Digi International Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021; comparisons are with the three months ended December 31, 2020, unless stated otherwise. Digi provides IoT connectivity products, services and solutions through its IoT Products & Services and IoT Solutions segments.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $84.3 million | $73.1 million | +15.2% |
| Gross profit / margin | $47.9 million / 56.8% | $41.0 million / 56.1% | +16.7%; +0.7 percentage points |
| Operating income (loss) | $3.8 million | $(0.1) million | Improved |
| Net income (loss) | $1.2 million | $(0.3) million | Turned profitable |
| Diluted EPS | $0.03 | $(0.01) | Improved |
| Adjusted EBITDA (non-GAAP) | $17.0 million; 20.1% of revenue | $13.0 million; 17.7% | Higher |
| Adjusted net income / diluted EPS (non-GAAP) | $12.7 million / $0.36 | $9.9 million / $0.32 | Higher |
Revenue growth was driven mainly by IoT Solutions, up 62.9% to $18.5 million, including Ventus, acquired November 1, 2021, and SmartSense growth. IoT Products & Services revenue rose 6.4% to $65.7 million. IoT Solutions gross margin increased to 65.9%, while IoT Products & Services margin declined to 54.3%, which management attributed partly to product mix and higher production and distribution costs amid supply-chain challenges.
Operating cash flow was $(9.9) million, versus $8.3 million provided a year earlier; management attributed the decline primarily to changes in operating assets and liabilities, including higher inventory and capitalized debt-issuance costs. Investing cash flow was $(348.0) million, principally reflecting $347.6 million for the Ventus acquisition. Financing cash flow was $252.7 million, including $350.0 million of term-loan proceeds and debt repayments. Cash declined to $47.2 million from $152.4 million at September 30, 2021.
Acquisition, debt and liquidity
Digi acquired Ventus for approximately $350 million in cash, funded with cash on hand and debt financing. Preliminary purchase accounting included $179 million of customer relationships, $32 million of technology and trademarks, and $116.9 million of goodwill; the allocation remained subject to change. Ventus expanded the IoT Solutions segment with managed network-as-a-service offerings. The segment reported an operating loss of $0.3 million, compared with $1.4 million a year earlier.
At December 31, 2021, debt was $300.0 million gross ($275.3 million long-term debt, net of issuance costs, plus $11.1 million current maturities); cash was $47.2 million. The term loan carries a floating rate, and the reported weighted-average interest rate was 4.58%. The company made a one-time $50 million term-loan payment in December. A $35 million revolving facility was undrawn and available. Current assets were $156.7 million and current liabilities $79.3 million.
Management stated it expects positive operating cash flows for the foreseeable future and believes cash, operating cash generation and borrowing availability will cover operations and capital expenditures for the next twelve months and beyond. No specific revenue or earnings guidance is provided in the filing.
Material changes, commentary and risks
- Interest expense rose to $4.9 million from $0.4 million, primarily due to acquisition-related borrowing and a $1.9 million write-off of prior debt-financing costs. Other expense totaled $5.0 million.
- Operating expenses increased 7.1% to $44.1 million. The filing cites $3.3 million of Ventus acquisition expenses and incremental expenses from acquisitions, partly offset by lower contingent-consideration expense and restructuring charges.
- The $2.4 million income tax benefit included a $2.2 million discrete benefit, primarily from excess tax benefits on stock compensation; this contributed to GAAP net income despite a pretax loss of $1.2 million.
- Management identifies ongoing COVID-19 uncertainty, supply-chain and transportation disruption, competition, changing technology, demand and customer-credit risks, acquisition integration and benefit-realization risks, and potential litigation. The filing describes ordinary-course claims and litigation but provides no specific material case outcome.
- The Ventus purchase-price allocation is preliminary. Contingent consideration liabilities totaled $6.2 million, including $6.1 million classified as current. Debt covenants include financial-ratio requirements; borrowings are secured by substantially all company assets.
Important facts for investors to verify
- Whether Ventus integration delivers sustained subscription growth and the expected operating benefits, and whether the preliminary purchase-price allocation changes.
- Whether operating cash flow recovers after the working-capital outflow, given the lower cash balance and acquisition-related debt burden.
- Exposure to floating interest rates and compliance with credit-facility covenants as debt is serviced.
- How much reported earnings growth depends on the discrete tax benefit and non-GAAP adjustments; compare adjusted results with GAAP results.
- Whether supply-chain costs and product mix continue to pressure IoT Products & Services margins.