Digi International Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. The filing was signed May 6, 2022. Digi provides IoT connectivity products, services and solutions through its IoT Products & Services and IoT Solutions segments. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $94.7 | $77.3 | $179.0 | $150.4 |
| Gross profit / margin | $52.0 / 54.9% | $40.5 / 52.3% | $99.9 / 55.8% | $81.5 / 54.2% |
| Operating income | $7.6 | $3.4 | $11.4 | $3.2 |
| Net income | $2.8 | $2.9 | $4.0 | $2.6 |
| Diluted EPS | $0.08 | $0.09 | $0.11 | $0.08 |
| Operating cash flow | Six-month period: $(4.0) | Prior-year six-month period: $21.3 |
Quarterly revenue rose 22.5%, gross profit increased 28.5%, and operating income more than doubled. GAAP net income fell 2.8%, as higher interest expense offset operating improvement. The filing also reports Q2 adjusted EBITDA of $19.5 million (20.6% of revenue), versus $11.7 million (15.1%), and adjusted net income of $14.5 million, or $0.41 per diluted share, versus $8.6 million, or $0.27. These are non-GAAP measures.
Q2 product revenue was $69.2 million versus $66.9 million; service revenue was $25.5 million versus $10.4 million. IoT Products & Services segment revenue increased 8.7% to $71.4 million. IoT Solutions revenue doubled to $23.3 million, reflecting Ventus and organic growth. IoT Solutions remained loss-making at the operating level, with a $1.5 million Q2 loss versus $1.2 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $41.4 million at March 31, 2022, down from $152.4 million at September 30, 2021. The six-month cash decline was $111.0 million.
- Operating cash flow was negative $4.0 million; investing cash flow was negative $349.2 million, principally reflecting $347.5 million of net cash paid for acquisitions, primarily Ventus. Financing provided $242.8 million, including $350 million of term-loan proceeds and debt repayments.
- Term-loan principal outstanding was $288.7 million; the $35 million revolving facility was undrawn. The term loan’s weighted-average interest rate was 4.93%. The loan is secured by substantially all company assets and includes financial covenants.
- Current assets were $167.8 million and current liabilities $90.0 million. Accounts receivable was $56.7 million, inventory $51.7 million, and unearned revenue $21.3 million.
Management expects positive operating cash flows and believes cash, operating cash generation and borrowing availability will fund operations and capital expenditures for the next twelve months and beyond. It attributed the first-half operating cash outflow largely to a $37.3 million net use from changes in operating assets and liabilities, which it does not anticipate at the same level in future periods.
Material changes, outlook and risks
- Digi acquired Ventus on November 1, 2021, for approximately $350 million in cash, financed with cash and debt. Ventus expanded IoT Solutions with managed network-as-a-service offerings and recurring subscription revenue. The preliminary purchase-price allocation includes $116.9 million of goodwill and $211 million of identifiable intangible assets; allocation remained subject to change.
- IoT Solutions gross margin improved substantially as recurring subscription revenue, including Ventus, grew. IoT Products & Services quarterly margin improved, but its six-month margin declined 90 basis points; Digi cited supply-chain-related production and distribution costs and product/customer mix.
- Management reported strong product demand, record bookings and backlogs, but said supply constraints limited its ability to meet demand. It also described renewed opportunities for project-based deployments. The filing provides no quantified revenue or earnings guidance.
- Key uncertainties include continuing component and freight disruptions, inflation, the COVID-19 pandemic, the war in Ukraine and related sanctions, and the effects of these conditions on costs, order fulfillment and demand. Management said their future scope and financial impact could not be reasonably estimated.
- Other items include $4.0 million of fiscal-year-to-date Ventus acquisition costs, higher interest expense after refinancing, and a $2.2 million discrete tax benefit in the first half, primarily from excess tax benefits on stock compensation. The filing notes ordinary-course claims and litigation but does not describe a specific material proceeding.
Important facts for investors to verify
- Whether supply availability, backlog conversion, and higher component and freight costs improve or constrain future sales and margins.
- Ventus integration, organic growth, recurring-revenue contribution, and the final purchase-price allocation and related amortization burden.
- Cash conversion and working-capital trends following the first-half operating cash outflow, alongside acquisition and capital-spending needs.
- Debt repayment capacity and sensitivity to floating interest rates; the filing estimates a 25-basis-point rate change would affect annualized interest expense by $0.7 million.
- The sustainability of reported GAAP profitability relative to adjusted, non-GAAP results and the impact of acquisition-related amortization, interest, and expenses.