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Digi International Reports First Fiscal Quarter 2019 Results

Momentum Continues with Strong Start to Fiscal 2019

(Minneapolis, MN, January 31, 2019) - Digi International® Inc. (NASDAQ: DGII), a leading global provider of mission critical Internet of Things ("IoT") products, services, and solutions, reported revenue of $62.3 million for the first fiscal quarter of 2019 compared to $45.0 million in the first fiscal quarter of 2018 and compared to our guidance range of $56.0 million to $60.0 million.  This reflects a 38.6% growth rate compared to the prior year quarter.

Net income for the first fiscal quarter of 2019 was $4.7 million, or $0.17 per diluted share, compared to a net loss of $4.5 million, or $0.17 loss per diluted share in the first fiscal quarter of 2018 and compared to our guidance range of $0.03 loss per diluted share to $0.01 per diluted share.  Net income in the first fiscal quarter of 2019 includes a gain of $4.4 million, or $0.16 per diluted share (net of tax $3.4 million, or $0.12 per diluted share) from the sale of our corporate headquarters in October 2018.  Our adjusted net income for the first fiscal quarter of 2019 was $1.2 million, or $0.04 per diluted share, compared to a net loss of $1.7 million, or $0.06 loss per diluted share for the first fiscal quarter of 2018.

Adjusted EBITDA in the first fiscal quarter of 2019 was $6.2 million, or 9.9% of total revenue, compared to our guidance range of $4.0 million to $6.0 million.  In the first fiscal quarter of 2018, our adjusted EBITDA was $3.0 million, or 6.6% of total revenue.

Reconciliations of GAAP and non-GAAP financial measures, including Adjusted Net Income (Loss) and Adjusted EBITDA, appear at the end of this release.

"A great start to fiscal 2019 is especially encouraging since the first quarter is traditionally our slowest quarter of the year" said Ron Konezny, President and Chief Executive Officer.  "We are pleased with the performance from each of our business segments.  Our transformation to a premier hardware-enabled, software, services and subscription company is accelerating."

Financial Results

Business Results for the Three Months Ended December 31, 2018 and 2017

Total revenue increased 38.6% to $62.3 million in the first fiscal quarter of 2019 from $45.0 million in the first fiscal quarter of 2018.

Product

Product revenue increased by $12.3 million, or 32.1%, in the first fiscal quarter of 2019 compared to the first fiscal quarter of 2018.  This increase included $5.2 million of incremental revenue from Accelerated Concepts, Inc. ("Accelerated"), a provider of cellular (LTE) networking equipment, which we acquired in January 2018.  Additionally, we experienced growth compared to the first fiscal quarter of 2018 across most of our products, with the largest growth in our cellular product offerings.

Services

Services revenue increased by $0.1 million, or 2.3%, in the first fiscal quarter of 2019 compared to the first fiscal quarter of 2018, related to increased revenues from our Digi Wireless Design services.

Solutions

Solutions revenue increased by $4.9 million, or 121.3%, in the first fiscal quarter of 2019 compared to the first fiscal quarter of 2018.  This increase was driven by new customer deployments, additional purchases from existing customers, and an increase in our recurring revenue base.  We are serving just over 54,000 as of December 31, 2018, compared to just over 38,000 sites a year ago.  Although a single transportation customer ended their relationship with this business, we continued to add new sites in multiple verticals and mitigated the transportation customer loss through new direct agreements with end customers.

Gross profit was $29.8 million, or 47.8% of revenue in the first fiscal quarter of 2019 compared to $22.0 million, or 48.8% of revenue for the first fiscal quarter of 2018.  This $7.8 million increase was driven primarily by our acquisition of Accelerated, increased sales from our IoT Solutions segment, and increased sales from most of our products.  Our gross margin decline was primarily a result of product and customer mix and increased amortization expense associated with the Accelerated acquisition, offset partially from an increase in higher margin recurring revenue and lower costs associated with our manufacturing transition.

Operating income for the first fiscal quarter of 2019 was $5.6 million, or 8.9% of revenue, as compared to an operating loss of $2.0 million, or 4.5% of revenue, for the first fiscal quarter of 2018, an increase of $7.6 million.  This increase was a result of increased gross profit of $7.8 million described above, offset by an increase in operating expenses of $0.2 million.  The increase in operating expenses included $2.8 million of incremental costs associated with Accelerated, $1.7 million of additional employee-related costs and $0.6 million of increased contingent consideration expenses.  These were mostly offset by a $4.4 million gain from the sale of our corporate headquarters in October 2018 and lower professional services expenses of $1.3 million as we had more acquisition costs in the first quarter of fiscal 2018.

Net income was $4.7 million in the first fiscal quarter of 2019, or $0.17 per diluted share, compared to a net loss of $4.5 million, or $0.17 loss per diluted share, in the first fiscal quarter of 2018.

Adjusted EBITDA in the first fiscal quarter of 2019 was $6.2 million, or 9.9% of total revenue, compared to $3.0 million, or 6.6% of total revenue, in the first fiscal quarter of 2018.

Balance Sheet, Liquidity and Capital Structure

Digi continues to maintain a strong balance sheet with no debt.  As of December 31, 2018, Digi had:

  • Cash and cash equivalents and marketable securities balance of $76.5 million, an increase of $13.7 million during the quarter.  The increase primarily related to $10.0 million of proceeds received in the first fiscal quarter of 2019 for the sale of our corporate headquarters.  We also experienced strong cash collections related to accounts receivable.
  • Current and long-term contingent liabilities of $10.1 million.
  • In October 2018, we signed a thirteen-year lease agreement with minimum lease obligations of $15.9 million for 59,497 square feet of office space.  This is now our new headquarters location in Hopkins, Minnesota, which is approximately three miles from our previous headquarters.

Customer Highlights

IoT PRODUCTS & SERVICES

  • TrackIt, a Command Alkon company and leading provider of fleet solutions for transportation and hauling of construction materials, entered into a multi-year agreement to use Digi’s Wireless Vehicle Bus Adapter and active vehicle monitoring services for critical vehicle data.  The agreement covers a minimum of 25,000 vehicles managed by TrackIt over a period of several years.
  • A large retailer selected AT&T's wireless network with Digi cellular routers to roll out primary and backup LTE connectivity to over 7,000 locations.  They will use our products as their VPN gateway and firewall with built-in LTE network access and to provide a second cellular uplink for dual-WAN functionality.  In moving to this solution, all traditional wired Internet circuits will be eliminated.  This project is expected to complete a full roll-out over approximately 18 months.
  • A global leader in the gaming and lottery industry has selected Digi for a 3G to 4G conversion project.  This project entails upgrading this customer’s existing connectivity infrastructure across a variety of state contracts off of a variety of 3G cellular networks to 4G LTE networks.  This project includes the upgrade of roughly 20,000 sites with Digi’s WR21s over the next twelve months.  Digi was selected due to our comprehensive portfolio, supply chain readiness and packaging options. 
  • A major German integrator providing managed VPN services has made a significant investment in Digi’s Remote Manager (DRM) to be rolled out across several thousand node points (Digi routers), used in a variety of applications across many customers.  The aim is to increase efficiency of all processes around the management and maintenance of their communications infrastructure.  A further major driver was the increased sensitivity for security risks.  DRM now allows them to roll out security patched across a network of thousands of endpoints within hours.
  • A leading manufacturer of residential solar energy devices has selected Digi’s XBee3 ZigBee module for inclusion in their next-generation product. The XBee3 ZigBee will enable reliable, short-range communication in a meshing environment containing XBee3 and third-party ZigBee devices.  The XBee3’s Bluetooth Low Energy ("BLE") feature will be used to simplify product provisioning.  In a space where time-to-market is critical, the XBee3 ZigBee module in this case enabled rapid software implementation via an easy-to-use API and simple hardware integration with its new micro form-factor.  The company plans to begin deployments in mid-2019 with annual volumes potentially reaching 100,000 units.

IoT SOLUTIONS

  • One of the nation’s largest retailers expanded their SmartSense deployment across thousands of pharmacy locations to ensure compliance with new requirements to monitor ambient temperature and humidity in the pharmacy.  The retailer trusted SmartSense to project manage the nationwide roll-out.
  • Festival Foods, one of Wisconsin’s largest privately-held grocers, selected SmartSense for task management and continuous temperature monitoring across all its locations.  The implementations are being made to help improve food quality and safety, increase employee efficiency and reduce inventory loss.  Festival Foods operates 32 locations across Wisconsin.
  • A leading national grocery chain selected SmartSense to monitor it’s distribution network in the Northwest.  SmartSense is monitoring over 350 refrigerated trucks and distribution sites, providing real-time insight into the cold chain and asset tracking.
  • A Midwest grocery chain selected SmartSense to monitor pharmacies in over 200 locations to ensure compliance.  This same retailer chose SmartSense to implement digital checklists within the Deli and C-Store operations.  The combined solutions will help to ensure compliance, improve consumer safety, and reduce inventory loss across the board.

Fiscal 2019 Guidance

For the second fiscal quarter of 2019, Digi projects revenue to be in a range of $59.0 million to $63.0 million.  EPS is projected to be in a range of $0.01 per diluted share to $0.05 per diluted share.  Adjusted EBITDA is projected to be between $4.5 million and $6.5 million.

For the full fiscal year 2019, we are not updating our annual revenue and Adjusted EBITDA guidance ranges of $245 million to $255 million, and $24 million to $28 million, respectively.  EPS is now projected to be in a range of $0.30 per diluted share to $0.45 per diluted share.

First Fiscal Quarter 2019 Conference Call Details

As announced on January 3, 2019, Digi will discuss its first fiscal quarter 2019 results on a conference call on Thursday, January 31, 2019 after market close at 5:00 p.m. ET (4:00 p.m. CT).  The call will be hosted by Ron Konezny, President and Chief Executive Officer and Gokul Hemmady, Chief Financial Officer.

Digi invites all those interested in hearing management's discussion of its quarter to access a live webcast of the conference call through the investor relations section of Digi's website at www.digi.com.  Participants may also join the call directly by dialing (855) 638-5675 and entering passcode 8398846.  International participants may access the call by dialing (262) 912-4765 and entering passcode 8398846.  A replay will be available within approximately three hours after the completion of the call, and for one week following the call, by dialing (855) 859-2056 for domestic participants or (404) 537-3406 for international participants and entering access code 8398846 when prompted.  A replay of the webcast will be available for one week through Digi's website.

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 us, please visit www.digi.com/aboutus/investorrelations.

About Digi International

Digi International (NASDAQ: DGII) is a leading global provider of Internet of Things ("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, 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," "looking forward," "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.  Among others, these include 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, 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 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, potential unintended consequences associated with restructuring or other similar business initiatives that may impact our ability to retain important employees, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures, 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, 2018 and subsequent quarterly reports on Form 10-Q and other 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 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 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 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 and that 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 income and income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits and restructuring 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 related to taxes and restructuring, which while important, are not central to the core operations of our business.  Additionally, management believes that the presentation of adjusted EBITDA and 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.

Investor Contact:

Gokul Hemmady
Senior Vice President, Chief Financial Officer and Treasurer
Digi International
952-912-3737
Email: gokul.hemmady@digi.com

For more information, visit Digi's website at www.digi.com, or call 877-912-3444 (U.S.) or 952-912-3444 (International).

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