Q3 2020 Digi International Inc Earnings Call
Ladies and gentlemen, today's call.
To begin shortly please continue to standby. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by welcome to Digi International third quarter 2020 earnings Conference call. At this time, all participants are not listen only mode.
After the speakers presentation, there will be a question answer session to ask the question doing that portion of the cool you would need to press star one when your telephone please be advised that todays conference maybe recorded if you require any part of.
It's fresh start encino.
No. It's my pleasure to turn the conference older to drain luck Chief Financial Officer. Please go ahead.
Thank you common.
Good afternoon, everyone and thank you for joining us today to discuss the fiscal 2023rd quarter results or did you international.
Joining me on today's call is Ron Konezny, our president and CEO.
I will provide his thoughts on our business and I will follow with highlights of our financial performance.
Well prepared remarks, we'll take your questions.
We issued our earnings release shortly after the market closed today.
You may obtain a copy through the financial releases section of our Investor Relations website at <unk> Dot com.
Some of the statement said, we will make during this call are considered forward looking at are subject to significant risks and uncertainties.
These statements reflect our expectations about future operating and financial performance and speak only as of today's date.
We undertake no obligation to update publicly or revise these forward looking statements.
Well, we believe the expectations reflected in our forward looking statements are reasonable we give no assurance such expectations will be much well that any other forward looking statements will prove to be correct.
For additional information please refer to the forward looking statements section in our earnings release today and the risk factor section of our 2019 form 10-K, and subsequent reports on file with the FCC.
Finally, certain of the financial information disclosed on this call includes non-GAAP measures.
The information required to be disclosed about these measures, including reconciliations to the most comparable G.E.P. GAAP measures are included in the earnings release.
The earnings release is also an exhibit to a form 8-K that can be accessed through the FCC filing section of our Investor Relations website.
Now I'll turn the call over to Ron.
Thank you Jamie and welcome to did you internationals 2023rd fiscal quarter earnings call.
Covering our best search results and outlook I'd like to comment on the pandemic and our initiatives around diversity and inclusion. Unfortunately, cobot 19 has been difficult disease for us to suppress on a global basis, it contagious and kind of.
Putting our society in a difficult position to balance our personal and economic well being with the exception did use all heroes that must be physically present at our off so the vast majority of our team is working productively from their homes, we about a handful of positive cases within digi, but all have recovered safely and that impacted others in big part due to our.
Policies and our great teams consideration for each other safety.
Our employee safety remains our top priority.
Leadership meet frankly to steward, our both our team and our company's health.
Well I hope whenever I see we increasingly believed that this new normal of social distinct saying mask wearing distributing working and limited travel will be with us for some time.
Fortunately, we had the team the tools and the offerings that enable did you to succeed in the zero touch economy.
In addition, we had begun to renew journey to eradicate racism injustice bias and violence.
Joining the CEO actually fledged working to improve our diversity and inclusion.
We have formed an employee led committee that is focused on promoting and cultivating and inclusive and diverse culture, which welcome everyone without bias and fosters active engagement in their communities to promote.
And social equity.
In terms of your base lining our company planning for continuous learning and taking other actions to promote these ames. We look forward to these initiatives positively impacting did you end our society.
Onto our business, we're very pleased with our results given the tremendous impact the virus induced recession has had on the global economy, including a record decline in U.S.G.P.
Did you guys called value proposition of enabling work well work and enhance productivity resonates in the urgency of our customers need for technology to create more productive and safe environments.
We believe strongly these trends investments have both accelerated and that these businesses are looking to experts like daisy to solve their business and mission critical challenges with over 35 years of experience success across thousands of customers and having provided millions of solutions did he is uniquely positioned to power the markets I O.
T solutions.
Our best fiscal third quarter performance in the company's history occurring in the most severely virus impact quarter to date.
Did you use business model showed the same resilience that our solutions products and services show.
For our customers.
We grew revenues, 15% from last year recorded record gross margins in excess of 50% and attained a 15% adjusted EBITDA margin.
To highlight our consolidated results. In addition, we paid down over a dollar share in debt, while maintaining our cash position l'oreal expense and strengthening our balance sheet.
Our cultural server product line, which includes only gear drove a 25% increase in I O T products and services revenues from last year. This growth was moderated by a modest decline in other products and services offerings as a pandemic impacted some of our customers during the quarter.
This revenue increase plus gross margin increased and good expense controls led to an 84% increase in adjusted EBITDA.
Next I'll provide some specific updates we achieved over 46 million in new product revenue fiscal year to date, which is up over 40% from the comparable period in fiscal 2019.
We launched the Connectcar eight embedded family the ice 20, industrial cellular router and enhanced console server resiliency products.
We're doubling our efforts to improve our channel program.
From partner support deal registration to simplifying our processes.
We finalized appointment of our Smart city project and of close additional business in this vertical.
We have opportunities to increase attach rates of software and services.
And improving the overall customer experience.
I don't see products and services has business application and vertical diversification, we experienced strong man and medical safe work from home business continuity data center and solely solar energy sectors. We've seen some business improvement as economies have reopened and business travel is reemerging.
Our smart sensor Aiotv solutions business added about 1000 subscribers to the quarter.
Driven by health care and retail verticals retention remain high proving the value of our offering.
Approximately 69300 subscribers power 17 million an annualized recurring revenue was approximately 80% gross margins.
Smart sense for the destination consolidation of the cloud and mobile interface now services over a thousand sites. We expect to have approximately 5000 sites on this platform by fiscal year end and all of our sites by the end of fiscal 2021.
This will unlock tremendous efficiency for our customers and for Digi.
We launched saved us a cloud based wellness in monitoring solution, which captures temperatures record century exit and tracks conditions are the onsite resources for our customers, we onboarded, our first customers and generated strong interest in the solution.
We are starting to see larger enterprise opportunities Reengage and rollout discussions, which is encouraging and key for us to return to adding 3000 to 4000 sites per quarter.
The pandemic is dynamic and both easing and tightening business restrictions at a high frequency. However, we've noticed a general trend toward a return to approve business and operations. We believe our offering will be more considered overtime and that we were able to grow our business in tandem with an increase confidence in the economy.
At the corporate level, we continue to progress did use efficiency and effectiveness software services and subscription continue to differentiate our offerings our offerings.
Our diversified supply chain is performing well and showed increased resilience.
We have significantly improved our back office processes to be more consistent and effective.
We continue to invest in existing and new I.T. tools and systems to reduce cost and improve productivity.
With regards to capital allocation, we remain on the on the offense regarding acquisitions, it's been more difficult to execute independent of Kara, but we feel confident in our ability to execute should the right opportunities arise.
Absent significant acquisitions, we will continue to bolster our balance sheet and our net debt position.
This pandemic has caused uncertainty as here I know I said this last quarter, but I can't tell you how probably I'm of the did you team whose perform courageously in this highly volatile and stressful time, a sincere. Thank you to our board our leadership and broader team, we're growing stronger through this pandemic with collaboration cooperation and willing.
Mr Change I will now I'll turn the call over to Jamie for more detail on our financial performance.
Thank you Ron.
I will recap some of the key financial highlights from our fiscal third quarter as well as our financial position and expectations.
Last quarter did you was establishing new levels of normal this fiscal quarter demonstrated truth in that statement and generates a level of excitement enthusiasm and seeing the vision over the past years being reflected in our financial performance.
Revenue once again surpass the 70 million dollar mark finishing at 70.3 million.
Our adjusted EBITDA also once again surpassed eight digits at 10.5 million.
Following up from an fiscal second quarter, where did you announced all time quarterly records combined with a fiscal Q3, which the U.S. economy shrunk by over 30% reinforces the did you modeled as being resilient and bodes well for the potential of our future earnings.
In addition to the revenue performance gross margins once again closed over 50% at 53.1%.
That margin performance combined with the cost controls. We described last quarter led to the adjusted EBITDA margins of 15%.
What we did not provide quarterly guidance at our last call revenue and adjusted EBITDA outpaced consensus among analysts estimates.
On a per diluted share basis, our non-GAAP EPS for the quarter was 23 cents, while our GAAP EPS was six cents.
We believe a key indicator in the value that did you brings to our customers' lives that are operational cash flow.
During the quarter, we generated 31.8 million in operating cash flow ending fiscal quarter with 55.1 million in cash.
We expect to generate positive operating cash in the foreseeable future and I'll comment more on that shortly.
Operating cash flow allowed us to make a significant payment on our credit facility being down over $30 million during the quarter, our ending bank facility debt position now stands at 74.5 million were a net debt position of 19.4 million.
These figures do not consider the treatment of leases, which based on the new accounting standards will add 16.8 million of what is now classified as debt on our books.
We are in compliance with our banks facilities covenants and we expect to remain in compliance.
Other balance sheet items of note our any our position of 53.9 is down from 56 million from our fiscal year end with no material changes to our reserves.
[noise] inventory increased to 46.6 million, which is up from the 40 million from our prior fiscal year end.
The increase is attributable to a classification change of skews between a b and C skews.
We are adding inventory to meet the liberty levels for each skews, well BNC skews take a little longer to work themselves out of our inventory balances.
We do not see any impact to our in old reserve as a result of the change.
Current inventory in the channel was 25.8 million, which is in line with levels over the past several quarters.
To date government travel restrictions border closures and the flooding impacting large parts of Asia have not material restrained our ability to obtain inventory to manufacturer or to deliver products or services to our customers.
We do not expect there to be any material change to our assets on the balance sheet.
Last quarter, we shared actions that we were taking to more closely align expenses to our projected revenues as well as to put just position Digi for continued operating performance and profitable growth.
These actions were executed on and are reflected in our operating expenses for the fiscal quarter.
For the quarter, our operating expenses were 34.5 million down from prior fiscal quarter by 400000.
Despite these measures there were other non cash items that offset some of those reductions with the current covina restrictions in place employee use of vacation is down significantly and an increase in that noncash expense was a partial offsets the operating expense saving seen in the quarter.
The measures that we have put into place will remain for our fourth fiscal quarter.
On a segment level for the fiscal quarter.
I O T products and services revenue increased 25.7% year over year in the third fiscal quarter of 2020 to 63.5 million.
Gross margin increased 770 basis points to 53.4%.
Product mix across the portfolio, including the products acquired through the acquisition of open gear drove the margin rate increase.
I would see solutions revenue decreased 35.6% year over year in the third fiscal quarter for 2020 to 6.9 million.
This was primarily due to delays and customer rollouts expansions and the upgrades as a result of corporate 19 as well as large enterprise deals in the prior fiscal year that did not reoccur in the third fiscal quarter of 2020.
Gross margins increased 70 basis points to 50.2% demonstrating the value of our high margin recurring revenue business model.
Now as it relates to forward looking guidance, the ongoing and dynamic macroeconomic circumstances could impact these expectations and we continue to monitor our positions closely.
We have noted continue disruptions in normal business activities during our third fiscal quarter from customers, we're reporting or predicting negative impacts from cobot 19, and the economic downturn on current and future operating results.
We are unable to reasonably estimate the duration and the severity of the current economic downturn, the timing and pace of any market recovery and the related impact on our business.
Our vision and our integration efforts have demonstrated that digi has risen to a new level of normal in our financial results.
We believe that new normal will continue on as we move into fiscal Q4 absent further decay in macroeconomic conditions.
And while we are continuing to suspend guidance for the fiscal year due to the uncertain economic impact of Cobot 19, we believed that the cash collected for the quarter is a strong indicator of the value did you provides to our customers and helping them deliver on their missions, particularly during a time of global capital and liquidity concerns.
Combined with growth in our pipeline as we see it today, we believe that the worst of the impact maybe behind us.
Absent an economic challenge presented in this very dynamic time with the pandemic the flooding issues in Asia, and the resulting pressures on financial institutions and businesses, we feel our business the stabilized and has the potential to perform slightly ahead of our fiscal quarter three results.
We expect to generate positive cash flow from operations for the fourth fiscal quarter similar to our fiscal Q2 operational cash flow.
That concludes our prepared remark we are now available to take your questions Carmen Please provide instructions to our listeners.
Secondly, in ladies and gentlemen.
Nine there to ask a question you would need to press star one.
Withdraw your question just press the pound or Taski. Please standby, while we compile that.
Yeah.
And our first question is from Anthony Stoss with Craig Hallum. Please go ahead.
You're right to Jamie.
Execution in her really tough environment.
I wanted to start with that.
Can you maybe comment.
Activity, especially on the sports inside you commented about no enterprise deals happening in the quarter, where do you stand.
Got it engagement wise with those those customers and a a similar question on the data center business. What do you how much visibility do you have on that side than I had a follow up after that.
Yes, thanks, Tony the.
On the Smartside side, we are seeing some some reengagement certainly parts of.
The verticals that smart sensors in particular restaurants are not a great position to move forward, but we're seeing some more activity from retail transportation and.
Some instead grocery.
We are seeing some reengagement there and we're encouraged by that because that's really key for us to get back to the three to 4000 sites per quarter that we had previously.
On the console server side really strong momentum a data center, we continue to see the investment both.
The conference servers in centralized locations cloud and multi cloud as well is on the edge. So the visibility is not always strong in that business, but but all of our customers are continuing to that particular strength in North America.
It's been hanging in there, but but we continue to be pleased with the execution of hobbled servers.
Okay, two more quick ones if I may.
The $30 million debt pay but.
Hey, down is pretty remarkable, especially when you're not guiding what gives you the confidence.
Actually make that payment and then Jamie help us if you can't on what you pick opex might look like going forward.
Yes on the first.
It is really a site confidence we feel confident in our ability to continue to manage this company to the levels of profitability that you've been seeing recently in hand in hand with that is cash generation. So that debt Paydown shows you lack confidence we have not only in today's business, but going forward.
Tony its Jamie from an Opex side.
I would say that the opex number for the quarter based on some of the things we saw those cost savings measures will stay in place.
I think vacation time is starting to open up a bit I think it's reasonable that that number would be in line to slightly better based on the fact that from a cash expense perspective, I don't really see anything changing here in the in the quarter coming up only the only real changes would be on an on site.
Okay nice job guys. Thank you.
Thanks, Tony Thanks, Tony.
Thank you our next question.
Jason Smith with Lake Street. Please go ahead.
Yes, thanks for taking my questions. Just curious I mean, I assume there are some push out what's going on but have you seen any significant cancellations across product lines.
We have not really Jason it's a good question that a lot more deferral smartside. Some particular resolve then we're not ready to move forward. This is still a priority for us we've got our hands full with plexiglas in mass and.
Temperatures checking other things going on with employees.
On the product and services side, there is both a push and pull there are some of our customers, especially people in medical device I've been going into some things and then some people course retail environments.
I have been pushing things out so there's a little bit of bulk going on.
But very few cancellations, Jason as Jamie just to add to that.
It's it's been pretty great not only the cancellations don't really been there, but our churn continues to perform at really good levels. So we're actually performing a little bit better than I'd say run rate on on that same told right now so.
We're not seeing the cancels the churn is performing a little bit better and then obviously with the cash collected.
I think those are good indicators of of where at least the current customers feel the value they're getting in that recurring revenue service.
Okay. That's helpful and I know, it's impossible to quantify but I'd just be curious to get your thoughts on the headwinds you currently seeing from the macro backdrop, how much of that he thinks attributed to.
The general sales cycle needing to just from the work from home lock down type environment and how much is more coming from your customers concerned on their budgets and maybe pulling back over all spending.
Yes, it's a really good question I'm not sure I'll be able to quantified as much as we'd all like but there certainly macro trends one is his confidence or the inverse here.
The virus and how much is contained are going to spread and that affect people's confidence in making investments in technology. There is also certainly bigger swings in confidence when it comes the verticals if you're in hospitality and travel that confidence is that a real low right now if youre in work from home or.
Activity tools that confident that confidence is more high at the moment. So you do see that that blended where you'll see pockets of confidence in pockets and then the second is more capital in an area restricted travel and the idea of the theme, it's actually quarantine and a geography for 14 days or if you've got back from a geography that limits.
Travel and you can work through that much easily whit.
Well, it's easier excuse me with existing customers with newer customers, where you're building trusting relationship. It takes a lot more work to get through that we as Jim calls or or other technology communication needs.
Okay, No that's helpful and the last one for me.
Into Q are you seeing any supplier.
Supply constraints or component shortages.
To date, we've made some comments earlier, we have a very diverse supply chain both from sourcing perspective, but also through our network of contract manufacturer. So we've been very fortunate that we've been able to really hanging in there and have a stable supply environment.
Okay sounds good thanks.
Thank you Sir our next question is frankly, it's Matt with Baird. Please go ahead.
Yes, good afternoon, and thanks for the questions.
Run I was just trying to maybe try to do a little bit of math fewer around your sites.
You know again, if I look at kind of a and ARPU earn.
Our P. S. If you will revenue per site.
No that the number looks like maybe around 90, but above $99 and you know I look at it year over year I think last year, the math was around 175.
I know part of this will come back to this episodic revenue versus the subscription revenue.
And maybe you could help us with that but the other the other thing I'm curious about is you are all of your sites consistently paying their subscription fee.
Or have you know.
Again in foodservice of a restaurant shut down are you waving the monthly fee here until they're back up and running is there a difference in.
The per site.
Yes.
Yes. Those are all good questions I think that smart sensor revenue really has two components. There's a there's a subscription component and then there's a onetime component that onetime component is usually comprised of of equipment installation and training and so when you look at that number you divide and insights you really got to look at just the recurring so what we said.
On the statement is was 69300 sites that represent 17 million an annualized recurring revenue, it's about $250 per site per year that we're getting out of that's a server based and the balance would be that onetime revenue that's associated with either implementation or training work.
Okay.
And well this quarter.
As much about two thirds of that revenue number in that range was recurring in about a third was associated with implementation.
Or services for our new and existing customers.
Okay, Alright, and tomorrow. So my question around begin how how do you manage sites that perhaps are closed.
Because of the covert issue and haven't reopened but how do you managed to the receivable from a from a site like that.
That's a good question we.
We don't have as many foodservice a restaurant customers as we'd like.
In our installed base and once we do have our larger enterprise customers that have wanted to keep the systems operational. So when we do have customers that had that need really we absolutely worked with them to restructure either their contracts or their payments to make sure that if they want the solution, we're helping them through this challenge.
But most of our customers regarding grocery transportation healthcare businesses that quite frankly are essential in a state operational during this period.
Okay. Okay, and then just just a question can you help us so.
Jamie if if you were to.
Pull out open gears revenue contribution was was there.
What kind of growth did you see in products and solutions I mean was it.
Was low single digits was it.
What was it what did that look like without actually giving us the number but I'm curious.
Yes.
Thanks, Rick without the help pulling the segment apart I.
I think what we can say as that.
Through the pandemic theres been.
And you can see the math theres been some decline that's taking place over on that side.
So we have seen that pressure as as the macroeconomic conditions.
Have come through anything more than that would start to fuel apart the segmented and I wouldn't be comfortable with that but I can't tell you that we've seen some decline.
Thats come through here over the over the endemic timeframe. Okay. Okay, because one might think that given the current environment open gear might or might have outperformed.
From a revenue perspective.
Oh, you know the the acquisition model if you will.
Yeah, I would I would say that the acquisition model is we're performing in line with expectations on that side of it so.
Okay, I think were in line with with the expectations on opening here I think that we've seen some challenges that are really.
That I think everyone in the economy is facing right now, but I think were in line with the expectations on open gear.
Okay. Alright, you just just last question for me.
EBITDA in the solutions business was that was that positive in the quarter.
It was it was modestly negative due is pretty close to breakeven, but it was modestly negative in the six figures type of.
Okay Alright.
Thank you.
All right. Thanks, Rick.
Thank you know NSR in mind, our ladies and gentlemen, Navy I've a question and just press Star then one today.
All right I'm not showing any further questions in the queue I will like to turn the call back to Ron commencement for his final remarks.
Thanks Carmen.
We appreciate everyone that joined the call today and thank you to our team our partners in our investors, we look forward to presenting at next week's.
Virtual Canaccord growth conference is mission to enable and automate remote work for industrial biotech customers has never been more imperative stay safe and healthy I look forward to our next earnings call.
And with that ladies and gentlemen, we thank you for participating in todays program you may now.
Okay.
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