Digi International Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Comparative 2018 figures were restated for adoption of Topic 606 revenue recognition.
Business context and financial results
Digi provides IoT connectivity products, services and solutions through its IoT Products & Services and IoT Solutions segments. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $65.8 | $54.5 | $128.1 | $99.5 |
| Gross profit / margin | $30.3 / 46.1% | $26.8 / 49.2% | $60.1 / 46.9% | $48.8 / 49.0% |
| Operating income (loss) | $0.8 | $0.8 | $6.3 | ($1.2) |
| Net income (loss) | $1.3 | ($0.1) | $6.0 | ($4.6) |
| Diluted EPS | $0.05 | $0.00 | $0.21 | ($0.17) |
| Operating cash flow | Not stated separately | Not stated separately | $6.2 | ($5.0) |
- Q2 revenue comprised $52.1 million product revenue and $13.7 million services and solutions revenue. Q2 Adjusted EBITDA, a non-GAAP measure, was $6.5 million (10.0% of revenue), versus $5.2 million (9.6%).
- At March 31, cash and cash equivalents were $69.6 million, marketable securities $2.5 million, and working capital $134.1 million. Total liabilities were $42.7 million; the balance sheet presents no borrowings under a debt line item.
- Six-month investing cash flow was positive $5.0 million, including $10.0 million from the headquarters sale; capital expenditures were $7.3 million. Financing cash flow was positive $0.9 million.
Changes versus prior comparable period
- Q2 revenue rose 20.6%; product revenue grew 9.5% and services and solutions grew 96.4%. The latter growth was driven largely by SmartSense by Digi, including new deployments, existing-customer purchases and a larger recurring-revenue base.
- Six-month revenue increased 28.7%. IoT Products & Services revenue increased 20.5%; IoT Solutions revenue increased 113.0%.
- Q2 gross margin declined 3.1 percentage points, primarily due to product and customer mix and third-party manufacturing transition costs, partly offset by higher-margin recurring IoT Solutions revenue.
- IoT Solutions remained loss-making: Q2 operating loss was $2.7 million, improving from $3.9 million; six-month loss was $4.5 million, improving from $7.1 million. IoT Products & Services Q2 operating income fell to $3.5 million from $4.7 million, while six-month income rose to $10.9 million from $6.0 million.
- Six-month earnings included a $4.4 million pretax gain on the October 2018 headquarters sale. The six-month comparison also reflects the prior-year Accelerated acquisition and its incremental revenue and expenses.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2019 capital expenditures of approximately $7.8 million, with $7.3 million spent through March 31. Management said available cash, operating cash generation and potential financing were expected to fund operations, possible acquisitions and capital expenditures for the next 12 months and beyond.
- Management expects IoT Solutions revenue to increase over time and expects its gross margin to improve as recurring revenue grows. It cautioned that deployments and one-time equipment orders can make quarterly growth uneven. SmartSense recurring revenue was approximately 35% of IoT Solutions revenue for the six months; the segment served just over 57,000 sites at quarter-end, versus nearly 42,000 a year earlier.
- The company signed a 13-year lease for new headquarters space, with stated minimum lease obligations of $14.8 million. Total minimum operating lease payments disclosed at quarter-end were $23.5 million. A $3.3 million tenant improvement allowance was received after quarter-end.
- A Canadian lawsuit alleges Digi products caused street-lighting system malfunctions and seeks just over CAD 1.0 million. Digi intends to defend itself; management said the likelihood and amount of any loss could not then be assessed.
- Contingent acquisition consideration was $8.5 million at March 31, including a $5.4 million Accelerated earn-out liability; its valuation depends on revenue thresholds and estimates. Management reported no additional goodwill impairment assessment was required at quarter-end.
- Risks highlighted include competition, technology and product-price changes, reliance on distributors, product defects, customer acceptance, acquisition integration, economic conditions, supply-chain disruption, litigation and foreign-currency movements. The company had no formal currency-hedging strategy. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the rapid SmartSense and recurring-revenue growth continues, and how much depends on deployment timing and customer concentration.
- Whether product margins recover from mix and third-party manufacturing costs, while IoT Solutions narrows its operating losses.
- How much of six-month profitability and cash generation reflects the one-time headquarters gain, and whether ongoing operating cash flow remains positive.
- Potential outcomes and financial exposure from the DimOnOff litigation and acquisition earn-outs, particularly Accelerated’s contingent consideration.
- The company’s lease obligations, remaining fiscal 2019 capital expenditures, and any subsequent developments affecting liquidity or financing needs.