Digi International Inc. (NASDAQ:DGII) Q3 2019 Earnings Conference Call August 8, 2019 5:00 PM ET Company Participants Jamie Loch – Chief Financial Officer Ron Konezny – President and Chief Executive Officer Conference Call Participants Greg Burns – Sidoti & Company Mike Walkley – Canaccord Genuity Jaeson Schmidt – Lake Street David Gearhart – First Analysis Dick Ryan – Dougherty Operator Good day, ladies and gentlemen, and welcome to the Q3 2019 Digi International Inc. Earnings Conference Call. At this time ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Common Stock, par value $.01 per share DGII The Nasdaq Stock Market LLC þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2019 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number: 1-34033 DIGI INTERNATIONAL INC. (Exact name of registrant as speci ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements and management's analysis [Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements%3A) This section presents the unaudited condensed consolidated financial statements for the quarter ended March 31, 2019, including restated prior period information due to the adoption of ASU No 2014-09 [Condensed Consolidated Statements of Operations](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement details the company's revenues, expenses, and net income for the specified periods Q2 & YTD FY2019 vs FY2018 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 (as adjusted) | Six Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2018 (as adjusted) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $65,764 | $54,548 | $128,077 | $99,503 | | **Gross Profit** | $30,329 | $26,834 | $60,112 | $48,793 | | **Operating Income (Loss)** | $785 | $818 | $6,343 | $(1,181) | | **Net Income (Loss)** | $1,342 | $(126) | $6,024 | $(4,613) | | **Diluted EPS** | $0.05 | $0.00 | $0.21 | $(0.17) | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This statement presents the company's net income and other comprehensive income components for the periods Q2 & YTD FY2019 vs FY2018 Comprehensive Income (in thousands) | Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 (as adjusted) | Six Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2018 (as adjusted) | | :--- | :--- | :--- | :--- | :--- | | **Net Income (Loss)** | $1,342 | $(126) | $6,024 | $(4,613) | | **Other Comprehensive (Loss) Income, net of tax** | $(76) | $1,796 | $(1,642) | $2,049 | | **Comprehensive Income (Loss)** | $1,266 | $1,670 | $4,382 | $(2,564) | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | September 30, 2018 (as adjusted) | | :--- | :--- | :--- | | **Cash and cash equivalents** | $69,593 | $58,014 | | **Total current assets** | $175,167 | $162,046 | | **Total assets** | $383,535 | $372,146 | | **Total current liabilities** | $41,091 | $35,573 | | **Total liabilities** | $42,697 | $41,653 | | **Total stockholders' equity** | $340,838 | $330,493 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement details the cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for Six Months Ended March 31 (in thousands) | Activity | 2019 | 2018 (as adjusted) | | :--- | :--- | :--- | | **Net cash provided by (used in) operating activities** | $6,202 | $(4,981) | | **Net cash provided by (used in) investing activities** | $4,953 | $(25,860) | | **Net cash provided by financing activities** | $908 | $3,364 | | **Net increase (decrease) in cash and cash equivalents** | $11,579 | $(25,831) | [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) This statement outlines changes in the company's equity accounts over the reporting period - Total stockholders' equity increased from **$330.5 million** at September 30, 2018, to **$340.8 million** at March 31, 2019. The increase was primarily driven by net income of **$6.0 million**, partially offset by an other comprehensive loss of **$1.6 million**[26](index=26&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides additional details and explanations for the financial statement line items - Effective October 1, 2018, the company adopted ASU 2014-09 (Topic 606) regarding revenue recognition, using the retrospective method. This required restating prior period financial information[29](index=29&type=chunk)[46](index=46&type=chunk) - The company finalized purchase accounting for the TempAlert acquisition in Q1 fiscal 2019. Contingent consideration for TempAlert was valued at **zero** as of March 31, 2019, while the fair value for the Accelerated acquisition contingent consideration was **$5.4 million**[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk) - On October 2, 2018, the company sold its corporate headquarters for **$10.0 million** in cash, recording a gain of **$4.4 million** (**$3.4 million** net of tax) in the first quarter of fiscal 2019[93](index=93&type=chunk) - The company is facing a lawsuit from DimOnOff Inc., which alleges damages of just over **CAD 1.0 million** due to allegedly defective products. The company intends to defend itself and cannot currently assess the potential loss[111](index=111&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=26&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and operational results for the quarter ended March 31, 2019, highlighting revenue growth, gross margin trends, and liquidity [Overview](index=27&type=section&id=Overview) This section provides an overview of Digi International's business and its operating segments - Digi International is a global provider of IoT connectivity products, services, and solutions, operating through two reportable segments: IoT Products & Services and IoT Solutions[136](index=136&type=chunk) - The IoT Products & Services segment provides communication products (cellular, RF, embedded, network) and development services. The IoT Solutions segment offers wireless temperature monitoring and task management services, primarily for healthcare, food service, and logistics, marketed as SmartSense by Digi™[137](index=137&type=chunk)[139](index=139&type=chunk) [Consolidated Results of Operations](index=30&type=section&id=Consolidated%20Results%20of%20Operations) This section analyzes the company's overall financial performance, including revenue, gross profit, and Adjusted EBITDA Q2 FY2019 vs Q2 FY2018 Revenue Performance (in millions) | Revenue Type | Q2 2019 | Q2 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | **Product** | $52.1 | $47.6 | +$4.5 | +9.5% | | **Services and Solutions** | $13.7 | $7.0 | +$6.7 | +96.4% | | **Total Revenue** | **$65.8** | **$54.5** | **+$11.2** | **+20.6%** | - Gross margin decreased to **46.1%** in Q2 2019 from **49.2%** in Q2 2018, primarily due to product/customer mix and costs from transitioning to third-party manufacturing, partially offset by higher-margin recurring revenue from IoT Solutions[146](index=146&type=chunk)[162](index=162&type=chunk) - Adjusted EBITDA for Q2 2019 was **$6.5 million** (**10.0% of revenue**), up from **$5.2 million** (**9.6% of revenue**) in Q2 2018[147](index=147&type=chunk)[148](index=148&type=chunk) - Revenue in North America grew **24.8%** YoY for the quarter, driven by SmartSense by Digi™ sales and the Accelerated acquisition[158](index=158&type=chunk) [Segment Results of Operations](index=33&type=section&id=Segment%20Results%20of%20Operations) This section details the financial performance of the IoT Products & Services and IoT Solutions segments Q2 FY2019 vs Q2 FY2018 Segment Performance (in millions) | Segment | Q2 2019 Revenue | Q2 2018 Revenue | % Change | Q2 2019 Operating Income (Loss) | Q2 2018 Operating Income (Loss) | | :--- | :--- | :--- | :--- | :--- | :--- | | **IoT Products & Services** | $56.0 | $49.8 | +12.5% | $3.5 | $4.7 | | **IoT Solutions** | $9.7 | $4.7 | +105.9% | $(2.7) | $(3.9) | - IoT Solutions revenue growth was driven by new customer deployments and an increase in recurring revenue, which constituted approximately **35%** of the segment's revenue for the six months ended March 31, 2019[181](index=181&type=chunk) - IoT Products & Services operating income decreased **26.4%** YoY for the quarter, primarily due to increased employee-related expenses and adjustments to contingent consideration[176](index=176&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's cash position, cash flow generation, and capital management activities - As of March 31, 2019, the company held **$72.1 million** in cash, cash equivalents, and short-term marketable securities, an increase from **$62.8 million** at September 30, 2018[187](index=187&type=chunk) - Net cash provided by operating activities for the first six months of fiscal 2019 was **$6.2 million**, a significant improvement from a **$5.0 million** use of cash in the same period of fiscal 2018. This was driven by higher net income and favorable changes in working capital[190](index=190&type=chunk) - Investing activities provided **$4.9 million** in cash, largely due to the **$10.0 million** proceeds from the sale of the corporate headquarters, compared to a **$25.9 million** use of cash in the prior year period which included acquisition spending[192](index=192&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks include interest rate fluctuations on its investment portfolio and foreign currency exposure from international operations - The company's main market risks are interest rate risk on its investment portfolio and foreign currency risk[197](index=197&type=chunk)[198](index=198&type=chunk) - For the six months ended March 31, 2019, revenue from foreign customers was approximately **$32.9 million**. A **10%** change in the average exchange rates for the Euro, British Pound, Japanese Yen, and Canadian Dollar would impact revenue by **0.1%** and stockholders' equity by **1.5%**[199](index=199&type=chunk)[200](index=200&type=chunk) [Controls and Procedures](index=37&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and Acting Principal Financial Officer concluded that disclosure controls and procedures were effective as of the end of the period[204](index=204&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to affect, the company's internal control over financial reporting[205](index=205&type=chunk) [PART II. OTHER INFORMATION](index=37&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other relevant information [Legal Proceedings](index=37&type=section&id=ITEM%201.%20Legal%20Proceedings) This section discloses a lawsuit filed by DimOnOff Inc. alleging over CAD 1.0 million in damages related to allegedly defective products - The company is being sued by DimOnOff Inc. for over **CAD 1.0 million** related to allegedly defective products. The company intends to defend itself against the claims[111](index=111&type=chunk)[206](index=206&type=chunk) [Risk Factors](index=37&type=section&id=ITEM%201A.%20Risk%20Factors) The company states that there have been no material changes to the risk factors that were previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2018 - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the year ended September 30, 2018[207](index=207&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company's $20.0 million stock repurchase program expired without any repurchases, though a small number of shares were bought for employee tax obligations - The Board of Directors authorized a **$20.0 million** stock repurchase program on April 24, 2018, which expired on May 1, 2019. No shares were repurchased under this program[208](index=208&type=chunk) - During the second quarter of fiscal 2019, **7,052 shares** were purchased at an average price of **$11.37 per share**, but not as part of the publicly announced repurchase program. These were likely related to satisfying tax withholding obligations for employees on vested equity awards[209](index=209&type=chunk)[115](index=115&type=chunk) [Defaults Upon Senior Securities](index=37&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) The company reports that there were no defaults upon senior securities during the period - None reported[210](index=210&type=chunk) [Mine Safety Disclosures](index=37&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) The company reports that there are no mine safety disclosures applicable to its operations - None reported[211](index=211&type=chunk) [Other Information](index=38&type=section&id=ITEM%205.%20Other%20Information) The company reports that there is no other information to disclose for the period - None reported[213](index=213&type=chunk) [Exhibits](index=38&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, incentive plans, and required certifications - A list of exhibits filed with the report is provided, including corporate governance documents, incentive plans, and required SEC certifications[213](index=213&type=chunk)

Financial Performance Highlights - The company reported record revenue of $65.8 million for Q2 2019, marking the highest quarterly revenue in its history, with IoT Solutions business growing 106% and IoT Products and Services business growing over 12% [22][23] - Net income improved to $1.3 million or $0.05 per diluted share, compared to a net loss of $0.1 million or $0.00 per diluted share in Q2 2018 [29] - Adjusted EBITDA increased to $6.5 million, representing 10% of Q2 revenue, compared to $5.2 million or 9.6% in the previous year [23][24] Business Segment Performance - IoT Products and Services revenue increased by 12.5% to $56 million, with growth driven by cellular and embedded products, while network products experienced a decline [30] - IoT Solutions revenue reached $9.7 million, up from $4.7 million year-over-year, driven by new customer deployments and upgrades from existing customers [33] - The gross margin for IoT Products and Services was 45.6%, down from 50.4% in Q2 2018, primarily due to product mix and manufacturing transition inefficiencies [31][32] Geographic Performance - North America revenue increased by 24.8% year-over-year, EMEA revenue grew by 13.3%, and the rest of the world saw a 4.4% increase [25] Company Strategy and Industry Competition - The company is focused on building recurring revenue through IoT Solutions, with an annualized recurring revenue of $13.8 million, representing approximately 35% of Solutions revenue [34] - The company is committed to software services and subscription revenue to enhance customer value and return on investment [18] - The company is simplifying its business model and exploring potential acquisitions to accelerate transformation [19] Management Commentary on Operating Environment and Future Outlook - Management expressed optimism about sustaining momentum, emphasizing the importance of a strong direct sales force and effective new product development [7][8] - The company anticipates some softness in Q3 but expects to rebuild momentum in subsequent quarters, projecting continued growth in the Solutions business [45][50] - Management highlighted the importance of cash management practices and expressed disappointment over a decrease in cash balance, although they expect improvements moving forward [20][36] Other Important Information - The company is implementing a unified CRM and ERP system, with the first phase planned for launch in Q3 [19] - The company added nearly 3,200 new sites, bringing the total to over 57,000, with minimal subscriber churn [16] Q&A Session Summary Question: Performance of IoT Solutions - Management confirmed that some revenue was from existing customers upgrading equipment, indicating a strong core business and potential for building recurring revenue [41] Question: Revenue from New Products - Management stated that they are exceeding the target of 15% of product and services revenues from products introduced in the last three years [42] Question: Inventory Levels - Management noted that distributor inventory levels were down slightly but within historical ranges [43] Question: Guidance for Second Half of the Year - Management projected a little softness in Q3 but expects to rebuild from there, maintaining a comfortable guidance range [45][46] Question: Contingent Consideration - Management confirmed that contingent consideration relates to earn-outs from SmartSense acquisitions, with minimal liabilities expected to carry into the next fiscal year [46][48] Question: Solutions Business Growth - Management indicated a healthy pipeline with expectations of at least 20% annual growth for the Solutions business [50] Question: Gross Margin Expectations - Management anticipates gradual improvement in gross margins, with expectations for improvements in both business segments [74] Question: Average Revenue per Site - Management noted variability in revenue per site but expects moderate increases over time, particularly in food service [76] Question: Cellular Business Growth - Management reported strong growth in the cellular portfolio, particularly with new products being well received in smart city applications [77][78]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 31, 2018 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number: 1-34033 DIGI INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 41-1532464 | --- | --- | |------------ ...

Digi International Inc. (NASDAQ:DGII) Q1 2019 Earnings Conference Call January 31, 2019 5:00 PM ET Company Participants Gokul Hemmady - Chief Financial Officer Ron Konezny - President and Chief Executive Officer Conference Call Participants Jaeson Schmidt - Lake Street Capital Anthony Stoss - Craig-Hallum Mike Walkley - Canaccord Genuity Greg Burns - Sidoti & Company Scott Searle - ROTH Capital David Gearhart - First Analys Operator Good day, ladies and gentlemen and welcome to the Digi International First ...