Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2013 Digi International Earnings Conference Call. My name is Crystal, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference 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'd like to remind our listeners that some of the statements that we may 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 a 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. The major theme for this year was to drive a return to revenue growth in 2013. The good news is that we effected that return to growth. The acquisition and integration of Etherios, combined with intense focus on R&D, marketing and sales execution improvement, has affected that shift. We have now put together 3 sequential quarters of improving top line growth. Even more importantly, we have driven very exciting top line growth improvement from our growth product and services portfolio, from single-digit growth rates in the first 2 quarters of the fiscal year to 10.6% growth in Q3, 24.9% growth in Q4. These double-digit growth rates are on a growth portfolio that is now 58.7% of our total revenue mix. So let's discuss the quarter in more detail. This was the 43rd consecutive quarter of profitability for Digi. Revenue of $51.4 million was above the middle of our guidance range and exceeded the Street revenue consensus. We saw top line revenue growth of $4.2 million or 8.7% year-over-year. Earnings per share of $0.08 was in the middle of our guidance range and met Street consensus. And I was even more pleased to see the 24.9% year-over-year increase in our growth products and services portfolio, inclusive of Etherios CRM. Excluding Etherios CRM, growth products grew 10% year-over-year. And of course, our mature products continue to spin off significant cash flows and provide us with the flexibility to buy back shares, as well as a flexibility to seek appropriate acquisitions like our purchase of Etherios, which we completed a year ago. The revenue breakdown this quarter for our growth portfolio of products and services, including Etherios, was 58.7%; and the mature product portfolio was 41.3%, continuing the desired trend. Gross margin of 50.5%…

Thank you, Joe. Revenue for the fourth fiscal quarter of 2013 was $51.4 million compared to $47.2 million for the fourth fiscal quarter of 2012, an increase of $4.2 million or 8.7%. In Q4 2013, we began presenting product and service net sales, as well as cost of product and cost of service on the base of our income statement. The prior year data for these line items has been recast accordingly. Other highlights for the fourth fiscal quarter of 2013, all in comparison to the fourth fiscal quarter of 2012, were as follows. Product net sales for Q4 2013 were $44.6 million compared to $44.8 million for Q4 2012. Service net sales for Q4 2013 were $6.8 million compared to $2.4 million in Q4 2012. Revenue from Etherios, acquired on October 31, 2012, was $3.6 million for the current quarter, all of which is included in service net sales. Domestic revenue increased from $28 million in Q4 2012 to $30.5 million in Q4 2013, an increase of $2.5 million or 9.1%. International revenue in Q4 2013 was $20.9 million compared to $19.2 million in Q4 2012, an increase of $1.7 million or 8.2%. Most of the increase internationally was in Europe, with slight decreases in the Asian countries compared to the fourth quarter a year ago. Wireless revenue was $21.3 million or 41.4% of total revenue in Q4 2013 compared to $20.3 million or 43.1% of total revenue a year ago. Revenue from growth products and services in Q4 2013 was $30.2 million or 58.7% of net sales compared to $24.1 million or 51.1% of net sales in the same quarter a year ago. Growth portfolio revenue, excluding revenue from Etherios, increased by $2.4 million or 10% compared to Q4 2012. Revenue from mature products was $21.2 million or…

[Operator Instructions] Our first question will come from the line of Matthew Kempler with Sidoti & Company. Matthew J. Kempler - Sidoti & Company, LLC: So first, I wanted to touch on the improving sales execution. Maybe you can put that in perspective relative to the pipeline and revenue visibility you have entering fiscal '14 versus fiscal '13.

Yes. So in general, on the sales execution, like I said, we brought in Kevin Riley to drive pipelines, to drive close rates. We implemented salesforce.com to improve visibility not only for the account managers but for the executive team to really drive the process and drive metrics. And so as a result of that and as a result of the transparency that we get through leveraging that system and Kevin driving the process, we're getting better visibility over time. So I would say the visibility is improving and the pipeline is improving. And Matt, that's why we feel pretty bullish about saying that the growth products will sustain the 20% range and pretty good confidence about mature in the 5% to 15%, around 10% decline. Matthew J. Kempler - Sidoti & Company, LLC: Okay. And maybe in broad brush strokes, you can list, in order of contribution, which segments or verticals will be the primary drivers in fiscal '14.

Yes. So from a vertical standpoint, what we're seeing is good momentum out of some of the key verticals that we've been focused on. So we saw -- this quarter, we saw actually Smart Energy growing both sequentially and year-over-year. We saw Tank grow sequentially and year-over-year. We saw Medical grow sequentially and year-over-year. So the verticals are moving, a real positive sign there. We had been seeing good momentum with Tank and with Medical. And the real positive sign we're starting to see is that Smart Energy is really perking up. And we're seeing some significant ramp happening there, so that's a positive note. If you cut to the product view of the world, the really exciting thing that's happened is, as you know, Matt, the broad perspective is we drove into this growth product space, the wireless space, a number of years ago, back in '05, '06, and drove from about $7 million to a nice ramp in FY '11 of about $100 million. And then we saw it drop as a result of the big investments that we made in Smart Energy. What we're now seeing is we were seeing year-over-year sequential -- and sequential challenges with our growth products. If you look at this year, our growth products, growth hardware products year-over-year declined in Q2, Q3. And then we saw growth this quarter in the 7% range, and we're expecting next quarter to see those hardware growth products' growth rate improve again. So the growth hardware products, the embedded modules, gateways, TransPort and RF, we expect to continue that growth momentum. And then laying on top of that the services piece, where you're seeing we already have very good growth momentum with Etherios CRM, with our Wireless Design Services and all the supporting professional services around that. Matthew J. Kempler - Sidoti & Company, LLC: Okay, great. And then on the TSM, so we landed our first customer. I know it's still early days, so maybe you can shed some light on what application and what kind of components of the products we would direct along with that sale.

Yes. So it's a really good example of we -- first of all, in general, what we're seeing is we're seeing very, very good pipeline growth for The Social Machine, so we're really excited about that. And like I said, we landed our first customer. It's in that Tank Monitoring in the oil and gas arena with a very good customer of ours, and they're implementing The Social Machine the way that you would expect them to deploy connectivity out to the tank level to drive value add, like understanding their batteries out of the tank level, understanding those batteries are working, how much battery power is left and driving efficiency for replacement of batteries and a whole host of other value propositions out at that endpoint level. That customer expects us to be a high-growth opportunity. And for us, what it means is it means recurring Device Cloud revenue. It means Social Machine revenue. It means hardware sales. Matthew J. Kempler - Sidoti & Company, LLC: Okay. And then finally for me, during the quarter, you had a couple of announcements of relationships with QUALCOMM and Ericsson. And I'm wondering if you could share some thoughts on those relationships and the scopes of the opportunities there?

Yes. So with QUALCOMM, we have partnered with them and Oracle to develop Internet of Things kit that we are jointly marketing. And as we do with all of our kit sales, the expectation is to jointly market these kits, seed these kits in order to drive quality lead generation that will eventually end up in opportunities and revenue. So it's a kit that we've jointly developed with them, we're jointly marketing with them. We expect to seed it, and we expect that to drive ramp. Ericsson is a relationship that has emanated out of China. Really the focus is on them as channel partner out there to drive more of our hardware sales. It's more on the Digi branded hardware side of the business, which should help us drive wireless growth in China.

[Operator Instructions] Our next question comes from the line of Mike Walkley with Canaccord Genuity.

Joe, can you just remind us on the seasonal slowdown in the December quarter, just which products had that seasonal aspect to it and why it's slowed a little bit in December? And then on a higher level, for your growth products, that strong 20% growth, does that assume any more acquisitions? Or is that just your organic plan for the year?

Yes. So I'll answer that first. It's organic, any acquisitions would be incremental to that, Mike. And the seasonality, this is typical. On the Digi brand side of the business, we typically see this seasonality. We go from -- sequentially, from 65 business days to 62. And the 62 business days, when you get around the holidays, they're not as high-quality business days either, so that diminishes the number of days. And so when you have half of your business that -- half of your revenue derived from the channel, obviously, that's going to have a softening impact. So it's not a significant impact on our 50% of the business that's direct with larger customers. But it definitely has that impact of minus 3 to, probably, effectively 5 days kind of impact sequentially from a quarterly perspective. What we've learned is with the Etherios consulting business, it's the same impact. They have a historical seasonality that's directly associated with the holidays. And then the other impact that we're seeing in the quarter is our largest customer, the company's largest customer is temporarily on hold, likely to be back next quarter, but on hold for the remainder of this quarter so that's having a significant impact on our guidance in the short term.

Okay, great. And is that the same customer that you talked about last quarter who had -- was on hold and so it's continued and that gives you a little better visibility into Q4 on the hardware side?

No, no. That is -- this is a new customer that's on hold.

Okay, great. So the customer on hold last quarter, I think you said it was in the embedded RF area. They came back and they're continuing into your Q4 guidance -- I mean, your December quarter guidance?

Yes. I -- Mike, I don't recall talking about that last quarter. This is new to this quarter. This is one that I didn't reference last quarter.

Okay, that's helpful. And then just to update on the trajectory of the Device Cloud and the number of connected devices or customers.

Yes. So we continue to drive that very aggressively. We don't provide detail on number of devices under management. I have talked about the fact that we've driven the number of production customers up over 200 in the past. So that's generally where we're at, and we're continuing to ramp that. And we have -- beyond that, we have in the thousands of customers that are trialing the Device Cloud that we're working on transitioning from trial mode into production mode.

Okay, great. Hope the momentum continues. Steve, just wanted to get a little clarity on the guidance. How should we think about just overall operating expense levels for the year? Should they remain relatively stable embedded in that guidance? Or given some of the investment you're doing, should we slowly grow that as the year progresses?

I suggest that it's relatively flat to the year we're exiting.

Our next question comes from the line of Tavis McCourt with Raymond James.

This is Dan Toomey on for Tavis. A quick question about the service revenues. I see that they're a bit lower than your product revenues, and I'm just wondering if you could give us any clarity on this and discuss how much Etherios impacts that.

Yes. So the good news on service revenues is that they've been growing very dramatically. The major components of the services revenue are Etherios CRM, our Wireless Design Services, Device Cloud and then professional -- additional professional services around that. As I said, I think, earlier in the call, we've seen not only dramatic growth that you would characterize as inorganic, but if you just look at organically what Etherios CRM is doing and what our Wireless Design Services is doing just organically, the growth is extremely strong. So all components of that business have been growing. They've been growing at very high growth rates. So there's a really strong organic growth engine there.

By my calculations, you have roughly 42% gross margins this quarter. Is that a rate we can expect going forward? Or maybe would it rise?

Yes, so it's going to -- a lot of it is going to depend on utilization and how well we drive utilization. So I'd say, generally speaking, that we will see gross margins that will be in the 40% to 50% range as we drive better utilization, which is easier to do as you gain mass. We will see higher gross margins towards the higher end, mid-40s, maybe upper-40s, closer to 50%. At the size we are now, we are subject to a little bit more variability. So I'd say right now, it's a big range of 40% to 50%. I would say, as we gain mass, that range tightens. But we gain leverage to drive higher utilization and higher gross margin.

Okay. And do you -- it sounds like with the growth in services, you would expect that to outpace products in 2014.

In terms of growth rate, yes, yes. We expect to see continued very strong growth rate from the services part of the business in fiscal 2014.

And one more question. You gave us some guidance on, you expect the growth part of your business to grow about 20% in '14 and the mature part to decline 10%. For the first quarter alone, can we use those same rates? Or do you think there'll be a difference in the first quarter?

Yes. First quarter, I would say that it's going to be in a similar ballpark. The growth products in 15% to 20% range and mature in the, probably, minus 7% to 10% kind of range, in that ballpark.

[Operator Instructions]

All right. We'll wrap it up. Thank you for attending the call. I'm obviously very excited about the momentum that we're creating, especially with the growth portfolio over 20% now and driving to continue to improve that over time. So we feel real good about the momentum, and I look forward to talking to you again in 3 months. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.