DGII

Digi International Inc. (DGII)

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Digi International, Inc. (DGII)

F2Q09 (Qtr End 03/31/09) Earnings Call

April 23, 2009 5:00 pm ET

Executives

Joe Dunsmore - Chairman, President and CEO

Kris Krishnan - SVP and CFO

Analysts

Jeff Evanson - Dougherty & Company

Jay Meier - Feltl & Company

Greg Weaver - Invicta Capital

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Second Quarter Digi International Incorporated Earnings Call. My name is Letrice. I will be your coordinator for today's conference. At this time all participants will be in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

At this time I would like to turn the call over to your host for today's conference, Mr. Kris Krishnan, Chief Financial Officer.

Kris 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 our press release section of the Digi website at www.digi.com.

Second, I'd 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. Important factors that may cause the 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 levels of profitability, the current uncertainty of the global economic conditions which could negatively affect product demand and the recent financial crisis affecting the banking system and the financial market which could negatively impact the financial solvency of our customers and suppliers, the extreme volatility in fixed income credit in equity markets which could result in actual amounts realized on our debt securities or other investments that differ significantly from current market values.

The estimated expense and risk associated with the planned restructuring of the company's operations, the ability to achieve the anticipated benefits and synergies associated with recent acquisitions and the risk that the combined businesses will not be integrated successfully.

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

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

Joe Dunsmore

Thank you, Kris. Good afternoon, everyone. This is the 25th consecutive quarter of profitability for Digi in an environment that remains very challenging. Our results were within the revenue and profitability guidance ranges that we provided at the beginning of the quarter, albeit revenue was at the low end of the guidance.

Revenue of $40.1 million was down 3.4% sequentially and 6.9% year-over-year. However, wireless product revenues continued their vigorous positive trend, growing 49.4% year-over-year. Wireless product revenues are now 34.9% of our total revenue, up from 21.8% this time last year.

Next, I will comment on the current environment and the opportunity that are presented to Digi, and the additional actions that we are taking to capitalize on that opportunity. As I have said in the previous calls, we (inaudible) in the most severe Darwinian survival of the fittest environment that I've seen in my business career. We are continuing to see shakeout and consolidation across virtually all industry sectors, including the M2M space.

There will be clear winners and losers by market sector as we move through and eventually emerge from this market downturn. Digi's position with its stellar balance sheet, strong operating margins and highly differentiated product positioning to gain share emerges the winner. We are taking action today to fortify this already solid long-term positioning in this very uncertain economic climate.

While we are hopeful that we will see improvement in the external environment, we don't feel that we can make that as an operating assumption going forward.

Thus we are taking actions to reduce expenses including the elimination of the 2009 incentive plan, while at the same time driving accelerated business pivot to invest even more heavily in our wireless solutions.

This restructuring will accelerate the ongoing pivot of Digi's business from wireline to wireless and from individual hardware products to solutions that include hardware, software and services. Specifically, we are shifting more resources to wireless solutions initiatives, closing an engineering location in Long Beach, California, relocating and consolidating the manufacturing function located in Davis, California to Digi's corporate headquarters located in Minneapolis, Minnesota.

This restructuring will result in a work force production of 87 positions and 13% of Digi's total work force. It will also result in increased engineering business development, sales and marketing focus and investment on wireless solutions.

Next, last quarter, I introduced the fundamental principles that we are focusing on in 2009. They are aggressive share gain, profitability, positive operating cash flow, aggressive supply chain management and acquisition.

Now let's review our progress, first, aggressive share gain through continued investment in wireless M2M. As mentioned earlier, we are continuing to increase investment, in wireless M2M while others are pulling back. As a result we are seeing high growth from our wireless product in the face of this downturn. Today's restructuring will create even more positive momentum.

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