Iron Man, so it was fun seeing everything in person.
But Ms. Miller wasn’t done. Using Schlage’s software and gateway (which used Sigma’s Z-Wave chip), she also demonstrated how you could open the door to your home from anywhere in the world, as long as you had internet access. For example, let’s say you left something at home and you wanted your friend to get it for you. With Schlage’s program, you could open your house’s door using a laptop. (Perhaps if Harvard University had invested in this technology, the situation involving Professor Gates and Officer Crowley would have never occurred.)
You can also activate home cameras from your iPhone or your laptop and check on your teenage children or other residents. Ms. Miller joked that from anywhere in the world, parents could have firsthand knowledge about whether their kids were at home and doing their homework. When I asked how much all this would cost, I received price estimates of $12.99/mo for Schlage’s software and about $500 for the lock, gateway and cameras. In terms of home control options, the future is here, and it’s surprisingly affordable.
With Sigma’s strong balance sheet and connections with established companies, it may become a potential takeover target. Right now, however, its revenues need to increase in order to boost its stock price and market exposure. Even so, in this economy, Sigma should be lauded for making a profit while its competitors posted losses.
Disclosure: I own fewer than ten shares of Sigma (SIGM).