Digi International Inc (DGII) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Digi International Third Fiscal Quarter 2017 Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Mike Goergen, Chief Financial Officer. Sir, you may begin.

Thank you, Chelsea. Good afternoon, and thank you for joining us today. Joining me on today's call is Ron Konezny, our President and CEO. Ron will provide his thoughts on our business, and I will follow with the highlights of our financial performance for our third fiscal quarter 2017. Following our prepared remarks, we will take your questions until 6:00 p.m. Eastern.

We issued our earnings release shortly after the market closed. If you do not have a copy of our earnings release, you may obtain a copy though the Financial Releases section of our Investor Relations website at www.digi.com.

Some of the statements that we make during this call are considered forward looking and are subject to significant risk and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. We believe the expectations reflected in our forward-looking statements are reasonable, but give no assurance of such expectations or any of our forward-looking statements will prove to be correct. Please refer to the forward-looking statements section in our earnings release today and under the heading Risk Factors in our 2016 annual report on Form 10-K and subsequent reports on file with the SEC for additional information.

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. The earnings release is also an exhibit to a Form 8-K that can be accessed through the SEC filings section of our Investor Relations website.

Now I'd like to turn the call over to Ron.

Thank you, Mike, and good afternoon, everyone. I'm pleased with our performance during the fiscal third quarter. We exceeded our profitability expectations, while meeting our revenue expectations. In addition, we're in line with the double-digit EBITDA margin targets we had established. We continue to streamline our operations, and we continue to improve the company's profitability capabilities. We believe further operating leverage is possible, especially when we hit our stride on our revenue growth plan. A significant component of our revenue growth plan is our Smart Solutions business, which had a solid quarter, growing our subscriber base and recurring revenue stream. Each of our business segments had significant activity during the quarter. In cellular, we made progress in this category, however, revenue results were a bit short of our expectations. This product line has large lumpy projects that cannot always be accurately forecasted. We continue to have strong interest in our product offerings. We're refreshing our WR cellular router series, adding additional features to our LR router series, while expanding both carrier and geographic coverage. In addition, we are both changing and adding direct-sales resources in both North America and Europe.

In network, targeted R&D resources have been added to start MPI and increase maintenance of line activity. We know this product family's SKUs to better leverage our R&D and sales investments. We expect this category to decline, but at a slower rate than what we had experienced this fiscal year.

Embedded, expectations were met for the product line. Our CC6UL offering continues to see increased adoption via design wins, and we integrated the offering with Amazon's Greengrass IoT platform. In addition, we've refreshed the ConnectCore 6 offering with improved pricing. In RF, we are in line with our revenue expectations as demand for existing products dropped off a bit higher than increased demand for our new products, but we continue to see adoption of our XBee Cellular offering. We released a global 3G variant of XBee Cellular in the fiscal third quarter, and we plan to release both LTE Cat-M and LTE NarrowBand IoT variants later this year. These innovations allow us to work with increasing number of MNOs as well as geographies.

Lastly, we're refreshing our short range XBee product line at a more value while continue to reduce the number of SKUs.

In services and solutions, we exceeded our expectations for the quarter in this category, led by the strong performance of Smart Solutions, in particular. The broad appeal of our offerings is clear, as we had a number of key customer lines and a diverse set of industries, including health services with Minnesota Children's Hospital; in food services, Jerry's Foods; and in transportation and logistics with VersaCold Logistics.

And in addition, we had good performance in our other service categories of Wireless Design Services, Remote Manager and professional services.

Now I'd like to share a few functional updates. In sales, as I mentioned earlier, we are adding direct sales resources in both North America and Europe. We designated our existing Munich office as our European sales and service headquarters, as we finalized the closure of our Paris office. Direct interaction with our prospects as well as existing new customers has been a key priority for the sales team. In product management, we established a short-term goal of reducing our number of SKUs to 1,300 by the end of calendar year '17 and to achieve 1,000 SKUs by the middle of calendar year 2018. The team has been working hard to ensure that alignment between sales and product management and R&D is there for our road map, our SKU planning and our pricing. We are currently at approximately 1,400 SKUs, so we are on track for both of our goals.

In R&D, we had a busy, but relatively quiet quarter for new product introduction. Most of the releases in the fiscal third quarter were product refreshes, which satisfied specific market opportunities and customer requests. As mentioned earlier, we have several new products scheduled for release in the next 3 to 6 months across both our cellular and RF product lines.

In information technology, we transitioned to a new CRM system across Digi recently, and we expect to go live with our product life cycle management, or PRM solution, this quarter. In addition, we're starting to integrate our CRM and ERP systems, which will be completed in 2018. We believe these modest investments within IT will result in both process streamlining, making Digi easier to do business with and reducing our overall costs.

In Smart Solutions, we released our new transportation logistics offerings in the fiscal third quarter, and we're excited about the market reception and its initial success. Integration of the 3 acquisitions has progressed with consolidation of our customer success team in SMART Temps' Mishawaka location, highlighting our efforts.

Lastly, in corporate development, we continued to advance our inorganic objectives, which are to complement our existing offerings and strengthen our team. With a cash balance of over $110 million and no debt, we have an opportunity to accelerate our growth rates through additional acquisitions.

We are pleased with our progress in streamlining the company and establishing a strong foundation for both profitability and cash generation. We have more work to do on top line growth, but we're encouraged by the leading indicators on the product, design wins, new product introductions, sales resources, services, subscriber growth and recurring revenue.

Now I will turn over to Mike for a comprehensive update of our financial performance and updated guidance for our fiscal 2017 period. Mike?

Thanks, Ron. We had 4 key financial highlights during the quarter. One, we are pleased our revenue performed as expected for the quarter and met the mid-range of our guidance. A key factor of our revenue performance was another great quarter for our Smart Solutions business. Two, we implemented restructuring initiatives, which primarily impacted our local office in France and certain employee costs in the U.S. The restructuring was the result of our decision to consolidate our French operations into our EMEA headquarters in Munich. These actions resulted in charges of $2.5 million. The benefits include streamlined EMEA operations and reduced operating expenses of an estimated $2 million annually. Three, income from continuing operations per diluted share was $0.05, which was near the high end of our third quarter guidance. Income from continuing operations per diluted share was $0.08 when adjusted for restructuring charges and other discrete tax benefits, which exceeded our third quarter guidance. And four, starting with the third quarter, we have expanded our reporting to 2 reportable operating segments. Our M2M segment contains our 4 hardware product categories, cellular, RF, embedded and network and our legacy services, Wireless Design Services, Device Cloud and Support. Our Solutions segment contains our 3 acquired Smart Solution businesses: SMART Temps, FreshTemp and bluenica. Our income statement will continue to report 2 line items: Hardware product revenue; and service and solutions. In addition, we'll continue to provide details by product category like you are used to seeing. Essentially, the only change you'll see is an expanded reportable segment footnote in our financial statements. We will do this for the first time when we file our 10-Q later this quarter.

I will now move to some additional details of the third quarter performance, starting with revenue. We generated $45.7 million of total revenue, which was at the midpoint of our guided range of $44 million to $47 million. Revenue decreased by 12.3% compared to the same quarter last year. Hardware product revenue decreased 19.6%. This was partially offset by an increase in services and solutions revenue of $3.5 million, primarily driven by incremental revenue from acquired companies of $2.4 million. Our cellular category was up slightly from prior year at $10.8 million. In addition to extended timing of a few project rollouts, we continue to feel the effects of the delayed introduction of the Digi TransPort LR54 router. We expect this category to grow over time with improved sales execution and continued product feature enhancements. RF product revenue in the third quarter of 2017 was down 25.4% compared to the same quarter a year ago. We continue to be encouraged by the pipeline for our new Cellular XBee. As I mentioned last quarter, this product is an embedded module. As such, we are still gaining design wins, but do not expect production volumes to be meaningful until fiscal 2018.

Embedded product revenue in the third quarter of 2017 decreased by 14.3% compared to the same quarter a year ago. Similar to our new Cellular XBee product, we are encouraged with our growing pipeline for our new ConnectCore 6UL. We believe design wins will lead to production volumes, which are expected to start in Q4 and ramp during fiscal year 2018. However, we are trying to mitigate a greater-than-anticipated decline in the mature product lines in this category, specifically our Rabbit products.

Our network category decreased by 33.4% in the third quarter of fiscal 2017 compared to the same quarter a year ago. Our network products have declined more rapidly than anticipated. We do believe the curve of the decline can be improved, and we have started to invest modestly in NPI as well as to add incremental sales resources to do this. As both Ron and I indicated, services and solutions revenue increased significantly in the third quarter of 2017 versus the year-ago quarter, fueled by the performance from Digi Smart Solutions as well as stabilization in our Wireless Design Services group.

Digi Smart Solutions now has nearly 13,000 sites under contract, and our annualized recurring revenue from this business continues to grow.

Geographically, North America revenue decreased by 11.9% in the third quarter of 2017, largely resulting from weaker sales of network and RF products compared to the same quarter in the prior fiscal year.

EMEA revenue decreased by 16.9% versus the prior year comparable quarter. Combined revenue in Asia and Latin America decreased slightly versus third quarter 2016. Gross profit decreased by 13.4% in Q3 2017 versus the year-ago quarter, due primarily to lower top line revenue performance and shifting product mix. Our overall gross margin was 49.2% compared to 49.8% in the third quarter of 2016, a decrease of 60 basis points.

Our Q3 2017 hardware product gross margin was 50.1% compared to 50.6% in Q3 2016. This modest decrease was a result of a decline in network products. As our network category continues to decline, which we expect, we should see further pressure on our hardware gross margins. Service and solutions gross margin for Q3 2017 was 41.6% compared to 26.4% in the year-ago quarter. We continue to expect margins in the service category to be 35% to 40% going forward.

We also expect that our service and solutions gross margin will improve over time as recurring revenue from Digi Smart Solutions business continues to ramp.

Operating expenses in Q3 2017 increased by 4.4% compared to the year-ago quarter. The primary reasons for the increase are the restructuring charges of $2.5 million and incremental operating expenses for SMART Temps, partially offset by lower incentive compensation expenses relative to a year-ago quarter.

We recorded an income tax benefit of $700,000 for the quarter compared to an income tax expense of $500,000 for the third quarter a year ago. The current quarter benefit was primarily the result of reversals of tax reserves due to the expiration of statutes of limitations from U.S. and foreign tax jurisdictions, FIN 48 reserves and extended R&D tax credits. Our overall effective tax rate is impacted by the mix of income between taxing jurisdictions, many of which have lower statutory tax rates than the U.S. For planning purposes, we project an overall effective tax rate of approximately 15% to 20% for the full fiscal year 2017.

Income from continuing operations for the quarter was $1.3 million or $0.05 per diluted share compared to $4.3 million or $0.16 per diluted share in Q3 2016. As I mentioned earlier, the $0.05 was at the high end of our Q3 guidance, and if we exclude the restructuring and discrete tax items, we are at $0.08, which was above our guidance range.

EBITDA from continuing operations was $2.1 million or 4.1% of revenue compared to $5.9 million or 11.4% of revenue for Q3 2016. We've provided a full reconciliation table for non-GAAP items in our earnings release for your convenience. Included in our EBITDA is stock compensation expense of $1.2 million and the previously mentioned restructuring charges of $2.5 million. Excluding our restructuring charges, we would have achieved our target of double-digit EBITDA margins.

Moving to the balance sheet. Cash and investments, including long-term investments, totaled $111.3 million, a decrease of $26.4 million over the comparable balance at September 30, 2016. The decrease in cash was primarily a result of the SMART Temps and FreshTemp acquisitions for a total cash expenditure of approximately $30.1 million, net of cash acquired of $500,000.

Cash and investments increased sequentially by $1.1 million from Q2 2017.

On May 2, 2017, our board approved a new $20 million stock buyback plan, which replaced the $15 million plan that expired on May 1. Our new plan expires on May 1, 2018. During the third quarter, we repurchased 28,691 shares for $300,000. Our balance sheet continues to be very strong with a current ratio of 8.1:1 at June 30, 2017 compared to 8.2:1 at September 30, 2016. We remain debt-free.

Now I would like to provide our updated guidance, which includes the fourth quarter and the full year of fiscal 2017. For the fourth fiscal quarter of 2017, we expect to see continued challenges with our product revenue and headwinds from increased channel inventory, which remains around $50 million. We also have seen a few named opportunities in North American cellular move out of fiscal Q4. We expect total company revenue in the range of $44 million to $47 million and net income per diluted share from continuing operations to be in a range of $0.07 to $0.10.

For the full fiscal year, we're projecting revenue to be in the range of $181 million to $184 million and net income per diluted share from continuing operations to be in a range of $0.26 to $0.29. Despite our product revenue challenges, we are confident the model demonstrates resiliency on the bottom line. EBITDA margin should return to double digits in our fiscal Q4.

Our excitement continues to build around our Smart Solutions business and its ability to attract and retain new customers.

That completes our prepared remarks. At this time, Ron and I are pleased to open the call for your questions. Chelsea?

(Operator Instructions) Our first question comes from the line of Jaeson Schmidt with Lake Street Capital.

I just want to start on your feelings on general visibility. I know it sounds like inventory in the channel have tweaked up a little bit, but how are you feeling just about overall visibility looking into the back half of this calendar year?

Yes, we feel pretty good, obviously, about the current quarter, given some of the comments Mike made about a few larger cellular projects that were delayed a bit. We didn't lose these opportunities. The timing of the delivery just shifted on us a little bit. So we feel good about building on the base that's been established here and accelerating from here.

Jaeson, this's Mike. I'll just comment on the inventory -- the channel inventory. So it's $50 million, I think, which is a little bit higher than we'd like to see it. Sequentially, it's actually, I think, it may even be down a little bit, but it's very similar to what we had in fiscal Q2, but -- so it's -- it hasn't grown substantially quarter-on-quarter, but it's a little bit higher than what we'd like to see.

That's helpful. And then just shifting to the network business and more specifically looking at the legacy products. I think, in the past, you've talked about an annual decline of 10% to 15%. And understanding that visibility within that product line is a bit cloudy, how should we think about that moving forward given that it sounds like you're going to be investing to offset some of the decline there?

Yes, I guess, if we roll the clock back to fiscal '16, we actually experienced growth in that category, which was a bit of a surprise for us. And so I think the decrease that we're experiencing this year is larger than we would have expected because we came off of a higher base in '16. We do think that the investments we're making bring us back within that range, that we have expressed in the past, and we do not expect network to decline at the rate that it's declined from '16 to '17.

Okay. And then just the last one for me, and I'll jump back into queue. How should we think about the economics surrounding your Smart Solutions?

I don't know if you could be more clear, Jaeson, in terms of what you are looking -- what is...

Maybe, kind of, how should we think about average revenue per site or just monthly fee per site?

Yes, I don't think we're quite ready to share that information. There is a wide range out there, Jaeson. The fees can vary depending upon the implementation. We're in pharmacies, hospitals, schools; we're in trucks and trailers; we're in warehouses, restaurants, grocery stores. So there is a pretty wide range, and I think the group is getting bigger and certainly is at a point where it can be more predictable, but right now we're not quite as eloquent on establishing that baseline that would be with strong merit.

Yes. So Jaeson, you're going to get a little bit more information with our segment reporting. So you'll be able to kind of -- you'll be able to peel out the revenue associated with Smart Solutions, but on top of Ron's comments, we also have a couple of different models that kind of operate within those 3 business units. We've -- you've got an OpEx model that has low upfronts and a higher recurring and then you've got a CapEx model, where there is a modest investment in products and hardware on the upfront and then that obviously changes the recurring on the back end. So you'll get a little bit more information in the segment reporting, but to Ron's point, I think it's a little bit too premature to start talking about average revenue across the deployments.

Our next question comes from the line of Mike Walkley with Canaccord Genuity.

Just following up on some of those questions. Just a little more color on the new product development. How is that tracking for your hardware business and when you guys see visibility on maybe returning to a year-over-year growth for your hardware business? Is that something we maybe expect starting to happen exiting this calendar year? Or just kind of how you see the pipeline in the new product development?

Mike, this is Ron. Good question. We're very enthusiastic about some of the products we released in fiscal '17, as Mike mentioned, particularly the XBee Cellular and CC6UL. They have a little bit longer gestation period. As we get (inaudible) kits out there, get design wins and start seeing that revenue, but we're planning on some -- more demonstrative revenue out of those products. We've got a number of cellular router enhancements that have been made, some more incremental than others and those are more quick hitters as we expose our product line to different wireless carriers, we enter new geographies. So we're really expecting that cellular product line to have a more near-term opportunity to help us on the revenue side, and it's critical. We're going to have to get revenue from our new products in order to hit our growth objectives.

Okay.

I'm sorry, I was just going to throw a couple of comments on top of that as well. So obviously, next quarter, we'll guide into FY '18 guidance, but we actually had -- really had implied a sequential growth as early as this quarter. And in my closing comments, when I gave the guidance for Q4, I kind of pointed out the fact that within North American cellular, we had a few other large opportunities that really unrelated to new product introduction, but really more customer timing, moved out of the quarter. But I think, absent that, we would've seen sequential growth this quarter.

Okay. No, that's helpful. And then, just with the changing business mix, very strong on the -- kind of the recurring revenue business that you're growing. How should we think about just gross margin trends? You've lots of different businesses and moving parts, but as we look out into maybe next year and even the short term, how do you see gross margins trending for your business?

Well it's -- obviously, it's going to change as our annualized recurring revenue becomes a bigger component. We really have settled into that 40% gross profit on the service business, but as we kind of overcome some of the -- the amortization of some of those intangibles associated with those acquisitions, I think, those margins could go north of 57%, 58%. And so that obviously will have an impact on the overall margins. We should -- we'll see some compression on the hardware side as network continues to decline, that's going to take the higher margin with it, but we're making other changes within the cost to console as well. So for the near-term, I don't know that you would model really anything substantially different than what you're seeing now.

Okay, that's helpful. And then with the restructuring and OpEx coming down, is there a kind of OpEx run rate target maybe by the end of the fiscal year or the calendar year?

So the actions we just took were about $2 million of annualized costs. And so I think, if you kind of build that into your Q4, you're going to be pretty close. We actually -- we had the $2.5 million of restructuring in Q3. So you got to take that into account, but that should give you a pretty good math for how we're going to exit the year.

Okay, great. So something around $19 million -- $18 million, $19 million, something like that?

Yes.

Perfect. And then just last question for me, and I'll pass it on. Just as you look at kind of your cold chain business and how it's growing, what is the kind of a run rate revenue gold ticket to kind of that high 57% gross margin? And when do you think you might hit that, just to help us on long-term modeling?

So it's interesting. If we look at just the solutions business, I really don't feel like we're that far off even today. I think, if you look at the solutions business, and, again, you're going to see just how big of a competent -- I'll just give it to you because you'll see it in the Q. Sales of $5 million of services, $3 million of it roughly was the solutions business. That business is already really kind of generating 50-plus percent margins. So you could get there in '18.

Perfect. That's helpful. And then, Ron, just building on that, just within the solutions business, very fragmented market. You guys have been really kind of rolling up the space. How do you see the competitive dynamics in the market? And do you think you'd still need to add more to bolster your solutions? Or you think you've the right business in place, it's just a matter of winning customers?

Yes, Mike, it's a really good question. We think we're really uniquely positioned to go after these 3 verticals with really strong go-to-market, really proven solutions that get better as we integrate them. Part of our inorganic activities, we are considering adding to that group. We're trying to be very selective. We're also looking at areas outside of Smart Solutions and products, but wouldn't exclude Smart Solutions from that list.

Our next question comes from the line of Scott Searle with Benchmark.

I apologize I got on the call a little bit late, but I was wondering if you could just run down quickly again the gross margin structure between hardware and solutions? And then, I've got some follow-ups?

Yes, absolutely. I'll just give you the exact numbers here, Scott. So let me just read this section here for you. So gross profit decreased 13.4% in the third quarter. Overall gross profit margin was 49.2%. And then, the hardware mix was 50.1% and then services and solutions was 41.6%.

Got you. So -- okay. And did you provide operational metrics on the Solutions side of the equation in terms of number of sites where you deployed? And maybe kind of expanding on that, a little bit about the pipeline, right? A lot of activity going on out there in terms of FSMA and other initiatives, Farm-to-Fork and Fresh Food initiatives, in general. How big is the pipeline looking right now? Is there a way for -- to qualitatively or quantitatively give us a better idea what that's looking like?

So we gave a few metrics out, Scott. So overall, the solutions business was $3 million for the quarter. So it's $3 million of the $5 million that you see on the services line. We are nearly 13,000 sites, which are now deployed and under contract. And I think we gave a pretty good overview, actually in Ron's comments, in terms of pipeline as well as activity, in terms of where we're winning. I think we're seeing strong performance in pipeline in kind of the 3 verticals that we're servicing there, the transportation, the restaurants and then the health care. Ron, I don't know if there is anything you want to talk about?

Yes, Scott, couple of qualitative comments. The market is very large. There is a lot of targets. It's a fragmented customer base to go after, between transportation logistics, food service and health services. We are largely competing against paper-based processes that are in place, and so we're having an educational sale process in some cases where the customer wants to try the solution as a work through the change to go from paper to digital. The transportation market is a little more advanced than the other 2 in that, as you mentioned, they've been exposed to the Food Safety Modernization Act and in the case of vehicles, some have been exposed to solutions that go inside their trailers and/or their trucks. But we're very, very excited about the pipeline. We think we've a unique offering because it spans the different segments, and so a customer can have a real consistent vendor experience, whether you're operating a warehouse, a truck, a store or some combination of those locations. And we think that makes us uniquely positioned. We've got very new technology as well. And so that's very exciting for our customers to get visibility. I think our biggest opportunity right now is on the go-to-market side. We're still relatively new to the space and getting our name established through great customer success stories and, of course, being and participating in those industries is -- those are some of our key objectives.

And if I could, just in terms of the sequential guidance. If you're looking at the different product categories, did you give any indication of what you expect to be up or down sequentially? I know that there are a lot of -- there are some inventory issues, there are some product transition issues, which have slipped a little bit to the right. But in the context of that, what you're kind of expecting maybe in some of the key categories? And then with that in mind, extrapolating it out, looking at the December quarter, does traditional seasonality hold where it's a little bit weaker or because of some of these later product introductions, you start to see some nontraditional seasonality, for lack of a better expression, as things ramp up, you start to get out some of the new XBee products, et cetera?

Well, Scott, so we just simply guided on top line revenue. So we didn't breakdown into either the product categories individually or collectively. So we just gave the top line revenue. In terms of the, well, I guess the calendar Q4, I think, we will be better prepared to comment on that on next quarter's call. To answer your question on seasonality, there always traditionally has been some level of seasonality for us in that -- our fiscal Q1, calendar Q4. Lot of it has to do, I think, with the channel trying to keep their shelves bare, as they go into their year-end calendars. New product introduction always, obviously, is something that is very important for us as we think about the '18 numbers, but I don't know that would see anything different seasonality because of that.

I think the only new wrinkle for us is going to be as we manage the Smart Solutions business through the calendar fourth quarter, there's likely to be different dynamics than what we're seeing on the product side.

Our next question comes from the line of David Gearhart with First Analysis.

I wanted to look at the smart -- the cold chain solutions first. I know you mentioned $3 million in revenue from that business in the quarter. Just wondered how it tracks to your expectations at the beginning of the quarter. And previously you gave guidance of $10 million to $15 million for the calendar year ending December 31. Just wanted to make sure if that's still intact? Or if there's any changes on the guidance range for that business?

Yes, I think overall, David, we remain on track with that business. Again, you'll see in the Q, it's -- sequentially we were really satisfied with how the whole group performed, but I would say we're still on track to deliver that calendar number.

Okay. And then just shifting back to the network business. Since you have a different calendar -- excuse me, fiscal year-end versus calendar, just wanted to make sure that I understand it correctly. You're saying that after further investment is put into the networking products, that in fiscal '18, we'll be back to that roughly 10% decline per year versus the 25%-or-so that we're going to see in fiscal '17.

Yes, that's really -- we think there's some increased focus there. We think we're going to really soften that decline and get back to our -- the expectations that we had set previously of around 10% to 15% decline versus the more severe drop we've seen this fiscal year.

Okay. And my last question is in regards to the takeout offer that was on the table for Digi previously. Just wondering if there was any hesitation on the part of buyers, potential customers holding back orders to kind of see how the dust settled out there. I'm just wondering if you are seeing activity return just because that dynamic is off the table. Just wondering if you could provide some business color there?

Yes, David. This is Ron. That's a very fair comment, and it was a distracting process, and we did get some comments from distributors and, certainly, there was the official and unofficial discussion amongst employees and amongst customers in some cases as well. So we do think that having that behind us really helps. Internally, us focus on the business and helps our partners as well concentrate on our roadmaps and our day-to-day activity.

(Operator Instructions) And our next question comes from the line of Greg Burns with Sidoti.

In the cellular segment, I think, last quarter, you'd a little bit of issue or maybe not an issue, but there is some resource reallocation that needed to be done between focusing on the LR routers versus the WR, maybe you're missing some opportunities. I just wanted to see have you realigned your resources? And how do you feel about your positioning in the cellular market now?

Yes. Greg, very good question, and you're absolutely correct. We are investing pretty hard on the -- pretty heavy, excuse me, on the LR54 product line, and we had a number of opportunities on the WR product line that we weren't able to take advantage of. We have repurposed a portion of our resources, and so they have now started to introduce the additional WR refreshes and variants. In some cases, they're with specific carriers. In some cases, it adds new cellular and -- and/or WiFi capabilities. And then in some cases, it allows us to get into new geographies. So we just started seeing the results of that change at the end of last quarter, and there is a lot more activity than there was new product introduction, but as these next 3 to 6 months unfold, you're -- we're going to see the benefit of that decision that we made.

Okay. And the -- as part of the restructuring, the engineering positions that were taken out domestically. Do that come from any one particular area? Or where was that focused on?

Yes, we focused on a particular area that we thought would actually help -- or streamline our process. We had some areas, in particular, that were closer to a testing function that we rely on our manufacturing team and manufacturing partners to help fill that gap. So we feel like those were opportunities to streamline the company that we, sort of, earn the right to do, if you will. It's always unfortunate, of course, to do these things, but we don't think it affects our productivity in any way.

And I'm showing no further questions at this time. I would now like to turn the call back to Ron Konezny, President and Chief Executive Officer, for any closing remarks.

Thank you, Chelsea. On behalf of the entire Digi team, thank you for your continued support and interest in our company. While we are meeting our profitability expectations, we have higher expectations for growth. We're encouraged by our progress in services and solutions and are committed to improve results in our products group. We look forward to our next update, and have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.