Digi International Inc (DGII) 2010 Q2 法說會逐字稿

Good days, ladies and gentlemen. And welcome to the second quarter 2010 Digi International Incorporated earnings conference call. My name is [Emetee] and I'll be your coordinator for today. (Operator instructions)

I will turn the presentation over to your host for today's conference, Mr. Subramanian Krishnan, Senior Vice President and CFO of Digi International. Please proceed, sir.

Thank you. 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 financial release section of our investor relations 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 factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under the heading Forward-Looking Statements in our earnings release today and under the heading Risk Factors in our 2009 annual report on the Form 10-K on file with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason.

Finally, certain of the 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 Form 8-K that we filed before this call. The Form 8-K can 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. I am very pleased with our results for the quarter. This is the 29th consecutive quarter of profitability for Digi in an environment that we believe has stabilized and is returning to growth. We exceeded the street consensus for revenue and met the consensus profitability target with the results within our guidance ranges. Revenue for the quarter of $45.1 million was up 12.5% compared to the same quarter in the prior year, and 4.9% sequentially.

Net income for the quarter of $1.7 million was up 136% compared to the same quarter in the prior year, and 40.6% sequentially. EBITDA for the quarter was up 50.7% compared to the same quarter in the prior year, and 15.9% sequentially. All of these trends are positive and indicative of an upturn in the business and a stabilization of the external environment.

A key indicator that continues to be very positive is the increase in bookings rate that we again saw in the quarter. Q1 was the highest bookings quarter at Digi for at least as far back as we have comparison data, which is eight years. And Q2 exceeded Q1 by a slight margin.

Wireless product revenue for fiscal Q2 increased 12.9% compared to the same quarter in the prior year and was 35% of our total revenue. Normalizing for the $3.3 million Fujitsu order of fiscal Q2 '09, our wireless revenues were up over 40%.

As a reminder, in last quarter's earnings call, I closed out the discussion of our five operating principles for 2009 in execution against our commitments within those principles. It is that execution, which included continued investment in wireless solutions that has put us in this strong position to grow in 2010. In 2009 we accelerated the pivot of the organization to focus on providing wireless solutions to our customers. We introduced the iDigi platform, iDigi Energy, and other iDigi offerings to accelerate this initiative. And as a result, we saw high growth of our wireless solutions.

In the first half of 2010, we are seeing the benefits of our investments in wireless solutions. Wireless products are 35% of our revenue base today and we expect wireless to become over 60% of our revenue base within the next three to five years.

As I mentioned in the Q1 call, but it bears repeating, we continue to increase our internal investment focus on markets and applications that will drive this growth. Fleet management, medical, tank monitoring, and smart grid are key areas where we're focused.

We continue to make good progress in our fleet management focus this quarter. The ConnectPort X5 telematics gateway and its follow-on products have put us in a strong position. We made good progress with our relationship with XATA over the past three months and are on track to begin to ramp revenue in the second half of 2010.

Our custom development of a product for a large customer in the heavy equipment arena began its ramp in Q2 and we have a robust pipeline of other opportunities that we're pursuing.

The medical vertical continues to yield good traction with our major customers in bedside connectivity and embedded device connectivity applications. We continue to invest in business development and have a strong pipeline of sales opportunities that will provide underpinnings for growth.

Tank monitoring customers continued to deploy this quarter. We have active large customers in water treatment, agriculture, and petroleum, and are seeing revenue ramp significantly in 2010.

I spoke at length about the smart grid opportunity in last quarter's earnings call. I will make a number of comments as an update to that discussion.

First, we have continued to build momentum at increasing pace over the past three months. We believe that Digi is a natural partner for key players in the demand response AMI energy management system and alternative energy markets.

Second, Digi has likely the largest deployment of home gateways for demand response today and we continued aggressive deployment in Q2.

Third, we have continued to build our existing partnerships and have added several new partnerships in the last three months.

And fourth, we continue to increase our investment in smart energy as we hire additional business development, product management, and R&D professionals to fully pursue this opportunity.

So I continue to be very bullish about the growth opportunities for our wireless solutions and overall product growth. As a result of our bookings momentum, these growth opportunities will be providing another guidance increase for the year, which Kris will discuss in his prepared remarks.

So to summarize. First, Digi posted its 29th consecutive quarter of profitability. Second, we grew revenue and earnings for the first -- for the quarter both sequentially and compared to same quarter in the prior year. Third, we have significant growth momentum with our wireless products and especially in our targeted verticals. And fourth, we're increasing our guidance.

Next I'll hand it back to Kris for his prepared remarks.

Thank you, Joe. Revenue for the second fiscal quarter of 2010 was $45.1 million, an increase of $5 million or 12.5% over the second fiscal quarter revenue a year ago. Revenue increased sequentially from the first fiscal quarter of 2010 to the second fiscal quarter of 2010 by $2.1 million or 4.9%.

Revenue in North America was $26.5 million in the second fiscal quarter of 2010 compared to $20.7 million in the comparable quarter last year, an increase of $5.8 million or 27.9%.

Revenue in EMEA, which is Europe, Middle East and Africa, was $12.3 million in the second fiscal quarter of 2010 compared to $14.9 million in the comparable quarter a year ago, a decrease of $2.6 million or 17.3%. EMEA revenue in the second fiscal quarter of 2009 included $3.3 million from a large deal with Fujitsu as discussed in last year's earnings call.

Revenue in Asia countries was $5.3 million in the second fiscal quarter of 2010, including MobiApps satellite revenue of $400,000, compared to $3.8 million in the second fiscal quarter of 2009, an increase of $1.5 million or 38.7%.

Revenue in Latin America was $1 million the second fiscal quarter of 2010 compared to $700,000 in a comparable quarter last year, an increase of $300,000 or 50.8%.

Revenue from the embedded products in the second fiscal quarter of 2010 was $20.2 million, including the MobiApps satellite revenue of $400,000, compared to $17.4 million in the second fiscal quarter of 2009, an increase of $2.8 million or 16.1%.

Revenue from non-embedded products was $24.9 million in the second fiscal quarter of 2010 compared to $22.7 million in the second fiscal quarter of 2009, an increase of $2.2 million or 9.7%.

Wireless revenue increase by $1.8 million in the second fiscal quarter of 2010 compared to the same quarter in the prior year or 12.9% and increased by $700,000 or 4.4% compared to the first fiscal quarter of 2010. Wireless revenue was $15.8 million or 35% of our total revenue in the second fiscal quarter of 2010 compared to $14 million or 34.9% of the total revenue in the second fiscal quarter of 2009 and compared to $15.1 million or 35.2% in our first fiscal quarter of 2010.

The gross margin was 50.5% in the second fiscal quarter of 2010 compared to 47.8%. The gross margin was higher in the second fiscal quarter of 2010 in the comparable period a year ago due to favorable product mix, product cost reductions, lower manufacturing expenses, resulting from the closing of our manufacturing facility in Davis, California and consolidation of manufacturing operations within our Minneapolis plant in fiscal 2009. We expect gross margin will approximate current levels for the remainder of fiscal 2010.

Total operating expenses for the second fiscal quarter of 2010 were $20.6 million or 45.6% of revenue compared to $18.6 million or 46.3% of revenue in the second fiscal quarter of 2009. The increase in operating expenses in the second fiscal quarter of 2010 compared to prior comparable quarter is primarily due to the reinstatement of fiscal 2010 of the partial incentive compensation program, which had been eliminated in fiscal 2009 and incremental ongoing operating expenses of $700,000 for MobiApps that was acquired on June 8, 2009.

Operating expenses benefited by $400,000 due to a reduction of restructuring reserve in the second fiscal quarter of 2010 because expenses associated with the plant were less than expected.

The weakening of the US dollar compared to the euro and the UK pound sterling had an unfavorable impact on the operating expenses of $300,000 in the second fiscal quarter of 2010 compared to a year ago comparable quarter. We expect that our total operating expenses will approximately 44% to 46% of revenue for the remainder of fiscal 2010.

Net income increased by $1 million or 135.8% in the second fiscal quarter of 2010 compared to the comparable quarter in the prior year. Net income for the second fiscal quarter of 2010 was $1.7 million or $0.07 per diluted share compared to $700,000 or $0.03 per diluted share in the second fiscal quarter of 2009.

Non-GAAP net income and net income per diluted share for the current fiscal quarter of 2010 was $1.5 million or $0.06 per diluted share, which excludes a reduction of the restructuring reserve of $200,000, net of tax, of $0.01 per diluted share. Please refer to the reconciliation table in the earnings release, which reconciles our operating income and net income, and net income per diluted share for GAAP basis to a non-GAAP basis.

Digi's effective tax rate for the second fiscal quarter was 34% compared to an effective tax rate of 28.1% in the second fiscal quarter of 2009. Digi expects this effective -- annual effective tax rate for the full fiscal year of 2010 to be in the range of 33% to 35%.

For the first six months of fiscal 2010, Digi reported a revenue of $88 million compared to $81.4 million for the first six months of fiscal 2009, an increase of $6.6 million or 8.1%.

Other highlights for the first six months of fiscal 2010 compared to the first six months of fiscal 2009 include the following. Revenue from embedded products in the first six months of fiscal 2010 was $38.2 million, including the MobiApps satellite revenue of $900,000 compared to $35.4 million in a comparable period of 2009, an increase of $2.8 million or 8%.

Revenue from non-embedded products was $49.8 million in the first six months of 2010 compared to $46 million in the first six months of 2009, an increase of $3.8 million or 8.1%.

Wireless revenue increased by $3.3 million or 10.8% for the first six months of fiscal 2010 compared to the first six months of fiscal 2009. Wireless revenue was $30.9 million during our first six months of fiscal 2010 or 35.1% of our total revenue compared to $27.6 million during the first six months of fiscal 2009 or 33.7% of our total revenue.

Net sales in the first six months of fiscal were favorably impacted by the foreign currency translation of $700,000 when compared to the same period in the prior fiscal year, resulting in the weakening of the US dollar. Our net income increased by $1.2 million or 66.7% for the first six months of fiscal 2010 compared to the same period a year ago.

For the first six months of 2010, Digi reported net income of $2.9 million or $0.12 per diluted share compared to net income in the first six months of fiscal 2009 and $1.7 million or $0.07 per diluted share.

Non-GAAP net income increased by $1.3 million or 95.2% for the first six months of fiscal 2010. Non-GAAP net income for first six months of 2010 was $2.7 million or $0.11 per diluted share compared to $1.4 million or $0.05 per diluted share.

Net income benefited by $200,000 or $0.01 during the first six months of 2010 due to the reduction of our restructuring reserve. Net income benefited by $400,000 or $0.01 per diluted share during the first six months of fiscal 2009 as a result of the retroactive benefit from the extension of research and development credit.

Our diluted weighted average shares outstanding at the end of the quarter was 25,212,813 shares compared to a previous quarter of 24,979,033, an increase of 233,780 shares.

Turning to our balance sheet and cash flow statements, our combined cash and cash equivalents in marketable security balances, including long-term marketable securities were $81 million as of March 31, 2010, increasing by $2.5 million from the end of the prior quarter and by $5.2 million from the end of the prior fiscal year.

Net cash provided by operating activities for the quarter was $5 million. We paid $3 million in January to the former shareholders of Spectrum Design Solution as one of the deferred payments on the acquisition became due. Our current ratio is 7.3 to 1.0 compared to the current ratio of 7.2 to 1.0 at the end of prior quarter. Our DSO is at 38 days, consistent with previous quarters.

Now I would like to provide some guidance for the third fiscal quarter of 2010. Digi projects revenue to be in the range of $44 million to $48 million and a net income per diluted share in the range of $0.07 to $0.11. For the full fiscal year, Digi projects revenue in the range of $174 million to $190 million, which is an increase of $4 million at the lower end of the range from the guidance previously provided. We expect a most likely revenue of $182 million, an increase of $2 million from the guidance provided at the end of the first fiscal quarter. We anticipate that earnings per diluted share will be in the range of $0.21 to $0.42, which is an increase of $0.03 at the lower end of the range from the guidance previously provided.

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

(Operator instructions) Your first question comes from the line of Tavis McCourt with Morgan Keegan. Please proceed.

Hey, guys. It's Tavis. Couple of questions. First on -- in terms of the amortization expense on the income statement, Kris, is that something we should expect at that similar rate for the rest of the year? And is that included in your OpEx guidance of 44% to 46% of revenues?

Yes, it is and I would maintain the same level that we've been incurring on a quarterly basis.

Okay. And Joe, you mentioned bookings were up slightly from the record December quarter. Can you give us a sense how the March quarter typically is on a seasonal basis for your bookings?

It's typically -- on a revenue basis what we typically see is a revenue ramp up through the fiscal year. So we typically see Q1 being the lowest and we typically see revenue ramp through the year. Bookings would tend to flow similarly, but I can't give you precise information on that. But we would tend to see revenue peak in fourth fiscal quarter of most years.

Got you. And then it looks like the non-wireless revenues had another nice up tick this quarter. Is that kind of general economic conditions improving? Or is there one or two products in there that are really driving that?

I think it's a combination. I think we're seeing a broad based -- the water level is increasing on a broad base and so we're benefiting from that. And I think that we're also seeing some significant large opportunities that are flowing as well or better than expected. An example would be in the cloud-computing arena, where we have our terminal server product line has an interesting play as a console server. And so providing that console server capability for a major cloud computing player helped boost our revenues a bit for the quarter. It came in a bit higher than we expected. So things like that were very positive in the quarter.

Great. And final question, Kris for you. You mentioned some of the currency impact year-over-year. In terms of sequentially when the dollar strengthened as quickly as it did, did it have any impact relative to what you guys were thinking were -- when you gave guidance?

Yes, when we give guidance, we expect it to be slight weakness in the dollar. And as we look forward, it shouldn't matter as significantly materially in our financial projections.

Great. Thanks a lot.

Thank you, Tavis.

(Operator instructions) Your next question comes from the line of Jay Meier with Feltl and Company. Please proceed.

Hi, guys. Thanks. Couple sort of high altitude questions, Joe. As far as the product development that you have been working on, really for some time with XATA Corporation, is there any exclusivity with that? I mean is there a reason why you can't take those products and market to other logistics and supply chain management vendors?

Generally speaking, our fleet management product line, which includes the X5 and then follow-on products that we're about to hit the market with, those generic products are being marketed to the broader fleet management marketplace. And I think XATA is real interested in Digi continuing to have success deploying these products because as we have success deploying products it helps us to drive down our costs and make the products even more attractive to them.

There are some unique things that we're doing with Spectrum Design Services just for XATA. And if other customers in the fleet management arena want unique capabilities, we would do the same type of thing for them. But we certainly wouldn't take the unique things that XATA is requesting that we do and market those unique custom capabilities.

Okay. And you made a comment earlier about your -- it seemed to be a share sort of guesstimate in the smart grid. You said you're delivering more gateways into the market than anybody that you can perceive. Can you elaborate on that a little bit? How are you measuring that? Can you give us a real quantification of what the means? And who do you think is your biggest threat out there right now?

Yes, so what we're seeing out there right now, Jay, generally is in the home gateway, home energy management system arena. This year is the 2010 and I think into 2011 is the year of the pilot, both from an AMI perspective and home energy management and -- perspective. And so we're out there in production as well as in pilot with our gateway.

Our gateway is being deployed in production with more than one major customer out there. We've sold in the tens of thousands of home gateways based on objective third-party market information that we look at and based on what we know from a bottoms up perspective. We believe that that's the highest volume of home gateways based on all the information we have. So we feel like we're getting good traction there, both with our production customers and that we have additional pilot customers that I've talked about in the past that are piloting our gateways and I would expect to deploy in the future.

So we feel like we've got really good traction both from a demand response, demand load curtailment application perspective and then extending beyond that into more sophisticated applications for the home gateway for home energy management systems. So we feel pretty good about the fact that we're out there deploying in production and pilot. And a lot of folks are out there just kind of stuck in pilot mode to a certain degree.

Sure. And you -- one of the things about Digi that is different is that you have entire families of products and including different transmission mediums. Other vendors that I'm aware of don't -- can't make that claim. Would you say that there's one particular level of gateway that's really penetrating more? I mean are we talking about a single point of data that's being transmitted? Or are you actually aggregating and collecting information from multiple sources and then batch file moving it forward?

Well so when we talk about the gateway play in smart energy, it's useful to talk about the various types of gateways. So one area where we're getting a lot of traction is with the home gateway. And where we're seeing a lot of volume right now with our partnership with Comverge and with others is deploying this home gateway that is an Ethernet. So it's broadband out and it's wireless in the home. It's ZigBee, ZigBee Smart Energy in the home.

And initial implementations that we have there in production are fundamentally connecting to the thermostat in order to enable connectivity back to, for instance, the Comverge Apollo platform to implement demand response and load curtailment. However with Comverge and with others, with other energy management system providers, et cetera, what we'll be doing is connecting to other devices within the home in order to provide a much more sophisticated solution.

So we're out there, we're in demand response applications. We're out there in energy management system pilots, working on connecting with other devices. And we expect that to evolve fairly quickly in terms of our ability with our home gateway to speak to lots of devices as we see the -- for instance, the ZigBee smart energy protocol standard being defined and more devices available to that standard, then we're going to be speaking to those devices and we'll see more sophisticated solutions in the home.

There are other places where -- in smart energy where we provide gateways. For instance, we have gateways that provide connectivity for residential communications. Communicating from the home to a gateway that communicates back to a knock. Or we're working on a gateway, as I mentioned before, which Itron to provide wireless communications for distribution automation applications in the substation.

And even at the home, alternative gateways that leverage cellular communications from the home, from the smart meter, et cetera are other forms of gateways. One that we're seeing the most traction with right now is the demand response/EMS oriented home gateway.

So is -- there isn't really one particular product that is dominating your deliveries right now. I mean it sounds like you are delivering all different types of gateways that have all different types of aggregator functions and -- is that fair? I mean -- or is there one particular product that's really dominating your deliveries into the smart energy market?

Well, your statement is true about our gateways across -- if you look across tank monitoring, fleet, and smart energy. Certainly we're seeing a wide variety of gateways being deployed in significant volume across these verticals. When you look at smart energy, the one that's driving the most volume right now is that home gateway that I described.

Okay. And lastly, Kris I suppose is MobiApps -- the $400,000 in revenue contribution from MobiApps the only non-organic revenue in the quarter?

Yes.

Okay, very good. Thanks a lot.

Thank you, Jay.

Your next question comes from the line of Anthony Newley with Private Investor. Please proceed.

Joe, you -- a couple of times last year said that you had your eye on $500 million revenue in the fiscal 2013 and an action plan, in your words, to get there. And I want to know whether that is still the way you see how it's going to go?

That is still my goal. I still think it's achievable. The way that we would achieve it is to drive organically up into the $275 million, maybe the $300 million range. And then beyond that we need to -- I believe we'll need to identify acquisitions to help drive us the rest of the way. So that's absolutely the goal. The goals that I have in mind for that timeframe that I've talked about are $500 million. 60% of our revenue wireless. I'd like to see the services piece drive to at least 15% of our revenues. And I'd to see international drive to a much more significant piece to close to 60% of our revenue. So those are my goals.

And the acquisition prospects are out there I take it.

Yes, I mean we're always looking and analyzing, and I think we've got our tentacles out there pretty effectively from a business development perspective. And so we're always looking at a rationale for finding acquisitions that are a good strategic and cultural fit and that are going to drive this strategy.

Okay. I got it, thank you.

Thank you.

(Operator instructions) You have no further questions at this time. I would now like to turn the call over to Mr. Joe Dunsmore for closing remarks.

Thank you, everyone for attending the call. As I said, I'm very bullish about the momentum with the business and I look forward to talking to you in three months. Thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.