Needham & Company analyst, Quinn Bolton, published an earnings review note highlighting that Sigma Designs (NASDAQ: SIGM) reported better than expected F3Q16 results driven by a strong seasonal ramp in its SmartTV business but guidance fell short of consensus. While the weaker than expected near term SmartTV outlook is disappointing, the continued penetration of Vizio's 4K TV line and growing traction of Roku-branded TVs, (SIGM remains the sole-source supplier of SoCs) is promising.

SIGM reported F3Q16 revenue/NG GM/NG EPS of $61.6MM/51.7%/$0.13, which exceeded guidance. Revenue grew 6% Q/Q, led by a strong seasonal ramp in SmartTV revenue (up 31% Q/Q). Stronger than expected sales of legacy TV solutions that carry high GMs drove a favorable product mix, resulting in better than expected NG GM. Z-Wave home control revenue declined $2.8MM Q/Q to $10.2MM as inventory clearance had a greater than expected impact on sales. However, management expects Z-Wave revenue to recover in F4Q16 to levels seen in F1H16.

Reflecting seasonal trends in the SmartTV segment and lower sales of legacy TV products, management guided F4Q16 revenue/ NG GM/NG OPEX to $50-53MM/48-51%/$27.0MM. SmartTV revenue is now expected to decline ~$10MM Q/Q while Media Connectivity and STB revenue will decline modestly. On a positive note, a recovery in Z-Wave revenue could occur as additional SPs ramp solutions. NG OPEX includes $1MM of Bretelon expenses. While management stated NG OPEX would likely remain at $27.0MM per quarter in F1H17 before declining in F2H17 as management finds cost reductions to offset Bretelon expenses

Despite near-term seasonal effects and a decline in legacy TV revenue, SIGM has 4 things going for it:

1) it remains the sole source of SoCs for Roku-branded TVs, which now include models from LG Electronics

2) it is expanding its tier-one customer base

3) it will double the number of SmartTV models based on its SoC solutions in CY16

4) it is sampling its FRC solutions that support HDR to customers in Asia and Europe

FY17 estimates come down modestly but Buy rating and $13 PT remains intact.

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Shares of Sigma Designs closed at $8.91 yesterday.