Good day, ladies and gentlemen, and welcome to the Q2 2014 Digi International Inc. Earnings Conference Call. My name is Clinton, and I’m your event manager. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. And now I’d like to 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 2013 annual report on Form 10-K on file with the SEC and any subsequent filings on Form 10-Q. 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’d like to introduce Mr. Joe Dunsmore, Chairman, President and CEO.

Thank you, Steve, and welcome to the call, everyone. Now for the report on our business. Our second quarter revenue was in line with guidance of $45 million to $48 million that we provided on our call at the end of last quarter. Earnings per share of $0.03 per share were also within GAAP guidance. Our earnings however benefited from $0.04 per share from the reversal of certain tax reserves arising from the completion of a tax audit. So we reported an operating loss primarily resulting from more than expected margins caused by an unfavorable mix in our hardware sales and sales in our services business that with the bottom end of our expectations. Hardware sales for the quarter met our expectations. This was led by growing momentum in sales of our cellular product line. Sales of mature products, embedded products were generally in line with expectations during the quarter. Sales of RF products were lower than anticipated. The combination of strong sales of cellular products, lower than expected sales of RF products and the longer term decline of sales of our mature products were the factors that drove our lower margin in hardware. Sales of our services offering were higher than the same period last year. We were at the bottom end of our expectations for the quarter. This was the result of several factors including certain projects that were expected to start during the quarter, but we were deferred in the delay in the completion of one project that resulted in reduced revenue. These lower than anticipated revenues had a negative impact on our margins for the quarter and our staffing cost relative to our early billings were lower than anticipated. As Steve will discuss the half year completed, we’re updating and narrowing the range of our guidance…

Thank you, Joe. Revenue for the second fiscal quarter of 2014 was $45.9 million compared to $48.2 million in the second fiscal quarter a year-ago. Other remarks for the second fiscal quarter of 2014, all in comparison to the second fiscal quarter of 2013, unless otherwise stated are as follows. Product revenue for Q2 2014 was $40.6 million compared to product revenue of $43.1 million for Q2 2013, a decrease of $2.5 million or 5.9%. Revenue from growth hardware products was $20.8 million in Q2 2014 compared to $22 million in the year-ago comparable quarter, a decrease of $1.2 million or 5.4%. Revenue from mature hardware products was $19.8 million in Q2 2014 compared to $21.1 million in Q2 2013, a decrease of $1.3 million or 6.5%. Product revenue was within the range incorporated into our guidance, although we experienced lower-than-expected performance in our RF module product line partially offset by cellular revenue, which was greater than anticipated. Revenue from our service offerings, which are part of our growth portfolio, was $5.3 million in Q2 2014 compared to $5.1 million in the same quarter a year-ago, an increase of $200,000 or 4.6%. Service revenue was on the low end of the range incorporated into our guidance. Revenue in North America was $27.4 million in Q2 2014 compared to $28.6 million in the comparable quarter a year-ago, a decrease of $1.2 million or 4.3%. International revenue was $18.5 million or 40.4% of total revenue in Q2 2014 compared to $19.6 million or 40.7% of total revenue in Q2 2013, a decrease of $1.1 million or 5.5%. Wireless revenue was $19.8 million or 46% of revenue in Q2 2014 compared to $20.8 million or 45.5% of revenue a year-ago. Gross profit was $21.8 million in Q2 2014 compared to $25 million in…

So, before we begin Q&A I want to say a few words about my retirement that was announced on Wednesday. As you all know I have been Digi’s CEO for 15 years. It's been my great pleasure to work with and get to know so many of you during that time. I firmly believe that life is about the journey and the relationships that we build. To our investors and to the analysts that covered Digi, Tavis, Matt, Mike, Howard, I want you to know I highly value these relationships. I am sure that you want to know why I’ve made this decision. Well before I started Digi I actually had a reasonable golf handicap. After 15 years of neglect, my golf games has suffered tremendously. I watched my swing erode and my cutting stroke (indiscernible). My decision was made clear on a recent rare warm spring weekend here in Minnesota when our CFO Steve Snyder came within a stroke of beating me on my favorite course. A man can only take so much and this was the moment I realized I must reassess everything in life. On a more serious note, 15 years is a long time for anyone to service CEO of a publicly trading company. At the age of 55, if I am able to write other chapters in my career now is the time to make this happen. I am very proud of what we accomplished over the years at Digi and the correct positioning of the company in the market place for the internet of things. I want nothing more than to see Digi take advantage of what we built. So rest assured that through the end of the calendar year I will remain fully focused on executing the company’s strategy and assuring a smooth transition to a new CEO. The board has retained a national search front to assist in the search for my successor. I am committed to make in the new CEO’s introduction to our business is smooth as possible, and I remain very optimistic about the overall market opportunity and believe we are well positioned to exploit it. So with that I’ll open it up for questions.

(Operator Instructions) Your first question comes from the line of Matthew Kempler of Sidoti & Company. Please go ahead.

Hi, guys. So, I would like to go back and just kind of reconcile the updated revenue guidance. Because on the one hand we’re hearing two of the top three clients are coming back faster than expected. We signed significant contracts in the quarter already and have a stronger backlog and salesforce.com activity is ramping up pretty rapidly. But we took down guidance for that $9 million of a midpoint to the range and you cited a few points there. So collectively if you can kind of break it out how those points contribute to you that $10 million or so reduction in the top line I’d appreciate that.

Yes. So, Matt we’re not really seeing anything significant in terms of those three customers, just very minor improvement, but it's a good sign. So, the notion that we have some small moderate improvement with a couple of those customers give us a lot more confidence about 2015 getting to more of a full recovery. I’d say that’s more the news on those top three customers. In terms of the delta between the $198 million most likely and the $191 million in change, I think Steve touched on it. The end of life view that we had of some of our mature products going end of life and customer orders coming from some of those end of life announcements. At least now what we’re seeing is the pace of orders coming in for those end of life announcement isn't quite what we had thought, and so it has brought down our projection on what we’ll see in fourth quarter -- especially in fourth quarter coming from that. Now that’s a number that could be highly variable and as we get closer we could see that come back up. But we’ve decided to go with a very conservative view of that for the second half of the year based on what we’ve seen. We’ve put out some announcements, we’re tracking it and so that’s almost half of the delta. Another significant portion of it is on new products. I think Steve eluded to that we had a couple of new products that were delayed a few months and thus we’re not seeing the ramp happen as quickly. We’ve got one new product where we were expecting to benefit from a regulatory change that we expected that to happen earlier this year possibly even late in 2013 that pushed out to earlier…

Okay. And then on to the gross margin. It sounds like the primary piece there is the mix between RF and cellular, so I mean how wide of gap is there between the margins on those two product segments that it could knock down the overall product margin, (indiscernible) year-over-year?

Yes. So, I would say one of the top level factors that had an impact on gross margin was just the fact that we saw revenue decline. And the revenue decline, this is a low watermark for us for a while and that had an impact on the services side of the business where it was down on utilization. And then on the hardware side of the business where it affects efficiencies when your revenue is lower than maybe what you expect. So that’s one factor. And then beyond that we see mix changes within the product that have an impact where the mix change from mature to wireless et cetera has an impact. Within that overall top level point the $45.9 million. Now as we see we talked about the ramp going from, to $48 million most likely next quarter, $50 million in fourth quarter. As we see that happen within that we’ll see increased efficiencies within our services business and we’ll see increased efficiencies, manufacturing efficiencies et cetera to help us drive gross margins back up. And the idea is to maintain -- to try to maintain that momentum going forward.

Okay. And then last thing for me, did the management say that the updated guidance excludes or includes transition cost tied to your retirement?

The guidance includes the transition cost.

It includes, okay. So, would you be able -- can you provide an estimate of what that impact is?

It's roughly $500,000 a quarter.

Okay. So $1 million for fiscal ’14?

Correct.

Okay. And as a company, what is the thinking behind operating near breakeven, it looks like we’re going to be staying at that pace, are we exploring cost control options to drive higher profitability?

So, Matt I think the number one priority, (indiscernible) is driving top line revenue growth, that’s what we’re focused on. And so what we’re doing is, is we’re maintaining our current cost structure, current expense structure, certainly looking at trying to find efficiencies there to drive more efficiency and also at the same time drive top line revenue growth. But it's my feeling that going in and making significant changes in cost reduction expense changes could impact the top line growth and in the space that we’re in it's all about that. So, I think driving top line growth maintaining the current expense structure and gaining leverage over time is the right model.

Okay. Thank you.

Thank you. The next question comes from the line of Howard Smith of First Analysis. Please go ahead.

Yes, good afternoon gentlemen. I had a question on the service side, the projects. You mentioned kind of a delay, and in the past you’ve had some delays and cancellations. I’m curious is there a common theme in these when they get delayed or they’re so different everything is a one off and kind of as a follow up, is there something different in what you’ve signed so far in Q3 in these relative to before to reduce that risk?

Yes. So, I don’t think there’s a common theme. I think we’re seeing different reasons behind some of the delays. In one case we had a senior executive, we talked about a senior executive leaving for the business -- for the customer leaving the business mid-quarter, put everything on hold. So we see various reasons for it. I’d say that what we’re seeing with the CRM business is, in the immediate term the momentum that we got from leads from Dreamforce combined with a sales team that’s much larger than it was a few quarters ago, we wrapped up the sales team. And so now we have a sales team that’s much larger that is able to leverage the Etherios brand in a much broader way, our coverage model is better. And what we’re seeing is significant pipeline ramp from these sales guys and backlog generation and in this quarter we see a reliable ramp that we’re talking about and we see that going forward. So, really good momentum from that standpoint, primarily driven by the understanding that the Etherios brand is a very strong brand in the sale force ecosystem and we need to hire really good confident sales people and drive broader coverage to really leverage the value of that brand.

Great. Thank you very much.

Thank you. (Operator Instructions) The next question comes from the line of Sid Sinha of Canaccord. Please go ahead.

Hi, thanks for taking my question. Joe, congratulations on your 15 years with Digi and our best wishes on your future endeavors including golf.

Thank you, Sid.

You are welcome. Just a quick question on the services business mix. I believe in your prepared remarks you talked about several CRM contracts being signed and then I am trying to reconcile that with the fact that the services ramp in the back half of this year is slower than your prior expectations. So, is the slow down more related to the social machine side of the business, is that -- am I thinking about this wrong?

The big driver is Wireless Design Services, so CRM looks good through the year. Wireless Design Services where we had projected a -- not a significant ramp but a -- we expected a ramp in the second half of the year. What we’ve seen is an internal execution issue that we needed to deal with and what we’re now projecting based on what we’ve seen. We’ve made the corrections. We’ve got a new managing director. We’ve got some new sales people. What we see is, because of the sales cycles we see that ramp going to flat, so we will have a flat time for two to three quarters and then we expect that we’ll expect to see the ramp, because it's not a demand issue, it's more of really getting the execution engine driving within that business, so that’s the driver.

Okay, thanks. And then just with respect to your WVA product that you talked about which is now -- is there a potential for using that in the usage-based insurance market. I know that market is ramping pretty significantly both in the U.S. and Europe and given the unique capabilities it have in terms of Telematics in coupling with the Smartphone or Tablet. Is that a consideration, I mean are you looking towards that market?

No, not right now. It's doesn’t have GPS built in, it's more focused on the Telematics service providers. Again we think this regulatory change will really drive the value proposition associated with the WVA, which it's a really nice form factor product that plugs into the vehicle bus, that did not get too technical, (indiscernible) CAN Bus and supports Wi-Fi, and will soon support Bluetooth. So we can provide that connectivity to automate, maintaining records so that you can move from a lot based approach to an electronic approach. And with this regulatory requirement coming in now it becomes much easier to enforce the law with this industry and to enforce things like the driving time limit for truck drivers, host of other things. So that’s one driver. The other thing we’re seeing is in the heavy equipment arena a secondary market that seems to be developing as we’re waiting on this regulatory opportunity is providing connectivity and heavy equipment for diagnostic purposes. And to go in and diagnose what's wrong, take those codes and to be able to handle that much more efficiently for a service group within a heavy equipment business.

Got you. And then just one last one from me, given Digi’s transformation over the past few years and the company’s capabilities in terms of hardware clouding platform and services offerings now, and you have a mature hardware products customer base that you said the last time seeing, coming in lower than your expectations. Is there a potential to basically try to sell your new bundled services into this base, I mean is that something you’re pursuing actively.

Yes, one of the things that we’re doing is we are investing in R&D in driving device management in enhanced services with our hardware products. So with our cellular routers and gateways and some of our RF products and other products, we now have a device cloud capability that we can bundle with those products. And we are continuing to invest in that to enhance that particular service offering. So that’s exactly what we’re doing.

All right. Thanks for taking my questions.

Thank you.

Thank you. (Operator Instructions) I’d now like to turn the call back over to Joe for closing remarks.

Thank you all for attending this call. And as I’ve said, thank you all for the relationships. I look forward to working with you over the next few quarters and into the future in potentially other ways and maybe on the golf course, who knows. But I look forward to talking to you again in three months. Thank you.

Thank you for joining today’s conference. That concludes your presentation and you may now disconnect. Thank you for joining.