Digi International Inc. (DGII)

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Digi International, Inc. (DGII)

F1Q09 (Qtr End 12/31/08) Earnings Call

January 22, 2009, 5:00 pm ET


Subramanian Krishnan - SVP and CFO

Joe Dunsmore - Chairman, President and CEO


Ragu Madabushi - Collins Stewart

Jay Meier - Feltl and Company

Charlie Anderson - Dougherty and Company



Good day ladies and gentlemen, and welcome to the First Quarter 2009 Digi International Incorporated Earnings Conference Call. My name is Wayne and will be your operator for today. At this time all participants are in listen-only mode. We will be performing a question-and-answer session towards the end of this call. (Operator Instructions).

At this time I will be handing the call over to your host for today's conference, Mr. Krishnan, you may proceed, sir.

Subramanian Krishnan

Good afternoon, and thank you for joining us today.

Before we start, I need to go over a few details. First, if you do not have a copy of our earnings release, you may access it through the press release section of the Digi Web site at www.digi.com.

Second, I would like to remind our listeners that our remarks may contain forward-looking statements that involve risks and uncertainties. These forward-looking statements are not a guarantee of the Company's future performance. The important factors that may cause actual results to differ materially include, but are not limited to the following.

Rapid changes in technologies that may displace; products sold by Digi; the business environment in which Digi operates; Digi's reliance on distributors; declining prices of networking products and changes in the company's level of profitability; the current uncertainty in the global economic conditions, which could negatively affect product demand; the recent financial crisis affecting the banking system and the financial markets, which could negatively impact the financial solvency of our customers and suppliers; the extreme volatility in the fixed income credit and equity markets, which could result in actual amounts realized on our debt securities or other investments that differ significantly from current market values; the ability to achieve the anticipated benefits and synergies associated with the recent acquisitions and the risks that the combined businesses will not be integrated successfully.

Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including the reconciliation to the most comparable GAAP measures are included in the earnings release or in the Form 8-K that we've filed before this call. The Form 8-K can be accessed through the SEC filing section of our investor relations web site at www.digi.com.

Now, I would like to introduce Mr. Joe Dunsmore, Chairman, President and CEO.

Joe Dunsmore

Thank you, Kris. Welcome to the call everyone. Digi team continued to execute in a steadfast way on its strategy in fiscal Q1 in a rapidly changing economic climate. Amidst a severe contraction in demand that began in November, we are able to achieve profitability for the quarter.

This is the 24th consecutive quarter of profitability for Digi and is of even greater significance this quarter in an environment where many NASDAQ companies will likely fall from profitability.

We saw negative impact across most product categories and geographies. However, the area that has wavered the least in these severe headwinds is our wireless product offering.

Total wireless revenue was up significantly year-over-year, and grew as a percent of revenue from 21.4% last year to 32.5% this year. Specifically, cellular performance far exceeded expectations and was primarily driven by many small to medium sized opportunities. Sarian performed well despite negative foreign exchange rate impact and MaxStream grew albeit at a much slower rate than in previous quarters.

Next, I will comment on the current environment and the golden opportunity that presents to Digi expanding on the comments that I made in the pre-release call a couple of weeks ago.

As I mentioned, we've clearly answered the most severe Darwinian survival of the fittest environment that I have seen in my business career. We will continue to see shake out consolidation across virtually all industry sectors over the coming months, including the M2M states. There will be clear winners and losers by market sectors who move through and eventually emerge from this severe market downturn.

This presents a tremendous opportunity for Digi to significantly enhance its market position since there are very few companies that have entered the downturn with the strength of operating margin and the balance sheet strength that Digi possesses.

Digi has no bank debt currently on its books. When you get the chance please look at the Digi investor presentation on our website and you'll find a table on slide four that compares Digi on five key liquidity ratios to high-tech bellwethers Intel, IBM, CI, Cisco and HP.

Digi's ranking is number one, number one, number one, number two and number two, respectively, versus the five bellwether companies for this analysis. Also keep in mind that many of our competitors have entered this downturn in a weakened state. And we believe that customers will place even greater focus on buying from strong and enduring companies like Digi.

We fundamentally believe the strength of the balance sheet and keeping an eye on relative performance are absolutely crucial in this current operating environment, Digi's position with its stellar balance sheet, strong operating margins and highly differentiated product positioning to gain share and emerge as a winner.

Next, I will expand on the fundamental principles that we are focusing on in 2009. One, aggressive share gain through continued investment in wireless M2M. We have continued to invest as others have pulled back over the past year. As a result, we are seeing growth from our wireless products in the face of this downturn.

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