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Digi International Reports Third Fiscal Quarter 2014 Results

Reiterates Annual Guidance

(Minneapolis, MN, July 24, 2014) - Digi International® Inc. (NASDAQ: DGII, www.digi.com) reported revenue of $47.9 million for the third fiscal quarter of 2014, compared with $48.8 million for the third fiscal quarter of 2013, a decrease of $0.9 million, or 1.9%. Net loss was $0.1 million, or $0.00 per diluted share, in the third fiscal quarter of 2014 compared to net income of $1.5 million, or $0.06 per diluted share, in the year ago comparable quarter.

“We met our guidance for the third fiscal quarter and we are reiterating our previously announced annual guidance,” said Joe Dunsmore, President and Chief Executive Officer.

Net loss in the third fiscal quarter of 2014 was reduced by the reassessment of certain state research and development tax credits and our ability to realize these credits in the future. This resulted in a tax benefit of $0.3 million, or $0.01 per diluted share.

Below is a table setting forth certain GAAP and non-GAAP results:

Business Results for the Three Months Ended June 30, 2014

Revenue from our hardware products for the third fiscal quarter of 2014 was $43.3 million, compared to product revenue of $42.3 million for the third fiscal quarter of 2013, an increase of $1.0 million or 2.3%. Revenue from growth hardware products was $21.7 million in the third fiscal quarter of 2014, compared to $20.9 million in the third fiscal quarter of 2013, an increase of $0.8 million or 3.9%. Revenue from mature hardware products was $21.6 million in the third fiscal quarter of 2014, compared to $21.4 million in the third fiscal quarter of 2013, an increase of $0.2 million or 0.8%.

Revenue from our service offerings, which are part of our growth portfolio, was $4.6 million in the third fiscal quarter of 2014, compared to $6.5 million in the year ago comparable quarter, a decrease of $1.9 million or 29.4%. The decrease in services revenue from the year ago comparable quarter primarily is due to customer deferral or cancellation of certain projects and the inability to replace the loss of revenue from these projects in the third quarter.

Revenue in North America was $28.0 million in the third fiscal quarter of 2014 compared to $30.4 million in the third fiscal quarter of 2013, a decrease of $2.4 million or 8.0%. Revenue in EMEA (Europe, Middle East and Africa) was $11.8 million in the third fiscal quarter of 2014 compared to $11.4 million in the comparable quarter a year ago, an increase of $0.4 million or 3.9%. Revenue in the Asian countries was $6.7 million in the third fiscal quarter of 2014 compared to $5.9 million in the third fiscal quarter of 2013, an increase of $0.8 million or 13.0%. Latin American revenue was $1.4 million in the third fiscal quarter of 2014 compared to $1.1 million in the comparable quarter a year ago, an increase of $0.3 million or 24.6%.

Gross profit was $22.1 million in the third fiscal quarter of 2014 compared to $24.7 million in the same period of the prior year, a decrease of $2.6 million or 10.4%. The gross margin was 46.3% in the third fiscal quarter of 2014 compared to 50.6% in the third fiscal quarter of 2013. The decrease resulted primarily from lower gross margins from our services offerings due to lower than anticipated CRM revenue and a resulting underutilization of consulting labor that had been retained for the expected demand for these services, as well as hardware product mix.

Total operating expenses in the third fiscal quarter of 2014 were $22.4 million, or 46.8% of revenue, compared to $22.8 million, or 46.7% of revenue, in the third fiscal quarter of 2013.

Digi reported an operating loss of $0.3 million, or 0.6% of revenue, in the third fiscal quarter of 2014 compared to operating income of $1.9 million, or 3.9% of revenue, in the third fiscal quarter of 2013.

Net loss was $0.1 million in the third fiscal quarter of 2014, or $0.00 per diluted share, compared to $1.5 million, or $0.06 per diluted share, in the third fiscal quarter of 2013. Net income includes a discrete tax benefit of $0.3 million, or $0.01 per diluted share, resulting from the reassessment of certain state research and development tax credits and our ability to realize these credits in the future.

Earnings before interest, taxes, depreciation and amortization in the third fiscal quarter of 2014 were $1.4 million, or 3.0% of revenue, compared to $3.8 million, or 7.8% of revenue, in the third fiscal quarter of 2013.

Business Results for the Nine Months Ended June 30, 2014

For the nine months ended June 30, 2014, Digi reported revenue of $141.1 million compared to revenue of $144.0 million for the nine months ended June 30, 2013, a decrease of $2.9 million or 2.0%.

Revenue from our hardware products for the first nine months of fiscal 2014 was $125.9 million, compared to $128.5 million in the first nine months of fiscal 2013, a decrease of $2.6 million or 2.0%. Revenue from growth hardware products for the first nine months of fiscal 2014 was $64.4 million, compared to $64.7 million for the first nine months of fiscal 2013, a decrease of $0.3 million or 0.5%. Revenue from mature hardware products was $61.5 million for the first nine months of fiscal 2014, compared to $63.8 million in the first nine months of fiscal 2013, a decrease of $2.3 million or 3.6%.

Revenue from our service offerings was $15.2 million for the first nine months of fiscal 2014, or 10.8% of revenue, compared to $15.5 million for the first nine months of fiscal 2013, or 10.8% of revenue, a decrease of 1.9%.

For the nine months ended June 30, 2014, Digi reported net income of $1.3 million, or $0.05 per diluted share, compared to net income for the nine months ended June 30, 2013 of $3.8 million, or $0.14 per diluted share. Non-GAAP net loss for the first nine months of fiscal 2014 was $0.2 million, or $0.01 per diluted share, compared to Non-GAAP net income of $4.1 million, or $0.16 per diluted share, in the first nine months of fiscal 2013. Please refer to the table reconciling net income and net income per diluted share to non-GAAP net (loss) income and net (loss) income per diluted share that is provided later in this earnings release.

Digi’s cash and cash equivalents and marketable securities balance, including long-term marketable securities, was $100.6 million at June 30, 2014, a decrease of $5.1 million from September 30, 2013 primarily resulting from repurchases of common stock. Please refer to the Condensed Consolidated Statements of Cash Flows that are included in this earnings release for additional cash flow details. Digi’s current ratio was 7.1 to 1 at June 30, 2014 and 7.0 to 1 at September 30, 2013.

Third Fiscal Quarter 2014 Business Highlights

Digi continues to work with industry-leading manufacturers to create innovative next generation connected product solutions. Examples in Q3 include:

  • Watkins, the world’s largest manufacturer of hot tubs-sold under the HotSpring® and Caldera® brands-introduced its new and innovative Connextion™ remote monitoring service. This product allows its dealers and customers alike to monitor and control spa functions from virtually anywhere in the world via a mobile device and/or a personal computer. The solution includes Digi gateways, Device Cloud by Etherios and custom application development and professional services from Etherios.
  • A leading manufacturer of diagnostic healthcare solutions announced a next generation communications platform for its diagnostic testing device, which utilizes Digi’s TransPort cellular routers along with Device Cloud by Etherios™.

In Q3, Digi experienced greater demand for its RF product line, which includes its XBee® brand of embedded modules and gateways.

  • A global company that produces agricultural irrigation solutions has chosen the XBee DigiMesh® to enable communications between irrigation control units and distributed GPS technology. The solution includes cellular communication to provide data to a web application that adds intelligence to watering schedules and patterns.

Digi had a number of noteworthy wins for its TransPort® line of cellular routers during Q3 including:

  • A leading global integrator chose Digi’s TransPort® WR21 to provide secure, reliable cellular data connectivity for one of Australia’s largest ATM providers. The Digi solution provides wireline, 3G and 4G -based primary and backup Wide Area Network WAN connectivity.
  • A Fortune 200 corporation and leader in natural gas distribution in the U.S. chose the Digi TransPort® WR21 to replace legacy 2G routers throughout its data network for real-time asset monitoring. The solution enables flow rate metering across its natural gas network.
  • A prominent provider of supply chain and asset management solutions selected the Digi TransPort® WR44 for its tank level monitoring application for fuel truck fleets. The solution connects in-vehicle cellular-enabled tablet computers using Wi-Fi.

Additionally, Digi strengthened its cloud solutions presence internationally by establishing a key alliance with Kerensen Consulting, the first Salesforce Platinum Partner in EMEA. The alliance integrates Device Cloud by Etherios™ and The Social Machine® in Kerensen’s product portfolio, allowing it to offer best-in-class CRM services to its customers already using the Salesforce platform. Together, the alliance combines Digi and Etherios’ industry-leading end-to-end M2M solutions with Kerensen’s consulting and integration expertise and leading CRM market presence in the Europe, Middle East and Africa (EMEA) region.

Fiscal 2014 Guidance

For the full fiscal year 2014, Digi reiterates its previously announced guidance for annual revenue in a range of $188.0 million to $194.0 million with a most likely annual revenue of approximately $191.0 million. Digi also reiterates its previously announced guidance for annual net income per diluted share in a range of $0.06 to $0.12, with a most likely annual net income per diluted share of $0.09.

 

Third Fiscal Quarter 2014 Conference Call Details

Digi invites all those interested in hearing management's discussion of its quarter, on Thursday, July 24, 2014 after market close at 5:00 p.m. EDT (4:00 p.m. CDT), to join the call by dialing (866) 713-8563 and entering passcode 48389126. International participants may access the call by dialing (617) 597-5311 and entering passcode 48389126. A replay will be available approximately two hours after the completion of the call, and for one week following the call, by dialing (888) 286-8010 for domestic participants or (617) 801-6888 for international participants and entering access code 89711257 when prompted. Participants may also access a live webcast of the conference call through the investor relations section of Digi's website, www.digi.com. The webcast will remain on our website for one week after the live session is completed.

A copy of this earnings release 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 Digi International® Inc., please visit www.digi.com/aboutus/investorrelations/.

About Digi International

Digi International is the M2M solutions expert, combining products and services as end-to-end solutions to drive business efficiencies. Digi provides the industry’s broadest range of wireless products, a cloud computing platform tailored for devices and development services to help customers get to market fast with wireless devices and applications. Digi’s entire solution set is tailored to allow any device to communicate with any application, anywhere in the world. For more information, visit Digi’s website at www.digi.com, or call 877-912-3444 (U.S.) or 952-912-3444 (International).

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 "anticipate," "believe," "estimate," "may," "will," "expect," "plan," "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 the company 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, including risks related to 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, risks associated with the retirement of our CEO announced in April 2014 and the associated transition to a new CEO who has not yet been appointed, our reliance on distributors and other third parties to sell our products, delays in product development efforts, uncertainty in user acceptance of our products, the ongoing shift of our sales efforts to focus more on the delivery of broader based solutions which can be a more complex sales process, has not been a historical sales focus of our company and can involve longer sales cycles than the sale of our legacy hardware 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 defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, the ability to achieve the anticipated benefits and synergies associated with acquisitions, 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 Securities and Exchange Commission, including without limitation, our annual report on Form 10-K for the year ended September 30, 2013 and and other subsequent filings, could cause the company's future 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 non-GAAP operating (loss) income and net (loss) income and net (loss) income per diluted share data, and earnings before interest, taxes, depreciation and amortization (EBITDA), 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 operating income or 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 the company. 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. 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 and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, we understand that 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 operating (loss) income and net (loss) income and net (loss) income per diluted share exclusive of legal settlements, restructuring expenses, and reversals of tax reserves and discrete tax benefits 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 matters such as the impact of decisions relating to taxes and restructuring, which while important, are not central to the core operations of our business. Additionally, management believes that the presentation of EBITDA as a percentage of net sales is useful to investors 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. Management believes that such information helps investors compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired. EBITDA is used as an internal metric for executive compensation, as well as incentive compensation for the rest of the employee base, and it is monitored quarterly for these purposes.

Digi International Inc.
Condensed Consolidated Statement of Operations

Digi International Inc.
Condensed Consolidated Statements of Comprehensive Income

Digi International Inc.
Condensed Consolidated Balance Sheet

Digi International Inc.
Condensed Consolidated Statement of Cash Flows

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