Digi International(DGII) - 2025 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Unaudited Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2025, including operations, balance sheets, cash flows, and explanatory notes Condensed Consolidated Statements of Operations Q3 2025 saw a slight revenue increase to $107.5 million and improved net income, while nine-month net income significantly rose to $30.8 million due to lower other expenses Q3 Fiscal 2025 vs Q3 Fiscal 2024 (Three months ended June 30) | Metric | 2025 (in thousands) | 2024 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $107,514 | $105,203 | +2.2% | | Gross Profit | $68,268 | $62,258 | +9.7% | | Operating Income | $14,923 | $12,908 | +15.6% | | Net Income | $10,243 | $9,702 | +5.6% | | Diluted EPS | $0.27 | $0.26 | +3.8% | Nine Months Fiscal 2025 vs Nine Months Fiscal 2024 (ended June 30) | Metric | 2025 (in thousands) | 2024 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $315,883 | $318,994 | -1.0% | | Gross Profit | $197,599 | $185,676 | +6.4% | | Operating Income | $42,009 | $33,192 | +26.6% | | Net Income | $30,823 | $10,642 | +189.6% | | Diluted EPS | $0.82 | $0.29 | +182.8% | Condensed Consolidated Balance Sheets As of June 30, 2025, total assets decreased to $770.3 million, driven by reduced long-term debt and inventories, leading to lower liabilities and increased stockholders' equity Selected Balance Sheet Data (in thousands) | Account | June 30, 2025 | September 30, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $20,104 | $27,510 | | Inventories | $35,439 | $53,357 | | Total assets | $770,341 | $815,075 | | Long-term debt | $40,085 | $123,185 | | Total liabilities | $148,834 | $234,040 | | Total stockholders' equity | $621,507 | $581,035 | Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, 2025, operating cash flow significantly increased, while financing activities used substantial cash, resulting in a net decrease in cash and equivalents Cash Flow Summary (Nine months ended June 30, in thousands) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $79,958 | $56,657 | | Net cash (used in) provided by investing activities | $(2,148) | $947 | | Net cash used in financing activities | $(85,291) | $(62,616) | | Net decrease in cash and cash equivalents | $(7,406) | $(3,356) | | Cash and cash equivalents, end of period | $20,104 | $28,337 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, segment performance, goodwill impairment, a new credit facility, revenue by region, key customer concentration, and remaining performance obligations - The annual goodwill impairment test was completed as of June 30, 2025, for both the IoT Products & Services and IoT Solutions reporting units, with the fair value exceeding the carrying value for each, resulting in no impairment[25][27] - On December 7, 2023, Digi entered into a new credit agreement providing a $250 million senior secured revolving credit facility, which was used to repay all obligations under the prior credit facility[28][29] - One distributor customer within the IoT Products & Services segment accounted for 16% of consolidated revenue for both the three and nine months ended June 30, 2025[38] - As of June 30, 2025, the company had approximately $158.9 million of remaining performance obligations, with about $78.4 million expected to be recognized as revenue over the next 12 months[44] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2025 revenue growth, improved gross margins, and increased ARR, noting that macroeconomic conditions are extending sales cycles and impacting future results Overview and Key Objectives Digi, an IoT solutions provider, aims to transition to complete solutions and grow ARR, but anticipates adverse impacts from longer sales cycles due to macroeconomic conditions - Key operating objectives for fiscal 2025 include transitioning to complete solutions with software and services to drive Annualized Recurring Revenue (ARR) and improving customer service[72][76] - Annualized Recurring Revenue (ARR) grew 12% year-over-year to $126 million as of the end of Q3 2025[76] - The company is experiencing longer sales cycles due to macroeconomic conditions, which is expected to negatively impact financial results for at least the remainder of fiscal 2025[73] Consolidated Results of Operations Q3 2025 saw consolidated revenue growth driven by IoT Solutions, significant gross profit margin expansion, increased operating expenses, and a notable decrease in other expenses Revenue by Segment - Q3 2025 vs Q3 2024 (in thousands) | Segment | 2025 | 2024 | % Change | | :--- | :--- | :--- | :--- | | IoT Products & Services | $80,032 | $80,003 | 0.0% | | IoT Solutions | $27,482 | $25,200 | +9.1% | | Total Revenue | $107,514 | $105,203 | +2.2% | Gross Profit Margin by Segment - Q3 2025 vs Q3 2024 | Segment | 2025 | 2024 | Basis Point Change | | :--- | :--- | :--- | :--- | | IoT Products & Services | 60.6% | 54.4% | +620 | | IoT Solutions | 72.0% | 74.4% | -240 | | Total Gross Profit Margin | 63.5% | 59.2% | +430 | - The decrease in Other Expense for the nine months ended June 30, 2025 was primarily driven by a $9.7 million write-off of debt issuance costs in the prior year and an $8.0 million reduction in interest expense[90] Liquidity and Capital Resources The company maintains strong liquidity, with significantly increased operating cash flow and a new $250 million revolving credit facility, ensuring sufficient funding for future operations - Cash flows from operating activities increased by $23.3 million for the nine months ended June 30, 2025, compared to the same period in 2024[105] - A new $250 million senior secured revolving credit facility was established on December 7, 2023, replacing the prior credit agreement[103] Contractual Obligations at June 30, 2025 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $14,049 | $3,503 | $4,366 | $3,724 | $2,456 | | Revolving loan | $41,000 | $— | $— | $41,000 | $— | | Total | $55,049 | $3,503 | $4,366 | $44,724 | $2,456 | 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 interest expense and stockholders' equity - The company is exposed to interest rate risk on its $41.0 million outstanding variable-rate Revolving Loan. A 25 basis point change in interest rates would increase or decrease annual interest expense by $0.1 million[110][113] - Foreign currency translation risk exists from consolidating foreign subsidiaries. A 10% change in the exchange rates for the Euro, British Pound, Australian Dollar, and Canadian Dollar would impact stockholders' equity by 0.9%[114][115] Controls and Procedures As of June 30, 2025, disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025[117] - No changes occurred during the nine months ended June 30, 2025, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[118] PART II. OTHER INFORMATION Legal Proceedings The company is subject to various claims and litigation in the normal course of business, with further details referenced in the financial statements - In the normal course of business, the company is subject to various claims and litigation with third parties[56][119] Risk Factors Key risks include product obsolescence from rapid technological changes like AI, evolving industry standards, and potential adverse impacts from new international tariffs - The company's future success is susceptible to rapid technological changes, such as the introduction of artificial intelligence, which could render existing products obsolete or unmarketable[121][122] - Potential new or incremental international tariffs pose a risk to the business, with the potential to disrupt supply chains, increase costs, and make products less competitive[124] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2025, the company repurchased 5,448 shares of common stock at $31.18 per share, primarily for tax withholding on restricted stock units Share Repurchases in Q3 Fiscal 2025 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2025 | — | $— | | May 2025 | 5,448 | $31.18 | | June 2025 | — | $— | | Total | 5,448 | $31.18 | Exhibits This section lists all exhibits filed with the Form 10-Q, including CEO/CFO certifications and iXBRL formatted financial statements - The filing includes certifications from the CEO (Exhibit 31a) and CFO (Exhibit 31b), a Section 1350 Certification (Exhibit 32), and financial data formatted in iXBRL (Exhibit 101)[129]