Digi International Inc (DGII) 2003 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the fourth quarter and fiscal year earnings conference call.

During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder this conference is being recorded today, November 6, 2003.

I would like to turn the conference over to Mr. Chris Krishnan, Senior Vice President, Chief Financial Officer with Digi International. Please go ahead, sir.

Good afternoon. And thank you for joining us today.

Before we start I need to go over a few details. First, if you do not have a copy of earnings release you may access it through press release action off our website at WWW.Digi.com.

Second, I would like to remind our listeners that our remarks may contain forward-looking statements that involve risks and uncertainties. These forward-looking statements are not a guarantee of the company's future performance. Important factors that may cause actual results to differ materially, include but are not limited to the following: rapid changes in technologies that may displace products sold by Digi; the dip in the industry in which Digi's operates; Digi's reliance on distributors; declining prices of networking products and changes in the company's level of profitability.

Finally, as a result of SEC's recently adopted rules governing the use of non-GAAP financial measures, we will not provide any non-GAAP financial measures in our earnings release, however, in our earnings release, we provided a balance sheet, a statement of operations, a statement of cash flows from which you can calculate those measures. We will also not provide any non-GAAP financial measures in response to questions at the end of the conference call, but rather will refer you to the information in the financial statements.

Now I would like to introduce Mr. Joe Dunsmore, Chairman, President and CEO.

Thank you, Chris.

And thank you to all those joining us for our fourth quarter and fiscal 2003 conference call.

Our earnings release crossed the wire today at 1:49 instead of 4:00 p.m. due to an error by our investor relations firm.

Frankly, we were very surprised by the market reaction since we feel that fiscal 2003 was a very good year for Digi and its shareholders. The company maintains steadfast focus on its objectives throughout the year. As a result the company managed revenue and profitability guidance throughout fiscal 2003.

For the year, Digi achieved a revenue increase of 1.4% over last year to $102.9 million. Increased gross margins of 8.9% year-over-year from 54.7% to 59.6%, and yielded very strong operating performance with a cash flow from operations of $15.8 million. Additionally, the company improved its balance sheet with strong asset management and ended the year with a cash in marketable securities balance of $57.6 million. The company accomplished these strong results by focusing on our key objectives through the fiscal 2003.

Revenue increase was an important objective for the company in fiscal 2003. Over the prior three years in executing the turnaround strategy we divested three businesses and acquired three others. Fiscal 2003 was the first year without major acquisition or divestiture activity. We felt that it was important to drive some level of revenue growth even in the face of a slow economy. We finished the year at $102.9 million which is at the high-end of our $101 to $103 million fiscal 2003 guidance. We were very happy with the numbers posted in our NetSilicon, Device Server and USB product lines offsetting the decline that we see in the async serial port expansion product line.

As you know, a key to Digi achieving sustained revenue growth is new product introduction. The year was characterized by new product introductions that broaden the product portfolio for our sales force, add wireless capabilities, and provide users with conductivity solutions that have a common core technology. The year started on a strong note with the Digi 1IA real port receiving the Control Engineering Editors Choice Award in January. NetSilicon added three very important products to its portfolio during the year. Introducing the 7520 network processor, the 9750 network processor, and the Net+Works 6.0 software suite for embedded device networking. These product additions provide the global NetSilicon OEM sales force with a broader product line to achieve its design win objectives.

The company introduced several products with wireless capability in fiscal 2003. The Digi TSW product line of one, two and four port wireless device servers provide serial to 802.11 wireless conductivity combined with Digi's patented real port technology and powerful security features. The Wavespeed/S wireless device server provides serial to blue tooth wireless connectivity for mission critical cable replacement applications.

Digi introduced the Digi connect ME module which is the most powerful and customizable embedded network solution available, as well as one of the smallest. The addition of the Digi connect ME module allowed Digi to realize it's strategy to provide a complete set of connectivity solutions that have a common core technology base to its customers. This means that a Digi customer can migrate from an external box to a border module and eventually to fully integrated chip without making major changes to their software platform.

In addition to new products that provide leading edge connectivity technologies to the marketplace, Digi made some tactical R&D expenditures that extend the life of our heritage asynchronous serial port expansion product line. We added Universal PCI, low profile PCI, and PCIX compliant products that will allow us to maintain our leadership position while extending the life of this product line.

Digi continued to maintain a strong balance sheet throughout fiscal 2003. Digi finished 2003 with a cash and marketable security balance of $57.6 million, slightly below the 2002 year end balance of $58.1 million. We achieved this result despite major extraordinary cash expenditures for stock buy-back and early debt pay down. We continued our aggressive approach to asset management throughout the year with improvements in days sales outstanding and inventory that Chris will discuss later in the call.

We've been executing on a plan to leverage the Digi brand into key vertical markets such as point-of-sale and industrial automation. Our strategy has been to extend the value of the Digi brand into these verticals by acquiring or organically developing growth products that will extent the value of the brand. In 2003 we augmented that strategy with the vision and message "Making Device Networking Easy". We made good progress on both strategies this year. This is manifested in many ways. The NetSilicon value proposition is to make device networking easy by providing the core technology and tools to reduce time to market for our customers.

In all product lines we are working on continuous improvement of our installation and configuration software and documentation to make device networking easier for our customers. The easy migration path for our customers from box to board or module to chip is also focused on this objective for our customers. We've made very good progress with these and many other initiatives to make device networking easy for our customers in fiscal 2003.

In summary while I'm very proud of the accomplishments of the Digi team in fiscal 2003, I believe that the future is much brighter as this team addresses the opportunities and challenges of 2004 and beyond.

Now I will hand it back to Chris to discuss our financial results in more detail.

Thank you, Joe.

Our revenue for the quarter was $26.3 million, an increase of $1.2 million over our fourth quarter revenue a year ago and the at upper end of our recently updated guidance of $26 to $26.2 million.

Sales of our device networking products which include both NetSilicon and Device Over product lines were $8 million, an increase of $1.4 million or 19.8% over year-ago quarter. Sales of the connectivity solution products have remained flat at $18.3 million in the fourth quarter of fiscal 2003 compared to $18.5 million in the fourth quarter of 2002.

Sales of device networking products in fiscal 2003 were $30.8 million compared to $18 million in fiscal 2002, reflecting the mid-year acquisition of NetSilicon in February of 2002.

Gross margin for the quarter was 59.1% compared to 55.9%, an increase of 5.7% in the fourth quarter of fiscal 2002. Gross margin for the full fiscal year of 2003 was 59.6% compared to 54.7%, an increase of 8.9% and as we continue to expand our product offerings of high margin embedded networking connectivity products and leverage our continued market strength in certain high margin mature products. The embedded network and connectivity products have replaced a lower margin Milan(ph) products included in our gross margin a year ago.

Our operating expense for the quarter was at $14 million compared to $20.6 million in the fourth quarter fiscal 2002. Expenses for the year were $55.6 million, compared to prior year of $77.3 million.

As indicated during our conference call last fiscal year end, the cost saving measures that were undertaken by the company at the end of the fiscal year 2002 would reduce our 2003 operating expenses by $10 to $11 million. The cost saving measures implemented at the end of fiscal 2002, combined with continuing cost controls in fiscal 2003, resulted in a savings of $11.7 million in sales and marketing, R&D, G&A and intangible amortization.

Net income for the quarter was $1.8 million or 9 cents per diluted share compared to a net loss of $4.4 million, or 20 cents per diluted share fourth quarter of fiscal 2002. Earnings per share exceeded the recently updated guidance of 7 to 8 cents.

Income, before cumulative effective of accounting change related to the adoption of SFAS-142, was $6.6 million for the full year of 2003 or 31 cents per diluted share. The net loss for fiscal 2003 after the cumulative effect of accounting change was $37.3 million or $1.76 per diluted share. This compares to a net loss of fiscal 2002 of $12.8 million or 65 cents per diluted share.

Turning to the balance sheet, our cash position increased by $3.1 million from the prior quarter. The increase is primarily a result of cash generated from operations of $6.8 million, offset partially by net cash used in financing activities of $3.5 million to pay down the debt on our Dortmund, German building, eliminating the long-term debt on the balance sheet and partially replacing it with lower interest short-term borrowing.

Cash decreased $500,000 to end the fiscal year at cash provided by operating activities of $15.7 million, was offset by cash used in investing activities of $3.7 million for various earn out payments on prior acquisitions, and purchases of property, plants and equipment, and by cash used by financing activities of $12.5 million primarily for repurchasing all the remaining shares of Sorrento Networks and the elimination of long-term debt in Germany and the replacement of short term borrowing.

Accounts receivable at the end of the year was $10.8 million compared to $10.5 million at the end of the prior fiscal year. DSO was 32 days compared to a year ago of 33 days. Inventory levels at the end of the fiscal year were $10.4 million compared to $12.5 million at the end of prior fiscal year, a decrease of $2.1 million or 16.4%.

Once again in fiscal 2003 Digi maintained a high quality balance sheet. With the current ratio of 3.2 to 1 compared to a year ago 3.7 to 1. The decrease is primarily the result of replacing our long-term debts in Germany with short-term borrowing of approximately $2 million and the reduction in inventory in fiscal 2003. The net tangible book value per share totaled $4.06 compared to $3.58 a year ago. Cash value per share is $2.85 compared to $2.62 last fiscal year.

Now I would like it take a few moments to provide you with some guidance for fiscal year 2004.

For the first quarter of fiscal 2004 we expect our revenues to be in the range of $25 to $26 million with earnings per diluted share in the range of 4 to 6 cents. For the full fiscal year we expect revenues to increase over fiscal year 2003 by 2% to 7%. We expect that earnings per diluted share for fiscal 2004 will be in the range of 26 to 32 cents.

Fiscal year 2003, earnings per diluted share included 9 cents relating to the tax benefit of net operating loss carry forward recorded. Earnings per diluted share for fiscal 2004 are expected to increase by 18% to 45% over 2003 earnings per diluted share, before the cumulative effect of accounting change related to the adoption of SFAS 142 and the tax benefit of net operating loss carried forward of 9 cents.

What this means is that, if you look at our fiscal 2003 earnings, it ended up at 31 cents including a 9 cent benefit of the operating loss carried forward. If you take that out, the reported earnings would be 22 cents, so the growth expected in EPS in 2004 is 26 to 32 cents which is 18 to 45%.

Now I would like to open the call to questions. Operator?

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your answer has been questioned and you would like to withdraw your registration, please press the one followed by the three. If you are using a speaker phone, please lift your handset before entering your request. One moment please for the first question.

Our first question comes from the line of William Becklean with Oppenheimer and Company. Please proceed with your question.

Hi, Joe and Chris.

Hi, Bill.

My question has to do with the revenue growth from the device networking business, which, if you look at the last 3 quarters has been relatively flat despite the fact that you have been getting design wins. Can you talk about when you expect to see that business start to pick up? The experience that you've had this quarter with design wins, what kind of design wins you have in backlog and when some those will actually start turning into revenues?

Thanks, Bill.

You're right about the last few quarters being flat. If you look that the piece year-over-year, if you look at Q4 '03 versus Q4 '02 it's up about 20% . And so we're seeing significant and about the same is true I think for Q3. I think there's a similar increase. So about a 20% increase, so year-over-year it's up.

And in terms of the fuel for growth in the future, we're real optimistic about the NetSilicon business. We had over 20 design wins again this quarter. We had several high volume design wins with major name customers. Those design wins were in verticals like industrial automation, office automation, building automation, medical and probably most importantly, if you look at the fuel for growth for the NetSilicon business, for the device networking business, we introduced the NS-7520 in 2003. We just introduced the NS-9750 which is a totally new class of device for us, instead of an arm 7 platform, this is an arm 9 platform, and what we're seeing in the marketplace is extremely positive feedback to that product.

So we feel like there's a significant underpinning in terms of fuel that it provides a broader product portfolio for the NetSilicon sales team and that these products and the current design win base momentum will allow us to drive long-term growth in that business.

Thanks.

Thanks, Bill.

Thank you.

Our next question comes from the line of Jay Meier with MJSK Equity Research.

Please proceed with your question.

Nice quarter, guys.

Thank you.

My first question as follow on from the last question.

I'm hoping you can just talk a little bit about the ramp cycle and any lag between revenue contribution and the introduction of new products.

Yeah, that varies. In the NetSilicon business, since it's an embedded solution, what we tend to see is a long cycle. We introduce a new product. A customer needs to spec us in, then design us in, and then go to market. And so from the time we get the design win to the time we actually get revenue can vary anywhere from, you know, probably a minimum of six to eight months to over two years. Sometimes longer. So on the NetSilicon side of the business, you have a rather long lead time between design win and actual production volume.

On the Digi side of the business, it's a shorter sales cycle, but we still tend to get designed in as the connectivity piece of a broader vertical market solution. So our cycles, tend to require product evaluation, certification, then we get the win and start shipping products. So that might, the sales cycle might be, you know, a three to six month sales cycle or something like that.

Okay.

So we've seen, throughout the course of '03, a number of new product releases and a number of new contracts with customers. Does your guidance guidance for '04 include significant contribution from those, knowing that the ramp cycles are so long?

Yeah, '04 really if you look underneath '04, looking at networking solutions and connectivity solutions solutions, we're still going to be looking at growth on the networking solution side of the business in 04. Within connectivity solutions we're certainly looking at significant growth in our USB product line, but the thing that we have to counter balance that with is the understanding that the asyncrnous serial port expansion product line is still part of a declining market.

And so while we're looking at top line growth projected at 2 to 7%, what you have to understand is that there's growth elements of that that are certainly higher than the 7%, and there are other elements, the asynch serial port product expansion line, that's a part of the market and overall market that, as we've said many times in the past, has been in consistent decline.

I understand.

So, you know, my impression is that the guidance here, my personal impression is that the guidance is relatively conservative. Can you give us any color as to how conservative it really is?

Good question, Jay.

The way I like to characterize it is we're very realistic about the business. We look at our plan very seriously and be very realistically. And so when we did our plan for 2003, you know, a few months ago, looking at 2003 and 2004, 2004 plan, it just wasn't clear what the market and the economy was going to do. So we planned accordingly.

You can look at a little bit at our history, you know, in 2003, in terms of the guidance that we provided each quarter, 24 1/2 to 25 1/2 and our EPS guidance, and we believe we looked at that realistically and worked very hard to meet or exceed those quarters. And so we look at 2004 the same way.

Okay. That sounds good.

Chris, one quick question. Am I correct in seeing that there was a two-cent tax benefit in the fourth quarter?

That is correct.

Okay. That's it. Thank you.

Thank you, Jay.

Thanks, Jay.

Thank you.

Ladies and gentlemen, as a reminder to register a question, please press the 1, 4.

Our next question comes from the line of Tursh Barber with Compass Point. Please proceed with your question.

Couple quick questions. What is the tax rate that you're assuming in the Q1 '04 guidance and fiscal year '04 as well?

Fiscal year '04 we're projected around 26% effective rate.

So that's --

If you look at this year we had pretty much a 0% effective rate.

That makes sense. And then seasonality, is there anything particular about your Q1 or a December, the December quarter that is-that would lead to sequential down guidance, is there anything typically that you see in your December quarter?

Well, let me characterize the guidance.

We increased the guidance, our guidance the last four quarters has been 24 1/2 to 25 1/2. We increased the guidance to 25 to 26 and I understand your point from sequentially down from the revenue this quarter.

In terms of seasonality, the way I've answered that question in the past there's not a tremendous amount of seasonality in this business because we have offsetting forces. However, 1Q has tended to be a little bit light, and the reason is because of the heavy holiday season. We have a lot of our product that flows through two-tier distribution and there tends to be, there's fewer days this quarter, so it tends to have a little bit of a seasonality impact. Channel tends to be a little bit light because of that, however, on the flip side, what we've seen is a little bit of help on the OEM side of the business because major OEMs, some of them tend to increase their purchases toward the end of their fiscal year.

So there is a little bit. And, you know, that's one of the reasons why, you know, the Q1 guidance what is it is.

Got it. Great, thanks for the time, appreciate it.

Uh-huh.

Thank you. Our next question comes from the line of David Finary with Heartland Funds. Please proceed with your question.

Good afternoon.

Good afternoon.

A couple questions, I guess still focusing on some of the guidance. When you look at 2004, does your guidance anticipate a relatively flat economy, or are you anticipating that we are seeing some growth in the economy?

When we did our planning, we were assuming flat to slightly up.

Okay.

So that was our base assumption.

So, I mean, it appears today that the economy is rebounding a bit better. So that really was not anticipated in your initial look at this?

Well, like I said, we planned based on flat to slightly up okay. And it's yet to be seen what's going to happen in 2004.

I would agree with your characterization that there's a positive news recently in terms of GDP, company earnings, Cisco I think said specifically that they were cautiously optimistic. So I understand your point that there are some positive signs, but that does not a trend make yet.

Fair enough. And if it is a trend, I mean, it seems like some of the industrial stuff is coming back too which should be good for some of the places your product is going.

Yeah.

Secondly in that regard, can you kind of help me to understand why, if you're projecting revenues in the first quarter of $25 to $26 million, at $26 million in the fourth quarter you made nine cents. Why, is there any particular elements of expense that are coming into the first quarter that are going to reduce EPS down to the four to six cents range?

Yeah, I think if you look at it, David, two cents of that is the tax rate, so if you bring it down, you're down to about 7 cents. And if you look at the rounding and then, of course, we factored in some potentially little, a lower gross margin based upon what was going into the quarter.

And the reason for the lower gross margin?

Just the operations during the first quarter, we just tend to be a little conservative.

Okay. Lastly, can you tell us what you're anticipating in terms of revenue strength in the SM product?

In the asynch product? Oh, revenue strength.

The asynch product line has been a part of the market for the last, that peaked, that overall market peaked in '95, '96 time frame. It's been on a pretty consistent 20% market decline per year.

And what we've seen recently is, that while we think the market is continuing to decline, some of the things that we've done to-in the channel and with some product extensions we've been able to flatten out our decline. So while we're still projecting a decline year-over-year in the asnyc product line, it's not as significant as it's been in the past.

So is 5%, is that reasonable number to think about?

We haven't broken that out. It's part of the connectivity solutions product line. The overall market's 20% decline. We're projecting that we're going to do significantly better than that.

Okay. At least that frames it.

Yeah.

Thank you.

Thank you, David.

Thank you. Our next question comes from the line of Ross Trailo with RBC Dain Rauscher. Please proceed with your question.

When you did the refinancing of the German building, with all the cash that you had why did you even take on any short-term debt. Why not pay the whole thing off?

Well, part of the reason being is that I utilize the euros that I had available to me in Germany rather than losing money in the conversion loss. And I felt that the short term euro, as you know, the euro has strengthen so I wanted to make sure that I utilized the euro build up in 2004 to pay down the rest of the debt.

Okay. Your cash seemed to be cash flow for the quarter seemed to be very strong. Was there anything extraordinary that happened during the quarter?

No, I think if you look at our cash flow statement, it addresses everything that we have normally done. So it's reflected in our cash flow statement and there's nothing extraordinary.

When can you sell that? I recall some restriction where you could not sell that building. When can you sell that?

Well, the building is in the market for sale, but again, the German economy is depressed from a real estate standpoint, so as soon as we have the opportunity, we have engaged a real estate agent. And so it's available for sale.

So the restriction is gone?

Yes, the restriction is gone, that's correct.

How about in terms of occupancy? How's the building doing?

Well, we have -- we do have some space available, we're looking at a lot of different alternatives to see if we can sublease it in that facility in Germany. So we're looking at a lot of alternatives to see how we can fill the building while trying it sell it.

What value do you have on the books on that building now?

It's approximately $5 million.

What have you got it listed for, what would you sell it for?

Again I'm looking into the marketplace. I don't have a value at this point, but you can be rest assured that I would not sell it for a loss.

All right. That's all for me.

Thanks, thanks, Russ.

Thank you.

Our next question comes from the line of William Becklean with Oppenheimer and Company. Please proceed with your question.

Thanks. In the fourth quarter you had credits from apparently a reversal of your restructuring charge?

Yes, we had some excess accrual that we finally cleaned up from a year ago that, as we went through it, we had $164,000 left and then we cleaned out the restructuring accrual that we had.

Is it going to be any more that have in '04?

No I think it's all gone.

How about the gain from the forgiveness of the grant.

That's all gone, that's why we have the restriction lifted on sale of the building.

Fiscal '04 none of these funny things going on.

That's correct.

Explain to me again, Chris, about your assumption of lower gross margins in the first quarter. Is that all about, is that mix or what?

It would be mix and I think we have a higher proportion of higher OEM sales because usually OEMs, a lot of OEM customers have a December year end, and so we just have have some percentage difference during quarter-to-quarter because of the mix.

To reflect higher OEM mix?

Yes, the issue is fewer days on the two tier distribution side in the quarter, higher OEM content.

Fine.

And another question and that optimal robotics in the retail point-of-sale business, it looks like it's struggling a little. What's going on in your retail vertical?

We've seen, in retail, we've seen recovery, and it's strengthening. So I'd say that that's one of the verticals that I would expect if the economy comes back in 2004, that that vertical would continue to strengthen.

Okay. Thanks.

Bill, my guess would be that they may be feeling some significant competitive pressures.

From NCR or IBM?

NCR. I think IBM is jumping in. I think they just did a recent acquisition in that space.

Are they both customers of yours?

NCR is.

Okay. Thanks,.

Thanks, Bill.

Thank you.

As a reminder to register for a question, please press the 1 followed by the 4. One moment please.

Our next question comes from the line of Jay Meier with MJSK Equity Research. Please proceed with your question.

Just a quick follow-up, somebody touched on IBM. You say IBM isn't a customer. Did you expect them to be or are you pursuing them aggressively at this point?

What I was alluding to was the company that IBM acquired is not a customer.

IBM is our largest customer, but the company that they acquired which is in this self-check out space is not a customer. So thank you for asking that question if that wasn't clear because IBM is very large customer.

And what kind of products is IBM purchasing? You know, can you give us any color as to what product lines IBM is working with?

IBM takes a lot of different products from us. It's a heritage relationship, where they have designed in our asynch products , they designed in our low density RAS products, and we continue to work with them on looking at additional opportunities for the future.

So I'm sure that there're some products that they're designing in that I'm not touching on today but, you know, we continue to work with IBM to expand that relationship.

Okay.

And just a couple quick notes on your costs containment efforts going forward, you've done obviously a wonderful job reducing your cost year-over-year. Are you pretty much at plan or are you looking for new opportunities and have you identified new opportunities to cut costs going forward?

We're at plan, we, as I think Chris articulated, we significantly reduced expenses, our expense to revenue ratio, excluding amortization, reduced from about 58% to about I think 47 and change percent.

About 48%.

That's a 10 point reduction. Our goal, our business model goal over time is to drive that ER down to 40%. So that's our goal over the next couple of years. And we expect to do that primarily through top-line growth.

Okay. Thank you.

Thank you, Jay.

Thank you. Our next question comes from the line of Troy Jensen with Synch Equity Partners. Please procedure with your question.

One quick question for Chris. In the 10-K you'll be reporting what the backlog is. Would you be willing to share that with us today?

No, I think we'll disclose it at that time because I don't have the exact number.

Thanks, anyway.

Thanks, Troy.

Thank you. Our next question comes from the line of David Finary with Heartland Funds. Please proceed with your question.

Two follow-up questions if I may.

One is, going forward should intangible amortization stay at about this level? 1282?

For the full year it will be 5 million 136 which is averaging to be about yeah, divide by four about $1.2 million.

And that's for 2004 as well?

Correct that's for full year 2004.

Okay.

And then if you could try to, I guess I'm still struggling with why device networking revenues, I know that they've grown 20% year-over-year. But they have been in this $8 million range for 3 quarters running. And at a time when seems like things have improved in some of the technology areas, but can you just talk a little more about the dynamics and when we might or when you might expect to see some growth in that area?

Well, we're expecting reasonable growth, like I said, earlier, we're expecting growth well above the 7%. We said 2 to 7% top line. The 7% in that area in device networking for next year. So we're expecting that.

That's underpinned by our Device Server business which has been growing on a quarter-over-quarter basis. And then the embedded business, the silicon and chip business, we expect to see growing year-over-year. And then we expect that with the NS 7520 and NS 9750 products, with a little bit more lead time, since they were just introduced in the last, 9750 in the last few months and the 7520 a little bit earlier. It's going to take a little bit more lead time for those to kick in and generate revenue for our NetSilicon part of the business.

So we expect that to drive significant long-term growth. So in general, what we saw was year-over-year growth, if you look at Q4 and Q3 of about 20% year-over-year, and we're looking at 2004 being a growth year. And we're expecting 2005 and beyond to ramp that growth more aggressively.

Does it go in step function, Joe? I mean, do you have any visibility on, if you have a new design win, when those design wins are going to ramp-up and could a single design win contribute significantly to a step function increase in those revenues on a networking device -- device networking side?

Yeah, we have visibility to the design wins. We work closely with our customers to try to get them through design and to production. They don't always meet their schedules. So you have, timing variations. And they don't always launch and have the success with their products that they expect to have.

Right.

So they don't always meet the volume expectations that we would hope. So there is, you know, a lot of variability in terms of when you might expect ramp-up from a customer or a group of customers, but we do track it very carefully.

Okay. Thanks.

Okay. Thank you.

Thank you, David.

Thank you.

Mr. Krishnan there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, everybody, for attending the call.

We're at Digi very happy with 2003 and expect that momentum that we've built in 2003 to continue into 2004. And hopefully, if the economy continues to show positive signs, hopefully we'll see everybody, if that happens, would see an updraft opportunity. But thanks for attending the call and I look forward to talking to you again in a few months. Thank you,.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.