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Digi International, Inc. (NASDAQ:DGII)

F1Q09 (Qtr End 12/31/08) Earnings Call

January 22, 2009, 5:00 pm ET

Executives

Subramanian Krishnan - SVP and CFO

Joe Dunsmore - Chairman, President and CEO

Analysts

Ragu Madabushi - Collins Stewart

Jay Meier - Feltl and Company

Charlie Anderson - Dougherty and Company

Operator

Good day ladies and gentlemen, and welcome to the First Quarter 2009 Digi International Incorporated Earnings Conference Call. My name is Wayne and will be your operator for today. At this time all participants are in listen-only mode. We will be performing a question-and-answer session towards the end of this call. (Operator Instructions).

At this time I will be handing the call over to your host for today's conference, Mr. Krishnan, you may proceed, sir.

Subramanian Krishnan

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 press release section of the Digi Web site at www.digi.com.

Second, I would like to remind our listeners that our remarks may contain forward-looking statements that involve risks and uncertainties. These forward-looking statements are not a guarantee of the Company's future performance. The important factors that may cause actual results to differ materially include, but are not limited to the following.

Rapid changes in technologies that may displace; products sold by Digi; the business environment in which Digi operates; Digi's reliance on distributors; declining prices of networking products and changes in the company's level of profitability; the current uncertainty in the global economic conditions, which could negatively affect product demand; the recent financial crisis affecting the banking system and the financial markets, which could negatively impact the financial solvency of our customers and suppliers; the extreme volatility in the fixed income credit and equity markets, which could result in actual amounts realized on our debt securities or other investments that differ significantly from current market values; the ability to achieve the anticipated benefits and synergies associated with the recent acquisitions and the risks that the combined businesses will not be integrated successfully.

Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including the reconciliation to the most comparable GAAP measures are included in the earnings release or in the Form 8-K that we've filed before this call. The Form 8-K can be accessed through the SEC filing section of our investor relations web site at www.digi.com.

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

Joe Dunsmore

Thank you, Kris. Welcome to the call everyone. Digi team continued to execute in a steadfast way on its strategy in fiscal Q1 in a rapidly changing economic climate. Amidst a severe contraction in demand that began in November, we are able to achieve profitability for the quarter.

This is the 24th consecutive quarter of profitability for Digi and is of even greater significance this quarter in an environment where many NASDAQ companies will likely fall from profitability.

We saw negative impact across most product categories and geographies. However, the area that has wavered the least in these severe headwinds is our wireless product offering.

Total wireless revenue was up significantly year-over-year, and grew as a percent of revenue from 21.4% last year to 32.5% this year. Specifically, cellular performance far exceeded expectations and was primarily driven by many small to medium sized opportunities. Sarian performed well despite negative foreign exchange rate impact and MaxStream grew albeit at a much slower rate than in previous quarters.

Next, I will comment on the current environment and the golden opportunity that presents to Digi expanding on the comments that I made in the pre-release call a couple of weeks ago.

As I mentioned, we've clearly answered the most severe Darwinian survival of the fittest environment that I have seen in my business career. We will continue to see shake out consolidation across virtually all industry sectors over the coming months, including the M2M states. There will be clear winners and losers by market sectors who move through and eventually emerge from this severe market downturn.

This presents a tremendous opportunity for Digi to significantly enhance its market position since there are very few companies that have entered the downturn with the strength of operating margin and the balance sheet strength that Digi possesses.

Digi has no bank debt currently on its books. When you get the chance please look at the Digi investor presentation on our website and you'll find a table on slide four that compares Digi on five key liquidity ratios to high-tech bellwethers Intel, IBM, CI, Cisco and HP.

Digi's ranking is number one, number one, number one, number two and number two, respectively, versus the five bellwether companies for this analysis. Also keep in mind that many of our competitors have entered this downturn in a weakened state. And we believe that customers will place even greater focus on buying from strong and enduring companies like Digi.

We fundamentally believe the strength of the balance sheet and keeping an eye on relative performance are absolutely crucial in this current operating environment, Digi's position with its stellar balance sheet, strong operating margins and highly differentiated product positioning to gain share and emerge as a winner.

Next, I will expand on the fundamental principles that we are focusing on in 2009. One, aggressive share gain through continued investment in wireless M2M. We have continued to invest as others have pulled back over the past year. As a result, we are seeing growth from our wireless products in the face of this downturn.

Two, profitability, Digi just posted its 24th consecutive quarter of profitability and we will be striving to continue to maintain profitability through this down cycle.

Three, positive operating cash flow, Digi EBITDA this quarter in the midst of the severe contraction was still over 8%. And we believe that we have strong operating momentum to drive positive operating cash flow going forward.

Four, aggressive supply chain management, we have been proactively managing the supply chain over the past few months since the credit crisis began to ensure that our key sources of supply are intact and that we have contingency plans in place. Additionally, we will have increased focus on inventory turns going forward.

And finally, continued focus on acquisition. In this environment, there are likely to be many opportunities to look at distressed companies and assets. We will certainly increase the focus and energy identifying and evaluating these opportunities as they present themselves.

Now let's discuss the guidance ranges for the quarter and for the year. Obviously, providing guidance in this cycle is quiet a bit more challenging than it has been in the past. In fact, as you know, many companies have stopped providing any guidance in the current environment. As a result, we will provide very broad ranges that try to account from a potential variability that we are seeing.

We expect Digi revenue for the year to be in the $170 million to $200 million range and EPS to be within a range of $0.19 a share to $0.47 a share. We expect 2Q '09 revenue to be $40 million to $46 million range and earnings to be in the range from $0.01 to $0.07 per share.

As mentioned in the previous call, we still expect the Fujitsu opportunity to deploy completely in fiscal 2009.

Next, a brief comment on stock buyback. We have previously announced our stock repurchase program and expect to continue repurchasing our stock while favorable conditions exist, and when permitted by Digi policy.

So, to summarize; first, Digi was profitable this quarter. Second, we continued executing our strategy and wireless continues to grow. Third, we will execute against our five focused principles. And fourth, there will be winners and losers, and Digi will clearly be a winner.

Thank you. Now I'll pass it back to Kris.

Subramanian Krishnan

Thank you, Joe. Revenue for the first fiscal quarter of 2009 was $41.4 million, a decrease of $3.2 million, or 7.2% over first fiscal quarter revenue a year ago. Revenue from Sarian and Spectrum acquired in April and July 2008, respectively, was $3.1 million and $1 million.

Revenue in EMEA, which is Europe, Middle East and Africa was $13.3 million in the first fiscal quarter of 2009, including Sarian branded products revenue of $3.1 million, compared to $11.1 million in the comparable quarter, a year ago, an increase of $2.2 million, or 19.6%.

Revenue in Latin America was $1.1 million in the first fiscal quarter of 2009 compared to $800,000 in the comparable quarter last year, an increase of $300,000 or 35.7%. Revenue in North America was $23.2 million in the first fiscal quarter of 2009, including Spectrum revenue from the date of acquisition of $1 million compared to $28.2 million in the comparable quarter of last year, a decrease of $5 million or 17.7%.

Revenue in the Asia-Pacific region was $3.8 million in the first fiscal quarter of 2009, compared to $4.5 million in the first fiscal quarter of 2008, a decrease of $700,000 or 15.4%.

The Sarian branded revenue of $3.1 million was sold entirely in the European region. Service revenue for Spectrum of $1 million was sold entirely in the North America region.

Revenue for embedded products in the first fiscal quarter of 2009 was $18 million, including Spectrum revenue of $1 million, compared to $20.7 million in the first fiscal quarter of 2008, a decrease of $2.7 million, or 13%.

Revenue from non-embedded products was $23.4 million in the first fiscal quarter of 2009, including Sarian branded product revenue of $3.1 million compared to $23.9 million in the first fiscal quarter of 2008, a decrease of $500,000 or 2.2%.

Revenue from embedded products decreased by $900,000 internationally for the first fiscal quarter of 2009 or 9.8%, and by $1.8 million or 15.5% in North America for the first fiscal quarter of 2009 compared to the same period a year ago.

Revenue from non-embedded products, including Sarian branded products, increased by $2.7 million internationally for the first fiscal quarter of 2009 or 35.4% and decreased by $3.2 million or 19.3% in North America for the first fiscal quarter of 2009 compared to the first fiscal quarter of 2008.

The weakening of the Euro and the UK pound sterling had an unfavorable impact on revenue of $1.4 million in the first fiscal quarter of 2009 compared to the first fiscal quarter of 2008.

The gross margin was 51.4% in the first fiscal quarter of 2009 compared to 53.6% in the first fiscal quarter of 2008. The gross margin was lower in the first fiscal quarter of 2009 than in the comparable period a year ago due to unfavorable product mix within primarily the non-embedded products including sales of Sarian non-embedded products, which provide lower gross profit margin.

Spectrum products also provide lower gross profit margin and contributed to the unfavorable gross margin variance from a prior year comparable quarter. The weakening of the Euro and UK pound sterling had a $900,000 unfavorable impact in gross margin in the first fiscal quarter of 2009 compared to the first fiscal quarter of 2008.

Total operating expenses for the first fiscal quarter of 2009 was $20.5 million, or 49.5% of revenue, compared to $19.3 million, or 43.3% of revenue in the first fiscal quarter of 2008. The increase in operating expenses in the first fiscal quarter of 2009 compared to prior comparable quarter is primarily due to ongoing operating expenses for Sarian and Spectrum, partially offset by the favorable impact of $500,000 due to the weakening of the Euro of the UK pounds sterling.

Total other income, net decreased by $800,000 in the first fiscal quarter of 2009 compared to the same quarter in the prior year due to the decrease in interest income, net of $500,000 and foreign currency transaction losses of $300,000.

Reported net income for the first fiscal quarter of 2009 was $1 million, or $0.04 per diluted share, compared to net income of $3.7 million, or $0.14 per diluted share in the first fiscal quarter of 2008. As a result of the extension in fiscal 2009 of the research and development tax credit for two additional years beyond calendar 2007, a benefit for research and development tax credit earned during the last three quarters of fiscal 2008 was recorded in the first quarter of fiscal 2009, resulting in an additional tax benefit of $400,000, or $0.01 per diluted share.

Non-GAAP net income and net income per diluted share for the first fiscal quarter of 2009 were $600,000 or $0.03 per diluted share excluding the discrete benefit recorded for the extension of research and development tax credit.

Please refer to the reconciliation table in the earnings release, which reconciles our net income and net income per diluted share from a GAAP basis to a non-GAAP basis.

Digi's effective tax rate for the first fiscal quarter of 2009 was nine-tenth of a percent including the discrete benefit realized as a result of the extension of the research and development tax credit, compared to an effective tax rate of 34.9% in the first fiscal quarter of 2008.

Digi expects its effective tax rate for the full fiscal year to be approximately 31% to 33% including the discrete tax benefits on the extensive research and development credit.

The effective tax rate is expected to be lower than the statutory rate for fiscal 2009, primarily due to the discrete tax benefit realized as a result of the extension of the research and development credit, as well as a shift in more taxable income to foreign tax in jurisdictions, where tax rates are lower than the domestic tax rates.

As indicated in our pre-release issued on January 05, 2009, we expect to continue repurchasing stock under our previously announced stock repurchase program. No stock was repurchased during the first fiscal quarter of 2009.

We have exercised this authorization by repurchasing 358,876 shares for $2.7 million at an average price per share of $7.64 during the first half of January 2009.

The total shares repurchased to-date, including shares purchased during the fourth quarter of fiscal 2008 are 830,076 shares for $7.8 million at an average price of $9.45.

Diluted weighted average shares outstanding at the end of the quarter were 25,678,663 shares compared to the previous quarter of 26,002,235 shares, a decrease of 323,572 shares.

According to the balance sheet and cash-flow statements, our combined cash and cash equivalents and marketable securities including long-term marketable securities were $70.2 million as of December 31, 2008, decreasing by $3.4 million from the end of prior fiscal year.

Net cash provided by operating activities for the quarter was $200,000. Cash flow was reduced by $5.4 million as a result of increase in inventories, primarily due to forecasted deals which were deferred to future quarters.

Pre-bills of new products primarily related to the Fujitsu deal and strategic inventory purchases. We intend to reduce our inventory levels over the following three quarters and focus on improving our inventory turns.

The increase in inventory was partially offset by an increasing cash flow due to the decrease in accounts receivable of $3.8 million and an increase in accounts payable of $1 million.

Our DSO remains at 39 days consistent with the previous quarters.

Our stockholders equity decreased by $5.6 million during the first quarter of fiscal 2009 compared to the prior quarter primarily as a result of translating the financial positions and operating results of our foreign subsidiaries into US dollars for consolidation purposes.

The translation adjustments are recorded in comprehensive income within the stockholders equity on our consolidated balance sheet, and result from the change in foreign currency rates for the Euro UK pound sterling and the Japanese yen during the first fiscal quarter of 2009.

Our current ratio is 6.7 to 1 compared to our current ratio of 6.4 to 1 at the end of prior fiscal year.

Now, I would like to open the call to questions, operator?

Question-and-Answer-Session

Operator

(Operator Instructions). And our first question comes from the line of John Vinh from Collins Stewart. You may proceed sir.

Ragu Madabushi - Collins Stewart

Thank you this is Ragu Madabushi for John Vinh.

Subramanian Krishnan

Hi, Ragu.

Ragu Madabushi - Collins Stewart

Hi, Kris. Just a housekeeping question first. MaxStream, can you tell us what the year-over-year growth was?

Subramanian Krishnan

Yeah it was, I mentioned earlier that it was slight growth. This was in the neighborhood of about 4% to 5%.

Ragu Madabushi - Collins Stewart

Okay. And Sarian, what kind of visibility are you having? Last call I think you had talked about wireless starter kit sales still keeping up. Is that still true now this quarter?

Joe Dunsmore

Yeah, we continue to see real strong demand. I'd say we had a peak in demand for kits last quarter for our wireless drop-in networking kits. And then if you look at year-over-year performance this last quarter versus the prior year, certainly the kit sales are up significantly. So we continue to see strong demand for those kits.

Ragu Madabushi - Collins Stewart

But you're not really getting any push back from Fujitsu or anything about their deployment in UK.

Joe Dunsmore

Well, as I mentioned before, I think I just mentioned in the call that we still plan to shift entire Fujitsu order in fiscal 2009.

Ragu Madabushi - Collins Stewart

Okay, and is the general environment more challenging in coming up with the forecast, what are you doing differently from prior quarters to I guess adding with the forecast?

Joe Dunsmore

The answer to that question is, yes. It is definitely a more challenging environment out there, and we continue to try to refine our process and continue to really drive to get more visibility, better visibility to all of our end customers and all of our opportunities and we'll review this on a weekly basis.

So, the process continues to be refined and we have a pretty well structured internal process for getting visibility. The reality is, in this environment, regardless of the visibility and the touch you have with customers sometimes the customer themselves don’t know what they are going to do from week-to-week. So, it's definitely a more reactive environment out there than we've ever seen, where you'll have customers pulling in one week and then canceling the next week, more so I think we've seen or probably anybody out there has seen in a very long time.

So it is definitely a more challenging environment. Our guidance is more challenging, things are more cloudy because of the nature of the environment. And you do the best you can to continue to drive for improved visibility on a customer-by-customer basis by just striving to manage that relationship more carefully, but it's challenging.

Ragu Madabushi - Collins Stewart

Thank you. And I was actually hoping that you could touch on what your assumptions were for $0.19 versus what your assumptions were for $0.47 for '09.

Joe Dunsmore

Okay. Obviously the $0.19 assumes the bottom of the revenue range at $170 million. And at the bottom of the revenue range, what we would expect is to see our daily bookings rate to be roughly equivalent to what we saw in November and December timeframe, so kind of a consistent bookings rate.

And you would expect to see a lot more push out, so deals that we have scheduled in backlog and those types of things, than you would in a normal environment. So, kind of a combination of an extension of what we saw in November and December with some large deal push outs that drive you to the bottom of the range.

The top of the range, what you might see is improvement from that daily booking rates especially being driven by small, medium sized deals to the channel, and you would expect to see the large deals not pushing out and holding in order to get to that $200 million.

Ragu Madabushi - Collins Stewart

Okay. And I guess the last question. Are you seeing any difference in the average sales cycle times? I thought it was something around 6 to 12 months, and how is it changing right now?

Joe Dunsmore

I think in general, the sales cycles are at least as long as or pushing out. And as I said earlier, once we have closed a deal and we are in production, especially on the embedded side of the business, we are seeing more [TOs] pushing out than we would normally see. So that's having an impact, and people are just much more cautious.

I mean what we saw in November was a contraction, a severe contraction, a step-function reduction in demand and people are just a lot more cautious out there. And what we have seen so far in January is a bookings rate that's slightly above what we were seeing in November and December.

Ragu Madabushi - Collins Stewart

Okay. Is the Chinese New Year in anyway a factor into all of this?

Joe Dunsmore

Yeah. It's a factor, but from just a typical kind of seasonality issue it is not a major factor.

Ragu Madabushi - Collins Stewart

Okay, thank you.

Joe Dunsmore

It's certainly factored into our range.

Ragu Madabushi - Collins Stewart

Alright, thanks.

Operator

And our next question, it comes from the line of Jay Meier from Feltl and Company. You may proceed, sir.

Jay Meier - Feltl and Company

Thanks, just a couple of additional questions. Joe if the wireless business remained relatively strong as you described, how would you describe parts that were weak, what verticals, what products were falling off quick for you?

Joe Dunsmore

Yeah. Since the wireless was very strong, we saw basically that the product lines that are moderate growth product lines across the terminal, server product line, the device server, the USB product lines were kind of in the moderate decline, kind of ballpark, in the 15% to 25% kind of decline which is pretty consistent with some of the industry benchmarks that we are looking at, if you looked at Intel they were down 23% year-over-year, TI down 33%.

So, and there is a lot of examples out there where, those were right in the ballpark. An area that was a little bit higher than that are embedded module was arena, was a little bit higher than that, what we saw there on a year-over-year basis was kind of the combined impact of some positive lumpy demand, very large deals won in particular last year. And then this year, what we have was several medium size deals where production customers pushed out of the quarter. So, we had several or decelerated medium sized orders that pushed out of the quarter and that had a extraordinary effect on our growth rate year-over-year.

Jay Meier - Feltl and Company

Okay. And Kris, can you give us, during the quarter with the push outs and the issues out there, you must have had some shifting around in operating expenses in gross margin? Can you give us an idea, how you expect those to behave going forward, I mean should I consider sort of Q1 on the base line and build from there?

Subramanian Krishnan

I would say that Q1 is a base line with one exception going forward through the year, as a result of the foreign exchange impact. Sarian will have a negative impact on gross margin to tune of probably 1point to 1.5 point.

Jay Meier - Feltl and Company

Okay, alright. Thank you very much.

Joe Dunsmore

Thank you, Jay.

Subramanian Krishnan

Thanks Jay.

Operator

And our next question, it comes from the line of Charlie Anderson from Dougherty and Company. You may proceed, sir.

Charlie Anderson - Dougherty and Company

Good afternoon, just want to follow-up on earlier question on the guidance range. And just ask you about expenses and then sort of what you are assuming there, you guys were able to bring G&A down and I am not sure I thought this specific number, but I think there was foreign currency impact there, but just wondering if you can walk me through your thinking on expenses?

Joe Dunsmore

Sure, in general the expense strategies, you guys know over the last several quarters has been to continue to invest especially the incremental investment in wireless and wireless drop-in networking opportunity. What you are seeing is the benefit of that. We are starting to see the benefit with the stiff headwinds of the wireless product lines continuing to grow, and that’s a result of the wireless drop in networking initiative driving more and more customers to production. So, that is a good thing.

In terms of how we are looking at expenses right now in this environment, the view is that we are going to try to hold the expenses flat, maybe, slightly down sequentially the way we will do that is to tighten maybe some discretionary spending. Then we will hire only for critical replacements and we are going to continue to drive manufacturing efficiencies consistent with our ongoing strategies.

So, that’s the model going forward and we will keep close track of the environment, the daily bookings etcetera. And if we need to modulate from there we will. The desire is to meet those principles that I've talked about, where we love in this environment as challenging as it is to continue to drive profitability and positive cash flow through this downturn.

Charlie Anderson - Dougherty and Company

And Kris, what was the impact on expenses, what currency, there was a positive impact with the currency?

Subramanian Krishnan

$0.5 million impact on all expenses because of the currency.

Charlie Anderson - Dougherty and Company

Got it.

Subramanian Krishnan

Modestly there was a favorable impact.

Charlie Anderson - Dougherty and Company

Have you guys done headcount reductions and does your guidance assume that you might go down that route at some point during the year?

Joe Dunsmore

We have not focused on that as a key kind of strategy to-date. We have a strategy to continue to drive manufacturing efficiencies and to the extent, in doing that we need to manage our headcount. We'll continue to do that. But, as of this point, the focus that we had is to really look at this as a time to go out and drive market share and we think we've operated the company in a very lean way.

And we've got a strong position, and so our focus is to drive market share gain and to hold expenses where they are at and to the extent that the overall market cooperates reasonably with us and we don’t see continued degradation, we'll be in a good position to do that. If we see continued degradation in the market, then we would look at other means to maintain profitability.

Charlie Anderson - Dougherty and Company

Then a question on the acquisition strategy; that was something you guys seem very focused on with, in the multiples coming down, across the Spectrum here. Wondering if you could just kind of share with us, what size opportunities you're looking at? I mean, one of your key points this year is to maintain profitability, would you do something that was dilutive if it was a great opportunity. Just kind of walk us through that if you could?

Joe Dunsmore

Okay. So, the core strategy that we have is to go out there and look for, especially wireless, possibly services, gaps to fill in our strategy. And so, all we are going to do is find companies that have products and technologies that help us fill those gaps and are a good cultural fit. And generally speaking, in this environment, we believe the opportunity is going to be an opportunity where assets are going to be available overtime pretty inexpensively.

We think that there is probably going to be a lot of that happening, a lot of shake out where there maybe opportunities to go in and pick up companies fairly inexpensively. It's a bit more difficult environment right now to do, let's say a major acquisition just because the whole valuation side of it is so difficult on both sides of it in an environment like this. And I think if you talk to investment bankers or anybody about this they'll tell you the same thing.

So, realistically that part of it is more challenging. We'll continue to look at those types of opportunities. The focus is to cast the net out there and make sure that we are maintaining really good strong relationships with companies out there that have unique products and technologies, and as the opportunity presents itself to go in there and pick up companies and assets especially if there is an opportunity to do it in an expensive way.

Charlie Anderson - Dougherty and Company

And just a last question on inventory, you talked about working that down. I wondered if you could kind of talk about that as well, I mean are there certain segments of the business that you put less focus on as you do that.

Joe Dunsmore

No, we will continue to have a focus, we had inventory turns goals and obviously this last quarter, it was a bit more challenging from the inventory perspective the way the quarter kind of changed in November and demand made a step function move. So that made the inventory management situation a bit more challenging last quarter. So, now we are looking at it across the board, across product lines and we've got aggressive inventory turns target set by product managers and we are going to put some significant focus on that. And we've got quarterly goals and we expect over the next few quarters to bring inventory down significantly.

Charlie Anderson - Dougherty and Company

Does that mean you will get aggressive on pricing in any of the categories?

Joe Dunsmore

No it has no strong correlation to pricing strategy.

Charlie Anderson - Dougherty and Company

Okay good. Thanks for taking my questions.

Subramanian Krishnan

Thank you, Charlie.

Operator

And our next question, it comes from the line of Jay Meier from Feltl and Company. You may proceed Jay.

Jay Meier - Feltl and Company

Thanks. I have a sort of a high altitude question for you. I get some feedback from the street occasionally comparing Digi to other companies that are doing M2M type services. And, oil fields capital monitoring and what not. Many of those companies are doing quite well actually, they are growing quickly much faster than Digi is. And it seems to me that, that's primarily because you are supplying the component technologies that are supporting those service businesses. In other words those companies aren't really making devices, you are making devices that they use in their services. They enjoy higher valuations and higher growth rates unfortunately for you.

But I wonder if you consider a business shift at all, or considering, introducing services out there that, that might compete that way. That might generate higher growth rates, I mean you have the component technologies and certainly the skill sets. Can you comment on that?

Joe Dunsmore

Sure, Jay, I would love to comment on that. You can probably help me if you would just enumerate maybe one or two of those companies that you are talking to that'll help me understand the perspective a little bit better.

Jay Meier - Feltl and Company

No, I'd rather not name companies in the conference call, but we can certainly share that information afterwards.

Joe Dunsmore

Yeah, we could, as I look, I mean so there is a number of perspectives I have on this. As I look at all the public M2M companies, Digi's growth rate over the last year has been far stronger than all of the public M2M companies that I am able to get data on. So I don't know of anybody publicly that would be a good example of that.

Private companies obviously it's hard to get data so I am not sure who you are talking about? But I guess my direct response to that would be that the big focus of our business on M2M is obviously the wireless M2M focus that we have. And if you look at that part of our business in comparison to these companies that you are talking about, I don’t know who they are, and I don’t know what their growth rates are. I think you would probably find that Digi's growth rate in the wireless arena is probably as robust or possibly more robust then any of the companies that you are talking about.

Jay Meier - Feltl and Company

And so you don’t anticipate. You wouldn't anticipate shifting your business strategy at all.

Joe Dunsmore

No. I am not saying that in terms of the business strategy shift. That wireless focus will continue to add to that organically and through acquisition and services as absolutely. I think I have mentioned in this call. It is absolutely an area where from an acquisition perspective, with the Spectrum acquisition as an example and the future acquisitions as well as organic investments. That’s definitely an area where we are investing and I think I mentioned in the last call that you should expect to see, over the next probably two to three quarters down the road in that ballpark, you could expect to see some services announcements from us.

Jay Meier - Feltl and Company

Are those type of services where you are actually; I mean they are not design services. Digi of old, 10, 15 years ago used to design almost customized systems for companies, and that weren't on the shelf inventory-type products, right? And you guys generated really high margins on those types of applications, as you had some great engineering expertise.

You since moved to another, maybe by default, because the way the industry is shifting, your price points have fallen and your margins have fallen, your volume has improved potentially, but that's really hampered your growth rate among some other reasons.

So, would the services that you are describing be more along the line of custom development-type services for an end-user, or services where you are actually using Digi products to monitor some type of network, or provide recurring revenue stream providing the service of that M2M communication.

Joe Dunsmore

Jay, I would love to answer your question right now. However, that would constitute a pre-launch, and I don't think my marketing folks and product management folks would appreciate me stealing this under and pre-launching our services strategy in this call.

So, the most I can say on that is that it's definitely an area that we are investing in, and I can't say anything obviously from a competitive standpoint, it's sensitive. And in the next two or three quarters down the road, you should expect to see some announcements from us.

Jay Meier - Feltl and Company

Okay. Alright, thank you.

Operator

Thank you. And at this time, we have no additional questions. Okay, and I'll be handing the call back over to Joe Dunsmore, sir you may proceed.

Joe Dunsmore

Great. Okay. Thank you everybody and I look forward to talking to you again in three months.

Subramanian Krishnan

Thank you.

Operator

And this concludes today’s conference call. You may now disconnect. Thank you for joining ladies and gentlemen.

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Source: Digi International, Inc., F1Q09 (Qtr End 12/31/08) Earnings Call Transcript
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