Digi International(DGII) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Financial Statements Unaudited financial statements for the period ended March 31, 2025, show a slight revenue decrease, significant net income growth, and improved operating cash flow, with reduced total liabilities Condensed Consolidated Statements of Operations For the three months ended March 31, 2025, total revenue slightly decreased, while operating income and net income significantly increased due to lower costs and expenses Consolidated Statements of Operations Highlights (Three Months Ended March 31) | Metric | 2025 (in thousands) | 2024 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $104,503 | $107,702 | -3.0% | | Product Revenue | $71,987 | $78,432 | -8.2% | | Service Revenue | $32,516 | $29,270 | +11.1% | | Gross Profit | $64,933 | $62,318 | +4.2% | | Operating Income | $13,727 | $8,151 | +68.4% | | Net Income | $10,497 | $3,994 | +162.8% | | Diluted EPS | $0.28 | $0.11 | +154.5% | Consolidated Statements of Operations Highlights (Six Months Ended March 31) | Metric | 2025 (in thousands) | 2024 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $208,369 | $213,791 | -2.5% | | Gross Profit | $129,331 | $123,418 | +4.8% | | Operating Income | $27,086 | $20,284 | +33.5% | | Net Income | $20,580 | $940 | +2089.4% | | Diluted EPS | $0.55 | $0.03 | +1733.3% | Condensed Consolidated Balance Sheets As of March 31, 2025, total assets slightly decreased, total liabilities significantly reduced due to lower long-term debt, and total stockholders' equity increased Selected Balance Sheet Data (as of March 31, 2025 vs. September 30, 2024) | Account | March 31, 2025 (in thousands) | September 30, 2024 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $26,296 | $27,510 | -$1,214 | | Inventories | $38,601 | $53,357 | -$14,756 | | Total current assets | $134,726 | $154,447 | -$19,721 | | Goodwill | $341,669 | $342,774 | -$1,105 | | Total assets | $781,024 | $815,075 | -$34,051 | | Long-term debt | $70,018 | $123,185 | -$53,167 | | Total liabilities | $175,806 | $234,040 | -$58,234 | | Total stockholders' equity | $605,218 | $581,035 | +$24,183 | Condensed Consolidated Statements of Cash Flows For the six months ended March 31, 2025, net cash from operations significantly improved, while cash used in financing activities increased, resulting in a slight net decrease in cash Cash Flow Summary (Six Months Ended March 31) | Activity | 2025 (in thousands) | 2024 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $56,005 | $31,727 | | Net cash (used in) provided by investing activities | $(1,135) | $1,425 | | Net cash used in financing activities | $(56,037) | $(42,692) | | Net decrease in cash and cash equivalents | $(1,214) | $(7,898) | | Cash and cash equivalents, end of period | $26,296 | $23,795 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, segment performance, and revenue recognition, highlighting a new credit agreement, growth in IoT Solutions, and remaining performance obligations - On December 7, 2023, Digi entered into a new Credit Agreement with BMO, providing a $250 million senior secured revolving credit facility[27][28] - Proceeds from the new credit facility were used to repay all obligations under the prior credit facility, resulting in a $9.7 million write-off of remaining debt issuance costs[31] Segment Revenue (Six Months Ended March 31) | Segment | 2025 (in thousands) | 2024 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | IoT Products & Services | $155,606 | $165,413 | -5.9% | | IoT Solutions | $52,763 | $48,378 | +9.1% | | Total Revenue | $208,369 | $213,791 | -2.5% | Revenue by Geography (Six Months Ended March 31) | Region | 2025 (in thousands) | 2024 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | North America | $162,554 | $152,093 | +6.9% | | Europe, Middle East & Africa | $32,999 | $33,875 | -2.6% | | Rest of world | $12,816 | $27,823 | -53.9% | - As of March 31, 2025, the company had approximately $160.8 million of remaining performance obligations, with about $76.2 million expected to be recognized as revenue over the next 12 months[43] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2025 revenue decline, offset by IoT Solutions growth, improved gross profit margin, strong net income and Adjusted EBITDA, and increased Annualized Recurring Revenue Q2 2025 Key Metrics vs. Q2 2024 | Metric | Q2 2025 | Q2 2024 | Change | | :--- | :--- | :--- | :--- | | Consolidated Revenue | $105M | $108M | -3% | | Gross Profit Margin | 62.1% | 57.9% | +420 bps | | Net Income | $10M | $4M | +150% | | Diluted EPS | $0.28 | $0.11 | +155% | | Adjusted EBITDA | $26M | $24M | +8.3% | | ARR (at quarter end) | $123M | $110M | +12% | - The company is experiencing longer than expected sales cycles, which is believed to be related to macroeconomic conditions and may adversely impact results for the remainder of fiscal 2025[73] Revenue by Segment Q2 2025 saw a revenue decrease in IoT Products & Services due to inventory reduction, while IoT Solutions revenue grew from recurring revenue in SmartSense and Ventus - IoT Products & Services revenue decreased by $5.6 million in Q2 2025 year-over-year, driven by a $6.8 million decline in one-time sales as customers reduce inventory levels, partially offset by $1.2 million in recurring revenue growth[78] - IoT Solutions revenue increased by $2.4 million in Q2 2025 year-over-year, entirely from growth in recurring revenue from both SmartSense and Ventus[80] - Total Annualized Recurring Revenue (ARR) grew to $123 million as of March 31, 2025, up from $110 million a year prior, with IoT Products & Services ARR at $28 million and IoT Solutions ARR at $95 million[82] Cost of Goods Sold and Gross Profit by Segment Consolidated gross profit margin improved in Q2 2025, driven by a favorable product mix in IoT Products & Services and higher-margin subscription revenue growth in IoT Solutions Gross Profit Margin by Segment (Three Months Ended March 31) | Segment | 2025 Margin | 2024 Margin | Basis Point Change | | :--- | :--- | :--- | :--- | | IoT Products & Services | 58.9% | 54.0% | +490 bps | | IoT Solutions | 71.4% | 71.0% | +40 bps | | Total Gross Profit Margin | 62.1% | 57.9% | +420 bps | Operating Expenses Total operating expenses decreased in Q2 2025, primarily due to the non-recurrence of a significant litigation reserve from the prior year - General and administrative expenses decreased by 25.5% year-over-year for the three months ended March 31, 2025, falling from $18.6 million to $13.8 million[88] - The decrease in operating expenses was mainly due to a $6.3 million litigation reserve in Q2 2024 that did not repeat in Q2 2025[88] Liquidity and Capital Resources The company maintains strong liquidity, with increased operating cash flow and a new $250 million revolving credit facility, sufficient to fund future operations - Cash flow from operating activities increased by $24.3 million for the six months ended March 31, 2025, primarily due to a $19.6 million increase in net income and favorable changes in net operating assets[107][108] - In December 2023, the company entered a new $250 million senior secured revolving credit facility, replacing its prior agreement[105] Contractual Obligations as of March 31, 2025 | Obligation (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $14,867 | $3,489 | $4,724 | $3,729 | $2,925 | | Revolving loan | $71,000 | $0 | $0 | $71,000 | $0 | | Total | $85,867 | $3,489 | $4,724 | $74,729 | $2,925 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on variable-rate debt and foreign currency exchange rate changes impacting financial results and equity - Interest Rate Risk: The company had $71.0 million outstanding under its variable-rate Revolving Loan as of March 31, 2025, where a hypothetical 25 basis point change in interest rates would change annualized interest expense by $0.2 million[112][115] - Foreign Currency Risk: A 10% change in the average exchange rate for the Euro, British Pound, Australian Dollar, and Canadian Dollar against the U.S. Dollar would have resulted in a 0.9% change in stockholders' equity during the first six months of fiscal 2025[117] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective[119] - No changes occurred during the six months ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[120] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various claims and litigation in the normal course of business, with potential material impacts disclosed in Note 11 - In the normal course of business, the company is subject to various claims and litigation with third parties, where the outcome cannot be assured not to materially affect the business[55][121] Item 1A. Risk Factors The company faces risks from rapid technological changes, including AI, potentially rendering products obsolete, and from international tariffs impacting supply chains and costs - The company's industry is characterized by rapidly changing technologies, such as AI, and evolving standards, which could disrupt markets and render products obsolete[123] - Future success depends on the ability to enhance existing products and introduce new ones to meet changing customer requirements and emerging technologies[124] - Potential new or incremental international tariffs could materially and adversely affect the business by disrupting supply chains, increasing costs, and making products less competitive[126] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2025, 4,057 shares were repurchased at an average price of $34.91, primarily from employee forfeitures for tax withholding on restricted stock units Share Repurchases in Q2 2025 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2025 | 35 | $32.15 | | Feb 2025 | 4,022 | $34.94 | | Mar 2025 | 0 | N/A | | Total | 4,057 | $34.91 | - All shares purchased were forfeited by employees to satisfy tax withholding obligations from the vesting of restricted stock units[127] Item 5. Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 trading plans or other trading arrangements during the quarter ended March 31, 2025 - No directors or officers adopted, modified, or terminated any Rule 10b5-1 trading plans during the quarter[130]