Digi International Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018. Unaudited results are compared with the corresponding 2017 periods. Digi provides IoT connectivity products, related services and IoT monitoring solutions.
Financial performance
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $54.8 million, up 20.1% | $100.0 million, up 10.1% |
| Gross profit and margin | $26.7 million; 48.6% (48.0% in 2017) | $48.6 million; 48.6% (47.7% in 2017) |
| Operating income (loss) | $0.5 million (versus $1.5 million income) | $(1.6) million (versus $3.9 million income) |
| Net income (loss) | $(0.4) million; $(0.01) per diluted share | $(4.9) million; $(0.18) per diluted share |
| Adjusted EBITDA, non-GAAP | $4.8 million, or 8.8% of revenue (versus $4.7 million, or 10.2%) | Not stated in the supplied filing text |
- Revenue mix and segments: Quarterly product revenue was $47.6 million, up 13.9%; services and solutions revenue was $7.2 million, up 87.1%. IoT Products & Services revenue was $49.8 million, with $4.7 million operating income. IoT Solutions revenue was $5.0 million, but the segment recorded a $4.2 million operating loss. For the six months, IoT Solutions revenue was $9.3 million and its operating loss was $7.6 million.
- Cash flow: Operating activities used $5.0 million in the first half, compared with $0.9 million used in 2017. Investing activities used $25.9 million, primarily reflecting acquisitions; financing activities provided $3.4 million. Cash and cash equivalents declined $25.8 million to $52.4 million.
- Liquidity and balance sheet: Cash, cash equivalents and short-term marketable securities totaled $57.1 million; including long-term securities, the total was $59.6 million. Working capital was $109.3 million, down from $156.4 million at September 30, 2017. Total liabilities were $37.3 million; the balance sheet lists no borrowings or debt balance.
- Taxes: The six-month income tax provision was $3.0 million despite a pretax loss, primarily reflecting approximately $2.7 million of provisional expense related to the Tax Cuts and Jobs Act and the accounting for share-based compensation. The company had not completed its tax-law calculations.
Changes versus the prior comparable periods
- Quarterly revenue growth was substantially acquisition-supported: Accelerated contributed $6.2 million of incremental product revenue, and TempAlert contributed $3.5 million of incremental services and solutions revenue. The filing attributes the broader rise in services and solutions revenue to growth in SmartSense by Digi as well as acquisitions.
- Quarterly gross margin improved by 0.6 percentage points, helped by the higher-margin Accelerated products; the filing cites IoT Solutions and increased acquisition-related amortization as offsets.
- Operating expenses rose 28.3% in the quarter and 27.4% in the first half. Operating income fell in the quarter, while the first-half result moved from operating income to loss. The first-half net result also moved from income to loss, with acquisition-related costs, higher expenses and the tax provision among the reported factors.
- Cash and working capital declined substantially, which management attributed primarily to cash paid for TempAlert and Accelerated. Identifiable intangible assets rose to $44.3 million and goodwill to $156.0 million, reflecting acquisitions.
Outlook, risks and notable items
- Digi gave no specific revenue or earnings guidance in the supplied filing text. It expects positive operating cash flow and believes available liquidity, operating cash generation and potential financing will support operations, possible acquisitions and capital expenditures for the next 12 months and beyond. Fiscal 2018 capital expenditures were expected to be approximately $2.2 million; $0.8 million had been spent by March 31.
- After quarter-end, Digi announced a manufacturing transition to contract manufacturers, with approximately 60 positions planned for elimination and about $0.6 million in restructuring charges expected in the third and fourth quarters of fiscal 2018. The company estimated annualized savings of $3.0 million to $5.0 million. It warned that longer lead times, forecasting errors and difficulty retaining employees could disrupt supply or sales.
- Management said it serves nearly 42,000 sites through IoT Solutions and expects that segment’s gross margin to improve as recurring revenue grows. However, IoT Solutions remained loss-making, and its operating loss increased year over year.
- Key business risks include mature product declines, project-driven and potentially variable cellular sales, competitive and technology change, acquisition integration and execution, cybersecurity and third-party cloud exposure, and foreign currency movements. Accelerated had historically been highly dependent on one telecommunications carrier customer. Greater reliance on contract manufacturers may lengthen production lead times.
- Contingent consideration for acquired businesses was $8.3 million at March 31, 2018. Its valuation depends on estimated probabilities of meeting revenue targets. Digi disclosed ordinary-course claims and litigation but provided no specific material case details in the supplied text.
- The board authorized a new share repurchase program of up to $20 million on April 24, 2018, expiring May 1, 2019. The prior authorization expired May 1, 2018.
Most important facts for investors to verify
- How much of reported growth reflects underlying organic demand versus acquisitions, particularly Accelerated, TempAlert and SMART Temps.
- Whether IoT Solutions can improve margins and reduce operating losses as recurring revenue and site counts grow.
- Cash conversion and working-capital trends after acquisition spending, including receivables and inventory growth.
- Final tax effects of the 2017 tax legislation and the effect of acquisition-related amortization and earn-out remeasurement on future earnings.
- Progress on the manufacturing transition, expected savings, service levels and the risk from longer lead times; and the retention or renewal of Accelerated’s major carrier relationship.