Digi International Inc (DGII) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Digi International Incorporated fourth fiscal quarter and full-year 2011 earnings conference call. My name is Laura, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Steve Snyder, Chief Financial Officer. 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 Financial Releases section of our Investor Relations website at www.digi.com.

Second, I'd like to remind our listeners that some of the statements that we may 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 or otherwise or revise these forward-looking statements for any reason.

Finally, certain of the financial information disclosed in 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'm pleased with our results for the year, although our fourth quarter wasn't quite as strong as we expected. Revenue for the quarter of $51.8 million was up 9.7% compared to the same quarter in the prior year. Our profitability for the quarter was $0.11 per share on net income of $2.85 million for the quarter, 27% increase compared to the same quarter last year. The fourth quarter is the 35th consecutive quarter of profitability for Digi.

Revenue for the year of $204.2 million was up 11.8% compared to fiscal 2010. Profitability for the year was $0.43 per share on net income of $11 million, up 23% year-over-year. Both revenue and profitability were slightly below our guidance ranges. This was primarily due to two factors.

We had one large customer order pushout and we encountered a slight slowdown in our North America channel business. This slight slowdown was consistent with recent comments by channel partners, Arrow and Avnet. Additionally, we observed that the Japanese tsunami triggered an inventory buildup response by customers in the high-tech space in fiscal Q3 and subsequent normalization in fiscal Q4.

Next, I will further recap our performance in the past fiscal year in the context of three major 2011 objectives of focus. One, leveraging revenue growth to drive increased profitability; two, becoming the device cloud leader; and three, driving growth in targeted vertical markets.

First, leveraging revenue growth to drive increased profitability. We reported revenue growth of 11.8% in fiscal 2011, up from the 10% growth we posted in fiscal 2010. Revenue increased in all regions compared to the prior fiscal year, despite a tumultuous economic environment, both domestically and abroad.

We focused on improvement of our gross margin during the year through cost reduction initiatives that allowed us to increase the gross margin on our high-growth products. In addition, we engaged outside resources to help us improve supply chain management and apply lean manufacturing principles to strengthen our inventory turns, lead time, and on time shipment metrics.

We also restructured our Breisach, Germany manufacturing operations to reduce our manufacturing footprint by consolidation production functions and centralizing outsourced production control in our US production facility. Our gross margin improved from 50.5% in fiscal 2010 to 52.2% in fiscal 2011.

Our total operating expenses as a percent of revenue improved to 43.9% in fiscal 2011 compared to 45.1% in fiscal 2010, due to good cost control. We reduced our expense-to-revenue ratio in fiscal 2011, despite the full reinstatement of our incentive compensation program during the year.

To summarize, we leveraged our revenue growth by improving our gross margins and reducing expense-to-revenue ratios to drive our profitability.

Earnings before interest, taxes, depreciation, and amortization were $25.5 million, or 12.5% of revenue in fiscal 2011 compared to $20.4 million, or 11.2% of revenue in fiscal 2010, an increase of 25%. As our revenue grows, we anticipate further leverage through the measures previously described that will drive profitability in the future.

Our balance sheet continued to be very robust, with a current ratio of 8.3 to 1 and no debt. We generated cash from operations of $21.8 million in fiscal 2011 compared to $16.1 million in the prior fiscal year.

Second, becoming the device cloud leader. During fiscal 2011, we invested significantly in iDigi product management, business development, and platform development. The iDigi device cloud is the wireless M2M industry's premier platform for connecting anything, anywhere to any application anywhere. It leverages Digi's 25-plus years of tribal knowledge in device networking to fundamentally bring down the cost and deployment barriers for M2M application providers.

Our go-to-market approach in our key vertical markets leverages our device connectivity suite of products and capabilities, with iDigi cloud services providing application providers with unprecedented ability to access any sensor, device, machine, or asset. In other words, anything, anywhere. As a result of the focus, we finished fiscal 2011 with over 3,500 companies using the iDigi device cloud.

Third, driving growth in targeted vertical markets. Digi focused in fiscal 2011 on industry-specific solutions, primarily in our four targeted vertical markets, which include smart grid, fleet management, tank monitoring, and medical. We saw large wireless customer deployments in all of these markets during the fiscal year.

Overall, our wireless revenue increased by $18.3 million and represented 41.5% of our total revenue in fiscal 2011 compared to 36.3% of our total revenue in fiscal 2010. We anticipate that wireless revenue will exceed 47% of our total revenue in fiscal 2012. Our wireless Drop-In Networking solutions set of gateways and endpoint products, complemented by our iDigi device cloud and wireless design services, have allowed large lead customers in our targeted vertical markets to accelerate their deployment and time to market.

Next, I would like to talk about the Thailand's flooding impact referenced in our press release dated 10/26. First, I would like to say that everyone associated with our contract manufacture in Thailand is okay. Our thoughts and prayers are with them and their families.

The flooding has had a significant impact. The main manufacturing facility has been shut down and will be for weeks to come. They are working on getting the backup facility operational as we speak. Fortunately, we've been able to save all of our testing equipment and most of our inventory. The task at hand are to assist them in operationalizing manufacturing lines at the backup facility in Bangkok, as well as reallocating production to our US facility and other contract manufacturers.

Since it is early, assessing the financial impact is very difficult and thus, our impact estimates are rough. We expect about $2 million to $6 million impact to revenue in the current quarter, and approximately 2 percentage points impact on gross margin. We expect to recover the missed revenue in the second and third fiscal quarters of 2012, and expect minimal revenue impact in the full fiscal year.

We expect the gross margin impact to the full year to be around 1 percentage point.

Next, I'd like to discuss guidance for fiscal 2012. Since it is a very uncertain time for the overall economy, I will be providing a revenue range associated with overall global economic assumptions. These revenue estimates are inclusive of any impact from the Thailand flooding.

Our revenue range for fiscal 2012 is $210 million to $235 million, with the most likely of $222.5 million or about 9% organic growth. Our low-end of $210 million assumes a mild global recession. Our most likely assumes slight economic growth. And our high-end of $235 million assumes robust global growth.

Note that in all cases, even with the negative economic growth, we are expecting to grow organically as a Company. So for our analysts, each may have a different set of assumptions with regard to the broader economy for fiscal 2012, this should provide a more nuance view.

Correlating EPS estimates range from a low-end of $0.38 per share to a midpoint and most likely of $0.51 per share, and a high-end of $0.64 per share. These earnings per share estimates have a $0.07 per share of decrement baked in due to the expected gross margin impacts from the Thailand flooding. Steve will provide you with guidance details for the quarter in his commentary.

In conclusion, we have established strong organic growth momentum for the business over the past two years. With revenue growth of 10% in 2010 and 11.8% in 2011, we have solid momentum going into fiscal 2012 and we expect strong organic growth to continue.

More importantly, I continue to feel strongly that Digi is positioned very well to benefit from the longer-term trends that we're seeing in the wireless M2M space. We continue to see barriers to deployment reducing at all levels in the M2M value chain. Ericsson, the leading global infrastructure provider and thought leader in M2M, has said, connected devices will grow from $5 billion today to over $50 billion in 2020.

I believe that the current market forces will cause acceleration of the growth curve to begin within the next one to three years; and from that, Digi is very well positioned to benefit. We are confident that our ability to provide complete wireless networking solutions, combined with Digi's brand reputation, allow us to take advantage of this tremendous potential for growth.

So to summarize, first, Digi posted its 35th consecutive quarter of profitability and posted double-digit revenue growth for the second year in a row. Second, the Thailand flooding impact on operations will impact revenues for the quarter, but not expected to have significant impact on the year.

Third, we continue to have significant growth momentum with our wireless products and feel that we are very well positioned for the longer-term growth trends in the industry. And fourth, we provided strong organic growth guidance for fiscal 2012, despite the uncertain external environment and flood impact.

So now, I'll hand it back to Steve for his prepared remarks.

Thank you, Joe. Revenue for the fourth fiscal quarter of 2011 was $51.8 million, an increase of $4.5 million, or 9.7% over fourth fiscal quarter revenue a year ago. Other highlights for the fourth fiscal quarter of 2011, all in comparison to the fourth fiscal quarter of 2010, are as follows.

Revenue in North America was $28.9 million compared to $26.8 million a year ago, an increase of $2.1 million, or 7.9%. Revenue in EMEA, which is Europe, Middle East, and Africa, was $14.4 million compared to $12.7 million a year ago, an increase of $1.7 million, or 13.5%.

Revenue in the Asia-Pacific region was $7.2 million compared to $6.3 million a year ago, an increase of $0.9 million, or 14.3%. Revenue in Latin America was $1.3 million compared to $1.5 million a year ago, a decrease of $0.2 million.

Revenue from embedded products was $26.3 million compared to $21.9 million a year ago, an increase of $4.4 million, or 20.5%. Revenue from non-embedded products was $25.5 million compared to $25.4 million a year ago. Wireless revenue increased by $6.2 million in the fourth fiscal quarter of 2011 compared to the same quarter in the prior year, or 37.3%. Wireless revenue was $22.7 million, or 43.8% of total revenue compared to $16.5 million, or 35% of total revenue in the same quarter a year ago. Revenue from wired products was $29.1 million compared to $30.8 million in the same quarter a year ago, a decrease of $1.7 million, or 5.2%.

Net sales in the fourth fiscal quarter of 2011 were favorably impacted by foreign currency translation of $0.5 million, when compared to the same period in the prior fiscal year. Gross profit in the fourth fiscal quarter of 2011 increased by $3.5 million, or 14.5% over the comparable quarter in the prior year. The gross margin was 53.1% compared to 50.8% in the fourth 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, manufacturing efficiencies, and reduced amortization of purchased and core technology due to certain intangibles becoming fully amortized.

Total operating expenses were $23 million, or 44.3% of revenue compared to $20.6 million, or 43.7% of revenue in the fourth quarter a year ago. The increase in operating expenses in the current quarter compared to the prior-year comparable quarter primarily is due to the increased headcount in sales and marketing, and research and development functions, as well as the full reinstatement for fiscal 2011 of the incentive compensation program, which had been only partially reinstated in fiscal 2010. The increase in operating expenses includes headcount and other expenses in advancement of the iDigi platform.

Total operating expenses included a charge of $0.2 million related to the restructuring of our Breisach, Germany manufacturing operations, which will result in a workforce reduction of 25 positions, most of whom will leave as of the end of December 2011. We expect to record additional charges of $0.3 million and $0.1 million in the first and second fiscal quarters of 2012, respectively, related to this restructuring. Total operating expenses also included a charge of $0.2 million for the estimated cost of settling a patent infringement suit; the settlement was completed in October 2011.

Operating income was $4.5 million, or 8.8% of revenue, increasing by $1.1 million or 34.3%, over operating income of $3.4 million or 7.2% of revenue in the comparable quarter a year ago.

Net income and net income per diluted share were $2.8 million and $0.11, compared to $2.2 million and $0.09 for the fourth fiscal quarters of fiscal 2011 and 2010, respectively. Net income in the fourth quarter of fiscal 2011 included a restructuring charge of $0.1 million, net of taxes, or $0.01 per diluted share, offset by a benefit of $0.1 million or $0.01 per diluted share, resulting from the reversal of tax reserves for closure of various jurisdictions' tax matters and a foreign tax rate reduction.

Net income in the fourth fiscal quarter of 2010 included a charge of $0.2 million, net of tax, or $0.01 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 the prior fiscal year.

Moving on to our annual fiscal 2011 performance, all in comparison to our annual numbers for fiscal 2010, Digi reported revenue of $204.2 million compared to $182.5 million, an increase of $21.7 million or 11.8%. Other highlights for fiscal 2011, all compared to fiscal 2010, include the following.

Revenue from embedded products was $95.7 million compared to $82.4 million, an increase of $13.3 million or 16.2%. Revenue from non-embedded products was $108.5 million compared to $100.1 million a year ago, an increase of $8.4 million or 8.3%.

Wireless revenue in fiscal 2011 increased by $18.3 million or 27.6%, compared to fiscal 2010. Wireless revenue in fiscal 2011 was $84.7 million or 41.5% of total revenue, compared to $66.4 million or 36.3% of total revenue during fiscal 2010.

Net sales in the fiscal 2011 were favorably impacted by foreign currency translation of $0.9 million when compared to fiscal 2010. Net income increased by $2.1 million, or 23.2% for fiscal 2011 compared to fiscal 2010. Digi reported net income of $11 million or $0.43 per diluted share, compared to net income for fiscal 2010 of $8.9 million or $0.36 per diluted share.

Non-GAAP net income for fiscal 2011 increased by $3.2 million, or 43.6% compared to fiscal 2010. Non-GAAP net income for fiscal 2011 was $10.4 million, or $0.40 per diluted share, compared to $7.2 million or $0.29 per diluted share in fiscal 2010.

Net income for fiscal 2011 benefited by $0.7 million, or $0.03 per diluted share, resulting from a reversal of tax reserves for various jurisdictions' tax matters, a rate reduction in a foreign jurisdiction, and the enactment of legislation extending the research and development credit.

Net income for fiscal 2010 benefited by $2.3 million, or $0.09 per diluted share, 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 $0.3 million, or $0.01 per diluted share, as a result of a reduction of the restructuring reserve established in fiscal 2009. Net income in fiscal 2010 was reduced by $0.9 million, net of taxes, or $0.04 per diluted share, as a result of expenses incurred in connection with the internal investigation that took place a year ago.

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 to a non-GAAP basis.

Diluted weighted average shares outstanding at the end of the quarter were 26,271,597 shares compared to the previous quarter of 25,878,754 shares, an increase of 392,000 shares.

Turning to the balance sheet and cash flow statement, our combined cash and cash equivalents, and marketable securities balance, including long-term marketable securities, was $107.8 million as of September 30, 2011, increasing by $2.6 million from the end of the prior quarter and by $20.2 million from the end of the prior fiscal year.

Net cash provided by operating activities for fiscal 2011 was $21.8 million compared to $16.1 million in fiscal 2010. Our current ratio is 8.3 to 1 compared to a current ratio of 6.4 to 1 at the end of the prior quarter and 6.7 to 1 at the end of the prior fiscal year. Our DSO is at 37 days, flat with the previous quarter and prior year.

Joe has provided annual guidance for fiscal 2012 in his remarks. Now, I'd like to provide our guidance for the first fiscal quarter of 2012.

Prior to consideration of the Thailand flooding impact, Digi anticipated their revenue in the first fiscal quarter of 2012 would approximate revenue recorded in the fourth fiscal quarter of 2011. Including the revenue impact of the Thailand flooding of $2 million to $6 million, Digi expects that revenue in the first fiscal quarter of 2012 will be in the range of $45.5 million to $49.5 million.

Digi expects that earnings per diluted share will be in a range of $0.00 to $0.05, which has been reduced by $0.08 per diluted share, due to the revenue and gross margin impact of the Thailand flooding described previously.

It is important to note that the flooding in Thailand happened very recently and that our estimates about the impact of the flooding on our operations or financial performance may change as the situation continues to evolve.

Laura, now, I'd like to open the call to questions.

Thank you. (Operator Instructions) Matt McKee, Morgan Keegan.

Hi, guys. Thanks for taking my call. This is Matt on behalf of Tavis.

Hi, Matt.

Can you talk a little bit more about the product cost reductions you're seeing? And I mean, is there something we'll see going forward?

Yes. So we've always had a significant effort at Digi focused on product cost reduction, both from an engineering perspective and from a manufacturing leverage perspective.

Over the past year, we have stepped up the focus on that. We've brought in external consultants and put a big focus on that to really drive some key objectives in manufacturing, to drive our -- drive down our COGS, to drive improved on time shipments, inventory turns, et cetera.

And so we've had a focused effort on that. And so that focused effort has contributed to the gross margin improvement that we've seen over the past several quarters and that we expect it to continue -- we expect to continue to drive that kind of focus. What's going to happen, however, is the impact of the Thailand flooding obviously is going to dilute that focus. We're going to place a big emphasis on that.

Our Thailand contract manufacturer is the lowest-cost producer for us. And so when we talked about the gross margin impact, the impact is moving some of the production back to Minneapolis, moving to other contract manufacturers that are not quite as low cost. So what we'll see is a temporary negative impact as a result of that, but underneath all of that, the initiative, the fundamental initiative continues to drive forward, and my expectation is that will bring our gross margin back to that 53% level and we expect to continue to improve on that.

All right. Thanks. And you said it's going to be about 2% in Q1?

Yes.

Okay. And can you talk a little bit about where you're seeing traction with iDigi, and maybe a little bit about where you're seeing weaknesses to the macro economy?

Okay. The macro economy assumption that we used was more conservative than the assumption that we used going into fiscal 2011. We've -- going into fiscal 2011, we had an assumption of -- I think, it was 1% to 2% GDP in the US, and correlating economic GDP numbers outside of the US. Going into fiscal 2012, our view is that it will be less than that, and probably in the 1% or less kind of ballpark.

So that's where we've locked on the -- the 9% growth assumption is locked on that assumption. If we see robust growth, if something changes and you see robust 3% plus growth then, we believe it will be back up to the higher end of that range, which we said is up -- $235 million, which is up in the 15% range. But right now, we're locked in on that assumption. We gave you the rough range to you guys. I know you were projecting, I know Tavis was projecting a mild recession. So you guys could look at it with your own judgment there.

We lock in on that particular number as a result of just watching all of the economic indicators out there, and especially yesterday, Bernanke came in and basically said, hey, economic growth, we're reducing the forecast. It's going to be frustratingly slow. And so, it's all those factors that have locked us in on that particular number. Now, given that, the one thing I'd like to really focus on is the way that we feel about Digi's positioning in the broader wireless M2M space, we couldn't feel better about that.

We feel like with iDigi and the focus that we have on that, the investment, the traction that we're getting with iDigi in our wireless solutions across the verticals that we're going after, the wireless growth that we're seeing, the pipeline that we're seeing coming in. And most importantly, looking at the macro indicators out there, what we see is at every point in the wireless M2M value chain, we're seeing barriers to adoption comes down. So for instance, one example, but every part of the value chain is like this.

When you look at the cost, for instance, for bandwidth communications over the cellular network, if you just look at the cost of a cellular module that comes from people like Qualcomm and others, five years ago, it was $100, $120 for about 200 kilobits of bandwidth. Now, you're paying the same for -- with LTE for 40 megabits of bandwidth. So we're looking at two orders of magnitude improvement per kilobit.

And so that's just one example, but we're seeing that phenomenon occur at every point in the value chain. So we believe that -- and Digi is a key part of bringing down those barriers, because we're experts at getting devices, a wide variety of devices on the edge that have different protocols, different security requirements, connected to applications anywhere. And so we believe that we're very well positioned for the longer-term growth opportunity and my belief on that continues to grow quarter-by-quarter.

Great. Thanks.

(Operator Instructions) Dick Ryan, Dougherty.

Good afternoon, guys.

Hey.

Hey, Joe, can you talk a little bit of the impact on your various products with Thailand? Is it just on one side of the equation, wired products, wireless, or it is a crossover?

Yes, that's a good question, Dick. What we're seeing is, first of all, what I said before about Thailand being our high-volume, low-cost facility. What we've done is, is we've moved the products that fit that profile. And so it does tend to be a lot of our embedded modules. We've got high-volume embedded modules, for instance, going to key customers in the medical space, as an example. And so we've got a host of product lines.

I believe we've actually posted the product lines on the website or planning to shortly. So that -- we will be providing visibility to the product lines publicly on the website, and there is a number of them, about 12 product lines, that are impacted. And today, we're obviously communicating on our partners' site specifics and we are encouraging customers to call if they have any questions beyond that, so that we can work with them on a one-on-one basis.

So far, we feel very good about our ability to manage our customer situations, and whether it'd be bringing up that backup facility in Thailand or a couple of other contract manufacturers here in the US picking up some of this, or our US facility right here in Minnesota, which by the way, we've actually been growing our capability here. We've got higher headcount here than a couple of years ago. We think we'll be able to manage those customers' situation very effectively.

At the start early on, you don't see any of the customer relations being impacted negatively, so this should just be viewed as a push?

What we're doing is, is we're trying to manage these situations in a very proactive, intimate way. And so we're going to do everything we can to understand what their needs are, what their requirements are, what their minimum requirements are, and to be able to respond to those needs. So it's our intent, absolutely our intent to do that. And that's one of the reasons why I feel very confident that the overall impact, as I said earlier, to fiscal 2012 will be very minimal.

Okay. Can you talk a little bit, Joe, about what you're seeing in the different verticals, [I mean], especially as you go into fiscal '12?

Yes. We're seeing, obviously, the overall economy is kind of an overriding factor, but within the verticals that we're looking at, I'd say what I'm saying in tank monitoring, what I'm saying in fleet, what I'm saying in medical is consistent with what I've said in the past.

I'd say within smart energy that in some of the application areas, for instance, solar and some of the alternative energy opportunities that we have, we're seeing things moving along the way that we had expected. I'd say the one area, commercial energy management, I think is one that continues to be fairly robust in general and we expect to be able to participate more in that in the future.

I'd say the one area that is slower than what we expected is the residential play. So basically, as a result of the smart meter deployments that a couple of years ago were projected to be at a certain level, I'd say over the last two years, our deployment is probably two-thirds roughly what most people expected, maybe less. And then, deployment of energy management or demand response services into the home through that meter pipe into the home have been much less than what was expected.

So I'd say that one piece is much slower. There's a lot of reasons for that. Consumer acceptance in the leading-edge markets like California and Texas and other areas has been less than what is expected. There have been class-action lawsuits by consumers unhappy with the meters for various reasons. In California, there's a big contentious issue relative to what's the effect of wireless technology on health and those kinds of -- so it's a lot of areas that have been thrown up that are slowing things down is the key point.

Now, having said that, we believe that looking at the fiscal 2012 plan, we believe that for us, that smart energy sector is going to be a high-growth sector. So we still are very bullish about it going forward and it's still not a huge part of our revenue base. It's still a subset of that wireless revenue base, but we're bullish about that going forward, especially as a result of the other application areas that we still think are very healthy.

Can you give us a sense of what you think you can grow the wireless business? We've seen the growth in '11. What kind of assumptions you might be looking at for fiscal '12 growth for wireless?

Yes. We expect wireless for 2012 to be in the neighborhood of 47% or better of our revenue, up from about 41% or so this year which was up from 35% the year before, and that should equate to somewhere in the neighborhood of 23% to 25% growth.

Okay. I'll get back in the queue. Thanks, guys.

Thanks, Dick.

Ty Lilja, Feltl and Company.

Hi, guys. Thanks for taking my questions.

Hey, Ty.

Hi.

Hey, I was wondering if you could talk a little bit about your current sales mix by vertical in wireless. I think in the past, you've said that sales into the medical space were kind of the biggest piece of the pie. Wondering if that's still true and kind of wondering how you expect that mix to evolve over the next year?

Yes. So medical continues to be the biggest piece; and medical, over the next year, we expect to continue to see growth, but not as robust as we see in the other verticals.

Okay.

We've seen very robust, lumpy growth, big customers coming on board over the past few years, and we won't see -- we don't believe we'll see the high growth that we've seen over the last few years in medical, but we'll see growth. Where we expect to see very high growth is in the smart energy space, which isn't as large as medical, but we think by the end of fiscal 2012, it will be the second largest to those verticals. And then, we expect to see very robust growth in tank and fleet also.

Okay. And also, I was wondering if you could kind of run us through what was driving revenue in your wired business. You had a bit of a decline there. Just wondering which product lines are rising and falling in that part of the business?

Yes. The biggest single impact on the wireline side this last quarter was in our USB product line. And in looking at that, we basically, as I said in the past, we have -- across a lot of the business, we have some lumpy demand situations. And what we saw this quarter in USB was, in third quarter, we had some big customers coming in with big orders. In fourth quarter, we didn't see them come in. And then, in the future, we expect to see them come in.

So we saw the biggest significant impact on the wireline side of the business was with USB, and [Mature] did about what we would expect it to do in terms of the decline, and then the others, terminal server, device server, grew and performed about where we would expect them.

Okay. And thinking about your gross margin, obviously, Thailand is going to have an impact, but looking beyond that, you're going to continue to improve that. I know you've been engineering costs out of some of your mature product lines. Getting further improvement, would that be about engineering more costs out of the same product lines, or would it be about kind of expanding your cost reduction program to different product lines? I'm just kind of wondering how much flexibility you have there, and what you're going to be trying to do in the next year?

Well, we'll continue on the same path though. We analyze, we're continually analyzing our products set. We're looking at fundamentally, where do we have leverage and opportunities? So for instance, with those products that tend to be high-volume, significant products, where we have the opportunity to go in and redesign and full cost out, we're going to drive our cost reduction efforts in those areas.

So bottom line is, is we're going to look across -- from an R&D perspective, we're going to look across the product lines to see where we have the best leverage to drive cost out over time and we'll do that. And from a manufacturing perspective, we'll continue to do what we've done over the past few years, which is to manage that manufacturing footprint, to improve utilization, and to drive appropriately our production to lower-cost manufacturing facilities.

All right. Thanks. I'll get back in queue.

There are no further questions at this time. I'd like to turn the conference over to Joe Dunsmore for closing remarks.

Thank you for attending the call. The one key point I'd like to make is that we continue to be very, very excited about this wireless M2M opportunity. Over the long term, we feel like we're very well positioned. And I look forward to talking to you guys in another three months. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.