Digi International(DGII) - 2019 Q2 - Earnings Call Transcript

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]