Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Digi International Inc. (NASDAQ:DGII)

F2Q10 (Qtr End 03/31/10) Earnings Call Transcript

April 22, 2009 5:00 pm ET

Executives

Subramanian Krishnan – SVP, CFO and Treasurer

Joe Dunsmore – Chairman, President and CEO

Analysts

Tavis McCourt – Morgan Keegan

Jay Meier – Feltl & Company

Anthony Newley

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 DiGi International Incorporated earnings conference call. My name is Amethy, and I’ll be coordinator for today. At this time, all participants are on a listen-only mode. We will facilitate a question-and-session towards the end of today’s conference. (Operator Instructions)

I’ll now turn the presentation over to your host for today’s conference, Mr. Subramanian Krishnan, Senior Vice President and CFO of DiGi International. Please proceed, sir.

Subramanian Krishnan

Thank you. Good afternoon. 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 release section of our Investor Relations website at www.digi.com. Second, I would like to remind our listeners that some of the statements that we make in this presentation may constitute forward-looking statements.

These statements reflect management’s expectation about future events and operating plans and performance and speak only as of today’s date. These forward-looking statements involve a number of risk and uncertainties. A list of factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking-statement is detailed under the heading Forward-Looking Statements in our earnings release today, and under the heading Risks Factors in our 2009 annual report and Form 10-K on file with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason.

Finally, certain of the financial information disclosed in the call, include non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures are included in the earnings release or in the Form 8-K that we filed before this call. The Form 8-K can be accessed through the SEC filing section of our Investor Relations website at www.digi.com.

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

Joe Dunsmore

Thank you, Krish, and welcome to the call everyone. I am very pleased with our results for the quarter. This is the 29th consecutive quarter of profitability for DiGi in an environment that we believe has stabilized and is returning to growth.

We exceeded the strict consensus for revenue and met the consensus profitability target with results within our guidance ranges. Revenue for the quarter of $45.1 million was up 12.5%, compared to the same quarter in the prior year and 4.9% sequentially.

Net income for the quarter of $1.7 million was up 136% compared to the same quarter in the prior year, and 40.6% sequentially. EBITDA for the quarter was up 50.7% compared to the same quarter of the prior year, and 15.9% sequentially.

All of these trends are positive and indicative of an upturn in the business and a stabilization of the external environment. A key indicator that continues to be very positive is the increase in bookings rate that we again saw in the quarter. Q1 was the highest bookings quarter at DiGi for at least this far [ph] back as we have comparison data, which is eight years. And Q2 exceeded Q1 by a slight margin.

Wireless product revenue for fiscal Q2 increased 12.9% compared to the same quarter in the prior year and was 35% of our total revenue. Normalizing for the $3.3 million Fujitsu order fiscal Q2, ’09, our wireless revenues were up over 40%.

As a reminder, in last quarter’s earning call, I closed out the discussions of our five operating principles for 2009 in execution against our commitments within those principles.

It is that execution, which included continued investment in wireless solutions that has put us in this strong position to grow in 2010. 2009 have accelerated the pivot of the organization to focus on providing wireless solutions to our customers, where is the iDigi platform, iDigi Energy and other iDigi offerings to accelerate this initiative. And as a result, we saw high growth of our wireless solutions.

From the first half of 2010, we are seeing the benefits of our investments in wireless solutions. Wireless products are 35% of our revenue base today and we expect wireless to become over 60% of our revenue base within the next three to five years.

As I mentioned in the Q1 call, which appears repeating, we continue to increase our internal investment focus on markets and applications that will drive this growth. Fleet management, medical and tank monitoring and smart grid our key areas where we’re focused.

We continue to make good progress in our fleet management focus this quarter. The ConnectPort X5 telematics gateway and its following products have put us in the strong position to make good progress with our relationships with Zeta over the past three months, and we’re on tract to begin to ramp revenue in the second half of 2010.

Our custom development of our products for a large customer in the heavy equipment arena began its ramp in Q2 and we have a robust pipeline of other opportunities that we are pursuing.

The medical vertical continues to yield good traction with our major customers, and that’s like connectivity and embedded device connectivity applications. We continue to invest in businesses development and have a strong pipeline of sales opportunities that will provide underpinnings for growth.

Tank monitoring customers continue to deploy this quarter. We have active large customers in water treatment, agriculture and petroleum and we are seeing revenue ramps significantly in 2010.

I spoke at length about these smart grid opportunities in the last quarter’s earning call. I will make a number of comments as an update to that discussion. First, we have continued to build momentum at increasing pace over the past few months. We believe that DiGi is a natural partner for key players in the demand response, AMI, energy management system and alternative energy markets.

Second, DiGi has likely the largest deployment of home gateways for demand response today. And we continued aggressive deployment in Q2.

Third, we have continued to build our existing partnerships and have added several new partnerships in the last three months.

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

So, I continue to be very bullish about the growth opportunities for our wireless solutions in overall product growth. As a result of our bookings momentum, these growth opportunities will be providing another guidance increase for the year, which Krish will discuss in his prepared remarks.

So to summarize, first, DiGi posted its 29th consecutive quarter of profitability. Second, we grew revenues and earnings for the first – for the quarter both sequentially and compared the same quarter in the prior year.

Third, we have significant growth momentum with our wireless product, especially in our targeted verticals. And fourth, we are increasing our guidance.

Next, I’ll hand it back to Krish for his prepared remarks.

Subramanian Krishnan

Thank you, Joe. Revenue for the second fiscal quarter of 2010 was $45.1 million, an increase of $5 million or 12.5% over the second fiscal quarter revenue a year ago. Revenue increased sequentially from the first fiscal quarter 2010 to the second fiscal quarter 2010 by $2.1 million or 4.9%.

Revenue in North America was $26.5 million in the second fiscal quarter 2010, compared to $20.7 million in the comparable quarter last year, an increase of $5.8 million or 27.9%. Revenue in EMEA, which is Europe, Middle-East and Africa, was $12.3 million in the second fiscal quarter of 2010, compared to $14.9 million in the comparable quarter a year ago, a decrease of $2.6 million or 17.3%.

EMEA revenue in the second fiscal quarter of 2009, included $3.3 million from a large deal with Fujitsu, as discussed in last year’s earnings call.

Revenue in Asian countries was $5.3 million in the second fiscal quarter of 2010, including MobiApps satellite revenue of $400,000, compared to $3.8 million in the second fiscal quarter 2009, an increase of $1.5 million or 38.7%.

Revenue in Latin America was $1 million in the second fiscal quarter of 2010, compared to 700, 000 in the comparable quarter last year, an increase of 300, 000 or 50.8%.

Revenue from the embedded products from the second fiscal quarter of 2010 was $20.2 million, including the MobiApps satellite revenue 400,000, compared to $17.4 million in the second fiscal quarter of 2009, an increase of $2.8 million or 16.1%.

Revenue from non-embedded products was $24.9 million in the second fiscal quarter of 2010 compared to $22.7 million in the second fiscal quarter of 2009, an increase of $2.2 million or 9.7%.

Wireless revenue increase by $1.8 million in the second fiscal quarter of 2010 compared to the same quarter in the prior year or 12.9%, an increase by 700,000 or 4.4% compared to the first fiscal quarter of 2010. Wireless revenue was $15.8 million or 35% of our total revenue in the second fiscal quarter of 2010 compared to $14 million or 34.9% of the total revenue in the second fiscal quarter of 2009 and compared to $15.1 million or 35.2% in our first fiscal quarter of 2010.

The gross margin was 50.5% in the second fiscal quarter of 2010 compared to 47.8%. The gross margin was higher in the second fiscal quarter of 2010 in the comparative period at a year ago, due to unfavorable product mix, product cost reductions, lower manufacturing expenses resulting from the closing of our manufacturing facility in Davis California and consolidation of manufacturing operations within our Minneapolis plant in fiscal 2009. We expect gross margin will approximate current levels for the remainder of fiscal 2010.

Total operating expenses for the second fiscal quarter of 2010 were $20.6 million or 45.6% of revenue compared to $18.6 million or 46.3% of revenue in the second fiscal quarter of 2009. The increase in operating expenses in the second fiscal quarter of 2010 compared to prior comparable quarter is primarily due to the reinstatement of fiscal 2010 of the Partial Incentive Compensation Program, which had been eliminated in fiscal 2009 an incremental ongoing operating expenses of 700,000 for MobiApps that was acquired on June 8, 2009.

Operating expenses benefited by 400,000 due to a reduction of restructuring reserve in the second fiscal quarter of 2010, because expenses are soaring [ph] with the plan were less than expected. The weakening of the US dollar compared to the Euro and the UK pound, sterling had an unfavorable impact on the operating expenses of 300,000 in the second quarter of fiscal 2010 compared to a year ago comparable quarter. We expect that our total operating expenses will approximately 44 to 46% of revenue for the remainder of fiscal 2010.

Net income increased by $1 million or 135.8% in the second fiscal quarter of 2010 compared to the comparable quarter to prior year. Net income for the second fiscal quarter of 2010 was $1.7 million or $0.07 per diluted share compared to 700,000 or $0.03 per diluted share in the second fiscal quarter of 2009.

Non-GAAP net income and net income per diluted share for the current fiscal quarter of 2010 was $1.5 million or $0.06 per diluted share, which excludes a reduction of the restructuring reserve of 200,000 net of tax or $0.01 per diluted share.

Pleas refer to the reconciliation table in the earning release, which reconciles on an operating income and net income, a net per diluted share for GAAP basis to a non-GAAP basis.

Digi's effective tax rate for the second fiscal quarter was 34% compared to an effective tax rate of 28.1% in the second fiscal quarter 2009. Digi's effective annual and effective tax rate for the full fiscal year of 2010 to be in the range of 33% to 35%.

For the first six months of fiscal 2010, Digi reported a revenue of $88 million compared to $81.4 million for the first six months of fiscal 2009, an increase of $6.6 million or 8.1%. Other highlights for the first six months of fiscal 2010 compared to the first six months of fiscal 2009 includes the following

Revenue from embedded products in the first six months of fiscal of 2010 was $38.2 million including the MobiApps satellite revenue of $900,000 compared to $35.4 million in a comparable period of 2009, an increase of $2.8 million or 8%.

Revenue from non-embedded products was $49.8 million in the first six months of 2010, compared to $46 million in the first six months of 2009, an increase of $3.8 million or 8.1%.

Wireless revenue increased by $3.3 million or 10.8% for the first six months of fiscal 2010 compared to the first six months of fiscal 2009. Wireless revenue was $30.9 million during our first six months of fiscal 2010 or 35.1% of our total revenue compared to $27.6 million during the first six months of fiscal 2009 or 33.7% of our total revenue.

Net sales from the first six months of fiscal were favorably impacted by the foreign currency translation of 700,000 when compared to the same period in the prior fiscal year resulting in the weakening of the US dollar. Our net income increased by $1.2 million or 66.7% for the first six months of fiscal 2010 compared to the same period a year ago.

For the first six months of 2010, Digi reported a net income of $2.9 million or $0.12 per diluted share compared to the net income in the first six months of fiscal 2009 of $1.7 million or $0.07 per diluted share.

Non-GAAP net income increased by $1.3 million or 95.2% for the first six months of fiscal 2010. Non-GAAP net income for the first six months of 2010 was $2.7 million or $0.11 per diluted share compared to $1.4 million of $0.05 per diluted share.

Net income benefited by 200,000 or $0.01 during the first six months of 2010 due to the reduction of our restructuring reserve. Net income benefited by 400,000 or $0.01 per diluted share during the first six months of fiscal 2009 as a result of the retroactive benefit from the extension of research and development credit.

Our diluted weighted average shares outstanding at the end of the quarter was 25,212,813 shares compared to a previous quarter of 24,979,033 an increase of 233,780 shares. Turning to our balance sheet and cash flow statements, our combined cash and cash equivalents in marketable security balances including the long-term marketable securities were $81 million as of March 31st 2010, increasing by $2.5 million from the end of the prior quarter and by $5.2 million from the end of the prior fiscal year.

Net cash provided by operating activities for the quarter was $5 million. We paid $3 million in January to the former shareholders of Spectrum Design Solutions as one of the deferred payments on the acquisition become due. Our current ratio is 7.321 compared to the current ratio 7.221 at the end of the prior quarter. Our DSO is at 38 days consistent with previous quarters.

Now, I would like to provide some guidance for the third fiscal quarter of 2010. Digi projects revenue to be in the range of $44 million to $48 million and the net income per diluted share the rage of $0.07 to $0.11. For the full fiscal year Digi projects revenue in the range of $174 million to $190 million which is an increase of $4 million at the lower end of the range from the guidance previously provided. We expect the most likely revenue of $182 million, an increase of $2 million from the guidance provided at the end of the first fiscal quarter.

We anticipate that earnings per diluted share will be in the range of $0.21 to $0.42 which is an increase of $0.03 with the lower end of the range from the guidance previously provided.

Now I’d like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question (Operator Instructions) Your first question comes from the line of Tavis McCourt with Morgan Keegan. Please proceed.

Tavis McCourt – Morgan Keegan

Hi, guys. This is Tavis. A couple of questions. First on – in terms of the amortization expense on the income statement is that something we should expect with that similar rate for the rest of the year and is that included in your OpEx guidance of 44% to 46% of revenues?

Joseph Dunsmore

Yes, it is and I would – we’ll maintain the same level that we’ve been incurring on a quarterly basis.

Tavis McCourt – Morgan Keegan

Okay. And Joe, you mentioned bookings were up slightly from the record December quarter, can you give us the sense how the March quarter typically is on a seasonal basis for your bookings?

Joe Dunsmore

It’s typically on a revenues basis what we typically see as a revenue ramp up to the fiscal year. So, we typically see Q1 being the lowest and we typically see revenue ramp through the year. Bookings they would tend to flow similarly, but I can’t give you precise information on that, but we would tend to see revenue peak in fourth fiscal quarter of most years.

Tavis McCourt – Morgan Keegan

Okay. And then it looks like the non-wireless revenues had another nice uptake this quarter is that kind of general economic conditions improving or is there one or two products in there, that are really driving that?

Joe Dunsmore

I think it’s a combination, I think, we are saying you know broad based, the water level is increasing on a broad base and so we’re benefiting from that. And I think that we’re also seeing some significant large opportunities that are flowing as well or better than expected. An example would be in the cloud-computing arena where we have our terminal [ph] server product line has an interesting play as a console server. And so proving that console server capability for major cloud-computing player, helped to boost our revenues a bit for the quarter and came in a bit higher than we expected, so things like that we’re very positive in the quarter.

Tavis McCourt – Morgan Keegan

Okay. And then final question Krish for you, you mentioned some of the currency impact year-over-year, in terms of sequentially when the dollar strengthen as quickly as it did, did it have any impact relative to what you guys were thinking were when you gave guidance?

Subramanian Krishnan

Yeah, when we gave guidance within we expected to be slight weakness in the dollar and has been look forward. It shouldn’t matter as significantly materially in our financial projections.

Tavis McCourt – Morgan Keegan

Great. Thanks a lot.

Subramanian Krishnan

Thank you Tavis.

Operator

(Operator Instructions) The next question comes from the line of Jay Meier with Feltl & Company. Please proceed.

Jay Meier – Feltl & Company

Hi, guys thanks. Couple of sort of high altitude questions, Joe. As far as the product development that you have been working on really for some time with Zeta Corporation, is there any exclusivity with that, I mean, is there a reason why you can’t take those products in market to other logistics and supply chain management vendors?

Joe Dunsmore

Generally speaking our fleet management product line, which includes the X5 and then follow on products that are about to hit the market, we’ve those. Generic products are being marketed to the broader fleet management marketplace. And I think Zeta is really interested in DiGi continuing to have success deploying these products, because as we have success the point products that helps to drive down our cost and make the product even more attractive to them. And there are some unique things that we’re doing with Spectrum Design Services just for data. And if other customers in the fleet management arena want unique capabilities, we would do the same type of things for them. But we certainly wouldn’t take the unique things that data is requesting that we do and market those unique custom capabilities.

Jay Meier – Feltl & Company

Okay. And you made a comment earlier about your – it seemed to be a share sort of guesstimate in the smart grid. You said you’re delivering more gateways into the markets than anybody that you can perceive. Can you elaborate on that little bit how are you majoring that, can you give us a real quantification of what that means and who do you think is your biggest threat out there right now?

Joe Dunsmore

Yeah, so what we’re seeing out there right now Jay, generally, is in the home gateway, home energy management system arena. This year, the 2010, and I think into 2011 is the year of the pilot, both from an AMI perspective in home energy management and – perspectives. So, we’re out there in production, as well as in pilot, with our gateways. Our gateways is being deployed production with more than one major customer out there. We’ve sold in the in the tens of thousands of home gateways, based on objective third party, market information that we look at. And based on what we know from a bottoms up perspective, we believe that that’s the highest volume of home gateways based on the all the information we have.

So, we feel like we’re getting good traction there both with our production customers and that we have additional pilot customers that I talked about in the past. That are piloting our gateways and would expected deploy in the future. So we feel like we’ve got really good traction both from demand response, demand load curtailments application perspective and then extending the beyond that’s into more sophisticated applications for the home gateway for home energy management systems. So, we feel pretty good about the fact that we’re out there deploying in production in pilot and lot of folks were out there just kind of stuck in pilot now to certain degree.

Jay Meier – Feltl & Company

Sure, and you – one of the things about DiGi that is different that you have kind of families of products and including different transmission mediums, other vendors that I am aware of don’t – can’t make that claim. Would you say if there's one particular level of gateway that’s really penetrating more. I mean are we talking about a single point of data that’s being transmitted or you actually aggregating and collecting information for multiple sources and then batch file moving it forward?

Joe Dunsmore

So, when we talk about the gateway playing in smart energy, it’s useful to talk about the various types of gateways. So one area where we’re getting lot of traction with the home gateway, and where we’re seeing a lot of volume right now with our partnership with Comverge and with others is deploying this home gateway that is Ethernet, so it’s broadband out and its wireless in the home. It’s ZigBee, ZigBee smart energy in the home. And initial implementations that we have there in production are fundamentally connecting to the thermostat in order to enable connectivity back to for instant to Comverge Apollo platform to implement demand response and load curtailment. However with Comverge and with others, with other energy management system providers et cetera what we’ll be doing is connecting to other devices within the home in order to provide a much more sophisticated solution.

So, we are out there, we’re in demand response applications We're out there in energy management system pilots and working on connecting with other devices. And we expect to that to evolve fairly quickly in terms of our ability with our home gateway to speak to lots of devices as we see the presently ZigBee smart energy protocol standard being defined and more devices available to that standards and we’re going to be speaking to those devices and we’ll see more sophisticated solutions in the home.

There are other places where in smart energy where we provide gateways, for instance we have gateways that provide connectivity for residential communications, communicating from the home to a gateway that communicates back to a knock. Or we’re working on a gateway as I mentioned before, with Itron to provide wireless communications for distribution automation applications in the sub station. And even at the home alternative gateways that leverage cellular communications from the home from the smart meter et cetera are other forms of gateways. One that we’re seeing the most traction was right now is the demand response/EMS oriented home gateway.

Jay Meier – Feltl & Company

So, there isn’t really one particular product that is dominating your deliveries right now. I mean it sounds like you are delivering all different types of gateways that have all different types of aggregator functions, and – is that there, I mean, is there one particular product that’s really dominating your deliveries in to those smart energy market?

Joe Dunsmore

Well, your statement is true about our gateways, across if you look, across tank monitoring fleet and smart energy. Certainly, we’re seeing a wide variety of gateways being deployed in signification volume across these verticals. When you look at smart energy, the one is driving the most volume right now is that home gateway that I described.

Jay Meier – Feltl & Company

Okay. And lastly Kris I suppose is MobiApps the 400,000 in revenue contribution for MobiApps the only non-organic revenue in the quarter

Subramanian Krishnan

Yes.

Jay Meier – Feltl & Company

Okay, very good. Thanks a lot

Subramanian Krishnan

Thank you, Jay.

Operator

Your next question comes from a line of Anthony Newley with Private Investor. Please proceed

Anthony Newley

Joe you couple of time last year said that you had – your eye on a $500 million revenue in the fiscal 2013 and then action plan in your words to get there. And I want to know whether that is still the way you to see how it’s going to go?

Joe Dunsmore

That is still my goal. I still think its achievable. The way that we would achieve it is to drive organically up in to the $275 million, maybe a $300 million range. And then beyond that we need to. I believe we’ll need to identified acquisitions to help drive us to rest of the way. So that asked (inaudible) goal, the goal that I have in mind for that timeframe that I’ve talked about our $500 million, 60% of our revenue wireless like to see the services case drive to at lease 15% of the revenues. And I’d like to see international drive to much more significant piece to – close to 60% of revenue, so those are my goals.

Anthony Newley

And the acquisition prospects are out there that taken?

Joe Dunsmore

Yeah, I mean, we are always looking and analyzing and I think we got our tentacles out there pretty effectively from a business development perspective and so. We are always looking – we’re always looking at rational for finding acquisitions that are good in the strategic and cultural fit and that are going to drive the strategy.

Anthony Newley

Okay. I got it, thank you.

Joe Dunsmore

Thank you.

Operator

(Operator Instructions) You have no further questions at this time. I’d now like to turn the call over to Mr. Joe Dunsmore for closing remarks.

Joe Dunsmore

Thank you everyone for attending the call. As I said I’m very bullish about the momentum with the business and I look forward to talking to you in three months. Thanks you.

Subramanian Krishnan

Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Digi International Inc. F2Q10 (Qtr End 03/31/10) Earnings Call Transcript
This Transcript
All Transcripts