Digi International Inc (DGII) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Digi International Incorporated Earnings Conference Call. My name is Jonathan and I am your operator for today. At this time all participants are in a listen-only mode. We will be conducting a question and answer session after the prepared remarks and if at any time during the call you require operator assistance, simply press star zero and an operator will be happy to assist you. And, as a reminder, this conference call is being recorded for replay purposes.

I would now like to hand the call off to one of your speakers for today, Mr. Steven Snyder, CFO. You may 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 Releases 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 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 2010 annual report on form 10-K and updated in the Risk Factors section of our second quarter fiscal 2011 Form 10-Q, both of which are 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.

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

Thank you, Steve, and welcome to the call everyone. I am extremely pleased with our results for the quarter. This is a record breaking quarter for Digi. This is the highest revenue quarter in the history of the Company. We achieved $54.3 million in revenue this quarter. The previous record high was $51.8 million in the fourth quarter of fiscal 1996.

Revenue for the quarter was up 14.9% compared to the same quarter in the prior year and 9.2% sequentially. Wireless product revenue for fiscal Q3 was $22.5 million, increasing 19.2% compared to the same quarter in the prior year. Wireless product revenue in the third quarter represented 41.5% of our total revenue.

Bookings continued to be extremely strong in the quarter, very consistent with the trends established in the last several quarters. This is also the 34th consecutive quarter of profitability for Digi.

Net income was $3.6 million, or $0.14 per diluted share for the quarter. Our EBITDA as a percent or revenue of 14.8% for the quarter is up significantly over last quarter's EBITDA 11.8%. It is very close to the targeted objectives of 15% to 20% that I've spoken about in previous calls.

Gross margins were particularly strong at 53%, continuing a positive trend of the past several quarters. Gross profit increased by 21.2% over the same quarter in the prior year. Our operating income of $6.2 million or 11.4% of revenue is especially significant since we are absorbing a noticeably higher compensation expense this year. In 2011 we've set our bonus targets to pay out at 100% for plan achievement, up from the 50% payout target in 2010.

The record quarter was particularly satisfying because it was a broad based effort by the team. All regions experienced double-digit revenue growth and on the product side both embedded and non-embedded products experienced double-digit revenue growth. We are leveraging our revenue growth combined with manufacturing cost reduction initiatives and good cost controls throughout the organization to drive our EBITDA.

As I've said in previous call, Digi has positioned itself squarely at the intersection of wireless end-to-end meets cloud computing meets smart energy as well as some other high growth verticals. Our wireless drop-in networking solutions set of gateways and endpoint wireless products is now fully complemented by our iDigi device cloud and wireless design services to bring our present value to our partners and customers. As a result, we continue to see largely customers in our targeted verticals accelerating their deployment of our wireless end-to-end solutions.

Additionally, in the smart energy space we added E2America, an energy management system provider, and PowerDash, the solar energy management system provider, as partners in the past three months. And we're making good progress with our key existing partners. As an example, earlier this year we launched a Smart Grid Now program that is built on our partnership with Itron. As part of that program, we provide a way for widely deployed Itron ERT meters to immediately connect to the Smart Grid and provide real-time access to energy, water and gas consumption information. We now have over 50 customers trialing this solution.

In the fleet management space we recently added an [L-Logistics] as a key partner integrating their solution into iDigi. In the tank monitoring space we added TankScan as a partner with iDigi. In the medical space we continue to see very strong momentum from large customers that have integrated our products.

In summary, we are very happy with the progress that we are seeing in our targeted verticals. So Steve will provide improved guidance in his comments in a few minutes. Let me reiterate. We continue to be excited about our bookings rates and sales pipeline that we're generating. We believe this provides continuity for strong organic growth into the future.

So, to summarize, first Digi posted all-time record revenue for the quarter. Second, Digi posted its 34th consecutive quarter of profitability. Third, we have significant growth momentum across our business, especially with our wireless products in our targeted verticals. And fourth, we improved our guidance and remain bullish about our long-term future.

Now I'll hand it back to Steve for his prepared remarks.

Thank you, Joe. Revenue for the third fiscal quarter of 2011 was $54.3 million, an increase of $7.1 million or 14.9% over third fiscal quarter revenue a year ago. Other highlights for the third fiscal quarter of 2011, all in comparison to the third fiscal quarter of 2010, are as follows.

Revenue in North America was $32.3 million compared to $28.5 million a year ago, an increase of $3.8 million or 13.2%. Revenue in EMEA, which is Europe, Middle East and Africa, was $13.0 million compared to $11.6 million a year ago, an increase of $1.4 million or 11.9%. Revenue in the Asia Pacific region was $6.9 million compared to $5.9 million a year ago, an increase of $1.0 million or 16.8%. Revenue in Latin America was $2.1 million compared to $1.2 million a year ago, an increase of $900,000 or 74.3%.

Wireless revenue increased by $3.6 million in the third fiscal quarter of 2011 compared to the same quarter in the prior year, or 19.2%. Wireless revenue was $22.5 million, or 41.5% of total revenue compared to $18.9 million, or 40% of total revenue in the same quarter a year ago.

Revenue from wired products was $31.8 million compared to $28.3 million in the same quarter a year ago, representing an increase of 12.0%.

Net sales in the third fiscal quarter of 2011 were favorably impacted by foreign currency translation of $700,000 when compared to the same period in the prior fiscal year.

Gross profit in the third fiscal quarter of 2011 increased by $5.1 million or 21.2% over the comparable quarter in the prior year. The gross margin was 53.0% compared to 50.2% in the third quarter a year ago. The gross margin was higher in the current quarter than in the same period a year ago, primarily due to product cost reductions, favorable product mix and less amortization of purchased and core technology due to certain intangibles becoming fully amortized. We expect the gross margins will be consistent with the past two quarters in the last fiscal quarter of 2011.

Total operating expenses were $22.6 million, or 41.6% of revenue, compared to $21.2 million, or 44.8% of revenue, in the third quarter a year ago. The increase in operating expenses in the current quarter compared to the prior year comparable quarter is primarily due to the increased investment in the iDigi platform and the full reinstatement for fiscal 2011 of the incentive compensation program, which had only partially been reinstated in fiscal 2010. We expect that total operating expenses will be approximately 41.5% to 43.5% of revenue for the fourth fiscal quarter of 2011.

Operating income was $6.2 million, or 11.4% of revenue, increasing by $3.7 million or 142% over operating income of $2.5 million, or 5.4% of revenue in the comparable quarter a year ago. Digi reported $300,000 of other expenses net compared to $100,000 of other income net in the same quarter of the prior year. This is primarily the result of foreign currency losses in fiscal 2011 on U.S. dollar balances held by our foreign subsidiaries. We expect reduced foreign currency exposure in future periods as it relates to non-functional currencies as we've taken measures to mitigate this exposure.

Non-GAAP net income and net income per diluted share was $3.6 million and $0.14 compared to $2.3 million and $0.09 for the third quarters of fiscal 2011 and 2010 respectively. During the third quarter the prior fiscal year net income benefited by $2.2 million or $0.09 per diluted share from the reversal of tax reserves associated with the conclusion of an audit of prior tax years and the statutory closing of a prior tax year.

Net income in that same quarter also decreased by $700,000 net of taxes, or $0.03 per diluted share as a result of expenses incurred in connection with the internal investigation described in our annual report on Form 10-K for fiscal 2010.

GAAP net income was $3.6 million, or $0.14 per diluted share, compared to $3.8 million, or $0.15 per diluted share, in the third quarter of the prior fiscal year.

Digi's effective tax rate was 37.9% compared to an effective tax rate of negative 46.8% in the year ago comparable quarter. For the fourth quarter of fiscal 2011 we expect the effective tax rate to be in a range of 33% to 35%. This drives an expectation for the tax rate for the full fiscal year to be in a range of 32% to 34% consistent with last quarter's guidance.

For the first nine months of fiscal 2011 Digi reported revenue of $152.3 million compared to $135.3 million for the first nine months of fiscal 2010, an increase of $17.0 million, or 12.6%.

Other highlights for the first nine months of fiscal 2011, all in comparison to the first nine months of fiscal 2010, include the following. Wireless revenue increased by $12.1 million, or 24.3%, compared to the first nine months of fiscal 2010. Wireless revenue was $61.9 million, or 40.7% of total revenue, compared to $49.8 million, or 36.8% of total revenue, during the first nine months of fiscal 2010.

Net sales in the first nine months of fiscal 2011 were favorably impacted by foreign currency translation of $400,000 when compared to the same period in the prior fiscal year. Net income increased by $1.5 million, or 22%, for the first nine months of fiscal 2011 compared to the same period a year ago.

Digi reported net income of $8.2 million, or $0.32 per diluted share, compared to net income for the same period in the prior year of $6.7 million, or $0.27 per diluted share. Non-GAAP net income increased by $2.6 million, or 54.2%, for the first nine months of fiscal 2011 compared to the same period a year ago. Non-GAAP net income was $7.5 million or $0.29 per diluted share compared to $4.9 million, or $0.19 per diluted share, in the first nine months of the prior year.

Net income for the first nine months of fiscal 2011 benefited by $600,000 or $0.02 per diluted share resulting from a reversal of tax reserves for various jurisdictions, tax matters and the enactment of legislation extending the research and development credit. Net income benefited by $2.3 million, or $0.09 per diluted share, during the first nine months of fiscal 2010 as a result of the reversal of tax reserves associated with the conclusion of an audit of prior tax years and the statutory closing of a prior tax year and by $200,000, or $0.01 per share as a result of reduction of the restructuring reserve.

Net income in that same period was reduced by $700,000 net of taxes or $0.03 per diluted share, as a result of expenses incurred in connection with the aforementioned internal investigation that took place a year ago.

Diluted weighted average shares outstanding at the end of the quarter were 25,878,754 compared to the previous quarter of 25,692,432, an increase of 186,322 shares.

Turning to the balance sheet and cash flow statements, our combined cash and cash equivalents and marketable securities, including long-term marketable securities, were $105.2 million as of June 30, 2011, increasing by $9.3 million from the end of the prior quarter and by $17.6 million from the end of the prior fiscal year.

Net cash provided by operating activities for the quarter was $8.6 million.

Looking into the fourth fiscal quarter of 2011, we will make our final deferred payment of $3 million related to the acquisition of Spectrum Design Solutions, which took place in July 2008.

Our current ratio is 6.4 to 1.0 compared to a current ratio of 6.8 to 1.0 at the end of the prior quarter.

Our DSO is at 37 days flat with the previous quarter.

We announced internally today the restructuring of our [Brysich], Germany operations, which will reduce our manufacturing footprint by consolidating the prototype and production functions and centralizing outsourced production control in our Minneapolis production facility. The consolidation is being driven by an overall global strategy of consolidation of production centers to drive efficiency improvements and enhanced customer service globally, the restructuring results and a work force reductions of 25 positions.

We expect to record a pretax charge of $300,000 in both the fourth fiscal quarter of 2011 and the first fiscal quarter of 2012 related to this restructuring. The charge in each of these quarters is expected to reduce earnings per diluted share by approximately $0.01. We anticipate annual pretax savings as a result of this initiative of approximately $500,000.

Now I'd like to provide some guidance for the fourth fiscal quarter and full fiscal year 2011. Digi projects revenue for the fourth fiscal quarter of 2011 to be in a range of $53 million to $57 million and net income per diluted share in a range of $0.13 to $0.17.

For the full fiscal year 2011 Digi projects revenue in a range of $205 million to $209 million, which is an increase of $5 million at the lower end of the range from the guidance previously provided. We expect the most likely full-year revenue to be approximately $207 million.

Digi anticipates that annual net income per diluted share will be in the range of $0.45 to $0.49, which is an increase of $0.05, at the lower end of the range from the guidance previously provided. The projected annual net income per diluted share of $0.45 to $0.49 is an increase of 25% to 36.1% over annual net income per diluted share for fiscal 2010.

Projected net income per diluted share for fiscal 2011 includes a net benefit of $600,000, or $0.02, for adjustments of tax reserves and other discreet tax items. As a reminder, net income per diluted share for fiscal 2010 included discreet tax benefits of $2.3 million, or $0.09 per share and a benefit for the reversal of a restructuring reserve of $300,000 net of tax or $0.01 per share partially offset by investigation expenses of $900,000 net of tax, or $0.04.

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

(Operator Instructions). And your first question is coming from the line of Michael Cox from Piper Jaffray.

Good afternoon and congratulations on a nice quarter, guys. My first question is just a housekeeping. Does your guidance include this $0.01 charge, restructuring charge for the German consolidation?

Yes it does.

Okay. On the wired products that segment growth was a little bit stronger than we've seen in the first half of the year, any specific vertical markets that you could call out that drove that increase or that acceleration and how sustainable do you view this double-digit rate in wired?

It was broad based across several product lines and several verticals and I think it was supported by some positive lumpy demand this quarter so I wouldn't expect, as I've said in the past, the wire line piece I would expect to be, the growth part of that I would expect to be more of a 5%, maybe to 10% kind of a growth set of products and the mature products, the ASIC and terminal server product line would tend to be declining. So we would expect to see something in the neighborhood of net no growth plus or minus a few points and then expect to see some positive quarters as a result of big customer demand, some lumpy demand, that might help us like we saw this quarter. But I'd say in general good broad based growth, wire line, wireless I would expect to see in most quarters higher growth from the wireless side and a little bit lower growth from the wire line side.

Okay that's helpful. And you noted the continued strength in bookings. I was just wondering if you could speak sort of qualitatively about the projects pipeline you see in the Smart Grid energy segment and perhaps maybe frame up the market potential that you would see in this Itron program.

Yes so I'll talk about the Itron program first. I think we're early with that. we've got a lot of pilots and trials going on and I would expect those to continue and I would expect us to see some real positive significant revenue ramp from that in fiscal 2012 so what we're seeing is a lot of interest from their large ERT customers. We're seeing a lot of pilot programs, commercial customer engagement programs, consumer customer engagement programs and it's very positive, positive momentum with revenue ramping next year. In general in the smart energy space we're seeing good growth.

We're seeing most of our partners and customers moving forward with their revenue ramp if they're at that point. We've got some good positive strategic alliances that we've announced where they're in the process of integrating with iDigi and would expect to get to market fairly quickly. And then we've got significant sales pipeline that's building.

In addition to that I would say looking forward that we expect some of our significant existing customers to ramp even more aggressively in 2012 so I am real optimistic about that.

That's great and my last question is on the balance sheet with cash now surpassing $110 million any thoughts on how you might put this to use in the form of maybe an acquisition or I guess the return to shareholders in a dividend or buyback form?

Yes so the strategy continues to be what it's been in the past. We continue to look especially in the smart energy space at acquisitions. We continue to look for acquisitions that will be accretive to our top line growth rate and EPS accretive fairly quickly and we continue to look for acquisitions that are complementary to what we're doing so that we could bring a unique value proposition to the space and so that's our main focus for the cash. And like Steve Jobs has said about their cash position, it's nice to have this. It's nice to build this so that when that significant opportunity comes up we'll be in a good position to take advantage of it.

Very good. Good luck finding it.

Matt McKee, Morgan Keegan.

Great quarter and thanks for taking my call. This is Matt on behalf of Tavis McCourt. Granted there coming off a low base but revenue just in Latin America and APAC were particularly strong. Are there certain verticals that are driving this or is it a similar distribution to North America and EMEA?

Yes I'd say it's the similar distribution. In Latin America I think it does probably tend to be more weighted. This is -- I am going to give you a gut feel rather than a quantitative analysis but I think it tends to be more weighted towards the wireless and wireless solutions. We're seeing a lot of exciting opportunities down there for those products. Asia Pacific tends to be just a broad, more of a broad based mix.

Okay and would you be able to provide any more detail into the distribution of revenue throughout the different verticals or in particular, like the medical devices versus energy or fleet and tank?

Yes we would love to be able to do that. We'd love to be able to have that ourselves. Right now about half of our revenues are direct and half are through two tier distribution and one of the major initiatives that we've got going on is to try to tag revenues by vertical. And given our distribution model, it can be a very challenging exercise so we don't have that by vertical yet. It's an initiative we have underway and at some point in the future we hope to be able to do that.

Yes the smart energy has received a lot of attention but is there another vertical that you're seeing a lot of growth in, I mean just on a more qualitative basis?

Yes I'd say that medical, it's a vertical that we've been focused on for longer than smart energy, about the last five or six years. It's a good sized vertical for us and we're seeing a lot of growth in medical. We've got significant customers that have been ramping up so we're seeing good size, very good growth for medical. And we're also seeing very strong design wins in the space.

Is that with both wireless and wire line on medical or is it pretty evenly split?

Yes it's a good mix of wireless and wire line. I'd say the design wins there's a mix. They probably tend to be a little bit more wireless and certainly the partnership that we announced to talk about was re-scaled with their IMX processor being part of our modules is significant partnering opportunity for us where we're seeing good traction and good design wins, especially in medical.

Great. Thanks a lot, great quarter.

Matthew Kempler, Sidoti & Company.

So a couple of things here, first on the gross margin it's the fourth consecutive quarter of sequential improvement so aside from the leverage and the amortization are we doing things here differently that should lead to this kind of 52% average that you're going to get in fiscal '11 to be more of a sustainable target?

So I am going to give you a little broader perspective on this and then we'll try to answer your question. So we've been able to drive gross margins from over the last eight or nine quarters from 48.7% to 53% and I think we've consistently given kind of conservative view of what we're going to do in a given quarter and not purposely. I mean we've actually been over achieving and a lot of the over achievement has come from better than expected execution in terms of really driving cost reduction efforts and being aggressive with our cost reduction program. So the big picture view is the combination of manufacturing efficiencies and cost reduction programs over that time period have had a very positive impact and have created a good positive trend.

Where they've improved that manufacturing efficiency with our move with Brysich and so I would expect to see a benefit as Steve talked about and quantified from that move with manufacturing efficiencies going forward. And what we would hope with that strategy to continue to focus on cost production and manufacturing efficiency to be able to outrun whatever price related ASP reductions you might see in the marketplace. And so that continues to be the focus my outlook has been that we would remain flat, maybe plus a little bit, minus a little bit and we've continued to see good progress and good execution and less than expected ASP degradation.

Okay and then it sounds like at least for the near term foreseeable future there's 52% average or so that plus or minus hundred basis points is kind of a new level that you think is sustainable?

Yes that's what it feels like.

Okay and then on the wireless side I think we've talked in the past about this is a segment that you expect can grow 25% plus over the long term. The last couple of quarters have been slightly below that, which I figure is just random lumpiness but I just wanted to get your thoughts on the comfort levels with that target. You mentioned seeing some customers ramp up more aggressively in fiscal '12.

Yes I think you characterized it right, Matt. We've seen over the last six or seven quarters growth rates that have ranged for wireless from a low of 12.9% to a high of 33.5%. That's reflective of lumpiness. We saw 12.9%, then 20%, then 30%, then 33.5%, then 21.7% and 19.7% so, as we ramp up wireless solutions there is going to be some lumpiness.

One of the impacts that we saw with the 19.2% this year-over-year comparison was the benefit of lumpiness that we saw a year ago so last year we saw a sequential move from $15.7 million to $18.8 million benefit coming from some real positive lumpy demand and then it scaled back to $17 million and so we're dealing with that comparison. So my expectation is that we'll continue to see lumpiness have an impact but that it will move somewhere in the roughly 20% to maybe 35% kind of range.

Okay and then I was wondering if you could comment. It sounds like in the demand response in smart energy area that you're still seeing very strong indications of demand but there is some news articles related to Google and Microsoft pulling their power management products because of kind of lackluster acceptance. Could you just express some thoughts around that and how you think Digi is maybe running a little bit of a different trend?

Well, we're focused on -- you know, Google what they were doing was basically providing an energy management system portal and it was merely taking information providing that energy consumption information to a consumer.

And our focus has been on demand response, working with the utilities and deploying demand response programs that are -- it's a very active market segment with very active growth opportunity. It's been focused on AMI and AMR with the Itron ERT meters focusing on extending that ERT program and bringing data off that ERT meter and providing that for various types of programs and then beyond that, we've made inroads into several other areas in the smart energy space.

Certainly solar has been an area where we have a number of design wins, a number of other areas, wind, alternative energy arenas. There's another one that's opening up for us in the energy management space in street lighting where we have a number of opportunities that are popping up in that space so we expect the opportunities to continue to expand. And whereas Google with Google Power Meter had a very narrow focus on EMS, an EMS portal, which there's a lot of other people doing the same kind of thing. We've got a broad based effort where we feel like we're going to do a great job of providing the picks and shovels and solutions beyond that for a lot of partners in this space.

Okay and then last question from me is regarding iDigi. It seems virtually every win that the Company has announced over the past year has included top clients taking up iDigi so it suggests to me a strong value there and I guess I wanted to understand are clients taking it primarily because you're giving it away as an inclusion with the hardware purchase or are you starting to extract value for it by charging monthly fees? Maybe you can give us some of the sense of the model that you're looking to potentially build around iDigi at this point.

It's not a giveaway model. It's a subscription model per device per month or per transaction tends to be the model and it varies by vertical and so we plan on extracting value that way. We think there's high value in the solution. We think there's a lot of stickiness that it creates with iDigi and our gateway products and our endpoint products. We think that we do a great job of enabling this machine to application, machine to machine play with the device cloud with iDigi and so this is a significant part of our strategy going forward. We -- the increased expense that we drive, that we're driving this quarter and that we'll drive going forward is going to be focused on R&D resources, business development resources, product management and marketing focusing on driving that because it's a very significant value proposition for us.

Okay and do you expect it then to translate as its own revenue line into something meaningful based on a certain number of connections? Is there a point where it starts to get broken out because it reaches a threshold?

We expect it to over time to drive a nice revenue ramp on its own. We also expect because of the value that it provides as a part of an overall solution, to provide in general gross margin protection for us across the solution that we offer, so gross margin protection for our gateways for our endpoint devices, for our customization services.

Okay thank you.

[Ty Logia], [Belto & Company].

Hey, guys, good quarter. I was just wondering, you know, you've had about seven strong quarters and out of strong growth in the wireless business and I'm wondering from this level what needs to happen to really juice wireless growth? Is it winning new customers? Is it just amping existing customers?

Well, I think it depends on what you mean by juice but I think what I said in the last couple of quarters is that we're seeing bookings rates improving and I think what I said in the last couple quarters is that we think we're beginning to bend the curve upward and so if you look at the revenue curve and the profitability curve it's bending upward and the EBITDA curve it's bending upward. So we think we're doing that and I think what needs to happen is what I just said. We need to just continue on the path that we're on, continuing to drive execution across the key verticals that I've mentioned, smart energy, medical, fleet management, tank. And then up the -- continue to up the focus and investment in iDigi and focused on these verticals and that's what we're doing.

Sure, sure. Also I know (inaudible) we're talking about 15% to 20% EBITDA margin and it looks like you're there. Is that you're just going to hold this level and then build it up to some kind of height that's sustainable?

So the good news is we're able to drive overall EBITDA margins over the last several quarters from where in 2009 they were at about 8% we've been able to drive consistently up. Last quarter they were 11.8%, this quarter 14.8% and if you look at the revenue, the sequential revenue growth was about 9.2% and I think the expense ramp was between 2% and 3%, so that provided the leverage for the EBITDA growth that we've seen. We're going to continue to invest in iDigi and the verticals so we'll continue to see some expense growth.

And we expect to continue to drive that top line organic growth so my expectation going forward this quarter is that we should be in the general ballpark. I don't expect to retract back to the 11.8% but somewhere in the ballpark of 14% to 15% kind of ballpark. And then next year I would expect that we've got a good chance of for the year and certainly for on a quarterly basis to drive into that 15% to 20%, in the low end of the 15% to 20% range.

Okay sure and then just looking at gross margin it seems like you guys have set a new level. I was wondering kind of speaking hypothetically if it were to rise from this level what do you think would be the driver if it were to fall off a bit? What do you -- what could cause that?

Well, we're intentionally driving a manufacturing strategy that's driving efficiencies. You saw the Brysich statement that we've made. That will drive efficiencies. That will help. We're going to continue to focus on driving manufacturing efficiencies. We've got an aggressive program in manufacturing to drive, pull more aggressive program that will allow us not only to drive costs down and efficiencies but inventory turns etcetera so that will be a positive. Continued focus on cost reduction, especially on the higher volume SKUs, will be a positive impact.

What would be a negative impact on a margin basis is if we see a couple things could happen. One is we could see higher than even expected industry growth rates that drive over time more competitive intensity and more average sell price degradation than we might expect. But if that happens that will be a good thing because we'll drive better top line organic growth rate. It will give us more leverage on the ER line so I'll take the EBITDA improvement either way.

Sure, sure. So the improvements in the manufacturing efficiencies, is that concentrated in your wired business or your wireless or is it just kind of spread out between both?

It's more broad based impact there.

Okay sure. All right thanks for taking my questions.

(Operator Instructions). Dick Ryan, Dougherty.

Thanks, guys, good quarter. Say, Steve, I didn't catch the cost savings you mentioned from the move of the manufacturing.

It's anticipated to be about $600,000 a year.

Say, Joe, is there a way you can give us a sense of the ERT opportunity with Itron, how large could that be or what's the -- how many meters are we talking about at least, if it's not totally at least in the pilots that are underway?

I wish I could, Dick. I don't have a great sense for that right now other than we are very enthusiastic about the level of focus that we're seeing from Itron and partnering with us on this and the number of trials that we're seeing. The challenge in giving you numbers is trying to assess how many of these trials are going to move to high volumes opportunities so as soon as we get a better handle on that ourselves in terms of what we think the scope of that could be. We think it will be significant but how significant I can't really characterize quite yet.

Okay and you got a nice period here of some strong bookings. Can you kind of qualitatively either give us a sense of the movement from maybe small kind of projects or programs to larger programs or maybe additionally can you give us a sense of what you might expect moving into 2012? Can you give us a sense from the bookings you're seeing?

Yes significant we're seeing both. We're seeing both small, medium sized deals. I'd say a significant part of the ramp is driven by larger either wireless solution customers or larger medical embedded customers. We're seeing significant medical customers that are embedding our modules that are high volume and large and then across the vertical, other verticals, fleet, tank and smart energy, we're seeing the wireless solution play. It does tend to be driven, the ramp, the growth we're seeing from more larger customers coming on board. And I expect that trend to continue. This is the result of the investment that we made in wireless drop in networking, wireless solutions focus and then, as we said in 2009 we doubled down on this investment expecting that we would see an incremental benefit coming out of the downturn and we're seeing that.

Great thanks, Joe.

[Jim Gentrup], Discovery Investment Research.

Good afternoon, gentlemen, nice quarter. Joe, can you just talk a little bit about the ASP trends that you expect going into the next quarter and 2012?

Yes so I have expected more ASP degradation than we've seen and we continue to be able to hold up ASP a little bit higher than what we expected. Going forward the expectation is that we're going to see with our wireless endpoint products we're going to see more volume, more opportunity and we should see some ASP degradation going forward and the focus from manufacturing and cost perspective is to offset that.

Okay but it's a function of higher revenue growth though.

Yes.

And then just a little bit on the competitive side, any changes in the marketplace? I mean, is your overall solution really helping you in that end yet or have you seen anything different?

I haven't seen any significant changes from a competitive positioning standpoint over the last few quarters. It's a fragmented worldwide market, tends to be on a product by product basis we tend to see a lot of point product competitors that aren't providing the full solutions approach that we're providing and that tends to provide us with a competitive advantage.

Oftentimes we are in with our customers and they're making a decision as far as whether they want to do a lot of the integration across multiple vendors themselves or work with somebody like Digi that pulls the pieces together for them. And so I guess that it tends to be we have a lot regional competitors that are point product competitors and our focus is not only to differentiate at the point product level but more importantly over time to provide a solution that those competitors can't provide.

And then one last question, Joe, on the Itron I know that has a potential of being a pretty large contributor. Is there other large type of companies like that that might be able to match that type of contribution in the pipeline?

Yes, yes we've got a number of -- some that we've announced, certainly XATA is ramping up in the fleet management space and that's a significant contributor. We've got a number of medical customers that are not public that are big contributors. We've got -- in tank we've got one that's not public that's a very big contributor. We've got others coming on board in that space. We've got others coming on board in medical and then certainly we've talked about Comverge. We expect going forward for Comverge to be very strong. It just looks 2012 and a number of other partners that we've talked about that we expect to be significant contributors across, each one of the sub verticals within smart energy in fiscal 2012.

But all these are relatively young type of projects. I know Itron obviously but these other ones you're talking about, are they relatively young yet?

Most are. I think that for the most part yes. We do have a project or two that we've been executing on for the last year or so that will be tending to ramp down but we've got many others ramping up so the numbers are with us.

Okay thanks, Joe. I appreciate it.

We have a follow-up question from the line of Matt McKee with Morgan Keegan.

Just a quick housekeeping question, on embedded versus non-embedded sorry if I missed this earlier.

And what specific question do you have?

Just the breakdown between embedded and non-embedded.

Yes so embedded was up year-over-year 16.2% and non-embedded was up 13.8%.

Thanks a lot.

[Jeff Myers], [Cobia Capital].

So since my question so it seems like there are a lot of big things in the pipeline. Could you talk a little bit about blended revenue growth in 2012 versus maybe let's say this quarter at 15%? I mean, is that how we should think about the entire 2012 or is it going to be bigger than that? What's the right way to think about that?

So the way you should look at 2012 is I've given you a sense for the momentum that we have, number one. We are in the midst of our 2012 planning process over the next two months and so I don't want to be preemptive of that process. We're going to go through that process and we're going to lock and load on numbers but I think I've given you a good general sense for the momentum that we're seeing. We've given guidance for the quarter and given you a sense for our feeling about ongoing organic growth.

Okay thanks.

And with no further questions in queue, I'd like to hand the call back to Mr. Joe Dunsmore, CEO, for closing remarks.

Thank you for attending the call. As you can tell, we're very excited about the opportunity at Digi. We feel like we're very well positioned with our wireless solutions and I look forward to talking to you again in three months.

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