Digi International Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended December 31, 2019. Comparisons are with the three months ended December 31, 2018 unless otherwise noted. Amounts are in U.S. dollars.
Business context
Digi provides IoT connectivity products, services and solutions through its IoT Products & Services and IoT Solutions segments. On December 13, 2019, it acquired Opengear, a provider of secure IT infrastructure products and software; Opengear results are included in IoT Products & Services from the acquisition date.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $62.3 million | $62.3 million |
| Gross profit / margin | $30.5 million / 48.9% | $29.8 million / 47.8% |
| Operating income (loss) | ($0.5 million) | $5.6 million |
| Net income | $0.2 million | $4.7 million |
| Diluted earnings per share | $0.01 | $0.17 |
| Operating cash flow | ($22.1 million) | $6.1 million |
| Investing cash flow | ($136.3 million) | $8.8 million |
| Financing cash flow | $112.9 million | ($0.2 million) |
- Product revenue was $54.2 million, down 1.3%; service revenue was $8.1 million, up 10.1%. Gross margin improved by 1.1 percentage points.
- IoT Products & Services revenue rose 2.5% to $54.6 million, reflecting Opengear, cellular products and Digi Remote Manager and support services. IoT Solutions revenue fell 14.6% to $7.7 million as prior-year customer product purchases did not recur; subscription revenue increased.
- Operating expenses increased 27.7% to $30.9 million. General and administrative expense included $1.9 million of acquisition costs; the prior-year quarter included a $4.4 million gain on sale of the former headquarters. These items make the year-over-year operating-profit comparison less representative of underlying operations.
- Net income included a $1.1 million income tax benefit, including approximately $1.0 million of discrete benefits, primarily from stock compensation tax benefits and a state deferred-tax-rate adjustment associated with Opengear.
- Company-reported non-GAAP adjusted net income was $4.5 million, or $0.15 per diluted share, versus $4.3 million, or $0.15, a year earlier. Adjusted EBITDA was $6.4 million, or 10.3% of revenue, versus $6.2 million, or 9.9%. These are non-GAAP measures and should be considered alongside GAAP results.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $49.1 million at December 31, down from $92.8 million at September 30, 2019. The quarter’s operating cash outflow primarily reflected working-capital movements, including higher receivables; investing outflow included $136.1 million, net of acquired cash, for Opengear.
- Gross borrowings were $110 million: $50 million term loan and $60 million revolving loan. Debt is variable-rate; the weighted-average rate for the quarter was 4.5%. The reported debt carrying amount, net of issuance costs and current maturities, was $105.5 million long-term plus $2.0 million current.
- The $150 million secured credit facility had $40 million of revolving availability at quarter-end. Digi reported compliance with its financial covenants. Management expected positive operating cash flow and believed cash, operating cash generation and borrowing capacity would fund operations and capital expenditures for the next 12 months and beyond.
- Current assets were $185.0 million and current liabilities $61.5 million. Total assets were $560.9 million and total liabilities $204.6 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described IoT Products & Services as positioned for modest revenue and profitability growth, and IoT Solutions as having potential for more significant growth as condition-monitoring and asset-tracking services develop. It expects recurring subscription and device-cloud revenue to support gross margins, while some mature network products may decline.
- Management identified fiscal 2020 priorities including growing SmartSense, developing IoT Products & Services through new products, pursuing strategic acquisitions and optimizing the fixed-cost footprint.
- The filing added risks related to the newly entered secured credit facility, including covenant compliance, repayment obligations and restrictions on business actions. A 25-basis-point rate move was estimated to change annual interest expense by approximately $0.3 million, holding other factors constant.
- Digi warned that the novel coronavirus outbreak could disrupt suppliers, customers, distribution and demand, with potential adverse effects on operations and results. It also cited competition, technology changes, product defects, customer order changes, acquisition integration and foreign-exchange exposure.
- Opengear purchase-price allocation remained preliminary. Its contingent earn-outs depend on revenue performance; total contingent consideration liabilities were $14.8 million at quarter-end, including $9.1 million for Opengear. A Canadian customer/distributor lawsuit alleges defective products and damages of just over CAD 1.0 million; Digi intends to defend the claim and could not assess the likelihood or amount of loss.
- Digi adopted lease accounting standard Topic 842, recording approximately $14.1 million of right-of-use assets and $17.9 million of lease liabilities at adoption; the filing said adoption did not significantly affect results or cash flows.
Important facts for investors to verify
- Whether Opengear delivers expected growth and synergies, and how final purchase accounting and earn-out outcomes compare with preliminary estimates.
- Whether operating cash flow recovers as working-capital balances, particularly receivables, normalize.
- Debt covenant headroom, variable-rate exposure, scheduled repayments and the availability of the revolving facility.
- Whether IoT Solutions revenue returns to growth and whether subscription growth sustains margins amid product declines and the disclosed coronavirus-related risks.
- Developments in the DimOnOff litigation and other contingencies, including any material change in estimated exposure.