Sigma's secret of success

 BY STEVE KAUFMAN
 Mercury News Staff Writer

 Sigma Designs Inc. soared, then floundered under the watch of its
co-founder, Thinh Tran. But the company has begun flourishing
again, and Tran remains its chairman and chief executive.
There's a lesson here for many small businesses. Tran learned
that a small company-especially one in high technology-gen-
erally must master a small niche, then stick to it, to thrive.
 His Fremont-based computer peripherals company has been
around well over a decade, and it grew rapidly in the late '80s. But
then it fell behind the technology curve, a fate that bedevils many
technology companies, and stumbled badly, gushing $57 million in
red ink between 1992 and 1996. But that's history.
Tran, who immigrated from Saigon in 1971 to pick up
electrical engineering degrees from the University of Wisconsin
and Stanford, has re-engineered Sigma Designs, transforming it
from a purveyor of high-resolution monitors and other PC-en-
hancement products to a maker of high-performance PC video
chips and video circuit boards and graphics chips.
  The company has been profitable three straight quarters, and
Wall Street is looking for more of the same and much fatter profits
this quarter and throughout 1997. Although the company's
share price remains well below its record high, it has risen more
than 30 percent since the end of October.
  Now that financial recovery is in place, Tran's next priority is to
put Sigma back on the map.
  "Sigma Designs has never been a household name in Silicon Val-
ley and probably never will be, but we were a highly profitable
company once and we will be again," Tran says.
  In the fast-changing high-tech arena, Tran says the key is to
never give up. "The trick is to learn from past mistakes and to
maintain the ability to innovate," he says.

  Sigma was founded in 1982, when several Amdahl Corp. engi-
neers began tinkering with a PC memory add-on board in one of
their homes in Sunnyvale. The gambit started as a hobby, but
the thing worked and appeared promising. Two years later,
monthly sales had rocketed to $800,000.

  Shortly afterward, Sigma Designs diversified and introduced
computer graphics cards, and later, specialized monitors. Busi-
ness peaked in fiscal 1990, with earnings of $9.2 million on reve-
nues of $76.2 million.
  Then the party ended.

Sales fizzle

  Many PC makers began putting graphics capabilities on their
motherboards, eliminating the need for graphics cards, and new
software with zooming capability and improved graphics resolution
killed much of the demand for Sigma's monitors. As sales fiz-
zled, Tran faced two choices: Build a new product line-or
watch his company die.

  In late 1993, after multimedia applications had started catching
on, Sigma decided to target that as a new niche. In 1993, it intro-
duced so-called MPEG (moving picture experts group) playback
cards for MPEG CD-ROMs for desktop computers. For $200,
these provide TV-quality CD-ROM video for corporate training,
computer games and other applications. In January 1996, Sigma
followed up with the introduction of MPEG chip sets for MPEG
cards for notebook computers. Then it bought Active Design, a
San Jose graphics chip designer start-up, to break into the 2-D
and 3-D graphics chip business.
  Next quarter, Sigma will introduce MPEG II cards, which will
offer PC video approaching the quality of motion pictures.
  In the MPEG market, at least Sigma is sticking to a narrow
niche. The old Sigma had more products and its niche was much
bigger and far more crowded. Today, bigger companies, such as
LSI Logic and C-Cube Microsystems, also make MPEG chips, but
they focus on the consumer products market, which uses the chips
in karaoke and DVD digital video disc) players and in set-top TV
boxes. They avoid PCs because they represent a smaller market
and require more complex software.

   Keeping up with Intel

  Tran figures that as long as sigma focuses on improving its
@ideo chip technology it can stay ahead even of Intel Corp., which
continues to incorporate more functions on its microprocessor.
Intel is on the verge of introducing its MMX (multimedia exten-
sion chip), which will offer improved video capability. But the
MMX also will include other multimedia functions, and therefore
its video capabilities won't match up to Sigma's, some stock ana-
lysts say.

  While Sigma is also moving into the less exclusive graphics chips
business, Tran says that will remain a side venture. In the short
term, the market is booming and can yield quick cash. In the longer
term, graphics could be married with video technology, giving Sig-
ma a major new market.

  In the three months ended in October, the new Sigma Designs
enjoyed its best quarter yet. It earned $1.1 million in sales of
$12.7 million, up from profits of $349,999 on sales of $10.1 million
the previous quarter.

  Bennett Nollman, a small stock technology analyst at H.C. Wain-
wright & Co., says the fact that Sigma has increased revenues at
least 16 percent in each of the last five quarters means the com-
pany knows how to target strong markets.

  Adds Mark Kirstein, a senior analyst at In-Stat, a Scottsdale,
Ariz., technology market research firm: "Sigma Designs is pursuing
a good strategy for a company with under $100 million in sales.
It shows that there are ample opportunities to dominate niche
markets and do well."