Digi International Inc (DGII) 2006 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the first quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded, Tuesday, January 17, 2006. I would now like to turn the conference over to Kris Krishnan, Chief Financial Officer. 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 the earnings release, you may access it through our press release section of Digi 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.

The important factors that may cause actual results to differ materially include, are not limited to the following; rapid changes in technologies that may displace products sold by Digi, a different industry in which Digi operate, Digi's reliance on distributors, declining prices of networking products, and changes in the Company's level of profitability. Finally, certain other financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliation to the most comparable GAAP measures, are included in the earnings release or in the Form 8-K that we have filed before this call.

The Form 8-K can also be accessed through the SEC filing section of our Investor Relations Website at www.digi.com. Now, I would like to introduce Mr. Joe Dunsmore, the Chairman and President and CEO.

Thank you, Kris. Welcome to the call, everyone. Q1 was a somewhat surprising quarter for Digi. And coming off a very strong $36 million plus fourth quarter we felt we had a very positive momentum flowing into our first fiscal quarter. However, we finished the quarter at 33.4 million in revenue. Approximately 6% below the midpoint of our original guidance range of 34 to 37 million. But towards the high end of our revised guidance.

We finished at $0.11 EPS before stock-based compensation expense, which is below the original guidance range of $0.12 to $0.17 per share. On the positive side, we still grew revenue 13.3% year-over-year, and the Rabbit product line exceeded our projections for the quarter. We're very happy with the integration progress and the future prospects for that product line.

Disappointingly, the combination of our growth products, which includes device servers, terminal servers, USB cellular and chips and software grew only 1% year-over-year. The soft U.S. distribution channel, delay in the cellular and ConnectPort display new productgrams and some Warner pushouts were the main factors restricting our growth. Adding in the Rabbit and FS Forth product line improves the picture to approximately 57% year-over-year growth of the growth product lines.

We experienced a greater than expected decline of 38% for more mature products with the Async product line driving most of that decline. U.S. channel softness was the major driver of the Async decline. Our results for the quarter included 15% operating income before intangible amortization and stock-based compensation expense. And 6.5% net income, which are indicative of strong underlying business fundamentals, despite the challenging quarter.

Next, I would like to speak in more detail about the trends that we see in the business and the resulting guidance for fiscal Q2 '06 and the full year. The North America channel weakness was a significant factor in Q1. While we typically expect fiscal Q1 to be slower due to the holiday season, the quarter was even weaker than expected. Our current intelligence tells us that it was likely a broader sector issue driving a weaker Q1.

The reasons for our belief are as follows. Our share position in the channel grew slightly in Q1. While October was strong, November was very weak and we didn't see an uptick until the last two weeks of December. Other anecdotal information tends to substantiate a broader issue in the networking sector for the quarter. We will learn more as other players announce their quarterly results. We expect a moderate seasonal bounce back in Q2, consistent with what we've seen in previous years. The expected ramp of our cellular and ConnectPort display new product lines was an important ingredient for our original guidance.

In Q1 our results were very disappointing as we came in well below our expectations. Key drivers impacting the delayed ramp in cellular were; longer than expected sales cycle, which were especially impacted by unexpected delays getting our products certified in some carrier networks in the U.S. We expect this to have a six month pushout effect on our cellular product ramp-up. The ConnectPort display product ramp-up was delayed by three to six months due to internal engineering delays, which impacted our ability to close some targeted large deals as expected.

From a product perspective, we expect to see sequential quarter over quarter growth from our growth products. Fueled by a moderate North America channel recovery. We expect continued positive momentum from our Rabbit product line. We expect our Async product line to be flat to slightly up sequentially. We expect our NIC product line to be down significantly in Q2 due do a forecast reduction from our largest Japan OEM customer. As a result, our revenue guidance for Q2 is a range of 32.5 to 37.5 million.

We expect positive revenue momentum to continue in Q3 and Q4 from our growth products in the Rabbit product line. We expect to get a boost in the second half of cellular and ConnectPort display offsetting the expect continued decline for mature products. However, the first quarter revenue misplaces us about 2.4 million behind the revenue plan. While we expect a similar sequential revenue growth curve slope, as we had in our original plan, the starting point is now 33.4 million. This creates a gap to our annual guidance.

Key components of the gap to the original guidance are as follows in priority order. The approximate six month delay in the revenue ramp of cellular and ConnectPort display products. The North America channel weakness, while we expect a recovery, we will have a gap to the annual plan. The Japan OEM customer forecast cut. And a one-time gap based on customer order pushouts in Q1. As a result, our revenue guidance will be reduced to a range of 136 to 148 million, from the original guidance of 150 to 160 million.

The new guidance represents 9% to 18% year-over-year revenue growth. We believe that we still have a very good opportunity to drive to sequential year-over-year revenue growth of better than the 12.6% revenue growth we achieved in 2005. While this reduction in guidance is disappointing, it is very important to understand and reiterate the strong underlying fundamentals in this business and some very positive long term indicators. Our operating margin for the quarter, less amortization, stock-based compensation expense, was still above 15% despite the down quarter. And we continue to generate significant positive cash flow, improving our cash position by 3.6 million over the course of the quarter.

And our EBITDA was at 18.8% of revenue for the quarter. Nationally, the more aggressive short term revenue decline that we're seeing from our mature products will likely put us in a good position for renewed organic growth in fiscal 2007. Our mature product lines made up 47% of our revenues in fiscal 2004, 37.5% in fiscal 2005. And we project that by fiscal Q4 '06, the mature product lines, Async, RAS, SYNC, ISDN and NIC will account for approximately 20% of our revenues.

This dynamic, combined with the anticipated ramp from our new products will likely put put us in a good position for organic growth going forward. Now, I will hand it back to Kris for a more detailed discussion of our financial performance.

Thank you, Joe. As we indicated on our call in November, we have been evaluating a change to our segment reporting. We have concluded that Digi is one reporting segment business. As a result of this change, effective for fiscal 2006, we will no longer be separating reporting results for connectivity solutions and device networking. Our revenue for the quarter was 33.4 million, an increase of 3.9 million, or 13.3% over first quarter revenue a year ago. And within management's revised guidance of 31.5 to 34.

Gross profit margin for the quarter was 58%, compared to 62.1% in the first quarter of fiscal 2005. Gross profit margin declined primarily as a result of customer and product mix and the impact of Rabbit product sales with lower gross profit margins. Gross profit margins were impacted approximately equally as a result of customer product mix and a lower gross profit margin so sales of Rabbit products. The impact of stock-based compensation for the quarter was 0.1% on gross margins.

Operating expense for the quarter were at 16.5 million, compared to 14.2 million in the first quarter of fiscal 2005. The increase in operating expenses in the first quarter of fiscal 2006 was primarily attributable to the acquisitions that were completed in the third fiscal quarter of 2005. In addition, general and administrative expenses increased our first quarter fiscal 2005 as a result of patent litigation professional services fees. Digi also adopted a statement of Financial Accounting Standards 123-R, share-based payment, in the first fiscal quarter of 2006. And recorded a charge of 500,000 for stock-based compensation expense in the quarter.

We anticipate that our annual effective tax rate for fiscal 2006 will be approximately 34%. We estimate that impact of additional permanent tax item associated with the recognition of compensation expense for the FAS123-R is approximately 1%. And that the estimated effective rate would have been 33% without these items. The physical first quarter 2006 rate of 32% was lower than the anticipated annual effective tax rate for fiscal 2006, primarily as a result of a discrete tax item recorded in the first quarter associated with FAS123-R. Net income for the first quarter of fiscal 2006 was 2.2 million, or $0.09 per diluted share, compared to a net income of 3 million, or $0.13 per diluted share in the first quarter of fiscal 2005.

Stock-based compensation expenses reduced earnings per diluted share by $0.02 for the first fiscal quarter of 2006. Earnings per diluted share excluding impact of stock-based compensation, was $0.11 for the first quarter of fiscal 2006. Earnings per diluted share were within the range of management's revised guidance of $0.07 to $0.12, excluding the impact of stock-based compensation expense. Diluted weighted average shares outstanding at the end of the quarter were 23,485,629 shares, compared to the previous quarter of 23,210,310 shares, an increase of 275,319 shares. The increase was primarily as a result of employee stock option exercises.

Turning to the balance sheet and cash flow statements, our combined cash and cash equivalents of marketable security balance increased by 3.6 million from the prior quarter. Net cash used in operating activities for the quarter was 2.2 million. And cash provided by financing activities was 1.9 million, and resulted primarily from stock option and employee stock purchase plan transactions. Net accounts receivable at December 31 was 17.2 million, compared to 16.9 million at the end of the prior fiscal year.

Our DSO's are 34 days. The inventory levels at December 31 were 18.7 million, compared to 18.5 million at the end of the prior quarter. Our current ratio is 5.0:1, compared to a current ratio of 4.4:1 at the end of the prior quarter. Tangible book value per share for the first fiscal quarter of 2006 is $4.15, compared to $3.91 at the end of the prior quarter. Our cash value per share for the first fiscal quarter is $2.35, compared to $2.21 at the end of the prior quarter.

Now, I would like to take a few moments to provide you with the guidance for fiscal 2006. For the second quarter, of fiscal 2006, we expect revenue to be in the range of 32.5 to 37.5 million. Digi expects second fiscal quarter, 2006, earnings per diluted share, to be in the range of $0.10 to $0.16, excluding the impact of stock-based compensation expense. We expect share-based compensation to have an impact of $0.02 per quarter.

As indicated by Joe Dunsmore earlier, as a result of the annualized gap for the U.S. channel weakness, delay in the revenue ramp-up of new products and older pushout, our new revised guidance for the full fiscal year of 2006 will be in the range of 136 to 148. Or an increase over fiscal 2005 revenues of 9% to 18%. We expect earnings per diluted share for fiscal 2006 to be in the range of $0.48 to $0.58 excluding the impact of stock-based compensation.

We estimate that stock-based compensation expense will impact the financial statement by approximately $0.08 per diluted share for the full fiscal year of 2006. Digi estimates reported earnings per diluted share, including the impact of stock-based compensation to be in the range of $0.40 to $0.50 for the full fiscal year. Now, I would like to open the call to questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Clint Morrison from Feltl & Company. Please proceed.

Hi, guys. I think I've heard you say that Rabbit outperformed your expectations in the quarter. Could you give us some sense of sort of what it sort of revenue and earnings contribution was? And does your statement suggest that it is going to do better for the year than you had originally thought?

Well, as you recall, Glenn, to last year, we indicated that our plan for the year would be 32 million for fiscal 2006. And we have not given a breakout of what the performance would be for by quarter.

Well, you have in the last two quarter, you've broken out Rabbit.

We broke out -- we did because we had given guidance at the time of the acquisition. But we did indicate that going into this year, where the run rate is, and what we performed, we indicated that the performance has been good. They are being accretive because we did indicate that they would be accretive going into 2006.

Okay. So, no change in annual guidance but it sounds like they are tracking ahead, if anything?

Yes, that's correct.

Okay. So, you should assume that they basically -- yes, okay. That's good enough for that. And then on mature products, I think I heard you say what that by Q4 '06, you were thinking mature was going to only be 20% of revenue?

Yes. Based on a projection and approximation, I wanted to give that perspective, Clint, just to give you a sense for how this dynamic has changed from 47 to 37, to -- for the quarter, we expect it to go all the way down to about 20%. Which should put us in a much better position in terms of being able to drive organic growth.

Okay. And I think you said mature products were down year-over-year, 38% in the quarter, and kind of a split in the quarter, or where we're at now, in terms of however you define mature versus growth?

Yes, the mature products, as you know, are the Async and RAS and SYNC and NIC products. Within, that like I said, we saw that 38% decline. The NIC piece is aggressively declining. We expect that, by the end of the year, to be approaching zero. I would expect the annual run rate on that NIC business by the end of year the year to be somewhere in the neighborhood of under $1 million. So that NIC product line should pretty much be gone by the end of the year. And at that point, we will have the Async product line moving ahead at a decline rate that is substantially less than what we're seeing from the NIC business.

I guess the simple question, is kind of where -- if we're going to be at 20% growth at the end of the year; where are we now at the end of the first quarter? Or what was it for the quarter? I'm just trying to get a little bit of a split on the quarter between mature and growth products.

Well, I guess at the end of the year -- fiscal year, we don't break that out. But at the end of the fiscal year once we did break it out indicating our mature products was 37.5% of the total revenue. So we were at about $47 million, approximately, in 2005.

37.5 was for '05 correct?

Correct.

Okay. So we would assume that the number would be lower at the end of '05 correct?

Yes, it had declined from '04, we indicated it was closer to 47, I think Joe had indicated closer to 47%.

Okay. So, my math says, we're under 37.5% at the end of the year, we just dropped a whole bunch. So your mature products, somewhere under 35% or something along those lines. 30%, 35% in the first quarter.

Yes, we just want to make sure we clarified Joe's comment, the 20% is for the quarter at the end of the fourth quarter, that's not for the full fiscal year.

Correct.

Okay?

No, I understand completely. And I realize you're not breaking out anything between connectivity and device networking anymore. But can you just give a little color as to maybe how, if you were breaking down how you changed relative to the end of the last year? Has there been any demonstrable change one way or another?

No, if we had maintained the breakout FS Forth and Rabbit would have been added on the device networking side. So, you would have seen a significant growth element there with the acquired product lines. So, that would have been significantly higher. And then the other dynamic that we saw was that that device networking piece for the quarter would have been right at break-even. So yes. And so those -- that's a little bit of color behind that. The reason that we have gone to one segment is we're now one -- essentially one functional organization. We don't have two segments. All of the technology from the net silicon business that we acquired a few years ago, we're leveraging now across most of our product lines. So, our net silicon core technology is now being leveraged into device servers, into our USB products, into our cellular products, et cetera. So, we are truly one functional organization and it makes a whole lot more sense for us to organize and report that way.

Okay. Thanks. I will let somebody else ask a question.

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

Thanks. I just wanted to touch a little bit more on what Clint said, as far as the -- trying to get a semblance of how the businesses will interact? And when the inflection point will occur? When you actually are expecting the whole group to move forward on a solid organic base? And Joe, if you could please repeat what you said, you mentioned in Q3 and Q4, certain product lines will be moving this way. Could you go back and refresh what you said about those various component revenue lines?

Yes, in general, what we're seeing is as we go from this first quarter, we expect to see a moderate recovery from the North America channel. And with that recovery, we would expect to see our growth products respond fairly well with that. And we would expect to see the new growth with our growth products with that channel recovery in Q2. We would expect to see the Async product line be flat to slightly up with that channel recovery. We would expect to see -- as we move forward into Q3 and Q4, we would expect to see the cellular and the ConnectPort display, new product ramps to augment that growth that we would see within the device server and USB and terminal server and chips and software, growth products. And so it will augment those products with growth from the new products, the cellular and ConnectPort display product line.

And we would expect to see the mature products -- we'll continue to see declines from Async. But the overall decline with mature products will begin to slow down again, because we will essentially have -- the NIC products will essentially be close to nothing by the end of this year, early next year. So, that's the dynamic that we will then see moving -- that we believe we will see moving forward, is a much better dynamic in terms of growth products to mature products, in terms of the percentages. As well as hopefully at that point, we will be in the midst of a fairly aggressive ramp with the cellular products and the ConnectPort display products moving into 2007.

So, looking out into 2007 potentially, what -- if you could ballpark, where do you think this Company -- how quickly do you think this Company can grow once we get through all of these transitions?

We haven't done our 2007 plan. What I wanted to do with the guidance that I've given is to try to help you guys understand the progression of these mature products relative to the growth products. And help you to understand the timing that we're anticipating with the cellular and ConnectPort ramp, and the expectation that we will be in a good position to drive organic growth. What I'm really not in a position to do right now is give you any kind of specific percentages in 2007. We're moving through a transition right now, it was a challenging quarter. And I just wanted to give you a sense for some of the trends that we expect to see over the coming two or three quarters.

Okay. Well, moving into some areas where you have given us some better -- some more concise prognosis. You used to give a measurement or a metrics about what you thought your operating margins would be, excluding noncash related expenses. Can you touch on that quickly again in a go forward kind of mode?

Yes, I don't believe that that was something that I forecasted, on a quarter to quarter basis. I think what I've done is we've given the results on that, Jay. And the results, like I said, were for this quarter, were still healthy at over 15%. So, there is still a really strong underlying dynamic to this business. And then the other thing that I've said in the past is that we have a long term objective to be able to drive that to -- originally a few years ago, I'd said we wanted to driving it from negative to 15% to 20%. And then the last couple of quarter, I've stated that over the long run, over the next three, four years, we would like to be able to drive it from where we are today, up to 25% or better. And we still have that long term objective to drive that.

Within that, what I said was that we expected that we would see growth opportunity in some of these segments that we're driving into cellular and the core module space with Rabbit and ConnectPort display. And that we expected to see with the higher growth, with the core modules being a little bit lower margin, we expected to see margins -- top line gross margins in the 55% to 60% range. And the top line revenue growth over the next three to four years would help to drive efficiencies to get us up into that 25% range. So, that's the model that we would expect, would be to be able to drive our top line revenues to drive those efficiencies to get to that level.

I understand. And I just -- we're looking for 15% to 20% over time. But over a longer period, we think we can hit, over the long term, I think was the word you used, of 25%. Can you give us an idea of what you view as long term?

Three to four years.

Okay. All right. And from a macro perspective, now we see a lot of companies, we're hearing it every day, of companies with record amounts of cash on the balance sheet. Cost of capital was starting to increase. Shareholders are getting antsy about cash sitting on the balance sheet. Wouldn't you expect -- or do you believe it is reasonable to assume sort of a build-out in North American networking applications, maybe an upgrade cycle?

Well, that is an interesting question. So the question is; do we expect to see a significant upturn in demand as a result of kind of a next generation cycle. And I'm going to be kind of cautiously optimistic and just focus in on the fact that our fundamental dynamics are, we're playing into a long term growth trend in a commercial grade device networking space. We think it is driven by the Internet, the extended Internet. We think it is driven by competitive dynamics within the device manufacturers. So we think that that is the fundamental long term driver for our business opportunity. We're positioned well with core competencies.

In terms of overall kind of -- the health of the economy, and what we would expect in terms of buildout, one of the things that we just saw in the "The Wall Street Journal" this morning was that they said that surprisingly the U.S. economic growth last quarter was under 3%. So, overall economy, there is some question marks about whether we're going to see robust growth this year or not.

And another dynamic for consideration is U.S. companies spent I guess $10 billion on Sarbanes-Oxley last year. It had to come from somewhere. Is that -- once that is done, is that going to free up dollars for more infrastructure spending? And I think there is a reasonable argument that says that is possible. We -- I don't think we're seeing it yet. But we're very cautiously optimistic over the next few quarters we'll start to see specific kind of broader sector demand increases.

Well, Joe, coming from you, I take that as somewhat of a bullish statement. And I will back off. Thank you.

Okay. Thank you.

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

Just in terms of your guidance for the year, 2006, you didn't give any guidance when you preannounced back in the middle of December. So, is this in the general range of what you thought when you preannounced in December? Or better or worse?

We really didn't have a view at that point. At that point, the focus was finish the quarter, as aggressively as we possibly can, execute for the quarter. And then go back and analyze; The results for the quarter. How things came in? Why they came in the way they did? Why they finished the way they did? How that compares to plan? And then go through an exhaustive review of not only the Q1 execution versus Q1 plan, but what that means relative to the next three quarters. And so we've spent a lot of time over the last two weeks taking that information, sitting down, analyzing it with the product managers and the channel managers, in order to determine our new guidance. So, there is no comparison to a month ago. All the analysis has happened in the past month.

Okay. Well, you gave a pretty good, I think, guidance on what is going on with the top line. Let me ask a couple of expense questions. Sales and marketing expense was down sequentially in the quarter, and I wondered why. And do we expect that to come back up or be maintained around the current level?

A part of it is because of the variable expenses associated with the decline in revenue. And so we would expect the expenses would be back to -- depending on -- if we are comparing Q4 to Q1, based on the target that was set for the year and the spread between the quarters, it will vary a little bit. Because we're down about $300,000 from Q4 to Q1.

Okay. And similarly, on the SG&A line, the SG&A line actually came up a fairly substantial amount. And I understand that there is about, what, $250,000 in there of compensation expense but it is up way more than that. And I'm just wondering what is going on there? Is that going to come back?

Part of that is if you look at the G&A, as I mentioned in my description, if you compare Q4 to Q1, the G&A is up almost 400,000 of course partly the Sarbanes costs associated with it. We had a separation payout during the quarter. And more importantly the patent litigation costs of legal expenses, that will continue to remain in place as we continue the litigation.

So, we should model that roughly out at roughly the same level?

I think, if you look at it, the expenses in total is up only like $200,000. Or $280,000 in total with our total, excluding intangible amortization.

Yes, so hold it there?

Hold it there.

Okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of David Sylvester from Morrison and Frazier. Please proceed with your question.

Good afternoon. Would you give us a little more color on the impact of the delays of the cellular and ConnectPort products? What is going on in the field? Are your customers going elsewhere? Are they sitting on their hands and waiting? And then ultimately, when those products get ramped, what kind of percent of revenues do you expect them to be to your business?

On the cellular product line, what we're finding is this is -- first of all, this is kind of a new area for us, and a new channel for us. And what we have to do with the cellular product line is partner with the carriers -- the main carriers, Sprint, Cingular, Verizon. And go through a process of getting our products certified on their networks, and then partnering with them with customers. And so it is a new experience. Sales cycles are longer than we expected. And the certification process with some of the carriers is more challenging than we expected.

Requirements sometimes change and the process, for various reasons, takes sometimes longer than we hope and longer than we had planned. And so what we're seeing is roughly -- in terms of the expected ramp, what we're seeing is roughly about a six month pushout. So essentially, what we would have expected to see in the last two quarters of this year will be pushing out. In terms of the customer impact, first of all, in the cellular product arena, the sales pipeline that we're seeing, the number of opportunities that we're generating, the pipeline that we're generating is probably the most exciting business development opportunity that we've seen since I've been at Digi. So, a significant pipeline.

And we engage directly with our customers. We work with them. They're aware of the product certification efforts that we're going through. And at this point, we don't anticipate significant fallout with the cellular product line delays. What I'm saying is the sales cycles are longer than we expected. And we are anticipating some delay but we are doing a pretty good job of managing those certification delays with the customer. And one of the reasons why -- that's often manageable is because the customer may be interested in working with a particular carrier, and so they will be very kind of tuned in to our certification efforts with that carrier.

Okay. Great. Thanks.

Thank you. Our next question comes from the line of Christian Schwab from Craig-Hallum. Please proceed with your question.

Thank you. I must have missed it, a follow-up to the previous gentleman's question, the cellular ConnectPort product line, what is that going to start generating in revenue in six months on a quarterly basis? What is the ladder step-up.

We're not disclosing that Christian. What we're saying is that we're expecting to see a significant ramp-up. And we expect that ramp-up to delay six months. But we haven't disclosed the level of the ramp-up and I don't plan to disclose that today.

Okay. Can you define significant ramp? Can you give me a comparison like we're going to go from like next to nothing to a bunch of millions?

I guess generally speaking, we will move from hundreds of thousands per quarter -- to on a quarter over quarter basis, to on the low million to over time up from there. So, I hope that gives you a general idea of what we're talking about.

Yes. That helps a lot, actually. And then Rabbit, I just want to make sure I heard that right, you expect to do 32 million, is the official guidance you gave for 2006 prior?

Right.

And what do you think the kegger there is, what is that business going to grow at?

What we said was that we expected 10% growth last year to this year. And we haven't projected that. For that part of the business, or any part of the business going forward to 2007/2008.

Okay. That's fine. And I guess I think there is a lot of confusion with the mature growth so I'm just trying to get there a different way. So, if we take the Rabbit away from our 2005 and in our model we got 10.6 million of Rabbit, of that 125 million would leave a core business of 114.6 million. And your guidance of 136 to 148, if we take out the 32 million of Rabbit, gives us 104 million to 116 million. So, as we still have to go from almost 40% mature business and cut it in half one more time before we exit the year, that impact to our core business takes that business down to flat on the very good end, to roughly down 9%. Which is not bad at all. So, as we go to 2007, and we take a look at maybe 10% organic growth in Rabbit. And we get implied core growth rate to offset at the very high end a flat, it comes with a pretty big decent year-over-year growth rate on growth products. So, when we exit 2006, is it safe to assume that all things being equal and with the step-up and the delay, that we should certainly be thinking about kind of a 15% to 20% type of growth rate on the core business? Isn't that reasonable? Or is that not reasonable?

Well Christian, you're asking me to answer a question that I already told you that I wasn't going to be able to answer. I will try to provide you a little bit more color. When we acquired Rabbit business, we said it would be 10% growth year-over-year. I would would hope that that would continue to be at that level or higher going forward. And the other thing I would say is just on a -- from a general perspective, overall, what we have always said that we're striving to do, and what we continue to strive to do is drive accelerated growth year-over-year. And so a few years ago we drove 1%, then 8.6%, then 12.6.

Our objective this year is still to over achieve that 12.6 to drive accelerated growth. And our hope is to be able to continue to do that going forward. I'm not giving guidance on 2007. That's a hope. The model to do that for 2007 could be pure organic, could be organic, plus some acquisitions.

We still have -- I've always said acquisition continues to be a viable strategy for us. It is a fragmented market. A lot of opportunities out there. But our long term emphasis continues to be the same. To try to be able to drive top line accelerated revenue growth over time.

Right. And that's close enough. I will take as a yes. On the operating expenses, call it 16.5, 17 million, what do you think that can support on a quarterly revenue basis?

What it can -- generally speaking, I think the point you're getting at is; how much leverage do we have with that? Are we going to have to add a lot of expense to drive top line growth?

It is only going to grow the business 15% to 20%, don't get me wrong, that's a nice growth rate, it seems to me operating expenses would grow disproportionately slower.

Probably. The one thing I will say though, Christian is, that one of the things that we have done over the last few years, in order to drive from the operating margins, negative operating margins to the 15% to 20% range is; we have been pretty aggressive in driving efficiencies within the business. So, I would say that we have become pretty darn lean over the last few years. And that we continue to maintain a pretty lean model. So, as we drive more aggressive growth, while I would expect pretty good leverage model there for us, that we wouldn't have to add dollar for dollar. As we drive more growth, we're probably going to have to add more expense going forward than in the past when we weren't as lean as we are today. And I think that's -- the point of the question is kind of where we are from a leanness perspective. And so to drive growth, there is some expense we're going to have to drive.

And then remind me, Kris, do you guys have a stock buyback in place, still?

Yes, we do. We have authorization up to 1 million shares.

When is the last time you bought stock in the open market?

It is about 2.5 years saying when we had an opportunistic approach client that wanted to sell the stock and we acquired it.

Okay. Thank you.

Thank you. Mr. Joe Dunsmore, I'm showing no further questions at this time. I will now turn the the conference back to you.

Thank you. Thank you, everyone. I look forward to talking to you again in three 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.