Record Quarterly Revenue of $112M, End of Quarter ARR of $104M

EPS of $0.18, Adjusted EPS of $0.50

Digi International^® Inc. (NASDAQ:DGII), a leading global provider of business and mission critical Internet of Things ("IoT") products, services and solutions, today announced its financial results for its third fiscal quarter ended June 30, 2023.

Third Fiscal Quarter 2023 Results Compared to Third Fiscal Quarter 2022 Results

Revenue was $112 million, an increase of 8%.

Gross profit margin was 56.9%, an increase of 140 basis points. Gross profit margin excluding amortization was 57.7%, an increase of 100 basis points.

Net income per diluted share was $0.18, up from $0.12, an increase of 50%.

Adjusted EPS was $0.50 per diluted share, an increase of 11%.

Adjusted EBITDA was $24 million, an increase of 16%.

Annualized Recurring Revenue (ARR) was $104 million at quarter end, an increase of 13%.

Reconciliations of GAAP and non-GAAP financial measures appear at the end of this release.

"Digi posted our tenth consecutive quarter of record revenue," said Ron Konezny, President and Chief Executive Officer. "Driven by strong Annualized Recurring Revenue (ARR) growth, we achieved the second of our ‘100' objectives. ARR exceeded $100 million at the end of the quarter. In addition, we reduced the principal of our outstanding debt by $20 million. Our team's solution mindset is driving customer and partner value."

Segment Results

IoT Product & Services

The segment's third fiscal quarter 2023 revenues of $87 million increased 10% from the same period in the prior fiscal year. This increase is attributable to growth in our OEM & Infrastructure Management product lines. ARR as of the end of the third fiscal quarter was $22 million, an increase of 47%. Gross profit margin increased 60 basis points to 54.1% of revenues for the third fiscal quarter of 2023, due to ARR.

IoT Solutions

The segment's third fiscal quarter 2023 revenues of $25 million increased 5% from the same period in the prior fiscal year. This increase was a result of increased sales of both SmartSense and Ventus offerings. ARR as of the end of the third fiscal quarter was over $82 million, an increase of 6%. Gross profit margin increased 450 basis points to 66.7%, due to higher ARR in the third fiscal quarter of 2023.

Fourth Fiscal Quarter 2023 Guidance

The debate around an imminent recession and the potential severity if one arrives is ongoing. Digi's broad array of end markets has helped the company weather challenging market conditions in the past. We believe the IIoT market is still in its early stage of adoption with a significant set of greenfield opportunities. Most of the world's machines are not connected today. Over time, we expect more end markets to deploy IIoT.

For the fourth fiscal quarter of 2023, we expect revenue of $108 million to $112 million, or growth of 2% to 6% year-over-year. Adjusted EBITDA is expected to be between $23.0 million and $24.0 million. Adjusted EPS is expected to be $0.46 to $0.49 per diluted share, assuming a weighted average share count of 37.3 million shares.

Based on our fiscal fourth quarter guidance combined with year-to-date results, Digi now expects to grow annual revenues at least 14%, which is higher than the growth rate we communicated last quarter. Previously we communicated we expected ARR and A-EBITDA growth to outpace total revenue growth in fiscal 2023. We continue to expect A-EBITDA to grow faster than total revenue growth. We still expect ARR to grow consistent with our prior expectations, however, it may not outpace total revenue growth.

We provide earnings guidance on a non-GAAP basis as it is difficult to predict with reasonable certainty various items including but not limited to the impact of foreign exchange translation, interest and certain tax related events. Given the uncertainty, any of these or other items could have a significant impact on U.S. GAAP results.

Third Fiscal Quarter 2023 Conference Call Details

As announced on July 11, 2023, Digi will discuss its third fiscal quarter results on a conference call on Thursday, August 3, 2023 at 10:00 a.m. ET (9:00 a.m. CT). The call will be hosted by Ron Konezny, President and Chief Executive Officer and Jamie Loch, Chief Financial Officer.

Participants may register for the conference call at: https://register.vevent.com/register/BI9b85c1468df24fcb826c07a7541ba76e. Once registration is completed, participants will be provided a dial-in number and passcode to access the call. All participants are asked to dial-in 15 minutes prior to the start time.

Participants may access a live webcast of the conference call through the investor relations section of Digi's website, https://digi.gcs-web.com/ or the hosting website at: https://edge.media-server.com/mmc/p/bt95nnhk.

A replay will be available within approximately two hours after the completion of the call for approximately one year. You may access the replay via webcast through the investor relations section of Digi's website.

A copy of this earnings release, as well as a shareholder letter relating to our second fiscal quarter results can be accessed through the financial releases page of the investor relations section of Digi's website at www.digi.com.

For more news and information on us, please visit www.digi.com/aboutus/investorrelations.

About Digi International

Digi International (NASDAQ:DGII) is a leading global provider of IoT connectivity products, services and solutions. We help our customers create next-generation connected products and deploy and manage critical communications infrastructures in demanding environments with high levels of security and reliability. Founded in 1985, we've helped our customers connect over 100 million things and growing. For more information, visit Digi's website at www.digi.com.

Forward-Looking Statements

This press release contains forward-looking statements that are based on management's current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue," or the negative thereof or other variations thereon or similar terminology. Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to the ongoing supply chain and transportation challenges impacting businesses globally, risks related to ongoing inflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks arising from the present war in Ukraine, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control. These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, our Annual Report on Form 10-K for the year ended September 30, 2022 and subsequent reports on Form 10-Q, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are beyond our ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Presentation of Non-GAAP Financial Measures

This release includes adjusted net income, adjusted net income per diluted share and Adjusted EBITDA, each of which is a non-GAAP measure.

We understand that there are material limitations on the use of non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures, such as net income, for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that were actually recognized by Digi. These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. We believe these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs.

We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, changes in fair value of contingent consideration, acquisition-related expenses and interest expense related to acquisitions permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals, and changes in fair value of contingent consideration is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring items reflected in the Condensed Consolidated Statements of Operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired.


Digi International Inc. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited)

	Three months ended June 30,						Nine months ended June 30,
		2023			2022			2023			2022
Revenue	$	112,236		$	103,517		$	332,686		$	282,487
Cost of sales		48,417			46,091			144,474			125,196
Gross profit		63,819			57,426			188,212			157,291
Operating expenses:
Sales and marketing		20,974			18,230			60,421			51,325
Research and development		14,945			13,968			44,194			41,199
General and administrative		15,424			15,254			46,983			43,430
Operating expenses		51,343			47,452			151,598			135,954
Operating income		12,476			9,974			36,614			21,337
Other expense, net		(6,588	)		(5,392	)		(18,888	)		(14,716	)
Income before income taxes		5,888			4,582			17,726			6,621
Income tax (benefit) provision		(839	)		456			(679	)		(1,539	)
Net income	$	6,727		$	4,126		$	18,405		$	8,160

Net income per common share:
Basic	$	0.19		$	0.12		$	0.51		$	0.23
Diluted	$	0.18		$	0.12		$	0.50		$	0.23
Weighted average common shares:
Basic		35,889			35,131			35,761			34,900
Diluted		36,817			35,740			36,838			35,740


Digi International Inc. Condensed Consolidated Balance Sheets (In thousands) (Unaudited)

	June 30, 2023		September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	29,580	$	34,900
Accounts receivable, net		47,964		50,450
Inventories		83,605		73,223
Income taxes receivable		2,751		3,764
Other current assets		3,454		3,871
Total current assets		167,354		166,208
Non-current assets		672,706		687,687
Total assets	$	840,060	$	853,895
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	15,523	$	15,523
Accounts payable		21,503		32,373
Other current liabilities		51,993		48,611
Total current liabilities		89,019		96,507
Long-term debt		194,556		222,448
Other non-current liabilities		24,902		33,427
Non-current liabilities		219,458		255,875
Total liabilities		308,477		352,382
Total stockholders' equity		531,583		501,513
Total liabilities and stockholders' equity	$	840,060	$	853,895


Digi International Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)

	Nine months ended June 30,
		2023			2022
				(Restated) (1)
Net cash provided by operating activities	$	27,804		$	31,216
Net cash used in investing activities		(3,842	)		(351,771	)
Net cash (used in) provided by financing activities		(28,920	)		208,551
Effect of exchange rate changes on cash and cash equivalents		(362	)		1,087
Net decrease in cash and cash equivalents		(5,320	)		(110,917	)
Cash and cash equivalents, beginning of period		34,900			152,432
Cash and cash equivalents, end of period	$	29,580		$	41,515
(1) We have restated the condensed consolidated statement of cash flows for the nine months ended June 30, 2022. We corrected $13.4 million of debt issuance costs previously recorded within operating activities and correctly presented the cash outflows within financing activities. We also corrected $2.3 million of amortization of debt issuance costs previously included within financing activities moving these to operating activities.


Non-GAAP Financial Measures

TABLE 1

Reconciliation of Net Income to Adjusted EBITDA (In thousands)

	Three months ended June 30,									Nine months ended June 30,
	2023					2022				2023					2022
				% of total revenue				% of total revenue					% of total revenue					% of total revenue
Total revenue	$	112,236		100.0	%	$	103,517	100.0	%	$	332,686		100.0	%	$	282,487		100.0	%

Net income	$	6,727				$	4,126			$	18,405				$	8,160
Interest expense, net		6,603					5,296				18,967					14,657
Income tax expense (benefit)		(839	)				456				(679	)				(1,539	)
Depreciation and amortization		8,005					8,747				23,963					25,393
Stock-based compensation		3,519					2,143				9,852					6,402
Restructuring charge		95					105				141					214
Acquisition expense		222					175				910					4,256
Adjusted EBITDA	$	24,332		21.7	%	$	21,048	20.3	%	$	71,559		21.5	%	$	57,543		20.4	%


TABLE 2

Reconciliation of Net Income and Net Income per Diluted Share to Adjusted Net Income and Adjusted Net Income per Diluted Share (In thousands, except per share amounts)

	Three months ended June 30,												Nine months ended June 30,
	2023						2022						2023						2022
Net income and net income per diluted share	$	6,727		$	0.18		$	4,126		$	0.12		$	18,405		$	0.50		$	8,160		$	0.23
Amortization		6,252			0.17			7,046			0.20			18,966			0.51			20,400			0.57
Stock-based compensation		3,519			0.10			2,143			0.06			9,852			0.27			6,402			0.18
Other non-operating income		(15	)		—			96			—			(79	)		—			59			—
Acquisition expense		222			0.01			175			—			910			0.02			4,256			0.12
Restructuring charge		95			—			105			—			141			—			214			0.01
Interest expense, net		6,603			0.18			5,296			0.15			18,967			0.51			14,657			0.40
Tax effect from the above adjustments ⁽¹⁾		(6,025	)		(0.17	)		(2,497	)		(0.07	)		(15,520	)		(0.41	)		(8,263	)		(0.23	)
Discrete tax expenses (benefits) ⁽²⁾		1,125			0.03			(556	)		(0.02	)		2,874			0.08			(2,746	)		(0.07	)
Adjusted net income and adjusted net income per diluted share ⁽³⁾	$	18,503		$	0.50		$	15,934		$	0.45		$	54,516		$	1.48		$	43,139		$	1.21
Diluted weighted average common shares					36,817						35,740						36,838						35,740

(1)	The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2023 and 2022 based on adjusted net income.
(2)	For the three and nine months ended June 30, 2023 and 2022 discrete tax expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation.
(3)	Adjusted net income per diluted share may not add due to the use of rounded numbers.

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Digi International Reports Third Fiscal Quarter 2023 Results