Good day, ladies and gentlemen. And welcome to the Third Quarter 2009 Digi International Incorporated Earnings Conference Call. My name is Melanie and I will be your coordinator today. At this time all participants are in listen-only mode. We will conduct a question and answer session at the end of this conference. (Operator Instructions). As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Mr. Subramanian Krishnan, Senior Vice President, Chief Financial Officer and Treasurer. Please proceed.

Good afternoon and thank you for joining us today. Before we start, I need to go over a few details. First, if you do not have a copy of our earnings release, you may access it through the Press Release section of the Digi 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 risks and uncertainties. A list of the factors that 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 2008 annual report and the Form 10-K already on file with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Finally, certain of the financial information disclosed on this call, 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 also be accessed through the SEC filing section of our investor relation website at www.digi.com. Now, I would like to introduce Mr. Joe Dunsmore, Chairman, President and CEO.

Thank you, Krish and welcome to the call everyone. This is the 26th consecutive quarter of profitability for Digi in an environment that remains very challenging. Our results were within the revenue and profitability guidance ranges that we provided at the beginning of the quarter and exceeded the street consensus on both counts. Revenue of 44.5 million was down 5.5% year-over-year and up 10.9% sequentially. Wireless product revenues continued their positive growth trend up 18% year-over-year. Wireless product revenues around 35% of our total revenue, up from the 28% of the third fiscal quarter of last year. Revenue of this quarter were bolstered by the large Fujitsu deal and the one-time Net +50 chip last time by sales. Next, I will comment on the current environment, the opportunity that it presents Digi and the additional actions that were taken to capitalize on the opportunity. The economic environment and markets of Digi sales continue to behave in a recessionary mode. One positive sign I can point to that we have seen are daily bookings rate improved in June over the previous five months. We believe that this is indicative of increase in inventory replenishment needs of our customers and this trend has continued into early July. We expect this trend to continue and increase in the current quarter. Another trend that we continue to see is the continuing shake up in consolidation across virtually all industry sectors including the M2M space. We, at Digi, choose to view this time period as a tremendous opportunity to improve our market position through talent asset and company acquisitions leveraging our strong financial position during this challenging time. As I said in previous calls, there will be clear winners and losers by market sectors, you move through and eventually emerge from this market downturn. Digi…

Thank you, Joe. Revenue for the third fiscal quarter of 2009 was 44.5 million, a decrease of 2.5 million or 5.5% over the third fiscal quarter a year ago. Revenue from Sarian and Spectrum acquired in April and July of 2008 respectively were 6.1 million and 1 million. Sarian revenue for the third quarter includes 3.6 million from a large deal with Fujitsu. As we have discussed in previous calls, this completes the entire contract with Fujitsu. Digi acquired substantially all of the assets of MobiApps Holdings on June 8, 2009. Revenue from MobiApps brand were 47,000 for the third fiscal quarter of 2009 from the date of the acquisition. Wireless revenue was 15.6 million or 35.1% of total revenue in the third fiscal quarter of 2009 compared to 14 million or 34.9% of total revenue in the second fiscal quarter of 2009, and compared to 13.2 million or 27.9% of revenue in the third fiscal quarter of 2008. Wireless revenue grew by 1.6 million or 11.6% sequentially comparing the third fiscal quarter of 2009 to the second quarter. Wireless revenue grew by 2.4 million or 18.6% in the third fiscal quarter of 2009 compared to a year-ago comparable quarter. Revenue in EMEA, which is Europe, Middle East and Africa, was 17.1 million in the third fiscal quarter 2009 compared to 14.5 million a comparable quarter a year ago, an increase of 2.6 million or 17.9%. Revenue in EMEA includes Sarian-branded revenue of 6.1 million and 2.4 million for the third fiscal quarter of 2009 and 2008 respectively. Revenue in Latin America was 800,000 in the third fiscal quarter of 2009 compared to 1.3 million in a comparable quarter last year, a decrease of 500,000 or 41%. Revenue in North America was 22.6 million in the third fiscal quarter of…

Yes, sir. (Operator Instructions). And our first question comes from the line of Jay Meier with Feltl and Company. Go ahead.

Thanks. Couple of... though I have two questions for you, Joe. Curious to hear your views on how did you participate in the Smart Grid build out ; I was starting to hear some reports from some of the big integrators about bidding and things like that. I know that you've seen some relationships between you and other companies in this space. What do you see out there, and how do you expect Smart Grid to impact your business over the next year?

Well, let's start with what's happening on the stimulus program, Jay. What we are saying is that we're finally seeing U.S. Department of Energy formalizing a program they put out on June 25. And so what we are going to see is a lot of big integrators submitting applications. The first awards we would expect... the application period finishes in early August and you would expect to see awards coming from the Department of Energy 90 days later. So you had a question three months ago on what was happening. That's what we are seeing happened. And we would expect to see funding going to the utilities on programs and we would expect already so to speak programs in this energy space would certainly include some of the demand response programs that we are involved in. And so that's progressing well for us. We've got... you know about the relationship with Comverge and the production program that we have in place with TXU. They are certainly working with other utilities, have programs in place, pilots going et cetera that we're participating with Comverge on. In addition to that, we have within demand responsible working other opportunities and have other pilots in place that are not announced. Beyond that, we have the Itron partnership where we see kind of a multi-dimensional opportunity to participate with Itron in their Smart Grid program working with their OpenWay AMI networking solution. And we're making great progress with that on the energy device side. We're working with some of the major other meter players to embed our wireless technology in the meters. And in addition to that, beyond the programs that we have going active today, we certainly have strong product developments focus and we have gateway product that's out on the market. We've got next generation gateway products in process. We've got the Smart Energy profile being integrated into our gateways and our end point products and we feel like we've got a lot of momentum. This is going to be an opportunity that's going to where we have several pilots in place, now we'll start to see those pilots turning to production over the next year. And we'll certainly see more pilot programs starting in the next few months or through this year. Hence I would expect you know the revenue ramp has already began. And I would expect that to continue to ramp up over time for us. So we are bullish about the opportunity and then in addition to the generic opportunity looks like government programs going to start to kick in for the utilities, especially starting calendar 2010.

Okay. And as you look out on this Smart Grid development, other CEOs of major companies, I mean CEO from CISCO Systems describe Smart Gird as potentially 1000 times bigger than the Internet build out. And that's a little bit hard to comprehend really. So maybe you can give us a little bit of color around how big you think Smart Grid could be for Digi. Could it be a 20% of your business kind of a vertical or even more?

Great question. I'd say in terms of the overall market opportunity, I'm not going to speak in terms of specific platitudes on the overall market. Other than to say, I do you think that energy management, energy technology Smart Grid build out does have the opportunities to be kind of the next major revolution driving a lot of spending in the U.S. kind of the high growth predecessor to the IT revolutions. So moving from IT becoming a little bit more mature still growing, and then ET becoming some of the higher growth opportunity. For Digi, it's hard to say with any precision what that's going to look like. But I would expect that we have goal of getting to 500 million by 2013, and with reasonable execution against that goal, the energy sector piece of it, it could be anywhere from 10 to 20% of that. So, we'd like to see that in the 50 to 100 million range after a five year time period.

Okay. That's helpful. And tell us a little about how iDigi fits in all on this, and how and maybe Kris could talk about this a little bit. How do you expect revenues from iDigi to impact your business, not necessarily how big are the revenues going to be, but what kind of margins are you looking at? How would that those flows start to happen and are you seeing visibility of any of that yet?

Well, iDigi is really important because it becomes an enabler for fast deployment of these networks. And so when we work with a partner like Comverge, one of the big selling points was it was very, very easy for them to basically take their demand, respond to application. And write that application using web services capability into our iDigi platforms. So, connect to the iDigi platform and leverage that platform and all the capabilities of that platform to simply connect to all the end points in the residential homes, for instance, in the TXU network. And so that platform pretty much makes that whole process much easier, faster deployment, lower cost deployment, ease of deployment, a highly scalable deployment because the platform is a very scalable platform and it allows them to deal with one partner that's providing this that's easy to connect to that brings all the data back from all these thousands of devices and so they get to deal with one partner, Digi, that does all of that. So that model, that iDigi platform model, is leverageable with other Smart Energy partners who have an application and want to connect to devices. It's leverageable in other vertical markets where you have the same dynamic where people or companies have an application and they need to leverage wireless connectivity to enhance their offering; whether it'd be fleet management applications or any of the many verticals that we're looking at right now. Some of the top verticals as energy management, medical fleet management are verticals that are fairing reasonably well through this downturn. So, and one of things that we've announced recently, our iDigi Tech offering builds across a few vertical markets leveraging remote tank monitoring and control. So, fundamentals value proposition though is the iDigi platform and all of our wireless connectivity capability from gateways to end point devices allow you to deal with one solution provider, Digi, that make us fast, low cost, easy, scalable and high quality.

Okay. So let's speak about the Texas utilities deals since you guys are since that public and you can talk hopefully little bit more freely about it. Is that an iDigi application then? And if so, how do you expect to get paid; on a per household basis or on a per month basis? Does the revenue recur? How does that work?

Yeah that is an iDigi platform deal. We haven't released the information on... specific information on deals that would compromise the other deals that we're looking at in general, I am not going to speak to this one, but in general the way this is going to work is that we'll take recurring revenue on a device per month basis. And in verticals that are highly price sensitive and where there's may be a little bit less value being provided, that the price might be a little bit more aggressive in verticals where maybe that are not as price sensitive and there is more value being added and might be a little bit more. But fundamentally, our base strategy is to charge on a device... recurring revenue device per month with this program. Alternatively, there maybe other models that will work with customers in order to understanding their business model, in order to best meet the return on the investment needs that we have and our customers have.

Okay. Well, that sounds great. That's all the questions I had. Thanks.

Thanks Jay.

Thanks Jay.

(Operator Instructions). We have a question on the line, please standby. Our next question comes from the line of Greg Lever (ph) with Investa Capital. Go ahead.

Hi, just a follow-up on Jay's question. So Joe, are you selling the devices or you just putting them out and then collecting it on monthly?

We sell by ourselves. Our basic revenue model hasn't changed. We are selling the end point device in the... example of TXU, we're providing our Xbee module as the wireless connectivity within the thermostat and we're selling the gateway that provides connectivity to the thermostat and then connectivity back from the homes to the iDigi platform and then back to the application itself. So we're selling the devices and then our basic model for the iDigi platform is addition to selling the device is to charge our recurring price on a per model basis, per device.

Okay. And just in terms of some of the other trials to ramp up here as well as this. The Smart Grid in aggregate and can you give us a sense that kind of how big that is for you?

Well, I yeah think I has spoke to that with Jay and listen...

No, revenue today.

Revenue today, no, I don't think we have. Already we have talked about that. I'm not prepared to talk about that right now. Other than to say that it's been ramping that we have in addition to TXU we have additional customers who are coupled, a few additional customers that are actually in production. And we have a couple of new deployment and then we have several in pilot.

Okay. And just in terms of the outlook, could you give us a little color about, I assume part of the sequential revenue decline is due to the Fujitsu thing going away?

Yeah. There are two things I mentioned. One was with one time Fujitsu revenue now ending. And that was about in the neighborhood of approximately 3.5 million or so this quarter. And our last time buy offer to customers on the Net +50 chip that were end of license. And, so the combinations of those two one-time kinds of things was a benefit this quarter. And, so if you look at... if you take that out, if you look at this quarter and last quarter take up Fujitsu were in last two quarters and Net +50. The base center has the numbers in front. But the base line, if you take those out, was maybe 37 million. So, looking forward to next quarter what we're seeing is, as I mentioned in my comments what we're seeing is June we saw increased daily bookings. We're seeing that same trend in July. And so with the improved bookings right that we're starting to see on top of that base line that's how we come to... and the expectations that that we'll continue. That's how we come to the range.

That's helpful. So the last time chip buyers were like in the $4 million neighborhood.

Yeah, in that neighborhood I guess I don't have that number. But yeah just like I said the total between Fujitsu and the chip brings us for the last two quarters each quarter roughly 37 million plus or minus of 200,000.

Did that how much of an impact on the gross margins in terms of the over the last time buys?

Actually that was down slightly. And Fujitsu certainly with the foreign exchange impact averaged just down because when we did the deal it was pretty decent margin deal on the 50% range and with foreign exchange impacts that came down substantially in the verdict. So, those were both situations that got from the revenue perspective were very positive and very positive from a general business perspective. They did average down our gross margin percentages slightly.

Got you. And lastly, Kris, on the tax rate for Q4 here, where is that coming that out or it is coming back until the call?

The annual rate will be effectively for the year will be in the 10 to 20% range, so we should that really quick for the quarter approximately about mid 30's.

Mid 30's. Okay, thank you so much.

Okay.

Our next question comes from the line of Henry Schein (ph) with Wedbush Morgan. Go ahead.

Hey Joe, you comment just a little bit more on the competitive environment. You've mentioned for a couple of quarters in a row where you talked about some of the other companies sort of in the sector having some difficulties. Can you explain that just a little bit more about whether... is this something Digi is doing, is there something in the markets doing, and what do you think the impact... net impact do you guys have for the next few quarters?

During this time, it is a couple of different data points. If you look at the broader tech environment, what we're seeing is, did you look at the bell weathers, Intel, GI those kinds of people. Generally speaking, the year-over-year revenues, even the IBM have a range from 12% to over 30% down year-over-year. The average I'd say is somewhere probably around 20 down year-over-year. Then if you look within some of the public companies touching the M2M space, what we're seeing is more significant impact then that would be even. We are saying it was way down last quarter. They haven't reported yet this quarter. You are saying... if you look across the public companies, numbers in the 20 to 30% down year-over-year. What we were saying is... what we've seen is within the core kind of product lines, we are down in the neighborhood year-over-year of about 17, 18, 20% in that kind of ballpark. We get the balance set of some pretty decent roads the last couple of quarters and continued growth this quarter year-over-year from the wireless products. And so they have held up pretty strong through this downturn.

But in terms of the companies that you guys compete with directly, is that some sort of commentary where you think you guys going to be two or three quarters from now, or is that just kind of a historical comment?

Well, first of this is historical. And then I made the comment perspectively because I feel pretty strongly that with the pivot that we're making from have a point product approach to the market to the solutions approach to the market with our lowest drop in networking solution at our end-point products, our gateway products and now at the iDigi platform that we're developing a much more differentiated position than our competitors, nobody is providing this kind of solution that we're providing. And, so I believe prospectively that we're making... we're investing more and making more progress in providing differentiated solutions sets than our competitors.

I understand that. Thank you very much.

Thank you.

Our next question is a follow-up from from Jay Meier. Go ahead.

Thanks. The iDIGI revenue stream is obviously distinct from your other revenue streams. I assume it has a higher margin and can you just tell us what you expect that gross margin come in at growth and do you anticipate breaking out that revenue from the mix of other revenues?

Yeah, it will be quite a bit higher than the product revenues. I'd say, probably in the 70, 80% range. I will say, that's where we would expect it to be over the time horizon. And as it becomes material, we'll provide that information. But there are margin and we expect to be able to maintain that margin over the five year time horizon.

Okay. And we talked about how much of your revenue, hypothetically no one is going to hold you to this, Joe, so speak freely. But hypothetically of the $500 million target in 2013 with ballparking 50 to 100 million in revenue from Smart Grid Energy Monitoring type of applications, how much of that would you imagine would be iDigi recurring revenue?

Okay.

Ballpark, should I be thinking half of it. Should we thinking a fraction of it?

I wish I knew the answer to that question.

How do you imagine it?

Ballpark I would love to, may I wish it was all of that. But it's not going to be all of it. It's going to be the some percentage in the probably...Yeah, probably 10 to 20%, but could be a little bit more. We're pretty early and the experience that we have in the marketplace on this. We have a number of early customers, but we're still early. So the gross margin number that I gave is what we think, but we may not be right, but that's what we think. And 10%, 20% ballpark is what I think but I may not be right. What I am giving you there is much more project... probably, because you're asking the questions, I'm trying to give you an answers, it's much more conjecture than the very firm goal and plans that we have in placed to achieve 500 million in revenue and 60% wireless, 60% international and 10% services. But that gives you a sense.

A pretty good sense and I appreciate it. Thanks.

Okay.

And ladies and gentlemen, that does conclude the time we have available for questions today. I'd like to turn the call back over to Mr. Dunsmore for closing remarks. Please proceed.

Thank you everybody for attending the call. And I look forward to speaking with you again you in three months.

Thank you.

Ladies and gentlemen, thank you for your participations in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.