Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Digi International Inc. Earnings Conference Call. My name is Charis, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would now like to hand the call over to your host for today, Mr. Steve Snyder, Chief Financial Officer. Please proceed, sir.

Good afternoon, and thank you for joining us today. Before we start, I need to go over a few details. First, if you do not have a copy of our earnings release, you may access it through the Financial Releases section of our Investor Relations website at www.digi.com. Second, I 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 expectations about future events and operating plans and performance and speak only as of today's date. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under the heading Forward-looking Statements in our earnings release today and under the heading Risk Factors in our 2011 annual report on Form 10-K, as well as our quarterly report on Form 10-Q for the quarter ended March 31, 2012, each of which is on file with the SEC. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. Finally, certain other 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 our Form 8-K that can be accessed through the SEC Filings sections of our Investor Relations website at www.digi.com. Now I would like to introduce Mr. Joe Dunsmore, Chairman, President and CEO.

Thank you, Steve, and welcome to the call, everyone. This was the 38th consecutive quarter of profitability for Digi. Earnings per share of $0.09, which included a $0.04 tax benefit recognized in the third quarter, met the Street consensus of $0.05 a share. Our revenue of $47.6 million came up slightly short of the Street revenue consensus of $48.2 million. Wireless product revenue for fiscal Q3 was $20.7 million and was 43.5% of our total revenue for the quarter. I said in the last call that I would also provide quarterly visibility to revenue from our growth portfolio of products and mature portfolio products. The breakdown in this quarter was 52.3% of revenue from the growth portfolio of products and 47.7% from the mature product portfolio. Gross margins of 53.1% continue to be strong. We are realizing benefits from both reduced amortization expense and previously announced cost reduction efforts. The revenue delta versus consensus was fundamentally driven by 2 things. One, 2 customers expected to make significant purchases coming in at less than their forecasted buy. And the second reason, the EMEA region experienced softer than expected demand. Steve will provide a much more detailed financial review in his comments. Next I'll discuss the revenue troughs that we've experienced for the last couple of quarters. Last quarter, I explained that the most significant driver was large deals with new customers that did not ramp at the rate expected. This was especially true in our Energy vertical where we have high expectations but has been very slow to develop. As a result, I talked about some retooling that we are doing to accelerate growth of our growth portfolio. First, we are aggressively funding expansion of our Solutions sales capabilities. To fund this expansion, we reduced investment in R&D and business development…

Thank you, Joe. Revenue for the third fiscal quarter of 2012 was $47.6 million compared to $54.3 million for the third fiscal quarter of 2011, a decrease of $6.7 million or 12.2%. Other highlights for the third fiscal quarter of 2012 all in comparison to the third fiscal quarter of 2011 are as follows: revenue in North America was $27.7 million compared to $32.3 million a year ago, a decrease of $4.6 million or 14.2%; revenue in EMEA, which is Europe, Middle East and Africa, was $12 million compared to $13 million a year ago, a decrease of $1 million or 8.1%; revenue in the Asian countries were $6.4 million compared to $6.9 million a year ago, a decrease of $500,000 or 6.8%; revenue in Latin America was $1.5 million compared to $2.1 million a year ago, a decrease of $600,000 or 26%. Current quarter revenue was negatively impacted by approximately $500,000 compared to the third fiscal quarter of 2011 as a result of currency fluctuations. Wireless revenue was $20.7 million or 43.5% of total revenue in the third fiscal quarter of 2012 compared to $22.6 million or 41.6% of total revenue a year ago. Revenue from wired products was $26.9 million or 56.5% of net sales in the third fiscal quarter of 2012 compared to $31.7 million or 58.4% of net sales in the third fiscal quarter of 2011. As announced in the prior quarter, Digi will begin reporting the revenue split between its core growth portfolio and its mature point products. The core growth portfolio includes all wireless products, as well as the ARM-based embedded module product line, which leverages the iDigi platform with both wireline and wireless connectivity. Revenue from the core growth portfolio in the third fiscal quarter of 2012 was $24.9 million or 52.3% of…

[Operator Instructions] And you have a question from the line of Tavis McCourt of Raymond James.

Joe, I wonder if you could talk a little bit about the hiring you're doing in Solutions sales, how unique is that? And kind of how many direct sales folks do you have now and how many we have kind of following the completion of this program?

Yes, Travis. I talked about that last quarter that we were doubling that size of that capability. We've hired a number of Solutions salespeople in addition to the Solution salespeople that we've hired in the last couple of months. We're also augmenting that group with inside sales capability, lead generation capability and a strong group of technology architects. So it's really kind of a complete function, and we expect to finish up the hiring with a couple more headcount over the next 3 months. And are very optimistic that, that group, I mean, these Solution salespeople are hunters. They are folks that understand business outcomes and business process, change, and are targeting the C-Suites in our customer base. And so we're really optimistic about the capability of this group, which augments the existing base of business development people that we have to really drive sales of our end-to-end Solution capability.

And are they focused largely on specific vertical markets, and is it all in customer or do some of it end up being kind of business development type of work?

We've got a business development team that -- where we've domain experts that are -- people that has that same kind of Solutions sales skillset but also are domain experts. And we have people focused on each one of the verticals doing that. This Solutions sales team is going to be kind of independent of that vertical focus. And focusing on various territories and crossing verticals going after, again, the C suite, with -- going after customers that have this end-to-end wireless requirements. So think of them is being kind of independent of that vertical business development effort.

I got you. And since you're willing to kind of talk a little bit about your expectations for next year, obviously, with all the caveats around the economy, how are you planning on kind of managing the cost structure of the business relative to where it is today?

Yes, that's a good, good question. The expectation is that we will stay pretty close to the current run rate. We may bump that up a little bit as we drive this Solutions sales capability but -- so maybe a little bit higher run rate, slightly higher run rate sales in R&D but not significant in order to drive that top line growth.

Great. And Steve, if you could repeat the geographic revenues again, that would be helpful. I only caught the Latin America.

Sure. So in North America, it was $27.7 million in the current quarter. EMEA was $12 million. Asia was $6.4 million and Latin America was $1.5 million.

And your next question comes from the line of Matthew Kempler with Sidoti & Company.

So I wanted to touch on the wireless side. I think you said that there were 2 customers that you were expecting large orders from that came in below expectations. Are these the same to the previously delayed orders or is this something different?

I think we're dealing with a major customer that we have in the Energy space, Matt, and a major customer that we have in the Fleet space. Two of our largest customers on those arenas. They continue to take healthy run rate but significantly less than what they had forecasted at the beginning of the quarter.

Okay. And then if you can talk about the wireless side of your business. How representative do you think the growth or challenge that you're seeing there are representative of the M2M industry in general at this point in time? And then maybe you could specifically talk about any impacts you think are affecting your results from either sales execution, the end markets that were or any increased competition you're facing?

All right. So that's a big question. I think -- generally speaking, I think that one of the reasons why we're seeing the trough, and it's a temporary trough, probably the most significant reason is that we made a -- of the wireless bets that we made, and we've talked about this, Smart Energy, Medical, Fleet and Tank, one or more significant bets was relative to Smart Energy. Not just from an R&D investment standpoint, but also from a business development standpoint. And while we also made significant bets in other verticals, the expectation that we have for the return on that investment in the short term for the revenue ramp was relatively high. And as I said last quarter, we had a number of new customers sales opportunities that we expected to be ramping this year that aren't ramping. Some of those, we don't expect to ramp, and then others we just expect to be delayed. So when you think about the wireless piece, that's the most significant impact that we've seen relative to Smart Energy. And so when you relate that to your question in the broader M2M space, I think that what you would see, Matt, is others who have placed that kind of bet or a more significant bet in M2M, Smart Energy, probably seeing the same kind of impact. Folks that have placed bets exclusively in other areas, maybe not seeing that same kind of impact. So one of the things that makes us a little bit unique is -- in the M2M space is that we're taking that short-term impact and, of course, we're aggressively doing something about it. We have reduced the investments. Still investing, not as much. And then driving that investment the broader way, one of the ways with the Solutions sales team. So does that answer both the M2M side of your question and the wireless -- the explanation of what's happening with wireless?

Yes, it does. So -- but just to be clear, so the other segments of your wireless business, absent blips here and there, are still growing to your expectations?

Yes, the -- so let me give you some specific qualitative comments on each one. Medical is growing very well. And in fact, I'd say that Medical is overachieving our expectations. And I expect it to continue to overachieve both in the short term and in 2013. Smart Energy, like I said, underachieving. But the other thing I would say is still expecting some modest growth into this year and then going into 2013. It's just not going to -- we're expecting aggressive ramp, and now it's a very modest ramp, but still growing. The Tank vertical, we're seeing modest ramp there and not as aggressive as what we had expected. And I explained earlier in the year that we had a major customer that went into a pause and is now starting to come back. And so we expect with that major customer and others to see that ramp more aggressively into 2013. In Fleet, the expectation there is we saw a major impact from a major customer's run rate declining, and we expect to hit the low point on that this quarter, next quarter, within the next 2 to 3 quarters. And then the combination of other customers ramping up some interesting new products that we have for that space, we expect the fleet to begin to ramp nicely in second, third, fourth quarter of 2013.

Okay, that was very helpful. I appreciate that. And then regarding the relationships we have on the iDigi side, with Freescale and Intel, have those products started shipping, and if not, what's the expectation for them? And the what's your view of kind of the promotional activity ramp-up and the commitment you're seeing from your partners today in launching those products and selling those products?

Yes, so my expectation is that we'll see launch in marketing activity with Freescale and Intel happening over the next 3 to 4 months. And it varies -- the activity will vary between what Freescale is doing and what Intel and Wind River is doing. But the launch marketing ramp activity happening over the next 3 to 4 months. Some of that activity early in that time period, some later in that time period.

And your next question comes from the line of Ty Lilja with Feltl and Company.

Joe, you referenced mature products. I was just wondering what's kind of a logical long-term rate of decline to think about for that category?

Yes, a long-term rate of decline probably varying around 10% per year, plus or minus 5% is a logical way to think of that.

Okay. And then I was wondering -- looking at what you said about growth in 2013, I was wondering if you could kind of walk us through how you're getting there? You mentioned Smart Energy picking up a bit, Tank picking up a bit. I was kind of wondering how much of that hinges on those verticals, how much hinges on the marketing solutions, investments you're making right now?

Yes. So we'll be going into 2013 with about 52% or so, 52% to 53% of our revenue coming from the growth portfolio, about 47%, 48% coming from the mature side. And we believe that on the growth portfolio side, that we'll grow probably somewhere in the neighborhood of 15% to 20%. And that's going to be driven by a number of things. One, the RF product line, the product line of ZigBee and proprietary RF, the XBee brand plus the TransPort product line, which is our product line of wireless routers. That just continues -- expectation is that will just continue to grow on the current trend line. The iDigi and iDigi Application Development Services and then additional professional services, we've now been in the market active for a while. We've got customers on -- many customers now on the platform. We've got a pipeline building, and now we're bolstering that effort with Solutions sales. And so we're expecting that to begin ramping next year, and so that's part of the equation. And then the expectation is that we'll see our Spectrum and Cellular Gateway resuming growth. So those are 2 areas that -- where we're seeing growth slow. And then on the Cellular Gateway side, we've seen a little bit of a decline. And as a result of the focus on Solutions sales, again, creating pull for the Cellular Gateways. And the investment focus changed where we were -- a lot of or our investments going after the Cellular Gateway opportunity, that Cellular Gateway was targeted for Smart Energy. We were doing a lot of things with the Smart Energy protocol, created a lot of unique products, did a lot of investment there. So we slowed down that investment, and we're now investing in a number of other areas in Fleet, in a number of other areas where we expect that Cellular Gateway revenue to pick back up. So those are the main drivers that we expect -- and again, bolstered by Solutions sales to drive the 15% to 20% growth and then offset by what we expect to see with the mature in the 10% plus or minus kind of rate of decline for 2013.

That's very helpful. This question is probably premature, but I think you gave a statistic in your K about your percentage of revenue from non-hardware sales. Just kind of piggybacking on what you said just now what iDigi and Professional Services. Do you have any -- I think it was like 4.5% last year. Do you have a sense of where that could be, what that could get to in 2013?

Yes, we do. So the bundle that we expect to be non-hardware includes Spectrum, wireless design services or includes iDigi recurring revenue, includes iDigi Application Development Services and Professional Services that include project management, upfront consultative services and network architecture services and those kinds of things. And so the expectation next year is that we'll see that bundle, that total bundle somewhere out in the probably 7%-ish plus range, maybe 8%, somewhere in that kind of range.

And at this time, there are no further questions in queue. And I would now like to hand the call back over to Mr. Joseph Dunsmore for closing remarks.

I'd like to thank everybody for attending the call. And I just want to reinforce that we -- this wireless growth portfolio, we think, is very well positioned in the market. We're just as excited about the opportunities as we have ever been, and I'm looking forward to talking to you in 3 months. Thank you.

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.