Digi International Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; comparisons are to the corresponding 2017 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial results
Digi provides IoT products, services and solutions through its IoT Products & Services and IoT Solutions segments. The period includes TempAlert, acquired in October 2017, and Accelerated Concepts, acquired in January 2018.
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $62.7 million | $45.7 million | $162.7 million | $136.5 million |
| Gross profit / margin | $29.3 million / 46.8% | $22.5 million / 49.2% | $77.9 million / 47.9% | $65.8 million / 48.2% |
| Operating income | $2.0 million | $0.7 million | $0.4 million | $4.6 million |
| Net income (loss) | $2.6 million | $1.3 million | $(2.3) million | $5.0 million |
| Diluted EPS | $0.09 | $0.05 | $(0.09) | $0.19 |
- Quarterly product revenue rose 27.1% to $51.7 million; services and solutions revenue more than doubled, up 117.1% to $11.0 million. Nine-month revenue increased 19.2%.
- Quarterly adjusted EBITDA, a non-GAAP measure, was $7.3 million (11.7% of revenue), versus $5.6 million (12.3%) a year earlier.
- For the nine months, operating cash flow was negative $8.8 million, versus negative $0.5 million in 2017. Investing cash flow was negative $25.8 million, primarily reflecting acquisitions; financing cash flow was positive $4.0 million.
- At June 30, cash and cash equivalents were $47.7 million; current marketable securities were $4.8 million and long-term marketable securities $2.2 million. Working capital was $115.5 million. The balance sheet reports no borrowings or debt; total liabilities were $36.8 million.
Changes versus prior comparable periods
- Quarterly growth reflected $8.0 million of incremental Accelerated revenue and $5.4 million of SmartSense by Digi growth, including TempAlert. Digi reported serving nearly 48,000 sites, up from nearly 42,000 at March 31, 2018.
- Quarterly gross margin declined 2.4 percentage points. Management cited the manufacturing transition, product and customer mix, and higher acquisition-related amortization.
- Nine-month operating income fell to $0.4 million, and the company recorded a $2.3 million net loss. The $3.0 million income tax provision included approximately $2.7 million of provisional tax expense associated with U.S. tax-law changes and $0.1 million of transition-tax expense; adoption of share-based-payment accounting also contributed discrete tax expense.
- Cash and short- and long-term marketable securities totaled $54.7 million at June 30, versus $115.0 million at September 30, 2017. Management attributed the reduction mainly to acquisition spending. Accounts receivable and inventory also increased.
- IoT Products & Services delivered quarterly operating income of $4.5 million. IoT Solutions revenue grew sharply, but the segment recorded a $2.5 million quarterly operating loss and a $10.1 million nine-month operating loss.
Outlook, risks and unusual items
- Management expected positive operating cash flows and said existing liquidity, operating cash generation and potential access to debt or equity financing should fund operations, possible acquisitions and capital expenditures for the next 12 months and beyond. Fiscal 2018 capital expenditures were estimated at approximately $2.2 million; $1.0 million had been spent by June 30.
- The manufacturing-function transfer from Eden Prairie to contract manufacturers was expected to eliminate about 53 positions, incur approximately $0.5 million in employee-related restructuring charges in fiscal 2018, and generate annualized savings of $3 million to $5 million.
- Management expected IoT Solutions revenue to increase over time, while noting that large customer deployments may cause quarterly fluctuations. It also expected Solutions gross margins to improve as recurring revenue grows. Mature network products were expected to decline over time.
- The board authorized a new $20 million share-repurchase program, effective May 23 through November 23, 2018; no shares were repurchased under the program during the quarter. Shares reported as purchased in the quarter were employee tax-withholding forfeitures, not program repurchases.
- Key risks include product and technology competition, mature-product declines, customer-project variability, acquisition integration and earn-out estimates, foreign-currency exposure, working-capital requirements, and potential impairment if reporting-unit performance or valuation assumptions weaken. The company reported no formal currency hedging strategy.
- The filing describes ordinary-course claims and litigation but provides no clear quantified loss estimate. The headquarters sale for $10.0 million was expected to close by October 2018 after remaining contingencies were satisfied on July 23, 2018.
Important facts for investors to verify
- Whether SmartSense growth and site additions translate into improved segment profitability and recurring-revenue margins.
- Whether operating cash flow recovers as receivables and inventory normalize, and how acquisition-related spending affects liquidity.
- The final tax accounting under the Tax Cuts and Jobs Act and the effect of discrete tax items on reported earnings.
- Progress and realized savings from the manufacturing transition, including remaining restructuring charges and position reductions.
- Actual performance against earn-out targets and the sensitivity of contingent consideration and goodwill valuations to assumptions.
- Whether the planned headquarters sale closed on the expected terms and timetable.