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Article by DailyStocks_admin    (01-01-14 11:20 PM)

Description

SIGMA DESIGNS INC. President & CEO THINH Q TRAN bought 454,546 shares on 12-20-2013 at $ 5.5

BUSINESS OVERVIEW

Overview

Our goal is to be a leader in intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes, and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs and Original Design Manufacturers, or ODMs. We sell our products into six primary markets which are the Digital Television, or DTV, market, home networking market, internet protocol television, or IPTV, media processor market, home control and energy management market, prosumer and industrial audio/video market, and the connected media player market. We derive a minor portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Products

Media Processor SoCs

Our media processor SoC product line consists of a range of functionally similar platforms that are based on highly integrated chips, embedded software, and hardware reference designs. These highly integrated chips typically include all the functions required to create a complete system solution with only the addition of memory. The integrated functions include applications processing (CPU), graphics processing (GPU), media processing (audio and video decoding/encoding), display processing, security management, memory control, and peripheral interfaces. Our embedded software suite provides an operating environment and coordinates the real-time processing of digital video and audio content, is readily customizable by our customers and is interoperable with multiple standard operating systems. Our reference system designs provide a hardware implementation of the circuit board, access to our embedded software suite, and sometimes provide a prototypical end-use product example for customer evaluation and use. We believe our SoC products deliver industry-leading performance in video decoding, picture quality, and software breadth and this value proposition is why manufacturers select Sigma products.

Our SoCs are generally configured for a specific market, either digital television (DTV) or set-top box (STB), the latter of which includes related products such as connected media players. The primary difference between these devices is the interfaces they support. SoCs created for the DTV market obtain inputs from HDMI and analog video and provide outputs to flat panel interfaces. SoCs created for the STB market obtain inputs from Ethernet and other broadcast interfaces and provide output to HDMI and analog video. Core components are therefore shared across these products while their configured hardware/software platforms and support are offered separately.

Home Networking Controllers

Our home networking product line consists of wired home networking controller chipsets that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. We believe these connectivity solutions provide consumers additional connection choices with greater flexibility and allow system integrators and service providers an opportunity to reduce their time and cost of home networking installations. Our home networking solutions are based on the HomePNA (HPNA), HomePlug AV (HPAV), and G.hn standards. HPNA and HPAV are two of the current leading technology standards used for transferring internet protocol, or IP, content across coaxial cables, phone lines and power lines. G.hn is the next generation ITU standard ratified in 2011 to create a unified global standard across coaxial cables, phone lines and power lines. Products based on these technologies enable service providers such as telecommunication carriers, cable operators and satellite providers to deliver high definition television services (HDTV) and other media-rich applications throughout the home. To date, we have not generated significant revenue from our products based on HPAV or G.hn technologies.

Home Control and Energy Management Automation

Our home control and energy management automation product line consists of our wireless Z-Wave chipsets and modules. These devices enable consumers to enjoy advanced home control and energy management automation functionality, such as home security, environmental and energy control and monitoring, within both new and existing homes. These devices consist of wireless transceiver devices along with a mesh networking protocol. Our Z-Wave chipsets utilize a low-bitrate, low-power, low-cost RF communication technology that provides an interoperable home networking security, monitoring and automation solution. We derive most of our revenues from these devices in the form of a module, which includes a chipset plus additional circuitry and an antenna and provides our customers with a ready to use communications capability. Our Z-Wave chipsets and the protocol they use to communicate commands have been built into an ecosystem of over 780 certified products, mostly intelligent appliances for use within the home.

Other Products

We also offer certain legacy products that are sold into prosumer and other industrial applications. These products include our VXP brand video image processor chipsets and our video encoder chipsets. Our VXP chipsets are standalone high performance semiconductors that provide studio-quality video output or input for professional, prosumer and consumer applications and address applications including audio/video receivers, broadcast studios, digital cinema, digital signage, front-projection home theatre televisions, HDTV, medical imaging and video conferencing systems. Our video encoder chipsets are designed to capture video for visual telephony between set-top boxes, connected media players, VoIP devices, video conferencing TVs and video surveillance devices. These products account for a minor portion of our revenue.

Target Markets

Digital Television Market

We target the digital television market with our media processor SoC products. Specifically, we are focused on providing leading edge solutions for next generation Internet-enabled digital televisions or “SmartTV”. These solutions include our enhanced picture quality, our frame-rate conversion chips, and our Internet-access software suite. We believe the SmartTV market will continue its strong growth and over time, incorporate much of the set-top box functionality. Additionally, we also sell selected legacy products into older television applications, such as analog TV and PC/TV products.

Home Networking Market

The home networking market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP or data through wired connectivity. Our home networking products are currently used in IPTV set-top boxes as well as residential gateways, optical network terminals, multiple-dwelling unit, or MDU, masters and network adapters by leading OEMs, such as Actiontec, Cisco Systems, Pace and Motorola. Set-top boxes containing our home networking products are deployed globally, primarily in North America, by telecommunications carriers, such as AT&T, Bell Aliant, Bell Canada, Century Link and Telus. To date, we have not generated significant revenue from our products based on HPAV or G.hn technologies.

IPTV Media Processor Market

The IPTV media processor market consists primarily of telecommunication carriers that deploy IPTV set-top boxes for delivering video services over a DSL network. We serve this market primarily with our media processor products. We are a leading provider of high definition digital media processors for set-top boxes in the IPTV media processor market in terms of units shipped. Our media processor products are used by leading IPTV set-top box providers, such as Cisco Systems, Motorola, Netgem and Samsung. IPTV set-top boxes incorporating our media processors are deployed by telecommunications carriers globally including carriers in Asia, Europe and North America, such as AT&T, Deutsche Telekom, NTT and SFR. We work with these carriers and set-top box providers as well as with systems software providers, such as Microsoft and various Android and Linux providers, to design solutions that address carriers' specific requirements regarding features and performance. In connection with our efforts to expand our IPTV media processor market, we have development projects underway to address the hybrid set-top box opportunities that result from combining IPTV with cable and terrestrial broadcast reception.

Home Control and Energy Management Market

The home control and energy management market consists of communication devices that use a standard protocol to connect equipment inside the home through wireless connectivity. Our wireless Z-Wave home control and energy management automation products are used in a wide variety of consumer products such as thermostats, light switches and door locks. These consumer products are designed by leading industry participants such as Danfoss, Ingersoll-Rand (Schlage and Trane), Leviton and Copper Wiring.

Connected Media Player Market

We target the connected media player (CMP) market with our media processor SoC products. The connected media player market consists primarily of digital media adapters, or DMAs, portable media devices and wireless display devices that perform playback of digital media. Our media processor SoCs are used by consumer electronics providers, such as Iomega, Netgear and Western Digital in applications such as DMAs and other connected media player devices.

Prosumer and Industrial Audio/Video Market

The prosumer and industrial audio/video market consists of studio quality audio/video receivers and monitors, video conferencing, digital projectors and medical video monitors. We target this market with our video image processor and video encoder product lines. Our VXP video image processor products are one of the leading solutions for studio-quality video image processing and are used by leading industry participants, such as Harris, Panasonic, Polycom and Sony. Our video encoder products are used in security and video conferencing systems.

Other Markets

We derive a minor portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Characteristics of Our Business

We do not enter into long-term commitment contracts with our customers and generate substantially all of our net revenue based on customer purchase orders. We forecast demand for our products based not only on our assessment of the requirements of our direct customers, but also on the anticipated requirements of the telecommunications carriers that our direct customers serve. We work with both our direct customers and these carriers to address the market demands and the necessary specifications for our technologies. However, our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our relationship with these customers or lead to excess inventory, which could negatively impact our gross margins in a particular period. During the fiscal years ended February 2, 2013 and January 28, 2012, we recorded provisions for excess inventory of $7.1 million and $9.0 million, respectively, primarily as a result of the end of life of certain products.

Our business is substantially dependent upon being designed into set-top boxes of large telecommunications carriers. If we are not designed into a particular generation of set-top boxes for our large target end customers, our operating results can be materially and adversely affected. We must spend a considerable amount of resources to compete for these design wins and the failure to obtain a design win for a particular generation of set-top boxes, and in particular for our large target end customers, means we likely would not recover a substantial portion of our expenses in competing for these design wins. However, if we do obtain these design wins, it is often the case that our end customer and direct customer will continue to incorporate our chipset solutions for that generation of set-top boxes. The set-top box industry is cyclical due to product transitions from generation to generation. Each generation typically incorporates emerging technologies, and so we must expend a considerable amount of research and development resources in order to compete in each of these cycles. Our failure to obtain a design win in a particular generation does not mean we necessarily will be unable to obtain a design win in the next generation. For example, our sales in the IPTV media processor market decreased in the past four fiscal quarters as a result of our inability to obtain certain design wins for our last generation of chipset solutions. However, we are in the process of competing for the next generation of set-top boxes, and we believe our chipset solutions contain features and prices that compete favorably with competitive offerings.

Many of our target markets are characterized by intense price competition. The semiconductor industry is highly competitive and, as a result, we expect our average selling prices to decline over time. On occasion, we have reduced our prices for individual customer volume orders as part of our strategy to obtain a competitive position in our target markets. The willingness of customers to design our chipsets into their products depends to a significant extent upon our ability to sell our products at competitive prices. If we are unable to reduce our costs sufficiently to offset any declines in product selling prices or are unable to introduce more advanced products with higher gross margins in a timely manner, we could see declines in our market share or gross margins. We expect our gross margins will vary from period to period due to changes in our average selling prices and average costs, volume order discounts, mix of product sales, amount of development revenue and provisions for inventory excess and obsolescence.

Our business is subject to seasonality as a result of selling a number of our semiconductor products to customers who manufacture products for the consumer electronics market. We expect to experience lower sales in our first and/or fourth fiscal quarters and higher sales in our second and/or third fiscal quarters as a result of the seasonality of demand associated with the consumer electronics markets. For example, we expect that our DTV business may experience seasonality typical of the consumer electronics markets, resulting in slower DTV sales in the first and fourth quarter of each calendar year and strongest DTV sales in the third calendar quarter. As a result of the seasonality in our business, our operating results may vary significantly from quarter to quarter.

Industry Background

The growth of the internet, proliferation of over-the-top content, advances in communications infrastructure, digital video and audio compression technologies, home networking technologies and improvements in television displays have resulted in significant demand for products in the markets that we primarily target.

Consumer multimedia entertainment applications are increasingly requiring video and audio data to be processed, transmitted, stored and displayed in an efficient and secure manner while simultaneously maintaining high resolution, multi-channel audio/video functionality and providing the end-user a variety of interactive options. In order to provide this increased functionality in a cost-effective manner, manufacturers of consumer electronics demand semiconductors that integrate more features on a single chip as well as reduce their costs, time-to-market and power consumption. A challenge to manufacturers of digital media processors is to balance the integration of more functionality with lower costs and shorter development cycles.

The IPTV media processor market is primarily driven by video service providers, such as telecommunication service providers, who utilize video servers and set-top boxes to deliver television services based on streaming video over broadband connections using IP. IPTV has become an important consumer multimedia application as it allows telecommunications carriers to deliver advanced video services to consumers using existing telecommunications infrastructure. These carriers are actively pursuing the deployment of IPTV because it enables them to offer attractive video, voice and data, or triple play, services and increase their revenue per subscriber. A challenge faced in delivering high-quality video content to end users across existing copper-based telecommunications infrastructure is the limited data carrying capacity of the existing wiring. This challenge can be addressed by advanced video compression technologies along with advanced high-speed communication technologies, which together can overcome the capacity limitation to allow the delivery of high definition video service throughout the home. IPTV set-top boxes currently use one of three platforms based on software developed by Microsoft or various Android or Linux providers, each of which offers certain advantages and disadvantages.

In the home control and energy management market, devices are involved in routing digital entertainment streams to ensure that television service and other shared media resources are accessible throughout the home. Currently, the vast majority of home video networking uses wired connections to distribute entertainment streams under one of the many networking standards that exist. As consumers begin to demand more from their viewing experience, we believe the ability to deliver these technologies within the home will be critical to a successful solution. Home control products enable remote control and monitoring of a wide variety of home appliances, such as thermostats, lighting and door locks. Much of the early adoption for home control and energy management products has been driven by installations in new home construction. We believe potential deployment by an increasing number of larger system integrators and service providers in the future could drive a cycle of broader adoption. Low frequency, low power solutions can offer consumers cost efficient ways to monitor and conserve energy usage, protect homes from theft and damage and improve the convenience of performing certain household activities. For example, Verizon recently began offering home control and energy management services to their customers. As a result of the benefits that low power and low frequency can provide, the International Telecommunication Union, or ITU, has developed a new sub 1GHz narrow band wireless standard.

In the connected media player market, devices primarily function as a connection between internet content and televisions and other video displays. As a result, there are many new form-factors and device types that are being introduced, such as IP streaming players, direct or network attached storage players, WiDi and WiFi Direct devices, and combination players. The primary differentiation among these devices is the software content that consumers can access. As a result, industry analysts project the overall market for this class of devices is expanding.

In the prosumer and industrial audio/video market, demand for improved video image processing continues to gradually increase from both industrial customers and consumers focused on high-end products, or prosumers. As a result, we believe standalone and integrated video image processors are likely to be incorporated into an increasing number of video-centric products over time.

Our Strengths

We have developed or acquired core technologies, expertise and capabilities that we believe are necessary to provide a comprehensive chipset solution or platform that includes media processing, communications and control. We believe we have the following key strengths:


•
Differentiable value with our DTV technology. We provide our customers with a broad and rich portfolio of IP. Our set of core technologies coupled with the convergence of OTT services and broadcasting provides us an opportunity to be a leading vendor of Smart TV solutions. Our experience in IPTV and software development creates a unique combination of cloud-based application delivery while providing industry leading picture quality, mature video processing, frame rate conversion and market leading demodulator technology.


•
Strong Position within IPTV Market. We are a leading provider of digital media processors for set-top boxes in the IPTV market in terms of units shipped. We have built this position, in part, by being one of the first media processing semiconductor providers to work extensively with IPTV set-top box manufacturers, including Microsoft’s Mediaroom ecosystem, as well as telecommunications carriers to design solutions that address their specific feature and performance requirements. Additionally, we deliver some of the leading IPTV connectivity solutions for set-top boxes and residential gateways. Through these experiences, we have gained valuable insight into the challenges of our customers and carriers and have gained visibility into their product development plans. As a result, we believe we are able to provide our customers with a stable and reliable source of field-proven solutions.


•
Highly Integrated Chipsets Leveraged Across Multiple Consumer Applications . We have developed a proprietary chipset architecture that allows us to integrate high-performance digital video and audio decoding, graphics processing, security management and home audio/video networking and advanced image processing. Our chipsets can replace a number of single function semiconductors, which can significantly improve performance, lower power consumption and reduce total system cost to our customers. Furthermore, all of these functions can be performed synchronously at high processing speeds. Our ability to integrate these multiple functions into a single, high-speed semiconductor allows us to address many different consumer multimedia entertainment applications with the same hardware platform.


•
Differentiated Software Development Capabilities. As a result of over 15 years of experience in delivering video and audio solutions, we have developed expertise in real-time software that synchronizes and controls the playback of video and audio from a variety of sources. This software translates the complex silicon architecture of our chipsets into a much simpler application programming interface. Using this interface, our customers are able to design their products under industry standard operating systems, enabling them to customize our solutions and reduce their time to market. The majority of our engineering personnel are dedicated to software development.


•
Multi-Standard Functionality. We design our chipsets to support multiple industry standards that are used across most consumer entertainment applications. For example, there are over a dozen different video and audio standards used in current consumer applications, including video standards such as H.264, MPEG-4, MPEG-2, MPEG-1 and WMV9, and audio standards such as Dolby, DTS and MP3. Beyond this, there are a range of digital rights management security standards such as AES, RSA and MSDRM. Additionally, there are three primary operating systems, Android, Linux and Microsoft Windows CE, each of which has its own middleware standards.


•
Breadth and Depth of Relationships within the Set-top Box Industry and Service Providers. In order to provide a complete system-level solution for the IPTV market, we have developed strong relationships with industry leaders that form the ecosystem required to deliver an end-to-end solution, from content creation to content display. The IPTV ecosystem consists of providers of middleware, encoders and security solutions. For middleware, server software must be successfully integrated into our products to provide effective system solutions for the service providers. For security solutions, there are also a range of providers, including Microsoft and Nagra. Our strong position in the IPTV market has enabled us to develop and maintain relationships with these providers and offer solutions that are interoperable with their products.


•
Z-Wave Standardization and Ecosystem. Our Z-Wave technology provides system integrators access to over 600 products complying with the same standard and with guaranteed interoperability which we believe creates an attractive ecosystem. This makes our Z-Wave technology unique in the home control and energy management market, and a prime candidate to be selected by new service providers entering this emerging space. Because the International Telecommunication Union, or ITU, has developed a new sub 1GHz narrow band wireless standard which is largely based on Z-Wave technology and defines backwards compatibility to the Z-Wave standard, and because of the large ecosystem of products based on the Z-Wave standard, we believe our Z-Wave products will be one of the preferred solutions for telecommunication and multi-service operators.

CEO BACKGROUND

DIRECTORS AND NOMINEES FOR DIRECTORS

A board of five (5) directors is to be elected at the Annual Meeting. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the Company's five (5) nominees named below all of whom are presently directors of the Company. In the event that any nominee of the Company is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them in such a manner in accordance with cumulative voting as will assure the election of as many of the nominees listed below as possible, and, in such event, the specific nominees to be voted for will be determined by the proxy holders. The Company is not aware of any nominee who will be unable or will decline to serve as a director. The term of office of each person elected as a director will continue until the next Annual Meeting of Shareholders or until a successor has been elected and qualified.

RECOMMENDATION

THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES LISTED BELOW.

NOMINEES FOR DIRECTOR

The names of the nominees, each of whom is currently a director of the Company, and certain information about them is set forth below, including information furnished by them as to their principal occupation for the last five
(5) years and their ages as of April 6, 1995.

NAME OF NOMINEE,AGE: Thinh Q. Tran,41
PRINCIPAL OCCUPATION: Chairman of the Board, President and Chief Executive Officer of the Company
DIRECTOR SINCE: 1982

NAME OF NOMINEE,AGE: Julien Nguyen,37
PRINCIPAL OCCUPATION: Co-Chairman of the Board and Chief Technical Officer of the Company
DIRECTOR SINCE: 1993

NAME OF NOMINEE,AGE: Q. Binh Trinh (1),51
PRINCIPAL OCCUPATION: Vice President -- Finance, Chief Financial Officer and Secretary of the Company
DIRECTOR SINCE: 1984

NAME OF NOMINEE,AGE: Alexander Au (1)(2),51
PRINCIPAL OCCUPATION: President and Chief Executive Officer, Silicon Magic Corporation
DIRECTOR SINCE: 1989

NAME OF NOMINEE,AGE: William J. Almon (1)(2),62
PRINCIPAL OCCUPATION: President and Chief Executive Officer, StorMedia Inc.
DIRECTOR SINCE: 1994

(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Except as set forth below each of the nominees has been engaged in his principal occupation described above during the past five (5) years. Mr. Trinh is the brother-in-law of Mr. Tran. There are no other family relationships among directors or officers of the Company.

Dr. Au has served as a Director of the Company since January 1989. Since April 1994, he has served as President and as a Director of Silicon Magic Corporation, a manufacturer of specialty memory products. Dr. Au served as President and as a Director of Vitelic Corporation, a manufacturer of specialty memory products, from 1983 until April 1994.

Mr. Nguyen has served as Co-Chairman of the Board and Chief Technical Officer of the Company since January 1995 and as a Director since October 1993. From August 1993 until January 1995, he served as the Vice President -- Engineering and Chief Technical Officer of the Company. From May 1992 until October 1993, Mr. Nguyen was President and Chief Executive Officer of E-Motions, Inc., which was acquired by the Company in July 1993. From 1986 to 1991, Mr. Nguyen worked at Radius, Inc. as Director of Product Development.

Mr. Almon has served as a Director of the Company since April 1994. In May 1994, he became President and Chief Executive Officer of StorMedia Inc., a manufacturer of thin film discs. From December 1989 until February 1993, Mr. Almon served as President and Chief Operating Officer of Conner Peripherals, Inc., a manufacturer of computer disk drives and storage management devices. From 1958 until 1987, Mr. Almon held various management positions with the IBM Corporation, most recently as Vice President, Low End Storage Products. Mr. Almon also serves as a Director of Read Rite Corporation.

VOTE REQUIRED

The five (5) nominees receiving the highest number of affirmative votes of the shares entitled to be voted for them shall be elected as directors. Votes withheld from any director are counted for purposes of determining the presence or absence of a quorum for the transaction of business, but have no other legal effect in the election of directors under California law.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Our goal is to be a leader in intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes, and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into six primary markets which are the Digital Television, or DTV, market, home networking market, internet protocol television, or IPTV, media processor market, home control and energy management market, prosumer and industrial audio/video market, and the connected media player market. We derive a minor portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Our chipset products and target markets

We consider all of our semiconductor products to be chipsets because each of our products is comprised of multiple semiconductors. We believe our chipsets enable our customers to efficiently bring consumer multimedia devices to market. We design our highly integrated products to significantly improve performance, lower power consumption and reduce cost.

We sell our chipsets into each of our six primary target markets. For fiscal 2013, 2012 and 2011, we derived nearly all of our net revenue from sales of our chipset products.

Our six primary target markets are the DTV market, home networking market, IPTV media processor market, home control and energy management market, prosumer and industrial audio/video market, and the connected media player market. Because of our focus on these target markets, we separately report revenues that we derive from sales into each of these target markets. The DTV market consists primarily of Internet-enabled digital televisions or “SmartTV”. We serve this market primarily with our enhanced picture quality, our frame-rate conversion chips, and our Internet-access software suite. The IPTV media processor market consists primarily of telecommunication carriers that deploy IPTV set-top boxes for delivering video services over a DSL network. We serve this market primarily with our media processor products. The home networking market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We target the home networking market with our wired home networking controllers that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. Our home control and energy management automation product line consists of our wireless Z-Wave chipsets which consist of wireless transceiver devices along with a mesh networking protocol. The connected media player market consists primarily of digital media adapters, or DMAs, portable media devices, and wireless streaming PC to TV devices that perform playback of digital media. We target this market with our media processor products. The prosumer and industrial audio/video market consists of studio quality audio/video receivers and monitors, video conferencing, digital projectors and medical video monitors. We target this market with our video image processor and video encoder product line. We also sell products into other markets, such as the digital signage, high definition television, or HDTV, projection TV and PC-based add-in markets, which we refer to as our other market. We derive minor revenue from sales of our products into these other markets.

Characteristics of our business

We do not enter into long-term commitment contracts with our customers and generate substantially all of our net revenue based on customer purchase orders. We forecast demand for our products based not only on our assessment of the requirements of our direct customers, but also on the anticipated requirements of the telecommunications carriers that our direct customers serve. We work with both our direct customers and these carriers to address the market demands and the necessary specifications for our technologies. However, our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our relationship with these customers or lead to excess inventory, which could negatively impact our gross margins in a particular period. During the fiscal years 2013, 2012 and 2011, we recorded provisions for excess inventory of $7.1 million, $9.0 million and $0.5 million, respectively, primarily due to the end of life of certain products and an end customer’s transition to a next generation product sold by our competitors.

Many of our target markets are characterized by intense price competition. The semiconductor industry is highly competitive and, as a result, we expect our average selling prices to decline over time. The willingness of customers to design our chipsets into their products depends to a significant extent upon our ability to sell our products at competitive prices. If we are unable to reduce our costs sufficiently to offset any declines in product selling prices or are unable to introduce more advanced products with higher gross margins in a timely manner, we could see declines in our market share or gross margins. We expect our gross margins will vary from period to period due to changes in our average selling prices and average costs, discounts, mix of product sales, amount of license revenue and provisions for inventory excess and obsolescence.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles or GAAP. The preparation of consolidated financial statements and related disclosures requires us to make judgments that affect the reported amounts and disclosures of the assets and liabilities at the date of the consolidated financial statements and also revenue and expenses during the period reported. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. The primary areas that require significant estimates and judgments by management include, but are not limited to, revenue recognition, allowances for doubtful accounts, sales returns, warranty obligations, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, restructuring costs, litigation and other loss contingencies. Management bases its estimates and judgments on historical experience, market trends and other factors that are believed to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the critical accounting policies as disclosed in Note 1 to the consolidated financial statements for the year ended February 2, 2013, reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

Reclassifications: Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation. In the first quarter of fiscal 2013, we concluded that it was appropriate to reclassify our purchased intellectual property, or IP, that is incorporated into our products, from software, equipment and leasehold improvements to intangible assets. The reclassification has no effect on previously reported consolidated statements of operations or accumulated deficit for any period and does not affect previously reported cash flows from operations or from investing activities in the consolidated statements of cash flows. For comparability purposes, the corresponding gross assets and accumulated amortization of $22.2 million and $5.9 million, respectively, have been reclassified as of January 28, 2012.

Restructuring charges : During the third and fourth quarters of fiscal 2013, we adopted a restructuring plan, which included targeted reductions in labor costs through headcount reduction and other related actions and targeted reductions in other operating expenses such as consulting, travel and subletting excess office space. We also plan to migrate to lower cost manufacturing components and processes. We expect to execute the restructuring plan in several phases. During the third quarter of fiscal 2013 we completed the initial phase, which consisted of headcount reduction in our North American operations and the implementation of expense management measures across worldwide operations. During the fourth quarter of fiscal 2013 we implemented a further reduction in headcount, primarily in Canada. For fiscal 2013, we recognized a charge of $3.3 million in connection with our restructuring activities. We anticipate we will incur additional restructuring charges in future periods as we continue to balance our current cost structure with our anticipated growth. In addition, during the first quarter of fiscal 2014 we reduced our headcount by 17 employees, resulting in an estimated restructuring cost of $0.3 million.

Derivative financial instruments: We account for our financial derivatives as either assets or liabilities and carry them at fair value. We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments. We use foreign exchange contracts to hedge certain existing and anticipated foreign currency denominated transactions. Unrealized gains and losses arising from the effective portion of foreign exchange contracts that are designated as cash flow hedging instruments are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the same period or periods during which the underlying transactions affect earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Gains and losses arising from changes in the fair values of foreign exchange contracts that are not designated as hedging instruments are recognized in current earnings.

Short and long-term marketable securities: Short-term marketable securities represent highly liquid instruments with a remaining maturity date at the end of each reporting period of greater than 90 days but less than one year and are stated at fair value. Long-term marketable securities represent securities with contractual maturities greater than one year from the date of acquisition. We classify our marketable securities as available-for-sale because the sale of such securities may be required prior to maturity. The difference between amortized cost (cost adjusted for amortization of premiums and accretion of discounts, which is recognized as an adjustment to interest income) and fair value, representing unrealized holding gains or losses, are recorded separately as a component of accumulated other comprehensive income within shareholders’ equity. Any gains and losses on the sale of marketable securities are determined on a specific identification basis. We monitor all of our marketable securities for impairment and if these securities are reported to have a decline in fair value, we use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and future prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and (vi) a comparison of the income generated by the securities compared to alternative investments. We recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary. No such impairment charges were recorded in fiscal 2013, 2012 and 2011.

Accounts receivable and allowances: We defer recognition of revenue and the related receivable when we cannot estimate whether collectability is reasonably assured at the time products and services are delivered to our customer. We also provide allowances for bad debt and sales returns. In establishing the allowance for bad debt, we review the customer’s payment history and information regarding their credit worthiness. In establishing the allowance for sales returns, we make estimates of potential future returns of products for which revenue has been recognized in the current period, including analyzing historical returns, current economic trends and changes in customer demand and acceptance of our products. In fiscal 2013, we released $0.2 million for sales returns, discounts and bad debt. In fiscal 2012 and 2011, we recorded provisions for sales returns, discounts and bad debt in the total amounts of $0.1 million and $0.3 million, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, or future product returns increased, additional allowances may be required.

Inventory: Inventory is stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market value. We evaluate our ending inventory for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and estimated future unit sales by product as well as product purchase commitments that are not cancelable. We develop our demand forecasts based, in part, on discussions with our customers about their forecasted supply needs. However, our customers generally only provide us with firm purchase commitments for the month and quarter and not our entire forecasted period. Additionally, our sales and marketing personnel provide estimates of future sales to prospective customers based on actual and expected design wins. A provision is recorded for inventory in excess of estimated future demand. In addition, we write-off inventory that is obsolete. Obsolescence is determined from several factors, including competitiveness of product offerings, market conditions and product life cycles. Provisions for excess and obsolete inventory are charged to cost of revenue. At the time of the loss recognition, a new, lower-cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If this lower-cost inventory is subsequently sold, we will realize higher gross margins for those products.

Inventory write-downs inherently involve assumptions and judgments as to amount of future sales and selling prices. As a result of our inventory valuation reviews, we recorded provisions for excess and obsolete inventory of approximately $7.1 million, $9.0 million and $0.5 million to cost of revenue for fiscal 2013, 2012 and 2011, respectively. Although we believe that the assumptions we use in estimating inventory write-downs are reasonable, significant future changes in these assumptions could produce a significantly different result. There can be no assurances that future events and changing market conditions will not result in significant inventory write-downs.

Warranty: Our products typically carry a one-year limited warranty that products will be free from defects in materials and workmanship. Warranty cost is estimated at the time revenue is recognized, based on historical activity and additionally for any specific known product warranty issues. Accrued warranty cost includes hardware repair and/or replacement and software support costs and is included in accrued liabilities on the consolidated balance sheets. Although we engage in extensive product quality programs and processes, our warranty obligation has been and may in the future be affected by product failure rates, product recalls, repair or replacement costs and additional development costs incurred in correcting any product failure. Should actual product failure rates differ from our estimates, additional warranty reserves could be required. In that event, our product gross margins would be reduced.

Software, equipment and leasehold improvements: Software, equipment and leasehold improvements are stated at cost. Depreciation and amortization for software, equipment and leasehold improvements is computed using the straight-line method based on the useful lives of the assets (one to five years) or the remaining lease term if shorter. Any allowance for leasehold improvements received from the landlord for improvements to our facilities is amortized using the straight-line method over the lesser of the remaining lease term or the useful life of the leasehold improvements. Repairs and maintenance costs are expensed as incurred.

Intangible assets: The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization. Intangible assets include those acquired through business combinations and intellectual property that we purchase for incorporation into our product designs. We begin amortizing such intellectual property at the time that we begin shipment of the associated products into which it is incorporated. We amortize the intellectual property over the estimated useful life of the associated products, generally two to three years.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Other intangible assets primarily represent purchased developed technology, customer relationships, trademarks, non-compete agreements, purchased IP and IP R&D. We currently amortize our intangible assets with definitive lives over periods ranging from two to ten years using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method. We capitalize IP R&D projects acquired as part of a business combination and upon completion of each project, IP R&D assets are reclassified to developed technology and amortized over their estimated useful lives. The amounts and useful lives assigned to finite lived intangible assets acquired, other than goodwill, impact the amount and timing of future amortization.

Impairment of goodwill and other long-lived assets: We evaluate goodwill on an annual basis as of the last day of our fiscal year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step quantitative goodwill impairment test. The first step requires identifying the reporting units and comparing the fair value of each reporting unit to its net book value, including goodwill. We have identified that we operate one reporting unit and the fair value of our operating unit is determined to be equal to our market capitalization as determined through quoted market prices, adjusted for a reasonable control premium. We estimate the control premium based on a review of acquisitions of comparable semiconductor companies that were completed during the last four years. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

During development, IP R&D is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We first assess qualitative factors to determine whether it is more likely than not that the fair value of IP R&D is less than its carrying amount, and if so, we conduct a quantitative impairment test. The impairment test consists of a comparison of the fair value to its carrying amount. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Once an IP R&D project is complete, it becomes a definite lived intangible asset and is evaluated for impairment in accordance with our policy for long-lived assets.

We test long-lived assets, including purchased intangible assets (other than goodwill and IP R&D) for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable. If indicators of impairment exist, we determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows that the assets are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long-lived assets and purchased intangible assets.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include forecasts of revenue and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and a determination of appropriate market comparable. We base our fair value estimates on assumptions we believe to be reasonable at that time, however, actual future results may differ from those estimates. Future competitive, market and economic conditions could negatively impact key assumptions including our market capitalization, actual control premiums or the carrying value of our net assets, which could require us to realize an additional impairment.

Long-term investments: Investments in private equity securities of less than 20% owned companies are accounted for using the cost method unless we can exercise significant influence or the investee is economically dependent upon us, in which case the equity method is used. We evaluate our long-term investments for impairment annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

Assets held for sale: Assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. The assets are classified as assets to be disposed of by sale when the following conditions have been met: management has approved the plan to sell; assets are available for immediate sale; assets are actively being marketed; sale is probable within one year; price is reasonable in the market and it is unlikely that there will be significant changes in the assets to be sold or a withdrawal to the plan to sell. Assets classified as held for sale, which include software licenses (design tools) and computer and testing equipment, are reported as current assets at the lower of their carrying amount or fair value less costs to sell and depreciation is not charged on long-lived assets classified as held for sale. Balance of assets held for sale at February 2, 2013 and January 31, 2012 was $0.6 million and zero, respectively, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.

Revenue recognition: We derive our revenue primarily from product sales. Our products, which we refer to as chipsets, consist of highly integrated semiconductors and embedded software that enables real-time processing of digital video and audio content, which we refer to as real-time software. We do not deliver software as a separate product in connection with product sales. We recognize revenue for product sales when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. These criteria are usually met at the time of product shipment. We record reductions of revenue for estimated product returns in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in the agreements, and other factors known at the time. We accrue 100% of potential returns at the time of sale when there is not sufficient historical sales data and recognize revenue when the right of return expires. In addition, we also derive a portion of our net revenue from licensing the right to use our intellectual property from our home control and energy management market. License fees are recognized over the term specified. We recognize licensing revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. These criteria are usually met at the time our technology is made available to the customer. Licensing revenue for fiscal 2013 was $5.7 million. Licensing revenue for fiscal 2012 was less than $0.1 million and zero for fiscal 2011.

We defer revenue when payments are received from customers in advance of revenue recognition. Deferred revenue, consisting principally of license fees collected in advance, at February 2, 2013 and January 28, 2012 was $3.1 million and $0.4 million, respectively, and is included in accrued liabilities in the accompanying consolidated balance sheets.

Income taxes: Income taxes are accounted for under an asset and liability approach. Deferred income taxes reflect the net tax effects of any temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes, and any operating losses and tax credit carry-forwards. Deferred tax liabilities are recognized for future taxable amounts and deferred tax assets are recognized for future deductions, net of any valuation allowance, to reduce deferred tax assets to amounts that are considered more likely than not to be realized.

The impact of an uncertain income tax position on the income tax return must be recognized as the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Stock-based compensation: We measure and recognize compensation expense for all stock-based payment awards made to employees and directors based on their estimated fair values measured on the date of grant. Stock option awards are measured using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our consolidated statements of operations. We estimate forfeitures, based on historical experience, at the time of grant and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Our goal is to be a leader in intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control market. We derive a portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Our chipset products and target markets

We consider all of our semiconductor products to be chipsets because each of our products is comprised of multiple semiconductors. We believe our chipsets enable our customers to efficiently bring consumer multimedia devices to market. We design our highly integrated products to significantly improve performance, lower power consumption and reduce cost.

We derive nearly all of our operating net revenue from sales of chipset products and we sell our chipsets into four primary target markets plus licensing, for which we separately report revenues that we derive from sales into each of these target markets.

DTV Market: Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that are sold into digital televisions or “SmartTVs” as well as other adjacent markets using chipset products that are designed for video post-processing. We believe DTV products complement our existing set-top box products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the connected home. We serve this market with our media processor SoCs and dedicated post-processing products.

Set-top Box Market: Also starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products. We have also eliminated the connected media player market as a separate revenue market as the majority of demand accruing from these sales will be represented in the set-top box market. We serve this market primarily with our media processor products.

Home Networking Market: The home networking market consists of communication devices that use a standard protocol to connect equipment inside the home and stream IP-based video and audio, VoIP, or data through wired or wireless connectivity. We serve the home networking market with our wired home networking controllers that are designed to provide connectivity solutions between various home entertainment products and incoming video streams.

License and Other Markets: This market includes other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

We have presented our results in the historical periods consistent with our new presentation of markets so that the presented information is comparable.

Restructuring program

In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. In fiscal 2013, we reduced our workforce by approximately 114 employees, implemented plans to scale down our reliance on contractors and consultants, impaired the unamortized value of certain software intellectual property licenses, which we no longer intend to use, initiated the closure of our facilities in Canada, Hong Kong and Japan and reduced our discretionary spending across all operational areas. We recorded $3.2 million in restructuring charges in fiscal 2013. Of the total restructuring charges recorded in fiscal 2013, less than $0.1 million were reflected in cost of revenue and $3.1 million were reflected in operating expenses ($0.0 million in cost of revenue, $2.4 million in research and development, $0.4 million in sales and marketing and $0.4 million in general and administrative). Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable. We anticipate that these restructuring measures will reduce ongoing headcount expenses in research and development, sales and marketing and general and administrative by approximately $14.0 million to $14.5 million annually and other additional operational expenses by $0.4 million to $0.5 million annually which is in line with our original estimates. Our restructuring measures could negatively impact our revenues and results of operations in the future as a result of less employees developing future products and working to sell our products.

In the first quarter of fiscal 2014, we recorded restructuring charges of approximately $0.2 million related to a workforce reduction of 17 employees with related charges to cost of revenue and operating expenses of $33,000 and $210,000, respectively. In the second quarter of fiscal 2014, and as part of our ongoing restructuring plan, we incurred restructuring charges of approximately $0.5 million net, related to a contingent liability under our lease obligation in Canada and $0.2 million in severance-related charges that resulted from a workforce reduction of eight employees. Of the total restructuring charges and exit costs recorded in the second quarter of fiscal 2014, there were no restructuring charges reflected in cost of revenue and $0.7 million were reflected in operating expenses ($0.1 million in research and development, $0.1 million in sales and marketing and $0.5 million in general and administrative). In the third quarter of fiscal 2014, and as part of our continuing effort to reduce expenses, we incurred restructuring charges of approximately $1.1 million, of which $1.0 million was related to a workforce reduction of 17 employees across several geographic regions and $0.1 million was related to the termination of a lease agreement and related costs in Canada. Of the total restructuring charges recorded in the third quarter of fiscal 2014, there were no restructuring charges reflected in cost of revenue and $1.1 million were reflected in operating expenses ($0.0 million in cost of revenue, $0.8 million in research and development, $0.1 million in sales and marketing and $0.2 million in general and administrative).

Expenses recognized for restructuring activities impacting our operating expenses are presented in the “Restructuring costs” line of the condensed consolidated statements of operations. We anticipate that these restructuring measures will reduce ongoing headcount expenses in research and development, sales and marketing and general and administrative by approximately $4.0 million to $4.5 million annually and other additional operational expenses by $0.4 million to $0.5 million annually. Our restructuring measures could negatively impact our revenues and results of operations in the future as a result of less employees developing future products and working to sell our products.

Sale of development project

On March 8, 2013, we entered into an Asset Purchase Agreement with a third party (the “Buyer”) to sell certain development projects (intellectual property) and long-lived assets (the “Connectivity Assets”) related to the connectivity technology over coaxial cable market, including the transfer of 21 employees (the “Connectivity Employees”) to the Buyer. The aggregate carrying amount of the Connectivity Assets ultimately transferred was approximately $0.6 million and were classified as assets held for sale in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet at February 2, 2013. We received an initial payment of $2.0 million in cash at the closing of the transaction and a payroll expense reimbursement payment of $0.6 million (as described more fully below). Under the terms of the Asset Purchase Agreement, if certain technical milestones were met by September 30, 2013 as a result of further development of the transferred technology by the Buyer, we were to be paid an additional $5.0 million in cash.

In April 2013, upon receiving the closing consideration of $2.0 million, we recorded a gain of $1.1 million, net of the carrying value of the Connectivity Assets and fees for legal and bank services of approximately $0.4 million. The gain is included in “Gain on sale of development project” in the accompanying condensed consolidated statements of operations for the nine months ended November 2, 2013. The gain was recorded in the first quarter of fiscal 2014 on the basis that we obtained a signed agreement, the closing consideration of $2.0 million was received (non-refundable), delivery of the underlying assets and intellectual property and transfer of employees occurred during the first quarter of fiscal 2014, and we do not have further obligations or deliverables under the Asset Purchase Agreement beyond May 4, 2013. Additionally, in April 2013, in connection with the Asset Purchase Agreement, the Buyer reimbursed us for payroll expenses related to the employees transferred to the Buyer for the period from February 1, 2013 through the actual payroll transfer, totaling $0.6 million.

We have elected to account for the contingent payment under the milestone method described by FASB ASC Topic 605-28, under which consideration contingent on the achievement of a substantive milestone is recognized in its entirety in the period when the milestone is achieved. Milestones are considered substantive based on the potential enhancement of value to the Buyer and the fact that consideration earned from the achievement of a milestone relates solely to past performance. Accordingly, payment consideration if and when the milestone is met associated with the technical milestone will be recorded as other income in our consolidated statements of operations in its entirety, which was due by September 30, 2013, in accordance with the Asset Purchase Agreement.

The Buyer has advised us that it does not believe the milestones have been met by September 30, 2013. We are reviewing the Buyer’s position and evaluating our response, which may include pursuing our rights through the dispute provisions set forth in the Asset Purchase Agreement. To the extent we recognize any payment in regards to the milestone completion, we will recognize income upon receipt of any such proceeds from the Buyer.

Sale of IP licenses

On September 27, 2013, we entered into an agreement to license specified IP block and other related technology to a customer to be used in chip designs for a fee of approximately $8.8 million. In addition, we agreed to provide technical support services to resolve difficulties and to answer inquiries in using the licensed technology. Pursuant to this agreement, the customer is obligated to make payments upon the attainment and acceptance of significant milestones, as set forth in the agreement. During the third quarter of fiscal 2014, the first two milestones were met, delivered and accepted by the customer resulting in $3.9 million of revenue recognition. Total additional milestone payments under the agreement are approximately $4.9 million.

Critical Accounting Policies and Estimates

Adoption of new accounting policy: During the third quarter of fiscal 2014, we adopted prospectively, the authoritative guidance, ASU No. 2010-17, “Revenue Recognition – Milestone Method”, (ASU 2010-17) that provides an alternative method of revenue recognition for milestone payments. Under the milestone method guidance, we recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. To be considered substantive, the consideration earned by achieving the milestone should be (a) commensurate with (1) either the vendor’s performance to achieve the milestone or (2) to the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone (b) the consideration should relate solely to past performance, and (c) the consideration should be reasonable relative to all deliverables and payment terms in the arrangement. Other milestones that do not fall under the definition of a milestone under the milestone method are recognized under the authoritative guidance concerning revenue recognition. There have been no other significant changes in our reported financial position or results of operations and cash flows as a result of the adoption of new accounting pronouncements or to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 that have had a significant impact on our consolidated financial statements or notes thereto.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or US GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The primary areas that require significant estimates and judgments by management include, but are not limited to, revenue recognition, allowances for doubtful accounts, sales returns, warranty obligations, inventory valuation, stock-based compensation expense, purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, restructuring costs, litigation and other loss contingencies. These estimates and assumptions are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements.

Business combinations

In May 2012, we completed our acquisition of certain assets from Trident Microsystems, Inc. and certain of its subsidiaries (collectively referred to as “Trident”). The consolidated financial statements include the results of operations of Trident commencing as of the acquisition date. Refer to Note 8, "Business combinations” of Part 1, Item 1, “notes to condensed consolidated financial statements."

Results of Operations

Net revenue

Our net revenue for the three months ended November 2, 2013 decreased by $9.5 million, or 15%, compared to the corresponding period in the prior fiscal year mainly due to a decrease of $17.1 million in DTV revenue, partially offset by increases of $6.2 million and $1.1 million in license and other revenue, and home control revenue, respectively. For the nine months ended November 2, 2013, our net revenue decreased by $11.7 million, or 7%, compared to the corresponding period in the prior fiscal year. This was primarily driven by a decrease in DTV revenue of $18.4 million, home networking revenue of $3.8 million and set-top box revenue of $4.1 million, partially offset by home control revenue increasing by $5.2 million and license and other revenue increasing by $9.5 million.

Net revenue by target market

We sell our products into four primary target markets, consisting of the DTV market, which includes the products resulting from our acquisition of certain assets from Trident Microsystems in the second quarter of fiscal 2013 and our prosumer and industrial audio/video products previously reported as a separate revenue market now included in DTV the home networking market the set-top box market, which includes the combination of our previously separately reported IPTV media processor products and our connected home player products; and the home control market. We also have license and other revenue.

DTV market: For the three months ended November 2, 2013, net revenue from sales of our products into the DTV market decreased by $17.1 million, or 57%, compared to the corresponding period in the prior fiscal year. For the nine months ended November 2, 2013, net revenue decreased by $18.4 million, or 30%, compared to the corresponding period in the prior fiscal year. In both cases, the overall decline was a result of lower demand due to overall softness in macroeconomic conditions especially in Europe and due to a shift away from legacy products as we continue to focus on the development of our new products. We expect that our DTV business may experience seasonality common to consumer electronics markets, resulting in slower DTV sales in the first and fourth quarter of each calendar year and strongest DTV sales in the third calendar quarter. We expect our revenue from the DTV market to continue to be a significant percentage of net revenue but will fluctuate in certain periods as we develop and introduce new products for this market.

Home networking market: For the three months ended November 2, 2013, net revenue from sales of our products into the home networking market remained relatively flat at $19.4 million compared $19.7 million for the corresponding period in the prior fiscal year. For the nine months ended November 2, 2013, net revenues decreased $3.8 million, or 6%, compared to the corresponding period in the prior fiscal year. The decrease was primarily the result of ASP declines and contract manufacturers' inventory adjustments. We expect our revenue from the home networking market to fluctuate in future periods based on seasonality changes with our contract manufacturers who manufacture equipment incorporating our products for deployment by telecommunication providers and transitions to next generation technologies.

Home control market: For the three months ended November 2, 2013, net revenue from sales of our products into the home control market increased $1.1 million, or 24%, compared to the corresponding period in the prior fiscal year. For the nine months ended November 2, 2013, net revenue from sales of our products into the home control market increased $5.2 million, or 46%, compared to the corresponding period in the prior fiscal year. The increase was primarily the result of increased demand in the home control market, evidenced by an increase in unit shipments. We have compelling products for our home control market and we continue to target large operators who are introducing home control products primarily in the North America and European regions. We expect our revenue from the home control market to continue to increase in the foreseeable future.

Set-top box market: For the three months ended November 2, 2013, net revenue from sales of our products into the set-top box market increased $0.5 million, or 6%, compared to the corresponding period in the prior fiscal year. The increase was primarily due to the addition of new customers in our set-top box market. For the nine months ended November 2, 2013, net revenue from sales of our products into the set-top box market decreased $4.1 million, or 12%, compared to the corresponding period in the prior fiscal year. The decrease was primarily attributable to our operators’ pending transitions to newer generations of set-top box products and the resultant draw-down of inventory levels. IPTV service providers deploy set-top boxes for many years and take a long time to evaluate potential new platforms, which results in long cycles between design wins and actual revenue. As such, the overall decline in revenue is a result of design losses that took place over a year ago. On the other hand, we believe that our recent successes in design wins, especially for Mediaroom second generation, should result in a new wave of deployments. We expect our net revenue from the set-top box market, however, to fluctuate in future periods as this revenue is dependent on IPTV service deployments by telecommunication service providers, adoption of newer and future generations of our technology, changes in inventory levels at the contract manufacturers that supply them and competitive market pressures.

Home control market: For the three months ended November 2, 2013, net revenue from sales of our products into the home control market increased $1.1 million, or 24%, compared to the corresponding period in the prior fiscal year. For the nine months ended November 2, 2013, net revenue from sales of our products into the home control market increased $5.2 million, or 46%, compared to the corresponding period in the prior fiscal year. The increase was primarily the result of increased demand in the home control market, evidenced by an increase in unit shipments. We have compelling products for our home control market and we continue to target large operators who are introducing home control products primarily in the North America and European regions. We expect our revenue from the home control market to continue to increase in the foreseeable future.

License and other revenue : Our other market consists primarily of technology license revenue and other ancillary markets. During the three months ended November 2, 2013, we recorded net revenue of $6.4 million compared to $0.2 million recorded during the same period in the prior fiscal year. For the nine months ended November 2, 2013, we recorded net revenue of $11.4 million compared to $1.9 million recorded during the same period in the prior fiscal year. The increase in revenue is attributable to two large license agreements pursuant to which we license our technology to third parties and for which we were able to recognize revenue in fiscal 2014.

Net revenue by geographic region

Asia: Our net revenue from Asia as a percent of total revenue grew 11% to $38.6 million for the three months ended November 2, 2013 compared to $38.5 million for the three months ended October 27, 2012. Our net revenue from Asia decreased 2% to $117.0 million for the nine months ended November 2, 2013 from $119.4 million for the nine months ended October 27, 2012. The slight decrease in the nine months ended November 2, 2013 was a result of lower demand in Asia for some legacy products primarily due to a shift in consumers’ preference for higher-end products.

North America: Our net revenue from North America increased 110% to $10.1 million for the three months ended November 2, 2013 from $4.8 million for the three months ended October 27, 2012. Our net revenue from North America increased 73% to $20.7 million for the nine months ended November 2, 2013 from $12.0 million for the nine months ended October 27, 2012. The increase in both comparative periods was due to higher revenue recorded in the license and other revenue market from two main customers in this region.

Europe: Our net revenue from Europe decreased 67% to $5.8 million for the three months ended November 2, 2013 from $17.6 million for the three months ended October 27, 2012. Our net revenue from Europe decreased 42% to $19.7 million for the nine months ended November 2, 2013 from $34.1 million for the nine months ended October 27, 2012. The decrease in both comparative periods is primarily the result of a decrease in shipments to our DTV market and the overall weak macroeconomic conditions in Europe.

Other regions: Our net revenue from other regions decreased to less than $0.1 million for the three months ended November 2, 2013 from $3.0 million for the three months ended October 27, 2012. Our net revenue from other regions decreased 53% to $3.2 million for the nine months ended November 2, 2013 from $6.9 million for the nine months ended October 27, 2012. The decrease in both comparative periods was primarily the result of the decrease in demand for our products in the home networking market in Brazil.

Gross Profit and Gross Margin

Our gross profit increased $5.6 million, or 22%, for the three months ended November 2, 2013 compared to the corresponding period in the prior fiscal year. Our gross profit increased $8.9 million, or 12%, for the nine months ended November 2, 2013 compared to the corresponding period in the prior fiscal year. The increase in both comparative periods was mainly due to higher revenue volumes in the license and other revenue market partially offset by a revenue decline in our DTV market.

Our gross margin increased to 57.1% during the three months ended November 2, 2013 from 39.9% during the same period in the last fiscal year due to a more favorable mix of products sold in our license and other market as well as our set-top box market. Our gross margin increased to 53.6% during the nine months ended November 2, 2013 from 44.8% during the corresponding period in the prior fiscal year. This increase in gross margin was spread across all markets with the exception of home networking.

Research and development expense

Research and development expense consists of compensation and benefits costs including variable compensation expense, development and design costs such as mask, prototyping, testing and subcontracting costs, depreciation and amortization of our engineering design tools and equipment costs, stock-based compensation expense, and other expenses such as costs for facilities and travel. During certain periods, research and development expense may fluctuate relative to product development phase and project timing.

Research and development expense during the three months ended November 2, 2013 decreased $9.2 million, or 34%, compared to the three months ended October 27, 2012, primarily due to reductions of $6.1 million in employee-related expenses, $0.6 million in stock-based compensation expense, $0.9 million in amortization and depreciation expense, $0.9 million in projects and material costs and $0.7 million in support and other variable expenses. Research and development expense during the nine months ended November 2, 2013 decreased $20.0 million, or 26%, compared to the nine months ended October 27, 2012, primarily due to reductions of $13.4 million in employee-related expenses, $1.6 million in stock-based compensation expense, $1.2 million in amortization and depreciation expense, $2.6 million in projects and material costs and $1.2 million in professional fees, services and other variable costs. In both the three and nine month periods, the significant cost reduction in our research and development expense resulted from our restructuring efforts, principally through reductions in force.

Sales and marketing expense

Sales and marketing expense consists primarily of compensation and benefits costs, including commissions to our direct sales force, stock-based compensation expense, trade shows, travel and entertainment expenses and external commissions.

Sales and marketing expense for the three months ended November 2, 2013 and October 27, 2012 includes $0.1 million and $5.7 million, respectively, of settlement charges in connection with a failure to comply with a third party technology licensor’s custodial and reporting requirement. Excluding settlement charges, our sales and marketing expense decreased $1.5 million, or 21%, for the three months ended November 2, 2013 compared to the three months ended October 27, 2012. The decrease was primarily due to reductions of $0.8 million in employee-related expenses, $0.1 million in stock-based compensation and $0.6 million in marketing, travel and other variable costs. Excluding settlement charges, our sales and marketing expense decreased by $5.0 million, or 23%, for the nine months ended November 2, 2013 as compared to the nine months ended October 27, 2012. The decrease was primarily due to reduction of $2.8 million in employee-related expenses, $0.4 million in stock-based compensation and $1.7 million in travel, marketing and other variable costs. The overall decrease in our sales and marketing expense is a result of our reduction in force and our restructuring efforts.

General and administrative expense

General and administrative expense consists primarily of compensation and benefits costs, stock-based compensation expense, legal, accounting and other professional fees and facilities expenses.

General and administrative expense decreased $0.8 million, or 13%, during the three months ended November 2, 2013 compared to the three months ended October 27, 2012, primarily due to lower corporate-level spending across all general and administrative areas. For the nine months ended November 2, 2013 as compared to the nine months ended October 27, 2012, general and administrative expense decreased $7.0 million, or 32%, primarily due to decreases of $1.2 million in employee related expenses, $0.5 million in stock-based compensation, $0.4 million in impairment charges, $2.9 million in professional fees and services and the costs related to the shareholders’ meetings, and $2.0 million in other corporate-level spending and allocations. The overall decrease in our general and administrative expense is a result of our reduction in force and our restructuring efforts.

CONF CALL

Kenneth Lowe - Vice President of Strategic Marketing
Thank you, Denise. Welcome to Sigma Designs' conference call to discuss financial results for our third fiscal quarter of 2014. I'm Ken Lowe, Sigma's Vice President of Strategic Marketing. With me today are Thinh Tran, Sigma's CEO; Elias Nader, Sigma's interim CFO; Mustafa Ozgen, Vice President and General Manager of Home Multimedia Products; and Gabi Hilevitz, Vice President and General Manager of Home Connectivity Products. The press release containing the quarter results, including selected income statement and balance sheet information, was released after the market closed today. If you did not receive the results, the release will be available in the Investors section of our website. Today's agenda will begin with my brief introduction, a review of selected financial by Elias, an executive overview by Thinh, a business update by Mustafa and Gabi on their respective business units and finally, our forward guidance by Thinh. We'll then open the call to questions from analysts and institutional investors, and we expect to conclude the call within 1 hour.

Before we begin, I'd like to remind everybody that today's call contains forward-looking statements, including guidance we provide about our future revenue, gross margin and other financial measures and anticipated trends in our target markets. We caution you that the forward-looking information we present today based on our current beliefs, assumptions and expectations speak of only as of today's date, and involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Other risk factors that may affect our business and future results are detailed from time to time in Sigma's SEC reports, including Sigma's quarterly report on Form 10-Q as filed with the SEC on September 12, 2013. A partial list of these important risk factors is set forth at the end of today's earnings press release. Sigma undertakes no obligation to revise or otherwise update publicly any forward-looking statement except as required by law.

In addition, during today's call, we will be reporting certain financial information on a non-GAAP basis, such as non-GAAP net income, which excludes certain costs and expenses. These excluded items are described in more detail in today's earnings press release, along with a detailed reconciliation of our GAAP to non-GAAP results.

And with that, I'll turn it over to Elias to cover the financial aspect.

Elias N. Nader - Interim Chief Financial Officer, Principal Accounting Officer, Principal Compliance Officer, Corporate Controller and Secretary
Good afternoon, everyone. Thank you, Ken. For the third quarter of fiscal 2014, revenue was $54.4 million, an increase of $600,000 or 1.2% compared to $53.8 million in the previous quarter. Compared to the year ago quarter, our revenue decreased $9.5 million or 14.9% from $63.9 million. Our revenue breakouts for the quarter are as follows: by target market and percentage of total revenues for the third quarter, our DTV, $13.1 million or 24%; set-top box, $9.6 million or 18%; home networking, $19.4 million or 35%; home control, $5.9 million or 11%; license and other, $6.4 million or 12%.

Gross margins. GAAP gross margins were 57.1% for the third quarter compared to 52.2% in the preceding quarter and 39.8% in the same quarter last year. Non-GAAP gross margins were 59.8% for the third quarter compared to 55.3% in the preceding quarter, and 44.3% in the same period last year. The primary factor in our improved non-GAAP gross margins in Q3 was due to higher license revenue.

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