Digi International Inc (DGII) 2010 Q3 法說會逐字稿

Good days, ladies and gentleman, and welcome to the Quarter Three 2010 Digi International, Incorporated Earnings conference call. My name is [Jonathan] and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session toward the end of this call. (Operator instructions).

I would now like to hand the call over to Ms. Brenda Mueller, who is the Digi Corporate Controller. Please proceed, ma'am.

Thank you, Jonathan. Good afternoon and thank you all 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 Releases section of our Investor Relations web site 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 expectations 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 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 reconciliations 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 also be accessed through the SEC filing section of our Investor Relations web site at www.digi.com.

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

Thank you, Brenda, and welcome to the call, everyone. I am very pleased with our results for the quarter. This is the 30th consecutive quarter of profitability for Digi. We exceeded the Street consensus for revenue and profitability for the quarter. Revenue for the quarter of $47.2 million was up 4.8% compared to the same quarter in the prior year and 6.2% sequentially. Revenue in 3Q '09 included a $3.6 million large deal to Fujitsu, as well as a $4.4 million last-time buy sale of a discontinued chipset as discussed in last year's call and in our third quarter 10-Q.

Net income was $3.8 million or $0.15 per diluted share for the quarter compared to $1.4 million or $0.06 per diluted share in the year-ago comparable quarter, an increase of $2.4 million. Brenda will provide a non-GAAP breakdown of this in a few minutes.

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. Q2 was the highest bookings quarter at Digi for at least as far back as we have comparison data, which is eight years, and Q3 exceeded Q2.

Wireless product revenue for fiscal Q3 increased 20.9% compared to the same quarter in the prior year and was 40% of our total revenue.

The important news this quarter is that we continue to see large lead customers accelerating their deployment of our wireless M2M solutions across our targeted vertical markets. Big customers are ramping revenue and we're seeing sales pipeline increases across these markets.

In the [fleet] management arena, we made our initial shipments to [Zeta] and we expect revenue to continue to grow nicely over the coming quarters.

And the medical vertical continued strong momentum with our major customers in the bedside connectivity and embedded device connectivity applications. In particular, we added another major customer in this quarter in the bedside connectivity space and have seen very robust sales continue. In the embedded space, we are providing a very large customer with wireless connectivity for their infusion pumps.

Tank monitoring customers continue to up their deployments this quarter. We have active large customers in water treatment, agriculture, and petroleum, and are seeing a market leader in water treatment deploying our cellular gateways very aggressively. Additionally, we are seeing sales pipeline growth in several other applications, including irrigation control systems and quick service restaurants to name a couple.

I spoke at length about the smart grid opportunity over the last couple of quarters. I will make a few comments as an update to that discussion. First, we have continued to build momentum at an increasing pace over the past three months and are seeing strong revenue growth. Second, we have added a number of strategic partners over the past three months, which include a few that we have publicly announced -- Cooper Power, Grounded Power, and EcoFactor.

Third, we continue to believe that Digi is a natural partner for key players in the demand response, AMI, energy management system, and alternative energy markets. As such, Digi has a very substantial deployment of home gateways for the demand response application, is partnering in early pilots in the EMS arena, and is providing enabling communication capabilities for several customers in the solar and wind power markets.

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

So I continue to be very bullish about our growth opportunities for our wireless solutions. As such, we will be providing another guidance increase for the year, which Brenda will discuss later in her prepared remarks.

Next I will make a few comments on the internal investigation that we initially disclosed in our previous 10-Q. Let me preface these comments by saying that our earnings release includes a detailed report on the status of this matter. This matter is under consideration at the SEC and DoJ and I am not in the business of predicting what they will do. As for Digi, we are endeavoring to improve our processes as a result of what we've learned. We have strengthened our internal controls and compliance procedures and will continue to do so. Since we have provided full disclosure of what we know today in the press release, please be respectful of that and focus your questions today on business operations.

Finally I will provide an update on the CFO search process. We engaged a professional search firm a number of weeks ago to conduct our CFO search. We are methodically identifying candidates to be considered and have provided a favorable update that the environment is very friendly with many solid prospective candidates available. Our search firm advises us that the average CFO search takes about three to six months. And while we're not in a position to commit to a strict time frame since we will take the appropriate time to find an A-plus candidate, we feel that the search is progressing very well.

So to summarize, first, Digi posted its 30th consecutive quarter of profitability. Second, we grew revenue and earnings for the quarter sequentially and compared to the same quarter in the prior year and exceeded consensus estimates. Third, we have significant growth momentum with our wireless products, especially in our targeted verticals. Fourth, the investigation and our CFO search are progressing. And fifth, we are increasing our guidance.

Next I will had it back to Brenda for her prepared remarks.

Thank you, Joe.

Revenue for the third fiscal quarter of 2010 was $47.2 million, an increase of $2.7 million or 6.2% over third fiscal quarter revenue a year ago. Other highlights for the third fiscal quarter of 2010 all in comparison to the third fiscal quarter of 2009 are as follows.

Revenue in North America was $28.5 million compared to $22.6 million a year ago, an increase of $5.9 million or 25.8%. Revenue in the Asia countries was $5.9 million compared to $4 million a year ago, an increase of $1.9 million or 47.9%. Revenue in Latin America was $1.2 million compared to $800,000 a year ago, an increase of $400,000 or 61.3%. Revenue in EMEA, which is Europe, Middle East, and Africa, was $11.6 million compared to $17.1 million a year ago, a decrease of $5.5 million or 31.9%. EMEA revenue in the third fiscal quarter of 2009 included a large deal with Fujitsu and a last-time-buy sale of a discontinued chipset, as Joe previously discussed.

Revenue from embedded products was $22.3 million compared to $20.5 million a year ago, an increase of $1.8 million or 9%. Revenue from non-embedded products was $24.9 million compared to $24 million a year ago, an increase of $900,000 or 3.8%.

Wireless revenue increased by $3.2 million when compared to the same quarter in the prior year or a 20.6% increase. Wireless revenue was $18.9 million or 40% of total revenue when compared to $15.7 million or 35.2% of total revenue a year ago.

The gross margin was 50.2% compared to 48.2% the same period a year ago. The gross margin was higher in the current quarter compared to the same period a year ago primarily due to favorable product mix, product cost reductions, and lower manufacturing expenses. We expect that gross margins will approximate current levels in the fourth quarter of fiscal 2010.

Total operating expenses were $21.2 million or 44.9% of revenue compared to $20.8 million or 46.9% of revenue in the third quarter a year ago. Total operating expenses in the third fiscal quarter of 2010 include $1 million of expenses pertaining to the investigation. Total operating expenses in the third quarter a year ago include a charge for restructuring expenses of $2 million. Total operating expenses increased by $1.2 million excluding the aforementioned items primarily due to the reinstatement for fiscal 2010 of the incentive compensation program, which had been eliminated in fiscal 2009, and incremental ongoing operating expenses of $500,000 for MobiApps, acquired on June 8, 2009. We expect that total operating expenses will be approximately 42% to 44% of revenue in the fourth quarter of fiscal 2010.

Net income increased by $2.4 million compared to the same quarter in the prior year. Net income was $3.8 million or $0.15 per diluted share compared to net income of $1.4 million or $0.06 per diluted share in the same quarter a year ago.

Non-GAAP net income and net income per diluted share was $2.3 million or $0.09 per diluted share, which includes investigation expenses of $700,000 net of taxes or $0.03 per diluted share, and a reversal of tax reserves of $2.2 million or $0.09 per diluted share associated with the statutory closing of a prior tax year and the conclusion of an audit of prior tax years.

Non-GAAP net income and net income per diluted share for the third quarter of fiscal 2009 was $2.2 million or $0.09 per diluted share, which excludes the charge for the restructuring reserve of $1.3 million net of tax or $0.05 per diluted share and the reversal of tax reserves of $500,000 or $0.02 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 from a GAAP basis to a non-GAAP basis.

Digi's effective tax rate for the third fiscal quarter of 2010 was a negative 46.8% compared to an effective tax rate of a negative 1.8% in the year-ago comparable quarter, both of which include the reversal of tax reserves and other discreet tax benefits. Digi expects its effective tax rate for the full fiscal year 2010 to be in a range of 13% to 17%, including the reversal of tax reserves and discreet tax benefits. The annualized effective tax rate is expected to be lower than the statutory rate in fiscal 2010 primarily as a result of the aforementioned items.

Sequentially from the second fiscal quarter of 2010 to the third fiscal quarter of 2010, revenue increased by $2.2 million or 4.8%. Wireless revenue increased by $3.1 million or 19.6% and was $18.9 million or 40% of total revenue compared to $15.8 million or 35% of revenue in the previous quarter.

Moving to the first nine months of fiscal 2010 performance all in comparison to the first nine months of fiscal 2009, Digi reported revenue of $135.3 million compared to $125.9 million, an increase of $9.4 million or 7.4%. Other highlights for these comparable periods include the following -- revenue from embedded products was $60.5 million compared to $55.8 million in the comparable period of 2009, an increase of $4.7 million or 8.4%. Revenue from non-embedded products was $74.8 million compared to $70.1 million in the same period a year ago, an increase of $4.7 million or 6.7%.

Wireless revenue increased by $6.7 million or 15.5% compared to the first nine months of fiscal 2009. Wireless revenue was $49.8 million or 36.8% of total revenue compared to $43.1 million during the first nine months of fiscal 2009 or 34.2% of total revenue.

Net income increased by $3.6 million in the first nine months of fiscal 2010 compared to the same period a year ago. For the first nine months of fiscal 2010, Digi reported net income of $6.7 million or $0.27 per diluted share compared to net income for the same period in the prior year of $3.1 million or $0.12 per diluted share.

Non-GAAP net income increased by $1.3 million for the first nine months of fiscal 2010 compared to the same period a year ago. Non-GAAP net income was $4.9 million or $0.19 per diluted share compared to $3.5 million or $0.14 per diluted share in the prior year.

For the first nine months of fiscal 2010, net income was reduced by $700,000 net of taxes or $0.03 per diluted share as a result of the investigation expenses. Net income benefited by $200,000 net of taxes or $0.01 per diluted share due to a reduction of the restructuring reserve.

Net income benefited by $2.3 million or $0.09 per diluted share as a result of a reversal of tax reserves and other discreet tax benefits. For the first nine months of fiscal 2009, net income was reduced by a charge for the restructuring reserve of $1.3 million or $0.05 per diluted share and benefited by $900,000 or $0.03 per diluted share as a result of the reversal of tax reserves and other discreet tax benefits.

Diluted weighted average shares outstanding at the end of the quarter were 25,271,893 shares compared to the previous quarter of 25,212,813 shares, an increase of 59,080 shares.

Turning to the balance sheet and cash flow statements, our combined cash and cash equivalents and marketable securities balances including long-term marketable securities were $82.5 million as of June 30, 2010, increasing by $1.5 million from the end of the prior quarter and by $6.7 million from the end of the prior fiscal year. Net cash provided by operating activities for the quarter was $3.4 million. Our current ratio is 6.8-to-1 compared to a current ratio of 7.3-to-1 at the end of the prior quarter.

Our DSO is at 38 days, consistent with the previous quarter.

Now I would like to provide some guidance for the fourth fiscal quarter of 2010. Digi projects revenue to be in a range of $46 million to $50 million and net income per diluted share in a range of $0.08 to $0.13. For the full fiscal year, Digi projects revenue in a range of $181 million to $185 million, which is an increase of $7 million at the lower end of the range from the guidance previously provided. We expect most likely revenue of $183 million, an increase of 11% over fiscal 2009 revenue. We anticipate that earnings per diluted share will be in a range of $0.35 to $0.40 for the full year.

Non-GAAP earnings per diluted share are expected to be a range of $0.27 to $0.33. Please refer to the reconciliation of diluted earnings per share guidance to non-GAAP diluted earnings per share guidance included in the earnings release.

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

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

Hi. Can you hear me? This is [Matt McKee] on behalf of Tavis McCourt and thanks for taking my call.

A few questions -- first, are you guys seeing any signs of slowing in any particular end markets?

No. As I mentioned, we saw that the bookings rate increased again this quarter, so once again we had record bookings. And so the momentum continued. And as a result, you know, it said -- backlog and we come into this quarter with a very strong backlog. So we have seen continued momentum.

All right, thanks.

And given your outlook for growth, what are your hiring plans currently?

Well, we continue to extend the strategy that we have been executing on, which has been to continue to focus on increasing our core capability and competency in the wireless solutions arena. So we've been adding business development people in that space. We've been adding R&D folks in that space and other functions. So we have continued to add people there, as well as in other parts of the business, in India, other parts of the business we have been adding people. So we're very bullish on the wireless solutions growth opportunity. We're seeing our large lead customers ramping up. We're seeing the pipeline build. And we just want to add to that momentum.

Okay. And are you expecting any benefits from this [market] vertical from the energy bill that's about to be written?

From what, I'm sorry? From what?

The energy bill that's being discussed.

You know, just as with the last iteration, we expect that there will be certainly long-term benefits from that. What happens in the short term is kind of hard to predict, but certainly we're going to see long-term benefits. It's going to help to fuel a market smart grid opportunity that many people predict over the next 20 years will be $2 trillion opportunity in the US and $6 trillion worldwide. So it's a significant long-term opportunity. And what the US government has done with the initial bill and then with follow-on activities I think in general helps to facilitate extension of the smart grid and the big focus areas for that extension plays right into the kind of things that we're doing with our X-Grid offering. We're focused on extending the grid into the home and into the business and providing our gateways and the iDigi platform and other products to naturally partners with - naturally partner with our partners to go do that in various applications. So we think it's a positive thing.

All right, one final question. I missed the end if the sentence. You were discussing your expected tax rate. Can you mention that again, the annualized you're expected to be lower than. What was that?

Sure. We expect our effective tax rate for the full fiscal year to be in a range of 13% to 17%, which would include the reversal of the tax reserves and discreet tax benefits.

Okay. Thanks a lot, guys.

Okay, thank you.

(Operator Instructions).

At this time, there are no further questions. I would now like turn the call back over to management for any closing remarks.

Well, thank you, everybody. We feel like we had a very strong quarter, the momentum continues, and I look forward to talking to you again in three months. Thank you.

Ladies and gentlemen, thank you for your participation in today's earnings call. The presentation has ended. You may now disconnect. Have a good day.