Wednesday, December 12, 2007

Sigma Designs and growth of IPTV

Tonight, Mad Money's Jim Cramer picked Sigma Designs as his featured stock. Sigma Designs makes the chips that go into the iptv STB and Blue Ray players. Cramer highlighted yesterday's PR by AT&T and their plans to spend $4.5-5B in their U-verse program suggesting iptv is at the beginning of the growth phase and Sigma Design will be a major beneficiary. He mentioned a target price of $100. I posted yesterday about some of the iptv spending and the U-verse program in particular.

Obviously, I am writing about Sigma Designs because of its link to iptv and UtStarcom. Sigma Designs is a supplier of UtStarcom. Some have wondered why Sigma has such a high market cap compared to UT while having much smaller revenues. Here are some numbers. Sigma currently has a $1.7B market cap compared to UTs $327m market cap. Sigma's GMs are 50% compared to UTs 10-15% (UTs iptv GMs not including STB is over 40%). Sigma grew revs at 50% from last quarter and 164% from last year. UT revs are flat. And finally, Sigma makes $2.5/share while UT is losing $1-2/share/year.

While the financial metrics are like night and day, UT is progressing in iptv winning contracts in Japan, China, India, Brazil, and a yet to be named Asian country. GMs in UTs iptv (not including STB) is over 40% and subscriber growth (while "lumpy") is significant and has reached over 600k subscribers. UT is definitely in a position to benefit from iptv growth as well as Sigma Designs.

Sigma currently has a much better model in that it supplies other providers, has much less operating expenses, and very high overall GMs. While Sigma benefits from providing others, they will get major competition starting in January when Broadcom and others introduce their products. I believe UT's benefits will come later on as they established their foothold in various regions. Thats why its essential that UT get their footprint right now even and why I support current expenses. The critical battles are being waged now. Equipment are being tested and contracts are being awarded now.

I talked with Fran Barton and Peter Blackmore about Sigma Designs and their high market cap compared with UT. As shown above, there are major differences but there is no denying UT's main growth driver going forward will be iptv. What I tried to get at is the higher operational costs and the slow growth/margin of the other businesses. So, I was atleast content on sharing my views on discarding the PCD and other none-core business and lowering expenses when prudent to do so. I believe management knows this anyway but the key to higher shareprices is having the street appreciate the growth in iptv without it being diluted by other slow growth/low margin businesses and obviously the losses.

Unfortunately, UT is still known as a PAS company or a PCD company with huge losses and debt issues coming up. Its painful to see a company like Sigma doing so well when they are UTs supplier. Hopefully, the company will take necessary steps to get to profitability, focus the company on their core businesses and then the street will see the company for its positives. Maybe one day, UT will be mentioned by Cramer in a positive light after all these years. He has gone from hating the company (he doesn't trust those guys) to pitying it the last time saying how much it has hurt shareholders and alluding to all the potential and missteps.

The potential is still there. There is still time and UT has the technology and the market is at the very beginning. It is up to management to manage resources well to get the company back to its glory days of growth and profitability.

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