Digi International(DGII) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1: Unaudited Financial Statements The unaudited condensed consolidated financial statements for the period ended June 30, 2022, show significant year-over-year growth in revenue and net income, largely driven by the acquisition of Ventus Networks. Total assets increased substantially due to added goodwill and intangible assets, financed by new long-term debt. Cash flow from operations decreased due to working capital changes, while investing cash flow was primarily used for the acquisition. Stockholders' equity saw a modest increase Condensed Consolidated Statements of Operations Highlights (in thousands) | 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 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $103,517 | $79,079 | $282,487 | $229,526 | | Gross Profit | $57,426 | $42,556 | $157,291 | $124,031 | | Operating Income | $9,974 | $4,018 | $21,337 | $7,242 | | Net Income | $4,126 | $3,157 | $8,160 | $5,778 | | Diluted EPS | $0.12 | $0.09 | $0.23 | $0.18 | Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Total Assets | $863,639 | $619,531 | | Goodwill | $341,708 | $225,522 | | Total Liabilities | $376,717 | $147,014 | | Long-Term Debt | $240,702 | $45,799 | | Total Stockholders' Equity | $486,922 | $472,517 | Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended, in thousands) | Activity | June 30, 2022 | June 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $15,454 | $42,084 | | Net Cash used in Investing Activities | ($351,771) | ($7,957) | | Net Cash from Financing Activities | $224,313 | $60,579 | | Net (Decrease) Increase in Cash | ($110,917) | $92,813 | - On November 1, 2021, the company acquired Ventus Networks, LLC for approximately $350 million in cash, funded by cash on hand and debt financing. This acquisition significantly enhances the IoT Solutions segment[23] - Goodwill increased to $341.7 million as of June 30, 2022, primarily due to the $118.3 million of goodwill from the Ventus acquisition. The annual impairment test indicated no impairment, but the fair values for the SmartSense and Ventus reporting units exceeded carrying values by less than 10%[38][42] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, highlighting strong revenue growth driven by both the IoT Products & Services segment and the newly acquired Ventus business in the IoT Solutions segment. The acquisition led to higher gross margins in IoT Solutions but also increased operating expenses and debt. Despite supply chain challenges, demand remains strong. The company believes its liquidity is sufficient for future operations Overview and Key Objectives Digi is a global provider of IoT connectivity solutions with two segments: IoT Products & Services and IoT Solutions. The IoT Solutions segment has been significantly expanded with the acquisition of Ventus. Key objectives for fiscal 2022 include growing the IoT Solutions segment, introducing new products in the IoT Products & Services segment, and integrating the Ventus acquisition. The company faces supply chain constraints but has strong demand and record backlogs - The business operates through two segments: IoT Products & Services (embedded modules, routers, console servers) and IoT Solutions (SmartSense® monitoring and Ventus MNaaS)[106][107][109] - Key operating objectives for fiscal 2022 are: continued growth of SmartSense® and Ventus, growth in IoT Products & Services via new products, and integration of the Ventus business[112] Q3 2022 Key Performance Metrics vs. Q3 2021 | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Consolidated Revenue | $104M | - | +31% | | Consolidated Operating Income | $10.0M | - | +148% | | Diluted EPS | $0.12 | $0.09 | +33% | | Adjusted EBITDA | $21M | - | +82% | | Adjusted Net Income per Share | $0.45 | $0.25 | +80% | Results of Operations For Q3 2022, total revenue increased 30.9% YoY to $103.5 million. IoT Solutions revenue surged 93.7% due to the Ventus acquisition, while IoT Products & Services grew 19.4% on strong demand. Overall gross margin improved to 55.5% from 53.8%, driven by high-margin recurring revenue from Ventus, which offset margin pressure in the products segment from supply chain costs. Operating expenses rose 23.1% due to the acquisition, leading to a 148.2% increase in operating income to $10.0 million Revenue by Segment (Three Months Ended June 30) | Segment | 2022 Revenue | 2021 Revenue | % Change | | :--- | :--- | :--- | :--- | | IoT Products & Services | $79,758K | $66,812K | +19.4% | | IoT Solutions | $23,759K | $12,267K | +93.7% | | Total Revenue | $103,517K | $79,079K | +30.9% | Gross Profit by Segment (Three Months Ended June 30) | Segment | 2022 Gross Profit | 2022 Gross Margin | 2021 Gross Profit | 2021 Gross Margin | | :--- | :--- | :--- | :--- | :--- | | IoT Products & Services | $42,643K | 53.5% | $36,806K | 55.1% | | IoT Solutions | $14,783K | 62.2% | $5,750K | 46.9% | | Total Gross Profit | $57,426K | 55.5% | $42,556K | 53.8% | - The gross margin for IoT Products & Services decreased due to increased production and distribution costs from supply chain challenges and changes in product/customer mix[122][125] - The gross margin for IoT Solutions increased significantly due to high-margin recurring subscription revenue from the Ventus acquisition[126][127] - Operating expenses increased by $8.9 million (23.1%) in Q3 2022 compared to Q3 2021, primarily due to incremental operating expenses from the Ventus acquisition[128] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA and Adjusted Net Income to provide investors with a view of core operating performance, excluding items like amortization, stock-based compensation, and acquisition-related expenses. For Q3 2022, Adjusted EBITDA was $21.0 million (20.3% of revenue), an 82% increase from $11.6 million (14.6% of revenue) in Q3 2021. Adjusted net income per diluted share was $0.45, up from $0.25 in the prior-year quarter Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Income | $4,126 | $3,157 | | Adjustments (Interest, Taxes, D&A, etc.) | $16,922 | $8,419 | | Adjusted EBITDA | $21,048 | $11,576 | | Adjusted EBITDA Margin | 20.3% | 14.6% | Reconciliation of GAAP to Non-GAAP Net Income (in thousands, except per share) | | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | GAAP Net Income | $4,126 | $3,157 | | GAAP Diluted EPS | $0.12 | $0.09 | | Adjusted Net Income | $15,934 | $8,736 | | Adjusted Diluted EPS | $0.45 | $0.25 | Liquidity and Capital Resources For the nine months ended June 30, 2022, operating cash flow decreased to $15.5 million from $42.1 million in the prior year, mainly due to a $34.6 million increase in operating assets and liabilities. The company funded the $350 million Ventus acquisition with a new $350 million term loan and cash on hand. As of June 30, 2022, the company had $41.5 million in cash and believes its liquidity is sufficient for the next twelve months and beyond - Cash flows from operating activities decreased by $26.6 million for the nine months ended June 30, 2022, primarily due to an increase in operating assets and liabilities (net of acquisitions)[146] - Cash used in investing activities increased by $343.8 million, almost entirely due to the Ventus acquisition[148] - Cash from financing activities increased by $163.7 million, driven by proceeds from a new $350 million term loan, partially offset by repayment of a prior facility and early payments on the new loan[149][150][151] Contractual Obligations Summary (as of June 30, 2022, in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $22,220 | $3,802 | $7,646 | $4,153 | $6,619 | | Term Loan | $268,748 | $17,500 | $35,000 | $35,000 | $181,248 | | Interest on long-term debt | $93,503 | $18,012 | $32,640 | $27,293 | $15,558 | | Total | $390,671 | $45,414 | $75,386 | $66,446 | $203,425 | Item 3: Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from interest rate fluctuations on its variable-rate debt, foreign currency translation risk, and credit risk. A 25 basis point change in interest rates would impact annual interest expense by $0.7 million. Foreign currency risk is mainly from translating foreign subsidiary results into U.S. Dollars. Credit risk is managed through customer monitoring - The company has $268.7 million in outstanding variable-rate debt. A 25 basis point change in interest rates would increase or decrease annual interest expense by approximately $0.7 million[156] - The company is exposed to foreign currency translation risk. A 10% change in the exchange rates for the Euro, British Pound, Japanese Yen, and Canadian Dollar would impact stockholders' equity by 0.6%[158] - Credit risk from accounts receivable is controlled through regular monitoring of customer financial status and credit limits[159] Item 4: Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company's disclosure controls and procedures were deemed effective as of June 30, 2022. There were no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[160] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[161] PART II. OTHER INFORMATION Item 1 & 1A: Legal Proceedings & Risk Factors The company is subject to various claims and litigation in the normal course of business, with no specific material proceedings detailed. There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - The company is subject to various claims and litigation in the normal course of business, as disclosed in Note 13 to the financial statements[163][82] - There have been no material changes in risk factors from those previously disclosed in the Annual Report on Form 10-K[164] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of fiscal 2022, the company repurchased 3,354 shares of its common stock. These shares were forfeited by employees to satisfy tax withholding obligations related to the vesting of restricted stock units - A total of 3,354 shares were repurchased during the quarter at an average price of $20.20 per share. These were shares forfeited by employees to satisfy tax withholding obligations on vested restricted stock units[165] Items 3, 4, 5, 6: Other Disclosures and Exhibits The company reported no defaults upon senior securities, no mine safety disclosures, and no other material information under Item 5. Item 6 lists the exhibits filed with the Form 10-Q - No defaults upon senior securities were reported[166] - No mine safety disclosures were required[167] - No other information was reported under Item 5[168]