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News / Press Releases / Digi International Reports Fourth Fiscal Quarter and Full Year 2017 Results

Digi International Reports Fourth Fiscal Quarter and Full Year 2017 Results

TempAlert Acquisition Strengthens Leadership Position in Task and Temperature Monitoring

(Minneapolis, MN, October 26, 2017) - Digi International® Inc. (NASDAQ: DGII), a leading global provider of mission critical machine-to-machine (M2M) and Internet of Things (IoT) connectivity products and services, reported revenue of $45.1 million for the fourth fiscal quarter of 2017 compared to our guidance range of $44.0 million to $47.0 million and to $50.5 million in the fourth fiscal quarter of 2016. GAAP net income for the fourth fiscal quarter of 2017 was $4.3 million, or $0.16 per diluted share, compared to our GAAP guidance range of $0.07 to $0.10 per diluted share and to GAAP net income for the fourth fiscal quarter of 2016 of $3.8 million, or $0.14 per diluted share.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) from Continuing Operations in the fourth fiscal quarter of 2017 was $5.5 million, or 12.2% of total revenue, compared to $5.9 million, or 11.8% of total revenue, in the fourth fiscal quarter of 2016. Stock-based compensation expense was $1.2 million in the fourth fiscal quarter of 2017 compared to $1.0 million in the fourth fiscal quarter of 2016. Stock-based compensation is included in EBITDA. Starting in the first fiscal quarter of 2018, we will be presenting Adjusted EBITDA results and guidance. Reconciliations of GAAP and non-GAAP financial measures, including Adjusted EBITDA from Continuing Operations, appear at the end of this release.

“We are pleased our fiscal fourth quarter results largely met expectations. The addition of two seasoned leaders, Scott Nelson (VP Product) and Scott Wilken (VP Technology), to Digi’s Products segment is aimed at delivering growth. The TempAlert acquisition both deepens and broadens our Digi Smart Solutions portfolio, and we are excited they have joined our team,” said Ron Konezny, President and Chief Executive Officer.

Acquisition Activity

Subsequent to end of the fourth fiscal quarter of 2017, as previously announced on October 23, 2017, Digi purchased all the outstanding interests of TempAlert, LLC (TempAlert), a Boston-based provider of automated, real-time temperature monitoring and task management solutions. TempAlert will join the Digi Smart Solutions™ team. Digi paid a purchase price of $45 million in cash paid at closing, which amount is subject to a customary net working capital adjustment. Digi has agreed to make additional payments to the sellers based on revenue in excess of established threshold amounts for Digi Smart Solutions during calendar 2018 and 2019.

The TempAlert solution will not only be supported and enhanced, but also leveraged within Digi’s existing products and services to expand its advanced portfolio of solutions. With its fourth strategic acquisition in 24 months, Digi is now a leader in the space with nearly 35,000 customer sites and a deep presence in the healthcare, transportation, industrial and foodservice markets.

Our cellular product category includes cellular routers and all gateways. The RF product category includes XBee® modules as well as other RF Solutions. The embedded product category includes Digi Connect® and Rabbit® embedded systems on module and single board computers. The network product category, which has the highest concentration of mature products, includes console and serial servers and USB connected products. Our services and solutions offerings include Digi Smart Solutions, wireless design services, the Digi Device Cloud platform and enterprise support services.

Total revenue decreased 10.6% to $45.1 million in the fourth fiscal quarter 2017 from $50.5 million in the fourth fiscal quarter 2016.

  • Hardware product revenue decreased by $7.7 million, or 15.8%, in the fourth fiscal quarter of 2017 compared to the fourth fiscal quarter of 2016. All product categories performed within our guidance. We continue to see decline in network product revenue, as there were significant terminal server sales to large customers in the prior fiscal year. Embedded and cellular routers and gateway revenue both declined as we had significant sales to large customers in the fourth fiscal quarter of 2016. Additionally, embedded products declined due to a decrease of sales of Rabbit® embedded modules, which are in the mature portion of their product life cycle.
  • Services and solutions revenue increased by $2.3 million, or 124.8%, in the fourth fiscal quarter of 2017 compared to the fourth fiscal quarter of 2016. The increase was driven primarily by the growth of our Digi Smart Solutions business, which includes $2.1 million of incremental revenue from our recent acquisitions of SMART Temps on January 9, 2017 and FreshTemp on November 1, 2016.

Gross profit was $21.3 million, or 47.3% of revenue in the fourth fiscal quarter of 2017 compared to $24.6 million, or 48.8% of revenue in the same period of the prior year, a decrease of $3.3 million. Gross profit was negatively impacted by lower hardware product revenue and product mix as the network category, which includes traditionally higher margin products, declined. This was offset partially by an increase in services and solutions gross profit from our Digi Smart Solutions business during the fourth quarter of fiscal 2017 compared to the same period in the prior fiscal year.

Operating income for the fourth fiscal quarter of 2017 was $4.2 million, or 9.2% of revenue, compared to operating income of $5.0 million or 10.0% of revenue, for the fourth fiscal quarter of 2016, a decrease of $0.8 million. The operating income decline was a result of the decrease in gross profit of $3.3 million, as described above, offset by a decrease in operating expenses of $2.4 million. Operating expenses decreased by $2.4 million in the fourth quarter of fiscal 2017, which included a benefit of $3.0 million compared to a benefit of $0.7 million in the fourth quarter of fiscal 2016 related to adjustments to contingent liability accruals. Additionally, incentive-based compensation expense decreased by $1.8 million for the fourth quarter of fiscal 2017 compared to the same period one year ago. This decrease was offset partially by incremental operating expense for the SMART Temps acquisition of $1.5 million. Operating expense for the fourth fiscal quarter of 2017 included merger and acquisition expense and severance expense of approximately $0.7 million.

Income from Continuing Operations was $4.3 million in the fourth fiscal quarter of 2017, or $0.16 per diluted share, compared to $3.8 million, or $0.14 per diluted share, in the fourth fiscal quarter of 2016.

EBITDA from Continuing Operations in the fourth fiscal quarter of 2017 was $5.5 million, or 12.2% of total revenue, compared to $5.9 million, or 11.8% of total revenue, in the fourth fiscal quarter of 2016. Stock compensation expense included in our EBITDA from continuing operations for fourth fiscal quarter of 2017 and 2016 was $1.2 million and $1.0 million, respectively.

Please refer to the tables at the end of this earnings release that provide reconciliations from GAAP to non-GAAP information.

Total revenue decreased 10.5% to $181.6 million in fiscal 2017 from $203.0 million in fiscal 2016.

  • Hardware product revenue decreased by $29.6 million, or 15.1%, in fiscal 2017 compared to fiscal 2016. Our decline in network product revenue was more than initially anticipated as there were significant terminal server sales to large customers in the prior fiscal year. This was offset partially by an increase in USB connected products revenue. Embedded and RF product revenue both declined as we had significant sales to large customers in the prior fiscal year. Additionally, embedded products declined due to a decrease of sales of Rabbit® embedded modules, which are in the mature portion of their product life cycle.
  • Services and solutions revenue increased by $8.2 million, or 119.5%, in fiscal 2017 compared to fiscal 2016.  This primarily was driven by the growth of our Digi Smart Solutions business. Services and solutions revenue includes $6.1 million of incremental revenue from the acquisitions of SMART Temps and FreshTemp in fiscal 2017. We acquired SMART Temps on January 9, 2017 and FreshTemp on November 1, 2016.
  • Included in revenue performance for the year was a foreign currency translation decrease of $0.4 million when compared to the same period in the prior fiscal year. This primarily was caused by the weakening of the British Pound and Euro against the U.S. dollar.

Gross profit was $87.2 million, or 48.0% of revenue in fiscal 2017 compared to $99.7 million, or 49.1% of revenue for the prior fiscal year, a decrease of $12.5 million. Gross profit was impacted negatively by lower hardware product revenue and product mix during fiscal 2017 compared to the prior fiscal year. This was driven primarily by the decline of the network category, which includes traditionally higher margin products compared to our other products. It was offset partially by an increase in services and solutions gross profit for fiscal 2017 compared to the prior fiscal year.

Operating income for fiscal 2017 was $8.8 million, or 4.8% of revenue, as compared to operating income of $17.1 million, or 8.4% of revenue, for the prior fiscal year, a decrease of $8.3 million. The operating income decline was a result of the decrease in gross profit of $12.5 million, as described above. The decline was offset partially by lower operating expense of $4.2 million. Operating expense savings were due primarily to lower incentive-based compensation expense of $6.9 million in fiscal 2017 and adjustments to contingent liability accruals of $4.4 million in fiscal 2017 compared to $0.7 million in fiscal 2016. This was offset partially by restructuring charges of $2.5 million incurred in fiscal 2017, compared to $0.7 million of restructuring charges incurred in fiscal 2016. Fiscal 2017 also included incremental operating expense for the SMART Temps acquisition of $4.1 million and an increase in merger and acquisition expenses of $1.1 million that was offset partially by a decrease in occupancy costs of $0.7 million in fiscal 2017 compared to fiscal 2016.

Income from Continuing Operations was $9.4 million in fiscal 2017, or $0.35 per diluted share, compared to $13.5 million, or $0.51 per diluted share, in fiscal 2016.

Income from Discontinued Operations, after income taxes had no activity in fiscal 2017, but was $3.2 million in fiscal 2016, or $0.12 per diluted share resulting from the sale of the Etherios business in October 2015 to West Monroe Partners.

EBITDA from Continuing Operations in fiscal 2017 was $14.4 million, or 7.9% of total revenue, compared to $21.0 million, or 10.4% of total revenue, in fiscal 2016. Stock compensation expense included in our EBITDA from continuing operations for fiscal 2017 and 2016 was $4.7 million and $3.6 million, respectively.

Please refer to the tables at the end of this earnings release for reconciliations from GAAP to non-GAAP information.

Balance Sheet, Liquidity and Capital Structure

Digi continues to maintain a strong balance sheet. As of September 30, 2017, Digi had:

  • Cash and cash equivalents and marketable securities balance, including long-term marketable securities, of $115.0 million, a decrease of $22.7 million from the end of fiscal 2016. Digi completed two acquisitions in fiscal 2017, for a total cash expenditure of $30.1 million (net of cash acquired of $0.5 million). Please refer to the Condensed Consolidated Statements of Cash Flows for more information.
  • Current and long-term contingent liabilities of $6.4 million.
  • A current ratio of 9.7 to 1, compared to 8.2 to 1 at September 30, 2016.

Customer Highlights

SMART SOLUTIONS

  • A public school district in Kansas contracted with Digi to monitor over 90 food service locations. The school district purchased SMART Shield Pros and will utilize SMART Temps’ state of the art menu integration solution.
  • Digi International was awarded a contract with a public school district in Colorado to monitor its food services at over 60 locations.
  • A Chicago based hospital selected Digi to monitor their hospitals and off-site clinics. Digi will monitor its lab, pharmacy, dietary, and surgery departments.

PRODUCTS

  • A southeastern US county has deployed a traffic management system using Digi’s WR44R as part of an infrastructure modernization program, which includes approximately 350 intersections that will be equipped with the WR44R. The program includes new traffic controllers and video detection sensors that will be part of an intelligent transportation system (ITS).
  • A multi-national systems integrator has selected the railway compliant Digi TransPort WR44RR for a state passenger railway project in Australia. The WR44RR will be deployed on new trains starting in 2018.
  • A commercial display solution provider in Shanghai selected the Digi TransPort WR21 extended-temperature 4G routers to update content remotely on its European users advertisement displays.
  • A meter manufacturer in India has selected Digi’s XBee 865 for a state utility metering project to connect approximately 20,000 meters using wireless technology. The manufacturer selected Digi because of the robustness and stability of our products.

Fiscal 2018 Guidance

For the first fiscal quarter of 2018, Digi projects revenue to be in a range of $44 million to $47 million. Adjusted EBITDA is projected to be between $2 million and $4 million. Loss from continuing operations per diluted share is projected to be in a range of $(0.06) to $(0.02). Included in our EPS guidance are TempAlert transaction expenses of approximately $1.5 million, or a ($0.04) per share.

For the full fiscal year 2018, Digi projects revenue to be in a range of $200 million to $212 million. Adjusted EBITDA is projected to be between $20 million and $24 million. Income from continuing operations per diluted share is projected to be in a range of $0.19 to $0.28.  As mentioned above, transaction expenses of approximately $1.5 million have a ($0.04) per share impact to our full year EPS range.

TempAlert is now included in our fiscal first quarter and full year guidance.

Fourth Fiscal Quarter and Year-End 2017 Conference Call Details

As announced on October 5, 2017, Digi will discuss its fourth fiscal quarter and year-end results on a conference call on Thursday, October 26, 2017 after market close at 5:00 p.m. EDT (4:00 p.m. CDT). The call will be hosted by Ron Konezny, President and Chief Executive Officer and Mike Goergen, 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 95855356. International participants may access the call by dialing (262) 912-4765 and entering passcode 95855356. 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 95855356 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 Digi International Inc., please visit www.digi.com/aboutus/investorrelations.

About Digi International

Digi International (NASDAQ: DGII) is a leading global provider of business and mission-critical machine-to-machine (M2M) and Internet of Things (IoT) connectivity products and services. We help our customers create next-generation connected products and deploy and manage critical communications infrastructures in demanding environments with high levels of security, relentless reliability and bulletproof performance. 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, 2016 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 income from continuing operations, adjusted income per diluted share from continuing operations, EBITDA from continuing operations and adjusted EBITDA from continuing operations, 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. 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 from continuing operations and Adjusted EBITDA from continuing operations 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 from continuing operations, 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 EBITDA from continuing operations and Adjusted EBITDA from continuing operations 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. EBITDA from continuing operations is used as an internal metric for executive compensation, as well as incentive compensation for the broader employee base, and it is monitored quarterly for these purposes.

Investor Contact:

Mike Goergen
Senior Vice President, Chief Financial Officer and Treasurer
Digi International
952-912-3737
Email: mike.goergen@digi.com

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

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