Digi International Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021; comparative periods ended June 30, 2020. The filing is unaudited. Digi provides IoT connectivity products, services and solutions through its IoT Products & Services and IoT Solutions segments.
Financial results
| Metric | Three months ended June 30, 2021 | Year-to-date 2021 | Comparable change |
|---|---|---|---|
| Revenue | $79.1 million | $229.5 million | Up 12.4% and 11.4% |
| Gross profit / margin | $42.6 million / 53.8% | $124.0 million / 54.0% | Margin up 0.7 and 2.3 percentage points |
| Operating income / margin | $4.0 million / 5.0% | $7.2 million / 3.2% | Quarterly income up 40.7%; year-to-date up 18.8% |
| Net income | $3.2 million | $5.8 million | Up 78.8% and 45.2% |
| Diluted EPS | $0.09 | $0.18 | Compared with $0.06 and $0.13 |
| Adjusted EBITDA (non-GAAP) | $11.6 million; 14.6% of revenue | $36.2 million; 15.8% of revenue | Compared with $10.5 million / 15.0% and $28.1 million / 13.6% |
For the nine months, operating cash flow was $42.1 million, versus $19.2 million a year earlier. Investing activities used $8.0 million, compared with $136.8 million, largely reflecting the prior-year Opengear acquisition. Financing activities provided $60.6 million, including $73.8 million net proceeds from a March stock offering. Cash rose to $146.9 million from $54.1 million at September 30, 2020.
At June 30, 2021, the company reported $48.1 million of revolving-loan borrowings ($45.7 million net of issuance costs), no current debt maturities, and $151.9 million of available borrowing capacity. The revolver matures March 15, 2026; its weighted-average interest rate was 0.47%, and Digi was in compliance with its debt covenants. Total current assets were $246.3 million and current liabilities $57.4 million. Total liabilities were $147.6 million and stockholders’ equity $465.5 million.
Performance drivers and changes
- Quarterly IoT Products & Services revenue grew 5.3% to $66.8 million; IoT Solutions revenue grew 78.7% to $12.3 million. For nine months, the segments grew 5.0% and 67.1%, respectively.
- IoT Solutions growth reflected new hardware installations and subscription revenue; the business served nearly 79,000 sites at June 30, versus nearly 69,000 a year earlier. Its quarterly gross margin declined 3.3 percentage points, partly due to greater one-time hardware sales and supply-related cost increases.
- Overall gross margin improved, with favorable product mix cited in IoT Products & Services. Digi also reported increased component, manufacturing and freight costs and longer customer fulfillment timelines.
- Operating expenses rose 11.7% in the quarter and 16.4% year to date. The filing cites higher compensation, acquisition-related costs, bad debt and outside services; year-to-date expenses also included a $5.8 million increase in fair value of contingent consideration. Lower travel and M&A expenses partly offset increases.
- Interest expense declined year over year following debt repayments and refinancing. Nine-month results included a $0.2 million income-tax expense, compared with a $0.9 million benefit in the prior-year period.
Outlook, risks and notable items
Management expects positive operating cash flow and believes cash, operating cash generation and revolver availability will fund operations and capital expenditures for at least the next 12 months. The filing provides no numerical revenue or earnings guidance. Management says the duration and effects of COVID-19 and global supply-chain and freight disruptions remain uncertain and could materially affect results. Risks include component shortages and higher costs, reliance on limited-source suppliers, demand uncertainty, competition, technology changes, acquisition integration and potential litigation.
- Digi acquired Haxiot in March 2021 for $7.1 million in upfront cash, with contingent earn-outs; its results are included in IoT Products & Services. The June 30 contingent-consideration liability was $5.9 million.
- On July 6, 2021, after quarter-end, Digi acquired Ctek for $12.0 million in cash, plus potential earn-outs. Purchase-price allocation was still in process.
- The company eliminated 19 positions under a reorganization and recorded $1.0 million in restructuring charges through June 30.
- A Canadian product-defect lawsuit was settled during the quarter with no payment by Digi, but the company agreed to provide reduced pricing on a limited number of products.
Investor verification points
- Verify segment operating income: the segment table reports year-to-date IoT Products & Services income of $12.0 million and IoT Solutions loss of $4.7 million, while the MD&A narrative gives materially different segment figures. The filing text does not provide a clear reconciliation.
- Assess the impact and duration of supply shortages, freight costs and longer lead times, including any effects on margins, customer orders and revenue recognition.
- Review the quality of reported earnings alongside non-GAAP adjustments, particularly amortization, stock compensation, acquisition costs and contingent-consideration changes.
- Consider dilution from the March offering of 4.025 million shares, which generated $73.8 million in net proceeds, and subsequent changes in weighted-average shares.
- Monitor Haxiot and Ctek earn-out liabilities, acquisition integration and the development of Ctek’s final purchase-price allocation.