Digi International Inc. (DGII) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Q3 2013 Digi International Inc. Earnings Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'll turn the call over to 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 2012 annual report on Form 10-K, as well as our quarterly report on Form 10-Q for the quarter ended March 31, 2013, 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 of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures, are included in the earnings release. The earnings release is also an exhibit to our Form 8-K that can be accessed through the SEC Filings section 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 42nd consecutive quarter of profitability for Digi. Revenue of $48.8 million and earnings per share of $0.06 were in the middle of our guidance range. Our EPS, net The Street consensus estimate. We saw top line revenue growth of $1.2 million or 2.5% year-over-year. The revenue breakdown this quarter for growth portfolio of products and services, including Etherios was 56.4% and the mature product portfolio was 43.6%. Gross margin of 50.6% was down sequentially, due primarily to product mix. We expect gross margin to bounce back between 51% and 52% in fiscal fourth quarter. Now for a bit more detail. I was happy to see our second consecutive quarter of sequential top line growth. Growth products grew 10.6% year-over-year, inclusive of Etherios. The mature products declined 6.4% year-over-year, which is right in the range we expected. Etherios continued to perform well in their second full quarter as part of Digi, outperforming our revenue expectations. The integration and performance of Etherios to date has gone very well and exceeded expectations. In fact, Digi is extending its Etherios brand to encompass not only the Etherios consulting services, but also our Wireless Design Services group, the Device Cloud and our custom application development and embedded platforms. This branding highlights our unique ability to deploy end-to-end M2M solutions. Collectively, these services represent the highest growth parts of our business, and our objective is to accelerate this growth curve by consolidating our efforts to market and sell business process improvement into the C-suite under one brand. Next, I'm going to discuss some key highlights and strategic progress made this quarter. First, the Social Machine. As mentioned in the last conference call, we introduced The Social Machine at Cloudforce Chicago in April. The Social Machine is the industry's first cloud-based application for connecting loudly deployed products in the core business processes via the Salesforce Platform. By providing real-time machine performance data to the Service Cloud, The Social Machine can dramatically evolve customer support operations from typical reactive support to support that is proactive and preventative. The Social Machine has already established a significant sales pipeline. Second, we had a key wireless product announcement. Continuing our leadership in wireless innovation, we launched the Digi TransPort WR44 RR, an enterprise-class cellular router designed specifically for rugged on-board rail environments. The router is ideal for locomotive communications and monitoring, establishing passenger Internet access and positive train control, a system for monitoring and controlling train movement to increase railway safety. Third, the Google I/O conference. Digi and Etherios deployed a 500-node sensor network for the Data Sensing Lab at Google's developer conference, Google I/O. This demonstrated how realtime M2M data can provide insight into customer behaviors and preferences. The sensor network's 4,000 data streams running over Device Cloud provided continuous updates on temperature, pressure, light, air quality, motion and noise levels in San Francisco's Moscone Center during the conference. Device Cloud collected more than 500,000 data points per hour during the Google I/O for the project. The data is now available to 5,500 Google I/O developers along with everyone interested in big data and the Internet of Things. This is an example of how Digi is partnering with major industry influencers to educate customers on the Internet of Things. I'm pleased to report that Dr. Satbir Khanuja and Girish Rishi have become active members of our Board of Directors. Satbir is President and CEO of DataSphere Technologies, one of the fastest-growing online marketing companies in the U.S. and has extensive past experience with Amazon.com and other online service companies. We are confident, his demonstrated acumen and marketing strategy and experience with cloud-based business strategies will be valuable as we grow our own cloud-based offering. Girish is presently Senior VP of Enterprise Solutions for Motorola Solutions. He has extensive experience building category-leading solutions, focused global businesses, which we believe will be valuable, given our focus on end-to-end M2M solutions. Last quarter, I announced that Kevin Riley was hired as our new Senior VP of Global Sales and was going to focus on bolstering our solution sales team and generally on improving our sales process. I'm happy to report that Kevin has made very good progress. He has hired a new leader for the solution sales team. They are building a strong pipeline for The Social Machine and other end-to-end solutions opportunities. Additionally, Kevin has gotten off to a good start in understanding our current sales team and processes and has initiatives to drive our growing sales pipeline, as well as sales cycle and close rate improvements. I expect these improvements to have a positive impact on fiscal 2014. Next, I'd like to give you some more input on the revenue trajectory that I'm expecting for the balance of 2013. We're expecting next quarter to be up for the third consecutive quarter. Our most likely revenue for fourth quarter is approximately $51 million, which would represent 8% top line growth year-over-year. Our guidance range is $50 million to $52 million, which represents a slight downward adjustment to guidance from the $50 million to $54 million we provided last quarter. We expect the growth portfolio of products to continue robust growth in fourth quarter of the year, fueled by momentum that we're creating with Etherios solutions and the return to growth of the cellular product lines. We believe these trends, combined with The Social Machine initiative will extend the growth momentum into fiscal 2014. Steve will provide specific guidance in his prepared remarks. Finally, I'm encouraged by the sequential momentum that we see for the business. I'm excited by the prospective customer interest and enthusiasm around The Social Machine. I remain very bullish about the overall positioning of the company. The Etherios solutions brand will reinforce and enhance the strong growth momentum for that part of the business. The tactical initiatives that we have underway and our wireless hardware growth products are expected to drive growth going forward, and the mature products continue to provide a stable platform from which to build. Thematically, we're driving sales process improvements across all of these product areas. So in summary, first, we achieved our 42nd consecutive quarter of profitability. Second, the Etherios solution brand is expected to accelerate growth of what is already a high-growth business, and The Social Machine is on track to expectations. Third, we are focused on sales process improvement and the addition of Kevin Riley is accelerating that progress. I'll now turn it back to Steve for his prepared remarks.

Thank you, Joe. Revenue for the third fiscal quarter of 2013 was $48.8 million, an increase of $1.2 million or 2.5% from the third fiscal quarter a year ago. Excluding Etherios consulting services of $3.4 million, wireless revenue was $20.2 million or 44.6% of total revenue in the third fiscal quarter of 2013 compared to $20.7 million or 43.5% of total revenue in the third quarter a year ago. Revenue from growth products and services in the third fiscal quarter of 2013, including $3.4 million of revenue from Etherios consulting services, was $27.5 million or 56.4% of net sales compared to $24.9 million or 52.3% of net sales in the third quarter a year ago, an increase of $2.6 million or 10.6%. Digi's growth products portfolio includes all wireless products, as well as the ARM-based embedded module product line, which leverages the Device Cloud by Etherios' platform for both wired and wireless connectivity. The growth portfolio also includes the services components of the business, including our Wireless Design Services, application consulting services, Etherios CRM consulting services and the Device Cloud by Etherios' platform. Revenue from mature products was $21.3 million or 43.6% of net sales in the third fiscal quarter of 2013, compared to $22.7 million or 47.7% of net sales in the year ago comparable quarter, an increase of $1.4 million -- excuse me, a decrease of $1.4 million or 6.4%. Revenue in North America was $30.4 million in the third fiscal quarter compared to $27.7 million in the third fiscal quarter a year ago, an increase of $2.7 million or 9.9%. International revenue was $18.4 million or 37.7% of total revenue in the third fiscal quarter compared to $19.9 million or 41.9% of total revenue in the year ago comparable quarter, a decrease of $1.5 million. Revenue in North America in third fiscal quarter increased sequentially by $1.8 million or 6.4%, primarily driven by increased revenue from Etherios. International revenue decreased sequentially by $1.2 million or 6.1%, impacting all regions. Gross profit was $24.7 million in the third fiscal quarter of 2013 compared to $25.3 million in the same quarter of the prior year, a decrease of $600,000 or 2.3%. The gross margin was 50.6% in the third fiscal quarter of 2013 compared to 53.1% in the third quarter a year ago. The gross margin was lower in the current quarter than in the same period a year ago, primarily due to changes in product mix. Amortization expense included in the cost of goods sold was $300,000 in the third fiscal quarter of 2013 compared to $400,000 in the same quarter a year ago. Sequentially, margins were down by 1.2%. The primary driver behind the decline was the mix of products sold within the cellular product line. We expect that gross margins will be in the range of 51% to 52% for the remainder of fiscal 2013. Total operating expenses in the third fiscal quarter were $22.8 million or 46.7% of revenue, compared to $23.2 million or 48.7% of revenue in the third quarter a year ago. Operating expenses for the third fiscal quarter included incremental operating expenses for Etherios, partially offset by cost containment measures that were put in place to achieve targeted expense levels. A restructuring charge of $1 million is included in total operating expenses in the third quarter a year ago, relating to changes that were implemented to focus more aggressively on Digi's shift to M2M solutions. Amortization expense included an operating expenses of $700,000 in the third fiscal quarter compared to $500,000 in the same quarter a year ago. We expect that total operating expenses will be approximately 44% to 47% of revenue for the fourth fiscal quarter 2013. Total operating expenses decreased by $1.7 million sequentially, largely due to the charge of $1.5 million recorded in the prior fiscal quarter for the settlement of a patent infringement lawsuit. Net income was $1.5 million or $0.06 per diluted share in the third fiscal quarter compared to $2.3 million or $0.09 per diluted share in the comparable quarter of the prior year. Etherios contributed $0.01 to earnings per diluted share for the third fiscal quarter. Net income in the third fiscal quarter also included a discrete tax benefit of $100,000, resulting from the disclosure of various -- from the closure of various jurisdiction tax matters. Digi recorded tax expense of $400,000 in the third fiscal quarter compared to a tax benefit of $300,000 in the third quarter of the prior year. The tax benefit from the third quarter of 2012 included a discrete tax benefit of $1.1 million or $0.04 per diluted share, pertaining to additional research and development tax credit identified for fiscal years 2009 to 2011. We expect our effective tax rate for the full fiscal year 2013, including discrete tax benefits, to be in the range of 25% to 28%. Diluted weighted average shares outstanding at the end of the quarter were 26,114,303 compared to the previous quarter of 26,476,237, a decrease of 361,934 shares. Digi repurchased 416,258 shares of its common stock during the third quarter at an average price per share of $9.16. As of June 30, Digi has repurchased 1,123,912 shares at an average price of $9.41. Earnings before interest, taxes, depreciation and amortization in the third quarter were $3.8 million or 7.8% of revenue compared to $3.9 million or 8.1% of revenue in the third quarter a year ago, and compared to $2.8 million or 5.9% of revenue sequentially. Revenue from growth products -- for the 9 months -- first 9 months of fiscal 2013, Digi reported revenue of $144 million compared to $143.3 million for the first 9 months of fiscal 2012, an increase of $700,000 or 0.5%. Revenue from growth products and services increased by $5.5 million or 7.3% of revenue in the first 9 months of fiscal '13 compared to the same period in the prior year. Etherios consulting revenue from the date of acquisition on October 31, 2012, was $7.3 million. Revenue from mature products decreased by $4.8 million or 7% of revenue in the first 9 months of fiscal 2013 compared to the comparable year ago period. Excluding Etherios consulting services of $7.3 million, wireless revenue increased by $300,000 or 0.5% compared to the first 9 months of fiscal 2012. Wireless revenue was $62.7 million or 45.9% of total revenue compared to $62.4 million or 43.5% of total revenue during the first 9 months of fiscal 2012. For the first 9 months of fiscal 2013, Digi reported net income of $3.8 million or $0.14 per diluted share compared to net income for the same period in the prior year of $5.2 million or $0.20 per diluted share. Non-GAAP net income for the first 9 months of fiscal 2013 was $4.1 million or $0.16 per diluted share compared to $4.7 million or $0.18 per diluted share in the first 9 months of the prior year. Please refer to the table, reconciling net income and net income per diluted share to non-GAAP net income and net income per diluted share, which is provided in the earnings release. Turning to the balance sheet and cash flow statement, our combined cash, cash equivalents and marketable securities, including long-term marketable securities, were at $103.8 million -- $103.8 million as of June 30, 2013, increasing by $1.9 million from the end of the prior quarter. $3.8 million was spent on stock buyback in the quarter. Our current ratio was 7.2 to 1 at both June 30, 2013, and March 31, 2013. Our DSO is at 46 days based on a quarterly calculation. I would like to provide some guidance for the fourth fiscal quarter of 2013. Digi projects revenue for the fourth fiscal quarter of 2013 to be in the range of $50 million to $52 million. This is a reduction in the high-end and midpoint of guidance previously announced. We expect revenue in all geographies to increase sequentially. Other than Europe, where we see a sequential growth, the increase will not be as strong as that in our previous guidance. We project net income per diluted share in the range of $0.07 to $0.09. For the full year 2013, Digi projects revenue in the range of $194 million to $196 million, and net income per diluted share in the range of $0.21 to $0.23. Now I'd like to open the call to questions. Operator?

[Operator Instructions] Your first question comes from the line of Matthew Kempler of Sidoti. Matthew J. Kempler - Sidoti & Company, LLC: Some progress sequentially, but the growth portfolio is still not back to growth on an organic basis. Maybe you can just talk a little bit from the market segmentation where we're still seeing challenges and we're starting to see some results.

Yes, I didn't hear the first part of that, Matt, but I think I get the gist of the question. So good news is we're up for the second quarter sequentially. Like you said, if you break that down and look at it, we have significant contributions from Etherios. And so on an organic basis, if you break it down and look at mature products and growth products. Mature, it's right in the range that we expected. We had projected 5% to 15% decline in there, minus 6.4%. If you look at than non-Etherios growth products, the wireless growth products, what we have is -- our Wireless Design Services is showing robust growth, which is positive. Cellular gateways grew, which is positive. Our TransPort, our routers, our wireless routers grew slightly, and where we saw some challenges were with our embedded and RF product lines. In both of those cases -- with embedded, the reason that was down was we had 1, our very largest customer that still took a lot but not as much as last year. So we saw that down, and that drove that year-over-year impact, so the lumpy demand issue from our largest customer. And we expect continued robust orders from them going forward. And RF, we had a situation where we had a number of customers that did not take revenue this year as a result of a product transition from 1 product line to a new product line, where they had existing inventory, which had a temporary impact on this quarter. In both cases, embedded and RF, we expect strong growth next quarter and we expect those to be up year-over-year. And so when you then project forward and look at the guidance for $51 million midpoint and look at what we expect for growth products next quarter, we expect it to be in the neighborhood of 20% growth overall and organically up about 7%. Matthew J. Kempler - Sidoti & Company, LLC: Okay, great. And you commented last quarter about improving visibility due to the strengthening backlog and pipeline. How do things feel entering the fourth fiscal quarter? Are we on the same track or any changes there?

Yes. I'd say we're on the same track. And to provide a little bit more color on the guidance piece, good visibility in North America, good visibility in EMEA and where we tend to have some challenges can be with visibility in Latin American and APAC. And we're looking at that slight reduction from a midpoint of $52 million to $51 million for next quarter, really comes out of the Latin America, APAC region, where while we're projecting sequential growth, it's not as robust as what we expected. And specifically, in Latin America, there's a number of orders that have pushed out or have been put on hold and underneath that, are -- if you'll look at that, in Argentina and Brazil, there are actually some regulatory changes that are having an impact on customer and distributor behavior down there. So we have seen that. And based on that, we've taken down our view of -- primarily of Latin America, and that's what have an impact on the $52 million to $51 million. Matthew J. Kempler - Sidoti & Company, LLC: Okay. And then I just wanted to clarify on Etherios. The revenue reported in the third fiscal quarter, did that include the newly consolidated categories?

No. Matthew J. Kempler - Sidoti & Company, LLC: Okay. So that's pure, acquired revenue?

That's pure -- think of that as the Etherios CRM business, the professional service business that does installations of the Sales Cloud and Service Cloud within that Salesforce ecosystem. Matthew J. Kempler - Sidoti & Company, LLC: Okay. And then I just wanted to get your thoughts because we're now bundling a lot of different segments and offerings under Etherios, which is previously a CRM-focused business. So share with us how you want to make sure we don't lose focus? I mean, what's the directive here for Etherios now, which -- they still have to focus on salesforce.com but also now, the broader market? Help us understand how you're addressing that.

Yes. So basically, what we're doing is we're bundling the Device Cloud, the Digi application customization capabilities and Wireless Design Services, which all are very, very synergistic with Etherios and The Social Machine offering. And if you remember, when we were talking about the acquisition of Etherios, what we felt was very important was that we take the capability that we have for on-boarding devices and leveraging the Device Cloud and our Wireless Design Services and our hardware, pulling in our hardware and wrapping around that professional services sales and delivery capability to be able to deliver the full end-to-end solution. And so that's what we're doing. We're implementing that strategy, leveraging that Etherios confidence within what we think is the most dynamic ecosystem for driving deployment of connected products, which is the Salesforce ecosystem.

And to your point on dilutive-ness, I think it's just the opposite. What we've seen with customers is that this initiative is complementary to our Salesforce, CRM and Service Cloud business and vice versa. Because when we go into customers, we -- and there's a huge win that we accomplished just in the last quarter on both sales and Service Cloud implementation, part of that win was not just selling implementation of Sales and Service Cloud, but extensibility of that solution to The Social Machine for connecting in the future, connecting their products and driving them to a more proactive preventative customer service model. So the extensibility of the Etherios solutions capability to now go beyond that and consult and to implement The Social Machine was a part of why we closed that business. So it's very complementary and actually supports us getting more CRM and especially Service Cloud deployments and more Service Cloud deployments support deployment of The Social Machine.

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

Just building on the last comment there. With Digi putting together a lot of solutions to create a leading end-to-end solutions company, a lot of these end-to-end end markets can be very long sales cycle. Can you maybe talk about how you attack different vertical markets and how you see these assets coming together on kind of a longer-term growth trajectory for the company?

Yes, so historically, we think that we've gone through a significant learning curve, being on the bleeding edge of this M2M space, attacking key verticals like Smart Energy and Telemedicine and Fleet Management and Tank Monitoring. So we've got a broad base of customers now implementing end-to-end solutions, including the Device Cloud. And so we're leveraging -- we continue to drive that vertical focus. And in fact, we're seeing a lot of growth now coming out of the Smart Energy vertical that we had invested in a couple of years ago, and we're seeing really slow growth. Now that's starting to materialize into a more significant growth stream. In addition to that, what we see and what -- we probably view the market maybe a little bit differently than others in that we see a very significant growth opportunity in the M2M space that does tend to be a little bit more horizontal within this -- today, the Salesforce's ecosystem, where Marc Benioff, the CEO is out there driving his whole new concept, his top line marketing team, the Customer Company, which at the core of it, includes connected products. And they don't have the capability to deliver that. And they're partnering with Digi in order to do that. We're the first player with the an app on the AppExchange that can provide that full end-to-end capability. So fundamentally, there's a horizontal play to -- with machine, device, durable goods companies to drive their whole customer support model from reactive, wait for a call and react to it, to proactive and preventative, connect to your products, get information and listen to your products, get predictive diagnostics, prevent struck roles, prevent technicians getting on airplanes, generate new revenue streams and in the end, put yourself in a position where you can drive customer support from a cost center to a profit center and drive up customer satisfaction. So that's my view of the market.

Okay, that's helpful. And just as you mentioned the Smart Energy, it's great to see that's picking up. On health care, just given the uncertainty of ObamaCare with -- some M2M companies we've talked about that being a market that's even gone slower on growth and that's one thing that's maybe a little slower that what you're seeing, and maybe you could also touch base on the fleet and tank markets.

Yes. So Medical -- generally speaking, Medical has been a very strong vertical segment for us. And where we've just got a lot of traction on the hardware point product side of the business has been in providing core modules for devices like infusion pumps and pulse oximeters and a host of other products like that. On the box side, providing connectivity in hospital rooms, emergency rooms, in clinics like dialysis, connectivity in clinics -- what we've done is we've extended that value proposition from point products now into Telehealth, Telemedicine, end-to-end M2M applications for remotely monitoring equipment, remotely diagnosing problems, monitoring patients, monitoring the elderly, et cetera. Those are the kinds of applications that we're seeing. And we're seeing that move pretty much as we expected. We -- unlike Smart Energy, where we expected a big growth curve and didn't see it, with Telemedicine, we pretty much expected that, that was going to move along at a little bit slower pace, and we're okay with that. What we're seeing is some early applications and we think that's going to be a good long-term growth opportunity. But we believe -- we agree with that, that it's going to be a little bit slow to develop. And reimbursement models, a lot of things have to kind of catch up with the capabilities that we're providing with Telemedicine. If you look at some of these other areas, we're -- in Fleet Management, we're investing in some really interesting new products that we are going to be deploying over the next quarter or 2 that are going to -- we think are going to drive significant revenue growth in the future. Those are roadmap items that we haven't talked about publicly. And Tank Monitoring continues to be a really rich area for us to drive and to drive growth in.

Okay. And last call, you mentioned you're hiring a new Senior VP of Sales, really to focus on a Solution Selling Approach. Is this sort of the existing verticals you're targeting? Are these for new verticals? Or maybe you could just let us know what you're thinking in terms of putting new resources in place to drive business.

So on the solution sales side of it, it's exactly what I mentioned. If you look at the way we're investing, we're investing in the existing verticals that we're going after. So we're investing, we continue to provide investment commensurate with the opportunity in Smart Energy as a core product roadmap area for us. Fleet is another core roadmap area that we're investing. Tank is another one. And then we vector off of those in order to provide solutions for other vertical markets. So there are products that we designed for each one of those markets that become adaptable to other vertical markets and opportunities that we see. But that's what we focus on. And then we have a big focus on that horizontal reinvent customer service value proposition that we're going after with The Social Machine also. And so that's also a big part of Kevin's focus, as well as in general, focusing on driving sales process improvement, driving increased pipeline through quality marketing, lead generation activities and really transforming our capability there, driving improved sales cycles, and we think the whole solution sales play that we have will help with that and improve close rate. So he's focused on -- very aggressively on process improvement also.

Okay. And then on new product, you mentioned in your prepared comments about the -- going after routers into the locomotive market and the Positive Train Control. Can you just talk about that market opportunity and see that, that market is getting ready to pick up later this year and into next year? It's the first I've heard you talk about it, can you maybe just talk about that opportunity?

Yes, this is actually a follow-on product that focuses on that market. If you look at Fleet Management broadly, we actually categorize Positive Train Control as a subset of Fleet Management. And we've been in that marketplace with a first-generation product. We've had a lot of success with the major railroad, and this is a next-generation product that's attacking that marketplace. So this is one where we feel very confident in the product because it's not something that's brand-new in terms of our experience of the marketplace. We have experience. We understand the segment. We've got significant customers already deployed. We're channeling that understanding with this new product, and so we feel that the business case is pretty well understood.

[Operator Instructions] And the next question comes from the line of Tavis McCourt of Raymond James. Tavis C. McCourt - Raymond James & Associates, Inc., Research Division: First, a housekeeping one, Steve. You mentioned tax rate, I think, for the year of 25% to 28%. So does that mean we should expect a pretty elevated tax rate for 4Q, or is that 25% to 28% for 4Q specifically?

That number, the 25% to 28% was for the fiscal year. So the rate for fourth quarter would be kind of our standard rate of mid to upper 30s. Tavis C. McCourt - Raymond James & Associates, Inc., Research Division: Okay. And then Joe, I guess, could you give us a sense of -- in terms of The Social Machine or the cloud-based services that you're selling now, how much of the demand generation is incumbent upon you on a direct Salesforce fashion versus indirect at this time? And is there a way to get more indirect channels involved that could kind of drive better leverage for your business?

Yes. So a big part of the demand generation, the lead generation for getting us access to the C-suite on The Social Machine initiative is very aggressive partnering with key -- with Salesforce primarily, and then key partners within the Salesforce ecosystem. So what we see being a platinum partner in Salesforce is a lot of lead generation anyway, coming in for Service Cloud, Sales Cloud opportunities. That's an ongoing revenue stream and lead stream that turns into revenue. In addition to that, we've evangelized, we've communicated throughout Salesforce, at the executive level with the sales teams The Social Machine. We introduced it at Cloudforce Chicago in April, where I had the opportunity to speak on stage, get good visibility for it. And as a result, I think it's unprecedented that the level of C-suite opportunity that we see in a short period of time as a result of the leads -- the relationship with Salesforce and the leads we see from that. Now beyond that, within the Salesforce ecosystem, you can think of what we're doing, the end-to-end solution that we're providing as an expert services M2M implementation that facilitates strategic business process improvement. So I've been, personally, and some of my team members have been spending a lot of time with the GSIs, some people like Deloitte and TCS and others, helping them to understand this capability to help them drive their strategic consulting business. And so with the large customers, the Fortune 500 guys, another form -- significant form of lead generation opportunity is partnering with other parts of that Salesforce ecosystem, like Deloitte and others. So to your point -- and then beyond that, we've already talked about the lead generation that we expect from other partners, and we've talked about Intel, Freescale. There are others that we haven't announced publicly. So being plugged into this ecosystem, the carriers, Verizon, AT&T, Sprint, another form of lead generation. So being plugged into this ecosystem, leveraging regeneration that comes from our key partners and then engaging directly is the model. Tavis C. McCourt - Raymond James & Associates, Inc., Research Division: And are you at the point where you can give us an example of either a deal you've won or a pending deal on The Social Machine through the Salesforce channel, just so it could become a little bit more tangible for us?

Yes. So I'll give you a broader context in terms of what I talked about last quarter. What I said last quarter was that, announcing in April, expected to generate pipeline from that and expected, generally speaking, 6 to 12 month sales cycle. But also expected that we would see -- likely see a couple of early wins in the second half of the fiscal year, and I still expect that. We've got a pipeline, we've got a number of opportunities. I expect to see that. I expect to be able to talk publicly about what those look like. I can speak generically to a typical situation that we're seeing out there, and the kind of situation we're seeing is one where either we're seeing the customer already implemented Salesforce, Sales Cloud and Service Cloud, or we may be doing the implementation for them and in that process, identify significant opportunity for business process improvement enhancing that Service Cloud capability. So we've got -- we see folks out there that have significant customer support expenses, they've got tens of thousands of devices that they're either not communicating with or communicating with ineffectively. And we see the opportunity to now put in place that infrastructure, be able to listen to the device and be able to help them dramatically reduce their customer service expense and increase customer sat. And so we see a number of those kinds of opportunities within that pipeline.

The next question comes from the line of Matthew Kepler of Sidoti. Matthew J. Kempler - Sidoti & Company, LLC: So just a follow-up. I was wondering if you can share with us a sense of how the Device Cloud is doing? Are we seeing subscription additions in the hundreds or thousands per quarter? And what is your outlook for that business evolving over the next couple of years?

Yes, so we've got thousands of subscribers, customers on the Device Cloud. We've gone, in the last couple of quarters, from, just to give you a general sense, from just over 150 active customers to, in the neighborhood of 200-plus active customers on the Device Cloud. And we're in the hundreds of thousands of devices under management and we certainly expect, with The Social Machine and the other initiatives focused on the vertical markets that I talked about, to drive significant growth of devices under management going forward. Obviously, that is on the solution side of the business, that is the core element of our end-to-end strategy. Having said that, I think it's -- we're very, very early in this market evolution and we think we're early to market with the capabilities that we provide for a scalable, secure, reliable, intelligent platform and glad to be on that learning curve, ahead of everybody else to be driving and learning and driving a leading-edge platform. Matthew J. Kempler - Sidoti & Company, LLC: Okay. And I know you work from a number of solutions under the Cloud, so it depends on what the clients adopt, but maybe you can give us a sense, at the low end of the range, what would a typical ARPU look like, and then somebody high end, I mean, your more sophisticated client using one of your services, what would the typical ARPU look like?

Yes, so at the low end, if they're just leveraging the Device Cloud to have their own applications, we're not providing a custom application or any additional services for them for a SaaS kind of monitoring services that might be bundled with that. You might see an ARPU that's sub $1, it might be $0.50 per device. For kind of a standard set of capabilities where we're providing the connectivity and we help them with the application, et cetera, or The Social Machine kind of scenario, it might be $1 per device per month or better, depending on the services. And then if we go so far as to provide more significant value add, providing the full end-to-end capability, writing customer -- custom application and then doing monitoring and some SaaS services for them, it could ramp up from there, to $5 to $10 or maybe even higher, depending on the value of the service that we're providing.

[Operator Instructions] Your next question comes from the line of Howard Smith of First Analysis.

I just wanted -- I just wanted to follow-up on some of your comments regarding sales execution and Kevin coming on and building the team. Obviously, once you bring people on, they have to build their own pipeline and it's a while before you see that come through the topline. But just in terms of getting the infrastructure in place, as you'd like to see it, percentage-wise or however you want to characterize it, how far do you think we are in that process?

Okay. So the good news is that about the same time Kevin came on board, we completed our Salesforce Sales Cloud implementation. And that Sales Cloud is a fantastic tool in terms of providing the fundamental tool and transparency for management to be able to understand exactly what's happening from a sales pipeline perspective and to be able to see exactly what's happening by sales stage, both in the sales pipeline and then in the lead -- marketing lead side of it. So that's a very serendipitous situation where we've got combination of that fantastic tool and Kevin coming on board. So in terms of percentage, it's very important that we've got that head start with that platform. And so what Kevin has done is he's come in, he's looked at people, he's looked at the sales process, he's looking at comp plans and he has put in place his sales model. He's in the process of putting in place his compensation strategy for the team, which will be in effect for fiscal 2014 and putting in place his metrics for driving sales pipeline and accelerated sales cycles and close rates. So as I said in the script, my expectation is that he's done a timeline, so we'll have all these things in place at the beginning of fiscal 2014, and we'll see a positive -- a very positive impact on a pure process perspective, across all product lines as a result of what he is doing. So I can't give you an exact percentage at this moment. What I can say is the idea is to be ready on all those fronts by fiscal -- beginning of fiscal 2014.

At this time, we have no questions left on the queue. I'd now like to turn the call over to Joe for closing remarks.

Thank you for joining the call, everyone. As you can tell, I'm very excited about the momentum that's beginning to build with the business and the opportunity that we have. We're very focused on some of these short-term initiatives to drive increased growth and feel like we're very well positioned for the long term. So I look forward to talking to you again in 3 months.

Thank you for your participation in today's call. That concludes your presentation. You may now disconnect. Thank you.