Digi International Inc (DGII) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2009 Digi International Incorporated earnings conference call. My name is Melanie and I'll be your coordinator today. (Operator instructions)

I would now like to turn the call over to Mr. Subramanian Krishnan, Senior Vice President, Chief Financial Officer, and Treasurer. Please proceed.

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 the press release section of the Digi website at www.digi.com.

Second, I would like to remind our listeners that some of the statements that we make in this presentation may constitute forward-looking statements. These statements reflect management's expectation about future events and operating plans and performance and speak only as of today's date.

These forward-looking statements involve a number of risks and uncertainties. A list of the factors that cause actual results to be materially different from those expressed or implied by any of these forward-looking statement is detailed under the heading Forward-Looking Statements in our earnings release today and under the heading Risk Factors in our 2008 annual report on the Form 10K already on file with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason.

Finally, certain other the financial information disclosed on this call include 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 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. This is the 26th consecutive quarter of profitability for Digi in an environment that remains very challenging. Our results were within the revenue and profitability guidance ranges that we provided at the beginning of the quarter, and exceeded the street consensus on both counts.

Revenue of $44.5 million was down 5.5% year over year and up 10.9% sequentially. Wireless product revenues continue their positive growth trend, up 18% year over year. Wireless product revenues are now 35% of our total revenue, up from the 28% in the third fiscal quarter of last year. Revenues this quarter were bolstered by the large Fujitsu deal and the one-time NET+50 chip last time buy sales.

Next I will comment on the current environment, the opportunity that it presents to Digi, and the additional actions that we're taking to capitalize on the opportunity. The economic environment in markets that Digi serves continue to behave in a recessionary mode. One positive sign I can point to that we have seen, our daily bookings rate improved in June over the previous five months. We believe that this is indicative of increasing inventory replenishment needs of our customers. And this trend has continued into early July. We expect this trend to continue and increase in the current quarter.

Another trend that we continue to see is the continuing shakeout and consolidation across virtually all industry sectors, including the M2M space. We at Digi choose to view this time period as a tremendous opportunity to improve our market position through talent, asset, and Company acquisitions, leveraging our strong financial position during this challenging time.

As I've said in previous calls, there will be clear winners and losers by market sector as we move through and eventually emerge from this market downturn. Digi is positioned with its stellar balance sheet, strong operating margins, and highly differentiated positioning to gain share and emerge as a winner.

With this in mind, we completed the acquisition of the assets of MobiApps in June. MobiApps is a developer of wireless M2M communications technology, focusing on satellite, cellular, and hybrid satellite/cellular solutions. The asset purchased positions Digi in satellite products and technologies that complement its wireless M2M strategy. MobiApps has a strong technology and product position in the ORBCOMM satellite ecosystem.

MobiApps India presence positions Digi to be much stronger in this targeted international growth market. MobiApps employs 53 people in India, including sales, marketing, and administrative staff, as well as approximately 30 engineers with strong wireless expertise. MobiApps employs an additional five people in Singapore and three in the US. This cross functional group of talented people provides a strong foundation for growth in India and Southeast Asia.

Now let's talk more about the strategic cultural and financial fit of MobiApps. Strategically, the acquisition of MobiApps satisfies two target areas in Digi's acquisition strategy by providing leading edge M2M satellite products and technologies and providing a strong base of operations to grow Digi's wireless solutions business in India and Southeast Asia.

Key aspects of the MobiApps strategic fit with Digi include the following. Strong tribal knowledge in M2M satellite communications. Custom satellite async for use across Digi products as needed. Strength and focus in India and Southeast Asia. Ability to leverage the broader Digi global sales channel, especially in Europe and the Americas. A common customization and product differentiation strategic orientation. Product synergies with iDigi wireless solutions and several of Digi's wireless product lines. And the acquisition of MobiApps is pursuant to our stated five-year objectives of driving wireless to over 60% of our revenue base and growing international revenues to over 60% by the year 2013.

Next, cultural fit. Culturally we believe that we have an excellent match. We have found MobiApps to be an open, high integrity culture where listening and teaming are highly valued, and where innovation is ingrained. We have found the management team to be entrepreneurial and yet mature. These values are very compatible with the Digi culture.

Finally, financial fit. MobiApps has recently introduced new products that Digi expects to market globally. And that are expected to be -- provide high growth, even in this difficult market environment. Digi expects the acquisition to be break-even if all financial targets are achieved in fiscal 2010. Digi expects high revenue growth on an annual basis over the five-year time horizon.

Next, at the end of our first fiscal quarter, I introduced the fundamental principles that we're focusing on in 2009. They are aggressive share gain, profitability, positive operating cash flow, aggressive supply chain management, and acquisition.

Now let's review our progress. First, aggressive share gains through continued investment in wireless M2M. As I mentioned earlier, we are continuing to increase investment in wireless M2M while others are pulling back. As a result, we continue to see strong growth from our wireless products. As we compare Digi revenue performance to others in our sector, we believe that we're continuing to gain market share.

Additionally, our recent introduction of the iDigi platform and iDigi Energy are adding significant momentum to our strategic shift from providing point products to providing wireless M2M solutions to our customers. This increases our competitive differentiation and will drive increases in our share position over time.

Second, profitability. Digi just posted its 26th consecutive quarter of profitability and we expect to continue this trend despite external challenges.

Three, positive operating cash flow. Digi EBITDA this quarter remained over 8% as a percent of revenue and we believe that we have strong momentum to drive positive operating cash flow going forward.

Fourth, aggressive supply chain management. We continue to manage our supply chain to ensure our key sources of supply are in tact and that we have contingency plans in place. Additionally, increased focus on inventory turns has reduced inventory levels by $5 million this quarter and we've maintained a very strong receivables and payables strategy and position.

Finally, continued focus on acquisition. MobiApps is a great example of the type of acquisition that can be completed in this environment. We are increasing our focus and energy on the identification and evaluation of these opportunities going forward and are well positioned to execute.

I said in previous calls that our goal is to be a $500 million Company by 2013. Additionally, I've said that we expect revenues to be at least 60% wireless, 60% international, and at least 10% services. I continue to believe more than ever that these goals are achievable and that Digi has an actionable plan in place to achieve these goals.

So, to summarize. First, Digi posted its 26th consecutive quarter of profitability. Second, we continued executing our strategy and pivoting more aggressively toward wireless and solutions. And MobiApps and iDigi will only augment that momentum. Third, Digi views this time period as a time of tremendous opportunity to improve our market position. And we expect to fully leverage that opportunity. And fourth, I'm very bullish about our ability to achieve our 2013 goal to be a $500 million Company with a very exciting revenue growth nets.

Next, I'll hand it back to Kris.

Thank you, Joe. Revenue for the third fiscal quarter of 2009 was $44.5 million, a decrease of $2.5 million or 5.5% over third fiscal quarter a year ago. Revenue from Sarian and Spectrum acquired in April and July of 2008 respectively was $6.1 million and $1 million. Sarian revenue for the third quarter includes $3.6 million from a large deal with Fujitsu as we have discussed in previous calls. That completes the entire contract to Fujitsu.

Digi acquired substantially all of the assets of MobiApps' holdings on June 8, 2009. Revenue from MobiApps branded products were $47,000 for the third fiscal quarter of 2009 from the date of the acquisition.

Wireless revenue was $15.6 million or 35.1% of total revenue in the third fiscal quarter of 2009. Compared to $14 million or 34.9% of total revenue in the second fiscal quarter of 2009. And compared to $13.2 million or 27.9% of revenue in the third fiscal quarter of 2008.

Wireless revenue grew by $1.6 million or 11.6% sequentially comparing the third fiscal quarter of 2009 to the second quarter. Wireless revenue grew by $2.4 million or 18.6% in the third fiscal quarter of 2009 compared to a year ago comparable quarter.

Revenue in EMEA, which is Europe, Middle East, and Africa, was $17.1 million in the third fiscal quarter of 2009 compared to $14.5 million at comparable quarter a year ago, an increase of $2.6 million or 17.9%. Revenue in EMEA includes Sarian branded revenue of $6.1 million and $2.4 million for the third quarter of fiscal 2009 and 2008 respectively.

Revenue in Latin America was $800,000 in the third fiscal quarter of 2009 compared to $1.3 million in a comparable quarter last year, a decrease of $500,000 or 41%.

Revenue in North America was $22.6 million in the third fiscal quarter of 2009 including Spectrum revenue $1 million, compared to $26.1 million in the comparable quarter last year, a decrease of $3.5 million or 13.4%.

Revenue in Asia Pacific region was $4 million in the third fiscal quarter of 2009 compared to $5.1 million in the third fiscal quarter of 2008, a decrease of $1.1 million or 21%

The Sarian branded revenue of $6.1 million was sold entirely in the European region. The service revenue for Spectrum of $1 million was sold entirely in the North America region. MobiApps branded revenue of $47,000 was sold entirely in the Asia Pacific region.

The revenue from the embedded products in the third fiscal quarter was $20.5 million, including Spectrum revenue of $1 million and MobiApps revenue of $47,000. Compared to $20.7 million in the third fiscal quarter of 2008, a decrease of $200,000 or 1.1%.

Revenue from non-embedded products was $24 million in the third fiscal quarter of 2009 compared to $26.3 million in the third fiscal quarter of 2008, a decrease of $2.3 million or 8.7%. Non-embedded products revenue includes Sarian branded product revenue of $6.1 million and $2.4 million for the third quarter of 2009 and 2008 respectively.

International revenue was $21.8 million or 49% of the total revenue in the third quarter of fiscal 2009, compared to $20.9 million or 44.4% of total revenue a year ago comparable quarter.

The strengthening of the US dollar compared to the Euro and the UK pound sterling had an unfavorable impact on the revenue of $1.7 million in the third fiscal quarter of 2009 compared to third fiscal quarter of 2008.

The gross margin was 48.2% in the third fiscal quarter of 2009 compared to 52.9% in the third fiscal quarter of 2008. But gross margin has improved sequentially by 0.4%.

The gross margin was lower in the third fiscal quarter of 2009 compared to 2008, due to unfavorable product mix within both the embedded and the non-embedded products, and including the sales of Sarian non-embedded products and Spectrum embedded products, which provide lower gross profit margins.

The strengthening of the US dollar compared to the Euro and the pound sterling had a $1.1 million or 0.4% unfavorable impact in gross margin in the third fiscal quarter of 2009 compared to the third fiscal quarter of 2008.

Our total operating expense for the third fiscal quarter of 2009 was $20.8 million or 46.9% of revenue compared to $22.2 million or 47.3% of revenue in the third fiscal quarter of 2008. The total operating expenses for the third quarter 2009 include a charge for restructuring expenses of $2 million. The total operating expenses for third quarter fiscal 2008 included a charge of $2.1 million for in process R&D and other expenses related to the acquisition of Sarian.

The decrease in operating expense in the third fiscal quarter of 2009 compared to prior year comparable quarter is primarily due to savings resulting from the restructuring plan and the elimination of the incentive compensation program for fiscal 2009, partially offset by ongoing operating expenses for Sarian, Spectrum, and MobiApps.

The strengthening of the US dollar compared to the Euro and the UK pound sterling had a favorable impact on operating expenses of $600,000 in the third quarter of fiscal 2009 compared to year ago comparable quarter.

Total other income net decreased by $300,000 in the third fiscal quarter of 2009 compared to the same quarter in the prior year. Interest income decreased by $500,000, primarily due to lower interest yields on cash equivalence and marketable security and lower average investor balance, offset by favorable other income, which primarily pertains to unrealized foreign currency gains of $200,000.

Net income for our third fiscal quarter of 2009 was $1.4 million or $0.06 per diluted share compared to a net income of $2 million or $0.08 per diluted share in the third quarter of fiscal 2008. Non-GAAP net income and net income per diluted share for the third fiscal quarter of 2009 was $2.2 million or $0.09 per diluted share, which excludes the tax benefit of $500,000 for the reversal of tax reserves due to the closure of certain domestic and foreign tax years or $0.02 per diluted share. And the restructuring charge of $1.3 million net of tax, or $0.05 per diluted share.

Please refer to the reconciliation table in the earnings release, which reconciles a net income and net income per diluted share from a GAAP basis to a non-GAAP basis.

Digi's effective tax rate for the third fiscal quarter of 2009 was a negative 1.8% including the discrete benefit realized as a result of the reversal of $500,000 in tax reserves due to the closure of certain domestic and foreign tax years, compared to an effective tax rate of 46.3% in the third fiscal quarter of 2008.on of a state tax matter compared to an effective tax rate of 33.6% in the second fiscal quarter of 2008. The effective tax rate in the third fiscal quarter of 2008 was higher than the statutory rate primarily due to the impact of the non-deductible charge of $2 million for acquired in process R&D. Digi expects its effective tax rate for the full year 2009 to be approximately 10% to 20%.

Including the discrete tax benefit for the extension of research and development credit, the reversal of tax reserves for the resolution of state tax matters and the closure of certain domestic and foreign tax years. The annualized effective tax rate expected to be lower than the statutory rate for fiscal 2009 primarily as a measure result of the afore mentioned items.

For the first nine months of Digi's fiscal 2009, revenue was $125.9 million compared to $134.6 million, a decrease of $8.7 million or 6.5%.

Revenue from the embedded products in the first nine months was $55.8 million including Spectrum revenue of $3.2 million, MobiApps revenue of $47,000, compared to $63.1 million in the comparable period of 2008, a decrease of $7.3 million or 11.5%.

Revenue from non-embedded products was $70.1 million in the first nine months of 2009, compared to $71.5 million in the first nine months of fiscal 2008, a decrease of $1.4 million or 2%. Revenue of non-embedded products includes Sarian branded products of $14.2 million and $2.4 million for the first nine months of fiscal 2009 and fiscal 2008 respectively.

International revenue was $59.4 million or 47.1% of our total revenue in the first nine months of fiscal 2009, compared to $56.4 million or 41.9% of total revenue in a year ago comparable period. Wireless revenue was $43.2 million or 34.3% of revenue for the first nine months of fiscal 2009 compared to $32.1 million or 23.8% of revenue for the first nine months of fiscal 2008. Wireless revenue increased by $11.1 million for the first nine months of fiscal 2009 versus fiscal 2008 or an increase of 34.7%.

The strengthening of the US dollar compared to the Euro and UK pound sterling had an unfavorable impact on revenue of $5.8 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008.

For the first nine months of fiscal 2009, Digi reported net income of $3.1 million or $0.12 per diluted share compared to net income for the first nine months of fiscal 2008 of $8.8 million or $0.33 per diluted share.

Net income for the first nine months of fiscal 2009 was reduced by the charge of restructuring expense of $1.3 million net of tax or $0.05 per diluted share, partially offset by tax benefit of $900,000 or $0.03 per diluted share.

Net income for the first nine months of fiscal 2008 was reduced for the charge in process R&D and other expenses associated with the acquisition of Sarian of $2.1 million or $0.08 per diluted share, partially offset by the tax benefit of $200,000 or $0.01 per diluted share, resulting from the reversal of tax reserves associated with the closure of prior tax year.

During the third quarter of fiscal 2009, we repurchased 58,972 shares of our stock under our previously announced stock repurchase program for $400,000 at an average price of $7.24 during the third quarter of fiscal 2009. The total shares repurchased to date is 1,364,362 shares for $11.7 million at an average price per share of $8.56. Diluted weighted average shares outstanding at the end of the quarter was 24,875,104 shares compared to the previous quarter of 25,195,058 shares, a decrease of 319,954 shares.

Turning to our balance sheet and cash flow statements, our combined cash and cash equivalence in marketable security balance, including long-term marketable securities was $66.9 million as of June 30, 2009, increasing by $3.3 million from the end of the prior quarter. Net cash provided by operating activities for the quarter was $5.1 million. We spent $3 million on the acquisition of the assets of MobiApps and $400,000 the repurchasing our stock in the third fiscal quarter of 2009.

Quarter over quarter, our receivables were up by $5 million to $25.7 million, primarily due to increased revenue during the third fiscal quarter compared to the second fiscal quarter. But our inventory is down $5 million to $29.2 million sequentially.

Our current ratio is 5.7 to 1 compared to current ratio 6.4 to 1 at the end of the prior quarter.

Our DSO is at 40 days compared to 36 days in the previous quarter.

Now I would like to provide some guidance for the fourth fiscal quarter of 2009. Digi projects revenue in the range of $39 million to $45 million. MobiApps is expected to have approximately $0.01 diluted impact in the fourth quarter of fiscal 2009.

Digi projects net income per diluted share in the range of $0.04 to $0.10. We project annual revenue in the range of $165 million to $171 million. The expense to revenue ratio is projected to be in the range of 46.5% to 47.5%. We project annual net income per diluted share in the range of $0.16 to $0.22. Our annual non-GAAP net income per diluted share, excluding the impact of restructuring charge and the reversal of tax reserve, and other tax benefits is projected to be in the range of $0.18 to $0.24.

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

(Operator instructions) And our first question comes from the line of Jay Meier with Feltl and Company. Go ahead.

Thanks. A couple sort of high altitude questions for you, Joe. Curious to hear your views on how Digi will participate in the smart grid build out. We're starting to hear some reports from some of the big integrators about bidding and things like that. And I know we've seen some relationships between you and other companies in the space. What are you seeing out there and how do you expect smart grid to impact your business over the next year?

Well, let's start with what's happening on the stimulus program, Jay. What we're seeing is that we're finally seeing the US Department of Energy formalizing a program they put out on June 25th. And so what we're going to see is a lot of the big integrators submitting applications. The first awards we would expect the application period finishes in early August and you'd expect to see awards coming from the Department of Energy 90 days later. So, you had a question three months ago on what was happening. That's what we're seeing happen. And we would expect to see funding going to the utilities on programs. And we would expect shovel ready, so to speak, programs in this energy space would certainly include some of the demand response programs that we're involved in.

And so -- and that's progressing well for us. We've got -- you know about the relationship with Comverg and the production program that we have in place with TXU. They're certainly working with other utilities, have programs in place, pilots going, et cetera that we're participating with Comverg on. In addition to that, we have within demand response we're working other opportunities and have other pilots in place that are not announced.

Beyond that, we have the Itron partnership where we see kind of a multi-dimensional opportunity to participate with Itron in their smart grid program, working with their OpenWay AMI networking solution and we're making great progress with that. On the energy device side, we're working with some of the major other meter players to embed our wireless technology into meters.

And in addition to that, beyond the programs that we have going active today, we certainly have a strong product development focus. And we have a gateway product that's out on the market. We've got next generation gateway products in process. We've got the smart energy profile being integrated into our gateways and our endpoint products. And we feel like we've got a lot of momentum.

This is going to be an opportunity that's going to -- where we have several pilots in place, now we'll start to see those pilots turning (inaudible) over the next year. And we'll certainly see more pilot programs starting in the next few months through this year. And so, I would expect the revenue ramp has already begun and I would expect that to continue to ramp up over time for us.

So, we're real bullish about the opportunity and then in addition to the generic opportunity it looks like the government program's going to start to kick in for the utilities especially starting calendar 2010.

Okay. And as you look out on this smart grid development, I mean its -- other CEOs of major companies -- I think the CEO from Cisco Systems described smart grid as potentially 1,000 times bigger than the Internet build out. And that's a little bit hard to comprehend really. So, maybe you can give us a little bit of color around how big you think smart grid could be for Digi. Could it be a 20% of your business kind of a vertical? Or even more?

Well, great question. I'd say in terms of the overall market opportunity, I'm not going to speak in terms of specific platitudes on the overall market other than to say I do think that energy management, energy technology, smart grid build out does have the opportunity to be kind of the next major revolution driving a lot of spending in the US, kind of the high growth predecessor to the IT revolution. So, moving from IT, becoming a little bit more mature, still growing, and then ET becoming kind of the high growth opportunity.

For Digi, it's hard to say with any precision what that's going to look like. But I would expect that we have a goal of getting to $500 million by 2013 and with reasonable execution against that goal, the energy sector piece of it could be anywhere from 10% to 20% of that. So, we'd like to see that in the $50 million to $100 million range out there in the five-year time period.

Okay. Well, that's helpful. And tell us a little bit about how iDigi fits in all of this. And how -- and maybe Kris could talk about this a little bit. How do you expect revenues from iDigi to impact your business, not necessarily how big are the revenues going to be, but what kind of margins are you looking at? How will that -- those flows start to happen? And are you seeing visibility of any of that yet?

Well, iDigi's really important because it becomes an enabler for fast deployment of these networks. And so, when we work with a partner like Comverg, one of the big selling points was it was very, very easy for them to basically take their demand response application and write that application using web services capability into our iDigi platform. So, connect to the iDigi platform and leverage that platform and all the capabilities of that platform to simply connect to all the end points in the residential homes, for instance, in the TXU network.

And so, that platform pretty much makes that whole process much easier, faster deployment, lower cost deployment, ease of deployment. A highly scaleable deployment because the platform is a very scalable platform. And it allows them to deal with one partner that's providing this platform that's easy to connect to that brings all the data back from all these thousands of devices. And so, they get to deal with one partner, Digi, that does all of that.

So, that model, that iDigi platform model, is leveragable with other smart energy partners who have an application and want to connect to devices. It's leveragable in other vertical markets where you have the same dynamic. Where people, where companies have an application, and they need to leverage wireless connectivity to enhance their offering. Whether it be fleet management applications, or any of the many verticals that we're looking at right now. Some of the top verticals are certainly energy management, medical, fleet management are verticals that are faring reasonably well through this downturn.

So -- and one of the things that we've announced recently our iDigi tank offering is goes across a few vertical markets, leveraging remote tank monitoring and control. So, fundamental value proposition though is the iDigi platform and all of our wireless connectivity capability from gateways to endpoint devices allow you deal with one solution provider, Digi, that make it fast, low cost, easy, scalable, and high quality.

Okay. So, let's think about the Texas utilities deal, since you guys are -- since that's public and you can talk, hopefully, a little bit more freely about it. Is that an iDigi application then? And if so, how do you expect to get paid? On a per household basis? Or on a per month basis? Do the revenue recur? How does that work?

Yes, that is an iDigi platform deal. We haven't released the information on -- specific information on deals. That would compromise the other deals that we're looking at. In general, I'm not going to speak to this one, but in general, the way this is going to work is that we'll take reoccurring revenue on a device per month basis in verticals that are highly price sensitive and where there's maybe a little bit less value being provided. The price might be a little bit more aggressive in verticals where maybe they're not as price sensitive and there's more value being added, it might be a little bit more. But fundamentally, our base strategy is to charge on a device reoccurring revenue device per month with this program.

Alternatively, there may be other models that we'll work with with customers in order to -- in understanding their business model and in order to best meet the return on investment needs that we have and our customers have.

Okay. Well, that sounds great. That's all the questions I have. Thanks.

Thanks, Jay.

(Operator instructions) Our next question comes from the line of Greg Weaver with Invicta Capital. Go ahead.

Hi, just a follow-up to Jay's question. So, Joe, are you selling the devices? Or are you just putting them out there then collecting on them monthly?

We're selling the devices. So, our basic revenue model hasn't changed. We're selling the endpoint device. In the example of TXU, we're providing our XB module as the wireless connectivity within the thermostats. And we're selling the gateway that provides connectivity to the thermostats and then connectivity back from the homes to the iDigi platform, and then back to the application itself. So, we're selling the devices and then our basic model for the iDigi platform is in addition to selling the device is to charge a reoccurring price on a per month basis for a device.

Okay. And just in terms of -- it sounds like you've got other trials ramping up here as well, has this -- the smart grid in aggregate? I mean can you give us a sense to kind of how big that is for you?

Well, yes, I think I spoke to that with Jay's -- unless I'm not understanding you.

No, revenue today.

Oh, revenue today. No, I don't think we have. I don't think we have talked about that. And I'm not prepared to talk about that right now other than to say that it's been ramping, that we have in addition to TXU, we have additional customers. A couple -- a few additional customers that are actually in production. And we have a couple near deployment. And then we have several in pilot.

Okay. And just in terms of the outlook, could you give us a little color about -- I assume part of the sequential revenue decline is due to the Fujitsu thing going away. Right?

Yes, there's two things I mentioned. One was one-time Fujitsu revenue now ending. And that was about in the neighborhood of approximately $3.5 million or so this quarter. And our last time buy offer to customers on the NET+50 chip that we're end of life-ing. And so, the combination of those two one-time kind of things was a benefit this quarter.

And so, if you look at -- if you take that out, if you look at this quarter and last quarter, take out Fujitsu over the last two quarters and NET+50, the base -- I don't have the numbers in front of me, but the baseline, if you take those out, was maybe $37 million.

So, looking forward to next quarter, what we're seeing is as I mentioned in my comments, what we're seeing is June we saw increased daily bookings. We're seeing that same trend in July. And so, with the improved bookings rate that we're starting to see, top of that baseline, that's how we come to -- then the expectation that that will continue, that's how we come to the range.

That's helpful. So, the last time chip buys were in like the $4 million neighborhood?

Yes, in that neighborhood. Like I said, I don't have that number. But like I said, the total between Fujitsu and the chip brings us for the last two quarters, each quarter roughly $37 million plus or minus a few hundred thousand.

Did that have much of an impact on the gross margin in terms of the last time buys?

Actually it averaged it down slightly. And Fujitsu certainly with the four-point exchange impact averaged us down because when we did the deal, it was pretty decent margin deal in the 50% range. And with foreign exchange impacts, that came down substantially into the 30s. So, those were both situations that while from a revenue perspective were very positive and very positive from a general business perspective, they did average down our gross margin percentages slightly.

Got you. And lastly, Kris, on the tax rate for Q4 here? Where's that coming out? I couldn't back into it. Just on the call here.

The annual rate will be -- effectively for the year will be in the 10% to 20% range, so we should -- that would equate for the quarter approximately about mid-30s.

Mid-30s. Okay. Thank you much.

Our next question comes from the line of Henry [Glassen] with Wedbush Morgan. Go ahead.

Hey, Joe, can you comment just a little bit more on the competitive environment? You've mentioned this a couple of quarters in a row where you've talked about some of the other companies that are in this sector having some difficulties. Can you explain that just a little bit more about whether -- is this something Digi's doing? Is this something the market's doing? And what do you think the impact -- net impact to you guys will be over the next few quarters?

Well, there's kind of -- there's a couple of different data points. If you look at the broader tech environment, what we've seen is usually you look at the bellwethers, the Ciscos, Intels, TIs, those kinds of people. Generally speaking their year over year revenues it -- IBM have ranged from 12% to over 30% down year over year. The average I'd say is somewhere probably around 20% down year over year.

Then if you look within some of the public companies touching the M2M space, what we're seeing is more significant impacts than that even. We're seeing Sierra was way down last quarter. They haven't reported yet this quarter. You're seeing, if you look across the public companies, numbers in the 20% to 30% down year over year.

What we're seeing is -- or what we've seen is within the core kind of product lines we're down in the neighborhood year over year of about 17%, 18%, 20% in that kind of ballpark. And then we get the benefit of some pretty decent growth the last couple of quarters. And continued growth this quarter year over year from the wireless products. And so, they've held up pretty strong through this downturn.

But in terms of the companies that you guys compete with directly, is that some sort of commentary on where you think you guys are going to be two or three quarters from now? Or is that just kind of a historical comment?

Well, first it was historical and then I made the comment perspectively. Because I feel pretty strongly that with the pivot that we're making from kind of a point product approach to the market to a solutions approach to the market with our wireless drop in networking solution center, our endpoint products, our gateway products, and now the iDigi platform, that we're developing a much more differentiated position than our competitors. Nobody's providing this kind of solution that we're providing. And so, I believe perspectively that we're making -- we're investing more and making more progress in providing a differentiated solution set than our competitors.

I understand that. Thank you very much.

Thank you.

Our next question is a follow-up from Jay Meier. Go ahead.

Thanks. The iDigi revenue stream is obviously distinct from your other revenue streams. I assume it has a higher margin and can you just tell us what you expect that gross margin to come in at? And will -- do you anticipate breaking out that revenue from the mix of other revenues?

Yes, it'll be quite a bit higher than the product revenues. I'd say probably in the 70% to 80% range. But we'll see. That's where we would expect it to be over the time horizon. And as it becomes material, we'll provide that information. But very high margin and we expect to be able to maintain that margin over the five-year time horizon.

Okay. And we talked about how much of your revenue, at least hypothetically no one's going to hold you to this, Joe, so speak freely. But hypothetically at the $500 million target in 2013 you hope to have -- with ballparking $50 million to $100 million in revenue from smart grid energy monitoring type of applications, how much of that would you imagine would be iDigi recurring revenue? Ballpark. Should I be thinking half of it? Should I be thinking a fraction of it?

I wish I knew the answer to that question. Ballpark.

How do you imagine it?

Yes, ballpark I'd love it to -- man, I wish it was all of it. But it's not going to be all of it. It's going to be some percentage in the probably 10% to 20%, but could be a little bit more. We're pretty early in the experience that we have in the marketplace on this. We have a number of early customers, but we're still early. So, the gross margin number that I gave is what we think, but we may not be right. But that's what we think. And 10%, 20% ballpark is what I think, but I may not be right.

What I'm giving you there is much more -- probably because you're asking the question, I'm trying to give you an answer. And it's much more conjecture than the very firm goal and plans that we have in place to achieve $500 million in revenue at 60% wireless, 60% international, and 10% services. But that gives you a sense.

Well, it's a pretty good sense. I appreciate it. Thanks.

All right.

And ladies and gentlemen, that does conclude the time we have available for questions today. I'd like to turn the call back over to Mr. Dunsmore for closing remarks. Please proceed.

Thank you everybody for attending the call. And I look forward to speaking with you again in three months.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.