Digi International Inc (DGII) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Digi International fourth quarter and year end earnings results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, November 01, 2007.

I'd 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 our earnings release, you may access it through our press release section of the 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, but are not limited to the following. Rapid changes in technologies that may displace products sold by Digi, the business environment in which Digi operates, Digi's reliance on distributors, declining prices of networking products, and changes in the Company's level of profitability.

Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including the reconciliation to the most comparable GAAP measures, are included in the earnings release, or in the Form 8K that we filed before this call. The Form 8K 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, Chairman, President, and CEO.

Thank you Kris, and welcome to the call everyone. Fiscal 2007 was a very successful year for Digi and its shareholders.

The Company finished the year on a high note, with full year earnings of 19.8 million, the highest in the Company's history, and revenue of a $173.3 million, which is 19.8% growth over fiscal 2006.

Additionally, the fourth quarter was a very good quarter for Digi, accented by the following highlights. Revenue of 45.1 million is the highest quarterly revenue achieved at Digi in the last 31 quarters.

This is our 19th consecutive profitable quarter. Net income was $5.6 million in the fourth quarter of 2007, compared to a net income of $3 million in the fourth quarter of 2006, an increase of 84.9%.

Reported earnings per diluted share of $0.21 in the fourth quarter, is a 75% increase over earnings per diluted share of $0.12, in the fourth quarter of fiscal 2006.

Earnings before depreciation, taxes and amortization, EBITDA, were $9.7 million for the quarter or 21.6% of revenue. This is a 10.2% year-over-year increase and the highest EBITDA Digi has posted in the past eight years.

Fiscal 2007 revenue of a $173.3 million represents the fifth consecutive year of accelerated revenue growth. From a revenue decline in 2002, to 1.4% growth in 2003, 8.1% growth in 2004, 12.6% growth in 2005, 15.5 % growth in 2006, and now 19.8% growth in 2007.

Earnings per share for the year were $0.76 compared to $0.46 in fiscal 2006, a 65% increase. Digi achieved strong cash flow from operations of $26.4 million for the year, compared to $20.4 million last year, which is a 29% increase year-over-year.

Additionally, the Company maintained its balance sheet through continued asset management and ended the year with a cash and marketable securities balance of $87.6 million, which is an increase of $28.7 million since the beginning of the year.

The MaxStream productlines, fell within our revenue range for the year, and beat our EPS accretiveness guidance for the year.

In fact, in October, Forbes Magazine named Digi one the 200 best small companies in America, based on their assessment of public companies with between $5 million and $750 million in revenue.

While Digi's underlying performance in financial fundamentals continued to improve significantly in fiscal 2007, the most important development in 2007, was our strategic progress.

There are three things I want to point out. First, we were able to successfully integrate MaxStream into Digi. Second, the launch of Drop-in Networking. The cross-leveraging of MaxStream products and technologies with Digi products and channels, resulted in the launch of the Drop-in Networking market category.

ConnectPort X gateway family combined with our ZigBee and Wi-Fi routers and endpoints are the most highly differentiated new products that we've introduced in the past eight years.

The third point is that Drop-in Networking places Digi in a leadership position in the second wave of internet expansion. The first wave was human centric, getting people connected. The second wave is about connecting devices, machines and things, really the assets of a business.

Drop-in Networking simultaneously provides very low cost wireless endpoint and long distance wireless connectivity. The result is that huge numbers of new devices can be economically connected directly to the corporate IT system.

The result of these three strategic points, MaxStream integration, Drop-in Networking, and the second wave of Internet expansion, is that we're seeing revolutionary new applications where customers are networking things that have never been networked before.

A few examples among many are irrigation systems, heavy equipment, fitness equipment, storage tanks, lighting systems, and even fish farms.

It is the most exciting business growth opportunity that I've seen since I've been with the Company. We believe this growth opportunity is a very long term, 10 to 20 year growth opportunity and that we are positioned strongly at the beginning of this growth trend.

As such we are very bullish about prospects for the business, and believe that our addressable market will likely double organically over the next five years.

In keeping with the desire to focus the business on long term execution against this opportunity, we will be providing more detailed annual guidance and more information on our view of the market opportunity over the long term, while stopping the practice of providing short term oriented quarterly guidance, which is very consistent with trends that we're seeing in the market.

In summary, I'm very proud of the accomplishments of the Digi team in fiscal 2007. We took on significant challenges during the year, and have managed to post very strong results. I look forward to continuing that positive momentum in fiscal 2008.

Now, I'm going to hand it over to Kris, who by the way was honored at a luncheon yesterday, by the Minneapolis St. Paul Business Journal with the prestigious CFO of the Year award.

Kris will discuss our financial performance in more detail and provide you with the annual guidance details.

Thank you, Joe. Our revenue for the quarter was $45.1 million, an increase of $4 million or 9.8% over the fourth quarter revenue a year ago.

Revenue from the embedded product sales for the fourth quarter fiscal 2007 was $20.6 million, compared to $17.2 million in the fourth quarter fiscal 2006, an increase of $3.3 million, or 19.4%.

Revenue from the non-embedded product sales for the fourth quarter fiscal 2007 was $24.5 million compared to $23.8 million in the fourth quarter of fiscal 2006, an increase of $700,000, or 2.9%.

MaxStream, which was acquired on July 27, 2006, contributed $5.6 million in revenue for the fourth quarter of 2007, compared to $3.2 million for the fourth quarter of 2006, which includes the revenue from the date of the acquisition.

Gross profit margin for the fourth quarter of 2007 was 52.8% compared to 52.4% in the fourth quarter of 2006. The amortization of purchased and core technology reduced gross margin in the fourth quarter of 2007, and 2006, by 2.5% and 3.2% respectively.

Total operating expense for the fourth quarter of 2007 were 17.6 million, compared to 18.1 million in the fourth quarter of 2006. An increase in variable compensation and other expenses compared to prior year offset the favorable variance of $2 million, pertaining to in-process R&D associated with the acquisition of MaxStream, recorded in the fourth quarter of 2006.

In addition, Digi sold undeveloped land at its Davis, California location, for a gain of $500,000 in the fourth quarter of 2007, which is included as a deduction of expense in general and administrative expenses.

Digi quarterly effective tax rate was 22.8% compared to 23.9% in the fourth quarter of 2006. The effective tax rate was lower than the statutory rate in the fourth quarter of 2007, primarily due to discrete tax benefits realized as a result of amended tax return filings associated with the closure of an audit.

The effective tax rate is lower in the fourth quarter of 2006, compared to the statutory rate, primarily due to the reversal of tax reserves associated with the settlement of a French tax audit of $1 million partially offset by the charge for in-process R&D, associated with the acquisition of MaxStream, which is non-deductible.

Net income for the fourth quarter 2007 was $5.6 million or $0.21 per diluted share, compared to a net income of $3 million or $0.12 per diluted share in the fourth quarter of 2006.

Tax benefits related to the closure of audits and the reversal of tax reserve, increased earnings per diluted share by $0.03 and $0.04 for the fourth quarter of 2007 and 2006 respectively.

The charts for in-process R&D and other acquisition related expenses associated with MaxStream reduced earnings per diluted share by $0.08 for the fourth quarter of 2006.

Earnings per diluted share were $0.18 and $0.16 for the fourth quarter of 2007 and '06 respectively, excluding the aforementioned items.

Digi reported revenues of $173.3 million for the 12 months ended September 30, 2007, compared to revenue of a $144.7 million for the 12 months of fiscal 2006, or an increase of 19.8%. Revenue from the embedded product sales for fiscal 2007 was $74.4 million, compared to $58 million in fiscal 2006, an increase of 28.2%.

Revenue from the non-embedded product sales were $98.9 million in fiscal 2007, compared to $86.6 million in fiscal 2006, an increase of 14.1%.

Revenue for MaxStream for fiscal 2007 was $20.6 million and in line with our expectation and early guidance. Net income for 2007 was $19.8 million or $0.76 per diluted share, compared to net income of $11.1 million or $0.46 per diluted share in 2006.

Earnings per diluted share for fiscal 2007 and 2006 were $0.59 and $0.51 respectively, excluding the reversal of tax reserves related to the settlement of audits and other discrete tax benefits of $0.17 and $0.04 respectively in acquired in-process R&D and other acquisition related expense of $0.09 in fiscal 2006.

Please refer to the table included in our earnings release, which reconciles our reported earnings per share to diluted earnings per share excluding the aforementioned items for both the three months ended September 30, 2007, and 2006, and for our fiscal year 2007 and 2006.

Diluted weighted average shares, outstanding at the end of the quarter was 26,384,573 shares compared to the previous quarter of 26,152,487 shares, an increase of 232,086 shares.

Turning to the balance sheet and cash flow statements, our combined cash and cash equivalents and marketable security balance, including long term marketable securities, was $87.6 million, an increase of $9.6 million from the prior quarter, and an increase of $28.7 million from the end of prior fiscal year.

Net cash, provided by operating activities for the quarter was $7.7 million. Cash provided by financing activities were $1.4 million and resulted primarily from stock option and employee stock purchase plan transaction.

Cash of $900,000 was received as proceeds from the sale of the land in Davis, California, partially offset by $600,000 of cash used for the purchase of property, equipment improvement and other intangible assets.

Net accounts receivable at September 30, 2007 were $21 million compared to $21.9 million at the end of prior quarter, and $20.3 million at the end of the prior fiscal year.

Our DSO is at 34 days, inventory levels at September 30th were $26.1 million compared to $25.3 million at the end of prior quarter, and $21.9 million at the end of prior fiscal year.

Our current ratio is 6.4 to 1 compared to a current ratio of 4.6 to 1 at the end of the prior fiscal year. Now, I would like to provide some guidance for fiscal 2008. Digi projects revenue to be in the range of a $197 million to $207 million or an increase over fiscal year 2000 revenue of 14% to 19%.

Gross margin as a percent of revenue is expected to be approximately 52% to 54%, including the amortization of purchased and core technology, amortization of 1.6%.

Operating income, as a percent of revenue is projected to be in the range of 12.5% to 15.5%.

Our effective tax rate is projected to be approximately 35%. We anticipate EBITDA as a percent of revenue will continue to show a positive trend in relation to fiscal 2007.

Digi projects earnings per diluted share to be in a range of $0.69 to $0.87 or an increase of 17% to 47% over fiscal 2007, excluding the benefit of the discreet tax benefit of $0.17 recorded in fiscal 2007.

Finally, I would like to note that Collins Stewart, formerly C.E. Unterberg, Towbin recently initiated coverage on Digi. Digi has an active and successful investor and analyst outreach program.

This outreach has yielded an increase in both institutional and mutual fund investments, as well as sell-side analyst coverage. With the addition of Collin Stewart, now we have four firms actively following Digi. They are Feltl & Company, Dougherty & Company, Boenning & Scattergood, and now Collins Stewart.

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

Thanks sir. (OPERATOR INSTRUCTIONS). And our first question comes from the line of John Vinh with Collins Stewart.

Good afternoon.

Hey John.

Hey, first question I have for you is regarding your fiscal '08 guidance, revenue guidance of a $197 million - $207 million, can you give us a little bit more color on what are your assumptions for embedded non-embedded and also MaxStream that kind of constitutes that revenue guidance.

Yes, I mean, the key assumptions on the revenue guidance are we'll continue to see that that 15% of the revenue of the mature piece is a small piece, it will continue to become a smaller piece.

We expect to see continued positive momentum and growth from our growth products, the device server productline, USB, core modules, and we expect to see high growth from the MaxStream and cellular productlines. And we expect the MaxStream now becoming an organic element, will help drive our organic growth rate this year.

I see. And on the legacy piece, you've talked about that piece becoming a smaller and smaller piece. Does that piece continue to trend down with your expectations, does it trend any less than your expectations or above your expectations, can you talk about that a little bit?

Yes, John, it varies around 20% plus or minus five points or so. So it does tend to be on about a 20% per year decline and it tends to vary around that 20% rate. Sometimes not quite as aggressive, sometimes a little bit more aggressive, but it's been fairly consistent over the last several years.

Okay, and in regards to MaxStream, sounds like you're going to start talking about that more organically. It grew almost 50% year-over-year in fiscal '07. Can we assume that MaxStream, part of an organic basis is going to have similar growth rates going into fiscal '08 at this point?

Yes, John, in general -- what we're seeing with MaxStream is a continued, very robust sales pipeline. And so my assumptions are that we're going to see continued high growth and -- I'd say that's in the ballpark of what we would expect.

Great. And just last question, and I'll step off the queue. On the competitive front, can you give us kind of an update on the competitive landscape that you're seeing within the MaxStream and the Drop-in Networking front at this point in time?

Yes, I'd say in the Drop-in Networking space, the combination of our ConnectPort X, which has integrated mesh networking capability, and our wireless routers and endpoints, really puts us in a pretty differentiated position versus our point product competitors. There are competitors out there that have gateway products that compete with our ConnectPort X, but do not have mesh networking integrated as of yet.

And there are other competitors that are point competitors that focus on the router endpoint products, but nobody brings that full solution set to the table.

So I think that provides us with a pretty significant competitive advantage, and we're not standing still. We're continuing to invest heavily in extending that advantage.

Okay, any -- are you able to mention any specific needs on who you're seeing from the point competitor, point of view --

Sure.

-- any -- no [ideals]?

Sure. Yes, I'd say in the gateway arena, companies like AirLink and Junction and JBM and a host of others. AirLink now is a part of Sierra Wireless, would be a few competitors that I would name.

In the mesh networking arena, some of the heritage competitors that MaxStream competed with continue to be competitors in that space, people like Cirronet, which is a part of RF Monolithics and AeroComm and others in that space.

Great, thank you very much.

Thank you, John.

Our next question comes from the line of Jeff Evanson, with Dougherty & Company.

Thank you, gentlemen. And Kris, congratulations on the honor, well deserved.

Thank you, Jeff.

So these two acquisitions have really worked out very well for you. I guess from the numbers that it did appear that may be MaxStream grew a little bit slower sequentially than it did last quarter. Was that just because last quarter was so strong or could you talk a little bit about maybe what was going on with MaxStream this quarter specifically?

Yes, it was a little bit slower. We took a close look at that, we had the sales team take a close look at that, and what we're seeing -- what we continue to see is a very, very robust sales pipeline.

The sales cycles are -- like the rest of our products, tend to be fairly long. So -- and we have a couple of orders that pushed out of this quarter -- last quarter into this quarter. So there's some of those dynamics. And I think we're going to see -- we've seen variability there from about 35%-40% growth for the year-over-year up to about 60% or so growth year-over-year, and I would expect to see that variability going forward, it's not going to be a steady 50% growth rate year-over-year report. We're going to see some variability, but inspecting that pipeline -- the pipeline for MaxStream products looks very healthy.

Okay, so that could improve sequentially in Q1 possibly?

Yes, possibly.

Okay. All right then -- now, this also kind of implies that possibly Rabbit and/or NetSilicon had very strong results this quarter. Could you talk about those?

Oh, yes. Rabbit, we continued this -- we saw good sequential progress throughout the year with Rabbit, and we saw sequential improvement quarter-over-quarter there. And we continued to expect positive momentum.

The underpinning for the positive momentum that we expect to see going forward with Rabbit is the fact that we introduced a new chip, the 4,000 chip about a year ago and now we have several 4,000 based modules out there on the marketplace. And we're expecting to see that 4,000 series modules augment the growth rate that is already in place with our 3,000 based products. So we'd expect to see the Rabbit's progress continue.

Are you -- Joe, are you seeing people that have taken on the application kit there, starting to lead the design winds?

Yes, the application kit strategy for Rabbit and the developing kit strategy is a key part of our strategy. The focus we've had, which we think is a real strong focus going forward, is ease of integration. We think the Rabbit brand means easy to integrate, and we believe that as more and more devices need to be networked that that ease of integration value proposition becomes more important, and Rabbit with their application kits and development kits certainly plays into that strategy.

In addition to that, the -- one of the benefits of the Rabbit acquisition was to a certain degree, Rabbit -- the Rabbit team, the Davis team teaching us on the ARM based side with our -- now with our JumpStart Kits how to drive even more aggressively that ease of integration, value proposition with our 32 bit ARM based modules.

So yes, I expect that value proposition will continue to be important, and we're going to leverage that across all of our embedded modules.

Great, and then the last question is could -- you ran through a list of new things being networked, everything from irrigation to fish farms. If you could just go through that list one more time real quick, I didn't get them all down. And just talk, may be about, one or two of those as you -- where you see a large and emerging market where you can have repeat sales over time.

Yes, I said irrigation systems, heavy equipment, fitness equipment, storage tanks, lighting systems, and even fish farms. I'd say all these areas are areas that are primed for high growth. I'd say that we're seeing a lot of opportunity in the storage tank arena, got wins there, we've seen them in lighting systems. We've got several -- many customers in the irrigation system arena, and we're starting to see more opportunity emerging in heavy equipment.

So I'd say all those areas are areas where we expect to see growth beyond that in the automated meter reading arena for electric meters, gas meters, electronic displays, medical equipment, other industrial equipment, or other areas that we would expect to see growth.

One of the -- really what's happening, Jeff, and where I think we're going to start to see more momentum is, a few years ago, a lot of these players looked at remote networking of their devices as being too difficult and too expensive.

And now with the convergence of all the market forces, the Internet and the web services standards which allow you to have devices that can communicate more easily. The deployment of these wireless backbone capabilities, whether it be the 3G cellular network or now with the ZigBee standard and Wi-Fi being so broadly deployed.

And now with Digi coming out with a full end to end set of products and very low cost wireless endpoint capabilities, these manufacturers are now saying, I can get ahead of the game and deploy value-added capabilities in my devices, or I can be a laggard. And so now there's a competitive dynamic that's driving this market place.

Do you want to be the first guy going into Life Time Fitness or a big fitness chain, selling your fitness equipment with networking capabilities so that you can remotely monitor and maintain it and provide value-added services for their customers, fitness portals for your customers, or do you want to be a laggard? And that's the fundamental dynamic; it's a competitive dynamic that's starting to have an impact.

Wonderful. How many facilities have you done with Life Time? Are you still just in pilot mode there?

We're not -- I'm not naming them as a customer. I'm merely using -- and then it wouldn't be, because my customers would be the fitness equipment manufacturers. I'm merely using them as an example close to home. They're five minutes down the road from my house.

Purely theoretical, understood, thank you.

Thank you.

Thank you.

We also have a question from the line of Michael Ciarmoli with Boenning & Scattergood.

Hey guys, congratulations on the quarter.

Thank you, Michael.

Joe, if you could, if you could talk about the status of the Drop-in Networking products? I know when you originally launched that line you talked about it being more of a second half '08 revenue story. Is that still the case, or are you seeing more traction for that productline now?

Well, it is still the case that we expect the revenue ramp to be a second half dynamic. I'd say that our experience in driving the opportunity, getting out there in the marketplace, telling the story, telling the story of trade service targeting customers, getting in there and talking to customers, seeing their reaction, and driving a sales pipeline is every bit as good or better than what I expected. So my -- but the sales cycle on these things tends to be similar to other products, so I'd say the revenue ramp would still be a second half of '08 story.

Okay, great. And just looking into '08, the guidance of the 14%-19% that would be all organic growth?

Yes.

Okay.

Any acquisition growth would be incremental to that.

Okay. Are there plans for an acquisition?

Well, if there were, I couldn't tell you.

Right, right. I know you've talked about it in the past using acquisitions --

Yes.

-- just to kind of add and augment the technology offerings. So is that something we should think about just looking at the cash base, I mean, if we're looking at what we're going to do with that cash in terms of a buyback or how it's going to be deployed.

Yes, I can't comment on timing. All I can say is Michael, you can expect our behavior over the next five years to be similar to our behavior over the last five years. So you can certainly expect acquisition to be a key part of our strategy. Timing on these things is impossible to predict.

Right.

But there certainly is a significant opportunity out there. It's a fragmented market, we see a lot of opportunity, we'll continue to work that.

Great. In terms of -- since you guys are just giving the annual guidance right now, what can we -- from a modeling perspective -- how can we expect the quarters to kind of flow in '08? Weaker in Q1 and kind of progressively gaining steam throughout the year?

Yes, I think that's a great question and you should look at past years and past trends as a good kind of a model for the future, and so what we've always said is that for the first fiscal quarter is always usually flat to slightly up or slightly down. So that trend we wouldn't expect to be any different --

Okay.

And then we would expect to see similar kinds of ramp expectations to past years with a catalyst, an augment in the second half of the year, coming from the Drop-in Networking initiative.

Okay, great. If you can, one other question, and I'll jump back in the queue. Can you talk about the status with certifying wireless carriers overseas?

Yes, we'd have over 25 carrier services certified on a worldwide basis. I think we've got, I know, somewhere in the neighborhood of 15 to 20 more that are in process. And we're starting to see pretty good traction beginning outside the U.S. We're getting some traction in Europe. We're getting some significant traction in Latin America.

Okay.

With our cellular products and the certifications that we've gotten down there. And we're beginning to drive into Asia-Pacific.

Okay. And just along that note, did you guys give the -- any statistics regarding cellular growth this quarter?

No, but I can. Cellular grew year-over-year. For the year it grew about a 177% and in the quarter-over-quarter, I think it was in the neighborhood of 40% to 50%.

Okay. And in terms of percent of revenue, you're not breaking that out yet, are you?

No.

Okay. All right great, thanks guys, I'll jump back in the queue here.

Thank you, Michael.

And for our next question, we'll go to the line of Clint Morrison with Feltl & Company.

Hey, Kris, I just wanted to look at your -- sort of your expense ratios a little bit. Selling was the piece that jumped out. Obviously, revenues went up nicely in the selling expense, and you may explain -- have explained this a little bit on the call and I missed it, but was there something unique going on for selling to be down so much, or are we looking at kind of a new paradigm here?

No, I think the selling expenses I had mentioned was primarily driven by the increase in revenue. So we would continue to see that growth going -- quarter-over -- if you're comparing to year-over-year --

Well, no, I was thinking sequentially. Traditionally, your selling expense took a pretty nice jump Q3 into Q4. And this year, even though your revenue was up a few million dollars, it dropped off. And I was just wondering is there -- to the lowest percentage of revenue it's been for a long time, yeah.

Well, it was only dropped down by $100,000 or so. So there is nothing unusual that is occurring in the -- either this quarter or next quarter. We'll continue to ramp up our sales and marketing expenses as we go into it, and it's tied into the revenue.

Okay, so nothing -- because it is at the lowest percentage of sales in multiple years.

Right.

And then G&A obviously came down. It -- little curious why sell land and stick that into G&A, it just seems like that's not the place where that would fall in.

Well, according to the accountants and the principles of accounting, I guess, when you do have a gain on a sale of an asset, it's an offset or what they call a contra account against G&A expense, and since this was undeveloped land, that's where it goes against.

Okay, out of curiosity, got any other little nuggets like that out there that -- to sell that would surprise us on the positive side with?

Well, that's the whole idea over here. It is continue to provide positive surprises.

No, I'm just kind of curious as to what -- what that was and how it came up, and are there other undeveloped land, building, sorts of things that -- or other assets on the balance sheet that we may not be aware of --

Well, there's always -- as I've said over the years, we do have a building in Dortmund, Germany, and we are continuing to look and determine the sale of that building. I think I publicly have -- we have said that over the years. So when the right timing and the right price comes along, we'll definitely take a look at it.

Okay, thank you.

See you next [quarter].

(OPERATOR INSTRUCTIONS). And our next question comes from the line of Ross Strella with RBC/Dain Rauscher.

Hey, Joe and Kris, congratulations on a great year.

Thank you Ross.

Couple of questions that I have got. How many design wins do you actually have in your Drop-in Networking?

Good question, I don't have that number for you Ross. We'll have to -- we don't have design win numbers in front of me here, so I'm going to have to go back and get that information. What we'll try to do is we'll try to provide that information in our next quarterly call.

Okay, and then I believe, at the end of your previous quarter, you mentioned that your backlog was at the highest level that it's ever been at, where does your backlog stand now?

Our backlog continues to be strong, and we feel real good about the backlog momentum for the business in general, and certainly with Drop-in Networking.

Is it higher now than it was at the end of the previous quarter, about the same, or lower?

It's lower.

Okay, all right. When you do your amortization of purchase intangibles, you're doing that against the gross margin, correct?

Correct.

Can you actually give a dollar amount, Kris, as far as what that was?

For the year, actually, if you look at our financial statement on the press release, for the quarter it was $1,132,000 in the cost of sales section for the quarter and for the year it was $4,541,000.

Okay, great, and then you -- I don't -- I didn't see the EBITDA number in the release, and you gave that, but I missed that, what was that please?

That EBITDA was 21.6% of revenue. By the way, that's up over the last four quarters, the trend was from 18.3% to 18.7% to 19.5% to 21.6%.

And the number was $9.7 million, Joe mentioned that.

Okay, okay. Now, your cash has done just phenomenal, but do you actually have a number then for cash flow from operations, for the year?

For the current year, we have a cash flow that we generated from operations of $26.4 million, for the year.

Okay.

And our overall cash was up $28.7 million.

Yes, I got that number Kris, okay, all right, that's it from me, thanks guys, way to go.

Thanks Ross.

For our next question, we'll return to the line of Michael Ciarmoli with Boenning & Scattergood.

Hey guys, just a follow up on Ross' line of questioning there. Operating expenses continuing to trend lower as a percentage of sales, I think you guys have stated the goal is to get to below that 40% mark. Is that attainable in fiscal '08?

Well, if you look at the guidance that I gave you Michael, I think you can work it basically.

Okay.

The gross margins I gave you was 52% to 54%.

Right.

And the operating income at 12.5% to 15.5%.

Okay.

You can run the model and you can get there.

Yes, okay, I just hadn't had the time to plug in those numbers yet.

Yes.

All right, that's all I've got guys, thanks a lot, again, congrats.

Thanks Michael.

Our next question comes from the line of Brian Kowalchyk, with WestPark Capital.

Good afternoon guys.

Hey Brian.

Hey Brian.

Hey, congratulations Kris. Without running the risk of feeding your ego a little bit, nice job.

All right, thanks.

Now that you've got all these sell-side analysts, I can't ask any detailed questions anymore, they've picked up on everything.

Very good.

One thing they missed though is I noted in your guidance for '08, 52% to 54% including amortization, a little pickup from where we've been this quarter, and somewhat historically. What's going on to drive that margin growth next year?

Well, we've got a combination of things happening. We've got cost reduction programs in place. We've got some new core technology that will help us get to lower costs in 2008, and we expect a drop in networking products to provide healthy -- very healthy margins, especially on the gateway side of the business. And we have a lot of positive momentum now, focusing on driving gross margins from a cost perspective now over the last four quarters or so.

And there is also reduction of the amortization too, as I -- if you listened to my -- it was 1.6% for next year. So this year we were closer to 2.5%, so this is --

Got you. Okay, that's helpful. I also wanted to talk to you, to make sure I understand the leverage that you're kind of showing in your model, forecasting revenue growth of 14% to 19%, an EPS growth of 17% to 47%. As I look at the model where -- where does most of that leverage come from, as you go through the P&L?

The leverage is primarily coming from on the expense side. There was a slight improvement of course in the gross margin too, so it's addition of both.

So gross margin improvement as well as leveraging some of the quick expenses on the operating side?

Correct.

Okay. Talk to me a little bit about -- I know that there are some questions about acquisitions, building a very healthy cash balance right now. What are your thoughts with regard to any more, shall we say, efficient uses of cash rather than generating interest income?

Yes, Brian -- I am continuing to focus on that. As you know, that's a big focus for me. We've done several acquisitions over the last eight years, and we continue to look very aggressively at that. And there are opportunities out there.

And however, it's very, very, difficult to give you guys any sense of timing, because as you also know, these things are very complex, and they involve two parties and so it's really hard to give any sense for that. What I can say, is what I said earlier. Over the long term, over a five year period, I would expect to see the same kind of behavior in terms of being acquisitive, as we have over the last five years.

So we're going to be very focused on that. The priorities will be to look for acquisitions that are going to accelerate our top line revenue growth, to look for acquisitions that are going to be focused in adding wireless products and technologies that are incremental to the capabilities and core competencies that we have today, and complementaries that we can do, kinds of things that we have done with MaxStream, as well as looking at -- looking in the remote device management software and middleware arena opportunities in that space.

So let's say, those are couple of the top priorities from a technology perspective. We're looking for complementary technologies. We're looking for a good strategic and cultural fit.

Well, the last several that you've done have worked out very well, and look forward to the next ones working out equally as well. Thanks, congratulations, and we'll talk to you soon in the quarter.

All right, thanks Brian.

And it seems there are no further questions on the phone lines at the moment. Mr. Krishnan, I'll turn the call back to you.

Great, thanks a lot everybody. I look forward to talking to you again in three months, 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 lines.