Digi International Inc. — Form 10-Q Summary
Business context and period. Digi provides IoT connectivity products, services and solutions through its IoT Products & Services and IoT Solutions segments. This report covers the fiscal third quarter and first nine months ended June 30, 2022; the comparative periods ended June 30, 2021. Amounts below are in millions unless stated otherwise.
Financial results
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $103.5 | $79.1 | $282.5 | $229.5 |
| Gross profit / margin | $57.4 / 55.5% | $42.6 / 53.8% | $157.3 / 55.7% | $124.0 / 54.0% |
| Operating income / margin | $10.0 / 9.6% | $4.0 / 5.1% | $21.3 / 7.6% | $7.2 / 3.2% |
| Net income | $4.1 | $3.2 | $8.2 | $5.8 |
| Diluted EPS | $0.12 | $0.09 | $0.23 | $0.18 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $15.5 | $42.1 |
Quarterly revenue grew 30.9%; gross profit rose 34.9% and operating income rose 148.2%. Revenue growth included the contribution from the November 2021 Ventus acquisition. Adjusted EBITDA, a non-GAAP measure, was $21.0 million for the quarter and $57.5 million year to date; adjusted net income was $15.9 million, or $0.45 per diluted share, for the quarter and $43.1 million, or $1.21 per diluted share, year to date. These measures exclude specified items and should be considered alongside GAAP results.
Segments and margins
- IoT Products & Services: quarterly revenue increased 19.4% to $79.8 million; operating income was $10.9 million. Segment gross margin declined 1.6 percentage points to 53.5%, which management attributed to higher production and distribution costs amid supply-chain challenges and product/customer mix.
- IoT Solutions: quarterly revenue increased 93.7% to $23.8 million, primarily reflecting Ventus recurring revenue. Segment gross margin rose to 62.2% from 46.9%; operating loss narrowed to $0.9 million from $2.1 million. The segment remained loss-making.
Balance sheet, cash flow and liquidity
- At June 30, 2022, cash and cash equivalents were $41.5 million, versus $152.4 million at September 30, 2021. Total assets were $863.6 million and stockholders’ equity was $486.9 million.
- Gross term-loan borrowings were $268.7 million; the balance sheet reported $15.5 million current debt and $240.7 million long-term debt, net of unamortized issuance costs. The $35 million revolving facility was undrawn and available. The term loan matures in 2028; its weighted-average interest rate was 6.85% at June 30, 2022. Borrowings are secured by substantially all company assets and subject to financial covenants.
- For the nine months, operating cash flow was $15.5 million, investing cash outflow was $351.8 million and financing cash inflow was $224.3 million. The $110.9 million net decline in cash principally reflects the Ventus acquisition and related financing activity. Operating cash flow fell from $42.1 million a year earlier; management cited a $34.6 million use from changes in operating assets and liabilities, net of acquisitions.
- Current assets were $169.6 million and current liabilities were $94.6 million. Inventory increased to $61.7 million from $43.9 million at fiscal year-end. The filing reports a $6.7 million year-to-date inventory-obsolescence provision.
Management expects positive operating cash flows and believes cash, operating cash generation and borrowing availability will fund operations and capital expenditures for the next 12 months and beyond. This is management’s assessment, not a guarantee.
Material changes, outlook and risks
- Ventus was acquired on November 1, 2021 for approximately $350 million in cash, funded with cash and debt. The acquisition added managed network-as-a-service revenue and substantially increased goodwill and intangible assets. Purchase-price allocation remained preliminary; acquisition-related costs were $4.3 million year to date.
- Interest expense rose to $5.3 million for the quarter and $14.7 million year to date, largely reflecting acquisition financing and the write-off of prior financing fees. The term loan has a floating rate, exposing future earnings and cash flows to rate increases.
- Management reported strong product demand, record bookings and backlogs constrained by supply-chain challenges. It also noted increased recurring Ventus revenue, while lower one-time implementation sales compared with the prior year partly offset growth in IoT Solutions. No specific quantitative revenue or earnings guidance is provided in the filing text.
- Macroeconomic risks cited include the pandemic, supply-chain and transportation disruption, inflation, possible recession and the war in Ukraine. Other disclosed risks include competition, technology changes, customer order cancellations, acquisition integration and litigation. The company says risk factors had no material changes from prior filings.
- The annual goodwill test found no impairment, but SmartSense and Ventus fair values exceeded carrying values by less than 10%; future results or market changes could result in impairment. The company also disclosed ordinary-course claims and litigation, including intellectual-property-related matters, without stating a clear estimate of potential loss.
- The nine-month tax benefit was $1.5 million, including a $2.7 million discrete benefit primarily related to excess tax benefits on stock compensation; tax effects therefore influenced reported results.
Important facts for investors to verify
- How much of reported revenue and growth reflects Ventus, and whether recurring revenue and acquisition synergies develop as expected.
- Whether supply constraints ease, backlog converts to sales, and product-segment margins recover from higher costs and mix effects.
- Whether cash generation and working-capital trends improve, particularly inventory and receivables, after the acquisition-related cash outlay.
- The effect of floating interest rates, debt repayment, covenant headroom and the company’s ability to maintain liquidity.
- Goodwill valuation sensitivity for SmartSense and Ventus, completion of Ventus purchase accounting, and any material litigation or contingency developments.
- The sustainability of GAAP earnings apart from acquisition-related amortization, discrete tax benefits and other adjustments underlying non-GAAP measures.