Digi International Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparisons are with the three months ended December 31, 2019. Digi provides IoT connectivity products, services and solutions through its IoT Products & Services and IoT Solutions segments.
Financial performance
- Revenue: $73.1 million, up 17.4%. Product revenue was $62.6 million, up 15.4%; service revenue was $10.5 million, up 30.6%.
- Gross profit and margin: $41.0 million and 56.1%, versus $30.5 million and 48.9%. Operating loss was $0.1 million, compared with $0.5 million; operating margin improved to -0.2% from -0.8%.
- Net income: GAAP net loss of $0.3 million, or $0.01 per diluted share, versus net income of $0.2 million, or $0.01 per diluted share. Non-GAAP adjusted net income was $9.9 million ($0.32 per diluted share), versus $4.5 million ($0.15). Adjusted EBITDA was $13.0 million, or 17.7% of revenue, versus $6.7 million, or 10.7%.
- Segment results: IoT Products & Services revenue rose 13.1% to $61.8 million; operating income was $1.3 million versus $4.4 million, including a $5.8 million contingent-consideration remeasurement expense. IoT Solutions revenue rose 47.5% to $11.4 million; operating loss narrowed to $1.4 million from $4.9 million.
- Cash flow: Operating cash flow was $8.3 million, versus cash used of $22.1 million. Investing used $0.8 million. Financing used $12.8 million, including $15.6 million of debt repayments. Cash declined $4.9 million to $49.3 million.
- Liquidity and debt: Current assets were $167.3 million and current liabilities $67.5 million. Gross term-loan principal was $47.5 million; no revolver borrowings remained, and $100 million of revolving capacity was available. The company reported compliance with debt covenants.
Material changes and unusual items
- Revenue growth reflected Opengear console-server sales and technical services, as well as new and expanded IoT Solutions deployments and subscriptions. SmartSense served more than 75,000 sites, compared with nearly 67,000 a year earlier.
- IoT Products & Services gross margin increased 900 basis points, while IoT Solutions gross margin declined 250 basis points, partly due to hardware mix, freight and tariffs, and remediation and warranty claims.
- Operating expenses rose 33.0% to $41.2 million, including a $5.8 million fair-value increase in Opengear contingent consideration, higher compensation and amortization, and $0.7 million of restructuring charges. The earn-out liability reached its $10.0 million maximum; payment was expected in Q2 FY2021.
- The company reorganized IoT Products & Services around product lines and eliminated 19 positions, primarily in the U.S. A non-material out-of-period adjustment increased goodwill by $0.8 million in connection with Opengear purchase accounting.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided in the filing. Management expects positive operating cash flow and believes cash, operating cash generation and available credit will fund operations and capital expenditures for the next 12 months and beyond. Fiscal 2021 priorities include growing SmartSense, driving IoT Products & Services growth through new products, pursuing strategic acquisitions and optimizing the cost footprint.
Management said COVID-19 impacts remain uncertain, with demand varying across customer industries; supply-chain and operating effects had been limited to date, but future restrictions could cause harm. Other disclosed risks include competition, technology changes, order cancellations, customer and supplier financial conditions, product defects, acquisition integration and restructuring effects. A Canadian customer lawsuit alleges defective products caused street-light malfunctions and seeks just over CAD 1.0 million; Digi intends to defend the matter and cannot assess the likelihood or amount of loss. Management reported no material changes to previously disclosed risk factors.
Investor verification checklist
- Review the quality and durability of revenue growth, particularly Opengear-related sales and IoT Solutions subscription growth.
- Assess GAAP-to-non-GAAP adjustments, especially the contingent-consideration remeasurement and other exclusions from adjusted earnings and EBITDA.
- Confirm the timing and cash impact of the $10.0 million Opengear earn-out and planned debt repayments.
- Monitor IoT Solutions margins, warranty and remediation costs, and the effects of COVID-19 on customer demand and supply chains.
- Track the outcome and potential financial exposure of the DimOnOff litigation.