Q1 2021 Digi International Inc Earnings Call

February 3, 2021

[music].

Ladies and gentlemen, thank you for standing by and welcome to <unk> International 2021 first fiscal quarter earnings call. At this time all participants are in a listen only mode. After the speakers' per.

And patients there will be a question and answer session to participate on that portion of the call simply press star one on your telephone if you require any further assistance. Please press star and here I will now hand, the conference over to your speaker today, Jamie Loch seniors, Vice President and CFO and Treasurer.

Thank you Carmen.

Good afternoon, everyone and thank you for joining us today to discuss the fiscal 2021 first quarter results of Digi International.

Joining me on today's call is Ron can ask me are president and CEO.

Ron will provide his thoughts and our business and I will follow with the highlights of our financial performance.

Following our 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 restaurant relations website at Digi Dot com.

Some of the statements that we make during this call are considered forward looking and 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.

While we believe the expectations reflected in our forward looking statements are reasonable we give no assurance such expectations will be met or that any of our forward looking statements will prove to be correct.

For additional information please refer to the forward looking statements section and our earnings release today and the risk factors section of our 2020 form 10-K, and subsequent reports on file with the SEC.

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 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 SEC filing section of our Investor Relations Web site.

Now I'll turn the call over to Ron.

Thank you, Jamie and welcome to Digi International 2021 first fiscal quarter earnings call. We are pleased with a record start to our fiscal year navigating the global pandemic team delivered on our new model of growth and new high recurring revenue strong gross margins record adjusted EBIT margins and our balance sheet.

And that is now net cash positive.

<unk> value proposition of remote automated zero touch and intelligently connected solutions power, our customers' key Iot initiatives.

Our new organizational structure has brought more focus to our customers.

And our distribution partners, while building camaraderie and energy within the organization.

Each leader is driving a combination of rock solid products, coupled with leading evolving software service and subscription offerings to bring more value to their customers.

Tracking our recurring revenues, which have been growing at twice the rate of our total revenues is a key indicator marking our progress.

Now a few comments on each of our business segments.

Our console server product line, which includes open gear drove a 13% increase and Iot products and services revenues from last year, and our highest gross margin to date.

This growth was tempered by a modest decline and our enterprise router line.

Resulting from delays and transportation and smart city projects.

We are investing and each of our product lines enhanced.

Enhanced cloud based device management combined with our for refreshed professional services and kind of and connectivity offerings drove record annualized recurring revenues of $13 million up from $10 million a year ago. We have increased the number of enterprise routers that are certified for <unk> first net and Verizon and first responder networks, we doubled our sales quarter over.

A quarter of our newest console server products. The O&M series that provides additional net ops functionality and OEM solutions, we are launching that connect for eight mini and nano products this quarter and.

Infrastructure management has advanced.

The upgrade of our connect easy product line due for launch and the second half of this fiscal year.

We are improving the fundamental processes of our Iot product lines with a goal of making our company and our products as easy as possible to work with.

And operator and.

Improved software automated tax contextual reporting customer experience sessions and quantitative market feedback will help make our solutions more effective and drive digi to be the provider of choice.

Smart Iot solutions added over 5000, and subscribers and the quarter driven by healthcare and retail verticals retention remains remains high and showing the value of digital differentiation.

We ended the quarter with over $19 million and annualized recurring revenue and over 75000 and subscribers.

Annualized recurring revenue was up from approximately $15 million a year ago.

Adding signed agreements and the process of implementation our annualized recurring revenue exceeds $20 million.

Customers are implementing and enjoying the benefits of digitized operating procedures and prove workflows and automation of routine tasks such as temperature monitoring.

<unk> for the destination consolidation of the cloud and mobile interface now services nearly 14000 subscribers approaching 20% of our total base.

We are seeing stronger demand and pipeline for our offerings in conjunction with the COVID-19 vaccines that require temperature management and monitoring this and resulted in business with new and existing customers. We are proud to play a role and helping save lives and and the pandemic.

Smart sense.

Our Iot solutions brand has more room to grow and this underpenetrated and underserved market that is estimated to have a $3 billion market size potential.

At the corporate level, we continued to progress digi is efficiency and effectiveness.

We now have over $32 million and annualized recurring revenue across the company demonstrating increasing software takes.

We continue to invest and our internal processes and systems to improve our efficiency, while moving to higher value and satisfaction work.

A special thanks to our resilient supply chain team and their commitment to our customers. During a time of ship based work to keep people safe.

While most of the team has worked remotely our supply chain heroes have been working on site and pods to meet our distributor and customer demand.

With a strengthened balance sheet, we are active and acquisition market, we continue to pursue opportunities and both our business segments.

Absent significant acquisitions, we will bolster our balance sheet and net cash position.

Vaccine and Rollouts declining case rates and potential additional government stimulus give us reason to be optimistic for improved conditions in the future.

Unfortunately appears we will need more time to remove the friction that the COVID-19 virus forced into our society and our economy. However.

However, digi team has proven its incredible talents have never been more needed and more effective and deeply deeply grateful to be surrounded by committed teammates and I'll now turn the call over to Jamie for more detail on our financial performance.

Thanks, Ron and good afternoon, everyone and happy new year today, I'll start with some of the key financial highlights that contributed to the results of our first fiscal quarter.

Our record first fiscal quarter performance continued our trend of growth and margin expansion driven by vision and execution amidst the backdrop of and ongoing macroeconomic uncertainty.

The first fiscal quarter set a series of Digi Records.

Our highest first fiscal quarter revenue of $73 1 million, which represents 17, 4% growth over prior year.

Combined with gross margins in excess of 56% and our continued discipline and focus on operating expenses led to an all time adjusted EBITDA quarterly record of $13 million or 17, 7% of our revenues.

On a per diluted share basis, our GAAP EPS was a loss of <unk> and our non-GAAP EPS for the quarter was 32.

Greater than a 100% improvement year over year.

The difference between EPS and non-GAAP EPS is driven by the incurred costs associated with an earn out payment related to the opened your acquisition, resulting in a one time P&L charge of $5 $8 million.

We have reached new record highs and overall recurring revenue total annual recurring revenue is now at $32 8 million, 35% from prior year.

Which is an all time high.

Those results for the quarter have surpassed consensus among analysts estimates and that's for revenue adjusted EBITDA and non-GAAP EPS.

As we highlighted last quarter, we believe a key indicator and the value that digi brings to our customers' lives and our operational cash flow.

We generated $8 3 million and operating cash flow for the first fiscal quarter, ending the fiscal quarter with $49 3 million and cash.

We maintain our expectation that we will continue to generate positive operating cash in the foreseeable future.

Once again, we were able to make another substantial payment.

$15 $6 million on our credit facility and have now retired the revolver portion of our debt facility.

Our ending debt position now stands at $47 5 million for a net cash position of $1 8 million.

These figures do not consider the treatment of leases, which based on the new accounting standard will add $19 4 million of what is now classified as debt on our books.

It is indicated of the strength of our financial model to a turn back into a cash positive position one year after closing and our acquisition of open gear.

We are in compliance with our banks bank facility's covenants and expect to remain in compliance.

Other balance sheet items of note our NDA, our position is $52 5 million down sequentially $6 7 million from our last fiscal quarter and with no material changes to our reserves.

Our ending inventory balance was $54 8 million up $3 2 million.

From 51, six at the end of our prior fiscal quarter.

The increase is attributable to the execution of the a b and C reclassification that we previous previously discussed.

As well as timing related increases that we expect to normalize within the fiscal year we.

We do not see any impact to our <unk> reserves as a result.

Current inventory and the channel is $34 million in line with levels over the past several quarters, we monitor our levels closely and regularly.

First fiscal quarter operating expenses include $5 8 million of acquisition related earn out charges and.

And as a note we have also made a change in our adjusted EBITDA calculation.

We introduced adjusted EPS last year, and we knew that we had a misalignment between adjusted EPS and adjusted EBITDA relating to the treatment of acquisition related earn out or contingent consideration.

We have aligned those measures this quarter and as such going forward, we will now add back and the impact of acquisition related earn outs or contingent consideration expenses. We believe these to be discrete onetime expenses similar to our acquisition expenses already included as an add back.

To date global travel restrictions and border closures have not materially restrained our ability to obtain inventory manufacture or deliver products or services to our customers.

At a segment level, we have updated our segment memo and have reflected that in our SEC form 10-Q, which will be filed later this week.

As such we will now be measuring the segments to and operating income level to provide greater clarity into the profitability between our segments.

Iot products and services revenue increased 13, 1% year over year and the first fiscal quarter of 2021 to $61 8 million and gross margin increased 900 basis points to 57 eight.

Annual recurring revenue increased 70% from prior year to $13 5 million.

Operating income is $1 3 million impacted by the $5 $8 million opened your earn out charge, which drove a year over year reduction and operating income of $3 1 million.

Product mix across the portfolio, including the products acquired through the acquisition of open gear drove both for revenue and margin rate expansion.

Iot solutions recurring revenue increased 31% year over year or two and annual recurring revenue of $19 3 million.

That is a key contributor to the overall revenue growth of 47, 5% year over year in the first fiscal quarter of 2021% to $11 3 million delivering a 47% gross margin.

The operating loss for solutions for the quarter was $1 4 million compared to the prior year loss of $4 9 million.

In addition to the continually growing recurring revenue from our subscription services revenue growth can also be attributed to large scale, new and existing customer deployments and equipment upgrades.

Iot solutions also grew the recurring revenue site count by nearly 6000 sites and serviced over 75000 sites in the fiscal first quarter.

Now as it relates to forward looking guidance, the ongoing pandemic and related global economic volatility could impact our expectations and we continue to monitor our positions closely.

As we noted last quarter, our vision and integration efforts abroad, digi to a new level of normal and our financial results and again proven with our first fiscal quarter results.

We do believe that the new normal will continue on as we move forward into fiscal Q2 and beyond and while we are continuing to suspend guidance for the fiscal year due to the uncertain economic impact of COVID-19, we believe that our strong balance sheet position combined with the performance and our pipeline is a strong indicator of the value Digi provides.

And to our customers and helping them deliver on their missions, particularly during a time of global capital and liquidity concerns.

We also still believe that the worst and the impact is behind us absent worsening economic conditions and this very dynamic time with the pandemic, we feel our business will continue with our stability throughout the year.

That concludes our prepared remarks, we're now available to take your questions. Carmen. Please provide the instructions to our callers.

Thank you, ladies and gentlemen, and if you wish to ask a question simply press star one on your telephone keypad.

The other question press, the pound or hash cool again that is star one to get index for please standby, while we compile the Q&A roster.

Yeah.

Our first question is from Anthony Stoss with Craig Hallum and your question. Please.

Alright, and Jamie Congrats on the strong Iot solutions, and especially adding over 5000 subs.

Three part question, Ron maybe comment about why you saw the explosion and the subs was it just COVID-19 and.

And the rigs are a little bit or was it just new mainly new customers coming on line and then also on that same vein on the vaccine distribution side are you able to keep up with demand in terms of your components and the supply shortages.

And then I had a follow up after that.

Great Hey, Thanks, Tony and nice to hear from your good questions and listen and <unk>.

Pandemic really set in and the April timeframe, there was a pretty decent freeze that happen with our pipeline and solutions people were trying to figure out what it was but theyre going to do and business closures impacted a lot of our customers.

And we became comfortable with the new normal.

Parts of our customer base that we target.

We really started to gain more confidence and particular health care, the grocery segment and and also parts of the transportation segment as well. So we saw them gain confidence throughout the year and if you look at our additions and solutions. They really came out of those key segments and fueled by some enterprise deals we've talked in the past.

Knee those enterprise deals to click in order to hit higher levels of productivity. So you saw that.

Part of the success, we had last quarter as well was to your point. The vaccine. We had a number of pipeline projects that were accelerated as the vaccine got approved and it became more well known as to how to handle and store the vaccine and and typical fashion a lot of our customers didn't have as much time to prepare.

And and so our supply chain has been tested and.

And I can't say that we've been perfect, but I give the team a ton of credit for fighting through a lot of challenges to meet some very time sensitive and.

Needs of our customers some of our customers have been purchasing ultra low temperature refrigeration equipment, which requires our our specialty ultra low temperature monitoring solution other customers ramped up much more quickly than they anticipated and some customers needed their nest temperature sensors recalibrated in order to make sure that.

They could give assurance to the government into their patience and their employees that they can keep.

The vaccines under under the proper conditions, so really a combination of those events really helped propel our record quarter for for the solutions group.

And as a follow up right. If you don't mind, just sharing and kind of your view on the data center business. How fast do you think that might be growing on a go forward basis, and then also on the flip side of that the <unk> router business was a little bit weaker and I think you made a comment in your prepared remarks love to hear a little bit more on why do you think the <unk> router business can rebound.

Yes, thanks for the follow up and the center console server. They open gear team did a fantastic job throughout the pandemic and you.

You can see from our GAAP results congratulations for the team, they're able to hit their earn out targets and that's really indicative of double digit growth that they experienced year over year, and we do think thats sustainable we're seeing strong demand both in the data center as well as and the edge and the team has done a fantastic job of identifying themselves with smart <unk>.

<unk> console service management, and and making sure that the customer always comes first.

And on the router side, we did see softness and particular, the transportation segment, which includes smart city as you know a number of urban areas have struggled with mass transit with tax revenues and that has affected their investments in and smart city projects. So we are optimistic that debt that will return its import.

And to have these transportation options available.

Vaccines are being distributed so we're hopeful and cautiously optimistic that as more and more people will get treated that there'll be more comfortable and those settings and and now maybe some potential stimulus that comes from the current administration as well. So we really net debt transportation piece to rebound in order to hit our expectations and that router group.

Thanks for the color on and best of luck. Thank you.

Thanks.

Thank you. Our next question comes from the line of Jason <unk>.

With Lake Street.

Your question please.

Hey, guys. Thanks for taking my questions just following up on the subscriber growth I think last quarter. You said you expect it to add three to 4000 sites per.

For quarter, just curious what sort of the incremental demand from the pharmacy side of things. If you think that's still a good range or if there could be upside to that.

Yeah. Thanks, Jason for the question and we do still think that's a good range. We are seeing increased demand both from existing customers that are looking to add locations and to service.

Customers looking for the vaccine and and as well as customers that we've been talking to for some time and the vaccine and really gave them I think that the final push because they needed to to invest and actively monitored systems like smart.

But we do expect to add three to 4000 sites on average there is certainly always some upside.

It's going to be balanced somewhat by our ability to implement the customers and get the proper equipment needed for those rollouts, but I think that's still a good expectation.

Okay. That's helpful and just curious if you could comment on what Youre seeing from a lead time perspective, and Relatedly I know youre, not providing guidance, but directionally for March I think historically marches up sequentially is that sort of a good baseline we should think about vickery.

Order.

Yes, so on the supply chain side as many of US know that theres been a lot of pressure on the supply chain and Durbin and some part by the automotive sector and.

And a tremendous demand for for up for for <unk>.

And Michael processors, and Gpus, driven by the gaming sector as well we've been very fortunate to have an incredibly strong supply chain team that's been able to fight through the supply chain constraints that are out there and I'm confident that that team will continue to deliver it wont be a golden road, but but but we do think we can we can fight through those challenges and meat.

Our customers' needs.

And in terms of guidance, we do we have and offer guidance as you mentioned I think our expectations were maybe up we want to build on the success that we saw in FQ one.

Were temporary and that a bit with how much demand got got leaked from F Q2 into F Q1, but we still think we can grow sequentially and <unk> and one other things the hallmarks of FQ. One we did have strong gross margins as you saw from Jamie's remarks, and and that was a little bit of a weighting towards some of the console server.

And other high margin products that weighting may change a bit here in the current quarter and so gross margins may come down a little bit which may temper, our adjusted EBITDA expectations in terms of quarter over quarter, but we do think we can grow sequentially. The office FQ one base.

Okay I appreciate the color thanks, guys.

Thanks, Jason.

Okay.

Thank you. Our next question comes from Mike Walkley Canaccord Genuity your question. Please.

Hey, guys. Good evening and this is Daniel on for Mark Thanks for taking my question.

So I was just wondering if you could just provide some color for us on sort of how to frame. The our strong adjusted EBITDA margins and free cash flow generation, how do you plan on balancing investments for growth moving forward.

Hey, Daniel Good afternoon, Hey, good questions one is as I mentioned.

And to Jason's question, we did have some mix that favored the gross margin side in particular <unk> had a strong comp performance that console server product line and comes with strong margins and additions you saw real nice contribution from the solutions and recurring revenue segments, which both have very strong margins.

So we do feel confident and this new model of above 50% gross margins, 15% plus adjusted EBITDA margins it'll waiver between low to mid fifties, depending upon some mix I'll, let Jamie comment on the free cash flow. Yes. Good afternoon, I think from a free cash flow perspective, our model still holds true.

Adjusted EBITDA and.

Free cash flow our close cousins.

Keep in mind that for the fiscal quarter. The reference to the earn out is cash that will be paid and the quarter side I would expect Q2 to be in line with our Q1 less and earn out payments.

And then for the for the remainder of the year projecting free cash flow to line up pretty closely to adjusted EBITDA for the rest of the way through.

Okay.

Very helpful.

Thank you.

And as a reminder, ladies and gentlemen, if you have a question simply press star one on your telephone.

Our next question comes from Scott Searle with Roth Capital Your question. Please.

Good afternoon, and thanks for taking my question.

Nice job on the quarter guys know its difficult operating environment out there and I hope you and your families are doing well.

Hey, just to follow up on the gross margins as it relates to the products side of the equation huge quarter, you've addressed and I think a couple of different ways and I just want to hit it one more time. It sounds like this is purely related to mix console has much stronger gross margins from the rest of the business, that's really what's driving it and its console and recurring that's driving that gross.

Margin performance or are there sort of some one time items or benefits from there just trying to calibrate for this as we're going forward because it sounds like it's and possibly and unsustainable level.

Yes, Scott good to hear your voice and these are good questions and yes, definitely fueled by a mix and the mix was weighted.

Higher than we would've expected going into the quarter on console server and recurring recurring is more sustainable that build debt revenue, we expect to build quarter over quarter console servers like a lot of our products.

<unk> businesses does have some fluctuation quarter to quarter. So we do think that console server mix will change in the current quarter. So again, our expectations is kind of low to mid 50% gross margins, depending upon mix tempered by the growth and recurring revenue.

Perfect and maybe to follow up on the solutions opportunity. It seems like vaccine is certainly starting to kick in as an opportunity I Wonder if you could put some more color around that kind of remind us through some of the customers might be and in terms of.

That segment of the healthcare market and then if there is there is a way you could kind of.

Quantify what that pipeline looks like today broadly speaking for Iot solutions, and cold chain and kind of what youre, saying it sounds like it's starting to fill up and over.

For the past six months or so it's really been driven home the value of cold chain, not just and vaccine, but in other areas and so just kind of wondering if you could put some soft numbers or qualitative comments around that.

Yes, Scott really really important question first and foremost we're just we're still thrilled to be a part of the vaccine rollout, albeit a small part we take our role incredibly seriously. We know that if we can help our customers keep these vaccines in the proper conditions that and incredible lifeline to people.

<unk> may go to waste and so we're thrilled to be a part of solving the pandemic challenge. Our society has been been working through and so we have both existing customers that are adding equipment and the case of and particularly the mrna vaccines they need ultra low temperature.

<unk> a lot of our customers were relying on some guidance that they could potentially do without those that equipment and just rely on dry ice and <unk>.

As I got into the operational challenges and quite frankly, some of the safety hazards of handling dry ice and getting access to your eyes. They became aware of those logistical challenges and especially if you're saving doses for that second shot that's a long time to be keeping medicine at a temperature that most of us are not accustomed to.

Managing and so our customers had to pivot towards this equipment and balance the lead times and the cost of that equipment with availability of our monitoring solutions. So that's certainly one piece. The second piece is and acceleration of business that we have been discussing with customers and they needed that extra push to make that investment and the.

This customer base. This includes not only pharmacist retail pharmacy chains like.

Walgreens, and Cvs and Rite aid, but also hospitals clinics.

And and other non traditional sites, we're very involved in the supply chain and warehouses and trucks, but we're also involved and a number of these sites that have been set up to help administer the vaccine and as we've seen from a slower start and rollout we think it actually will get bigger and the near term as more and more people look to equip sites that they.

Don't have use for the convention centers and hotels are or shopping centers and convert them into vaccination sites and we've got a great solution to get people up and running quickly and make sure patients are getting safe.

Medicine that will be effective and we think that trend will continue and we're happy to be participating and that in terms of sizing the pipeline as it is.

Been very very strong recently and one of the strength. We've seen in particular is net grocery segment. We've seen a couple of press releases out of us.

Hugo's market and recently Cockburn's. These are great opportunities because we can help these customers and so many ways Colborne for example, where not only in their retail food for.

Footprint Freezers refrigerators were also and their pharmacies and their delis and their transportation and even in their car washes and for those of you that live and northern climates.

And not unusual for a car wash to be close because it's too cold and it makes sure that equipment doesn't have any channel and so.

So we're thrilled to be helping our customers because theyre kind of super sites and that grocery segment.

Perfect and lastly, if I could just to follow up on the recurring revenue that's outside of the cold chain management.

I think the number is about $13 million on annualized basis indicated.

And kind of coupling that with the rater router and the gateway market.

And kind of looking the opportunity evolution to cradle point types of models is a lot of that revenue all attributable to those types of recurring access fees and models that youre seeing there I was wondering if you could expand on that a little bit in terms of the evolution of the router and the gateway business to the credit point model and then I guess as part of that what's the opportunity set that you're seeing now for private networks for <unk>.

And for US you mentioned <unk> and your opening remarks, but it seems like there's a tremendous amount of activity going on and that front right now I'm wondering how youre getting pulled into that and how there are different ways to monetize it beyond the gateway. Thanks.

Yes, Scott really good questions and.

And I can't stress enough how important it is for us to provide more and more value to our customers through innovation through service and through subscription and software and.

And we're starting to become much more.

Sort of about how well, we're doing and those areas and to be clear, it's not happening just on the enterprise router side, which the credit point example is very relevant but it's also happening on our console server open gear side, our attach rates are growing theyre not at 100% and Thats actually thrilling to me that.

How much more progress we can make our attach rates are and the 30% to 40% rate on the on the enterprise router side on the ear sides, a little bit higher more like 40% and 50%, but we have a tremendous amount of opportunity to go to get to a 100% attach rate and really deliver more value to our customers. So those are going to be the primary drivers the other leg.

And the recurring revenue stool for product and services is connectivity services and we're increasingly being asked to provide connectivity services as we ship our device our equipment to our customers. So they can plug and play and operate configured or get the ROI out of the solutions versus they get the device and then they have to do staging so youre going to see us become much more.

Relevance and helping bring the total solution when its and the customers' best interest.

Yeah.

Great. Thank you.

Thank you.

Now I would like to turn the call back to Ron <unk> for his final remarks.

Thank you Carmen and.

In closing we are pleased with the start of our fiscal 2021 year. Our team is working tirelessly on behalf of our customers distributors and each other digi.

<unk> will be participating and Roth Capital's 2021 virtual conference on March 15th and 16th please contact your Roth representative to schedule time with us we.

We are cautiously optimistic on the successful rollout of vaccines across the globe, helping and gain control of the pandemic and the meantime stay safe and healthy. Thank you for your time today.

Thank you, ladies and gentlemen, and for your participation in today's conference and you may.

And now disconnect.

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And then.

And.

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Ladies and gentlemen, and thank you for standing by and welcome to Digi International 2021 first fiscal quarter earnings call. At this time, all participants are in a listen only mode.

For the speaker's presentation, there will be a question and answer session to participate on that portion of the call simply press star one and your telephone if you require any progressive cause.

Let's first start and I will now hand, the conference over to your speaker today, Jamie Loch Senior Vice President and CFO and Treasurer.

Thank you Carmen and good.

Good afternoon, everyone and thank you for joining us today to discuss the fiscal 'twenty and 'twenty, one first quarter results from Digi International.

Joining me on today's call is Ron can ask me are president and CEO and Ron will provide his thoughts and our business and I will follow with the highlights from our financial performance.

Following our prepared remarks, we'll take your questions.

We issued our earnings release shortly after the market close day.

To obtain a copy through the financial releases section of our Investor Relations website at Digi Dotcom.

Some other statements that we make during this call are considered forward looking and 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.

Finally, certain other 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 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 SEC filing section of our Investor Relations website.

Now I'll turn the call over to Ron.

Thank you Jamie and welcome to Digi International Inc. 2021, first fiscal quarter earnings call. We are pleased with a record start to our fiscal year navigating the global pandemic team delivered on our new model of growth and new high recurring revenue strong gross margins record adjusted EBIT margins and our balance sheet.

And is now net cash positive.

JJ and value proposition of remote automated zero touch and intelligently connected solutions power, our customers' key Iot initiatives.

Our new organizational structure has brought more focus to our customers and our distribution partners, while building camaraderie and energy within the organization.

Each leader is driving a combination of rock solid products, coupled with leading evolving software service and subscription offerings to bring more value to their customers.

Racking, our recurring revenues, which had been growing at twice the rate of our total revenues is a key indicator of marking our progress.

Now a few comments on each of our business segments.

Our console server product line, which includes open gear drove a 13% increase and Iot products and services revenues from last year, and our highest gross margins to date.

This growth was tempered by a modest decline and our enterprise router line.

Resulting from delays and transportation and smart city projects.

We are investing and each of our product lines and enhanced.

Enhanced cloud based device management combined with our for refreshed professional services and kind of and connectivity offerings drove record annualized recurring revenues of $13 million up from $10 million a year ago. We've increased the number of enterprise routers that are certified for CBS first net and Verizon first responder networks, we doubled our sales quarter over.

For quarter of our newest console server products. The O&M series that provides additional net ops functionality and OEM solutions, we're launching the connect core eight mini and nano products this quarter and.

For structure management has advanced the.

And the upgrade of our connect easy product line due for launch and the second half of this fiscal year.

We are improving the fundamental processes of our Iot product lines with the goal of making our company and our products as easy as possible to work with.

And operate improve software automated tax contextual reporting customer experience sessions and quantitative market feedback will help make our solutions more effective and drive digi to be the provider of choice.

Smart Iot solutions added over 5000 subscribers and the quarter driven by healthcare and retail verticals retention remains remains high and showing the value of digital differentiation.

We ended the quarter with over $19 million and annualized recurring revenue and over 75000 subscribers.

Annualized recurring revenue was up from approximately $15 million a year ago.

Adding signed agreements and the process of implementation our annualized recurring revenue exceeds $20 million.

Customers are implementing and enjoying the benefits of digitized operating procedures improve workflows and automation of routine tasks such as temperature monitoring.

Smart sense for the destination and consolidation of the cloud and mobile interface now services, nearly 14000 and subscribers approaching 20% of our total base.

We have seen stronger demand and pipeline for our offerings in conjunction with the COVID-19 vaccines that require temperature management and monitoring this and resulted in business with new and existing customers. We are proud to play a role and helping stabilize and and the pandemic.

Smart.

Our Iot solutions brand has more room to grow in this underpenetrated and under service market that is estimated to have a $3 billion market size potential.

And the corporate level, we continue to progress digi is efficiency and effectiveness.

We now have over $32 million and annualized recurring revenue across the company demonstrating increasing software takes.

We continue to invest and our internal processes and systems to improve our efficiency, while moving to higher value and satisfaction work.

A special thanks to our resilient supply chain team and their commitment to our customers. During a time of ship based work to keep people safe.

While most of the team has worked remotely our supply chain heroes have been working on site and pods to meet our distributor and customer demand.

With a strengthened balance sheet, we are active and acquisition market, we continue to pursue opportunities and both our business segments absent significant acquisitions, we will bolster our balance sheet and net cash position.

Vaccine Rollouts declining case rates and potential additional government stimulus and give us reason to be optimistic for improved conditions in the future.

Unfortunately appears we will need more time to remove the friction that the COVID-19 virus forced into our society and our economy. However.

However, digi team has proven its incredible talents have never been more needed and more effective and deeply deeply grateful to be surrounded by committed teammates and I will now turn the call over to Jamie for more detail on our financial performance.

Thanks, Ron and good afternoon, everyone and happy new year to you.

I'll start with some of the key financial highlights that contributed to the results of our first fiscal quarter of.

Record first fiscal quarter performance continued our trend of growth and margin expansion driven by vision and execution amidst the backdrop of and ongoing macroeconomic uncertainty.

The first fiscal quarter set a series of Digi Records, our highest first fiscal quarter revenue of $73 1 million, which represents 17, 4% growth over prior year.

Combined with gross margins in excess of 56% and our continued discipline and focus on operating expenses led to an all time adjusted EBITDA quarterly record of $13 million or 17, 7% of our revenues.

On a per diluted share basis, our GAAP EPS was a loss of <unk> and our non-GAAP EPS for the quarter was 32.

Greater than a 100% improvement year over year.

The difference between EPS and non-GAAP EPS is driven by the incurred costs associated with an earn out payment related to the open gear acquisition, resulting in a onetime P&L charge of $5 $8 million.

We have reached new record highs and overall recurring revenue total annual recurring revenue is now at $32 8 million, 35% from prior year.

Which is an all time volume.

Those results for the quarter have surpassed consensus among analysts ask and that's for revenue adjusted EBITDA and non-GAAP EPS.

As we highlighted last quarter, we believe a key indicator and the value that digi brings to our customers' lives and our operational cash flow.

We generated $8 3 million and operating cash flow for the first fiscal quarter, ending the fiscal quarter with $49 3 million and cash.

We maintain our expectation that we will continue to generate positive operating cash in the foreseeable future.

Once again, we were able to make another substantial payments.

$15 $6 million on our credit facility and have now retired the revolver portion of our debt facility.

Our ending debt position now stands at $47 5 million for a net cash position of $1 8 million.

These figures do not consider the treatment of leases, which based on the new accounting standard will add $19 4 million of what is now classified as debt on our books.

It is the indicators of the strength of our financial model to have turned back into a cash positive position one year after closing and our acquisition of open gear.

We are in compliance with our banks bank facility's covenants and expect to remain in compliance.

Other balance sheet items of note, our ending AAR position is $52 5 million down sequentially $6 7 million from our last fiscal quarter and with no material changes to our reserves.

Our ending inventory balance was $54 8 million up $3 2 million.

From 51, six at the end of our prior fiscal quarter.

The increase is attributable to the execution of the P&C reclassification that we've previously previously discussed.

As well as timing related increases that we expect to normalize within the fiscal year we.

We do not see any impact to our <unk> reserves as a result.

Current inventory and the channel is $34 million in line with levels over the past several quarters, we monitor our levels closely and regularly.

First fiscal quarter operating expenses include $5 8 million of acquisition related earn out charges and as a note. We have also made a change and our adjusted EBITDA calculation.

We introduced adjusted EPS last year, and we knew that we had a misalignment between adjusted EPS and adjusted EBITDA relating to the treatment of acquisition related earn outs or contingent consideration.

We have a line those measures this quarter and as such going forward. We will now add back the impact of acquisition related earn out or contingent consideration expenses. We believe these to be discrete onetime expenses similar to our acquisition expenses already included as an add back.

Today's global travel restrictions and border closures have not materially restrained our ability to obtain inventory manufacturer or deliver products or services to our customers.

And our segment level, we have updated our segment memo and have reflected that in our SEC form 10-Q, which will be filed later this week.

As such we will now be measuring the segments to and operating income level to provide greater clarity into the profitability between our segments.

Iot products and services revenue increased 13, 1% year over year and the first fiscal quarter of 2021 to $61 8 million and gross margin increased 900 basis points to 57 eight.

Annual recurring revenue increased 70% from prior year to $13 5 million.

Operating income is $1 3 million impacted by the $5 $8 million opened your earn out charge, which drove a year over year reduction and operating income of $3 1 million.

Product mix across the portfolio, including the products acquired through the acquisition of opening year drove both the revenue and margin rate expansion.

Iot solutions recurring revenue increased 31% year over year or two and annual recurring revenue of $19 3 million.

That is a key contributor to the overall revenue growth of 47, 5% year over year in the first fiscal quarter of 2021 to $11 3 million delivering a 47% gross margin.

The operating loss for solutions for the quarter was $1 4 million compared to the prior year loss of $4 9 million.

Iot solutions also grew the recurring revenue site count by nearly 6000 sites and serviced over 75000 sites in the fiscal first quarter.

Now as it relates to forward looking guidance, the ongoing pandemic and related global economic volatility could impact our expectations and we continue to monitor our positions closely.

As we noted last quarter, our vision and integration efforts abroad, Digi to a new level of normal in our financial results and again proven with our first fiscal quarter results.

To our customers and helping them deliver on their missions, particularly during a time of global capital and liquidity concerns.

We also still believe that the worst and the impact is behind us.

Absent worsening economic conditions and this very dynamic time with the pandemic, we feel our business will continue with our stability throughout the year.

That concludes our prepared remarks, we're now available to take your questions. Carmen. Please provide the instructions to our callers.

Thank you, ladies and gentlemen, and if you wish to ask a question simply press star one on your telephone keypad to withdraw your question press the pound or hash key again that is star one to get index for please standby, while we compile the Q&A roster.

Our first question is from Anthony Stoss with Craig Hallum and your question. Please.

Sure Jamie Congrats on the strong Iot solutions, and especially adding over 5000 subs.

Three part question Rod maybe comment about why you saw the explosion and the subs was it just the COVID-19 kind of.

And the range or a little bit or was it just new mainly new customers coming on line and then also on that same vein on the vaccine distribution side are you able to keep up with demand in terms of your components any supply shortages.

And then I had a follow up after that.

Great Hey, Thanks, Tony and nice to hear from your good questions and.

Listen, we and <unk>.

<unk> really set in and the April timeframe, there was a pretty decent freeze that happen with our pipeline and solutions people were trying to figure out what it was but theyre going to do and business closures impacted a lot of our customers.

As we became comfortable with the new normal.

Parts of our customer base that we target.

It really started to gain more confidence and particular health care, the grocery segment and and also parts of the transportation segment as well. So we saw them gain confidence throughout the year and if you look at our additions and solutions. They really came out of those key segments and fueled by some enterprise deals we've talked in the past.

Need those enterprise deals to click in order to hit higher levels of productivity. So you saw that.

A part of the success, we had last quarter as well was to your point. The vaccine. We had a number of pipeline projects that were accelerated as the vaccine got approved and it became more well known as to how to handle and store the vaccine and and typical fashion a lot of our customers didn't have as much time to prepare.

Pair and and so our supply chain has been tested and.

I can't say that we've been perfect, but I give the team a ton of credit for fighting through a lot of challenges to meet some very time sensitive.

Needs of our customers some of our customers have been purchasing ultra low temperature refrigeration equipment, which requires our our specialty ultra low temperature monitoring solution.

Other customers ramped up much more quickly than they anticipated and some customers needed their nest temperature sensors recalibrated in order to make sure that they could give assurance to the government into their patients and their employees that they can keep the vaccines under under the proper conditions. So really a combination of those events really helped propel our record.

Quarter for for the solutions group.

And as a follow up right. If you want to line just sharing kind of your view on the data center business. How fast you think that might be drawing on a go forward basis, and then also on the flip side of that the <unk> router business was a little bit weaker and I think you made a comment in your prepared remarks and love to hear a little more on why do you think the <unk> router business can rebound.

Yes, thanks for the follow up.

And the console server they open gear team did a fantastic job throughout the pandemic and.

You can see from our GAAP results congratulations for the team they are able to hit their earn out targets and that's really indicative of double digit growth that they experienced year over year and we do think that sustainable we're seeing strong demand both in the data center as well as and the edge and the team has done a fantastic job of identifying themselves with smart.

<unk> console service management, and and and making sure that the customer always comes first.

And to have these transportation options available.

Vaccines are being distributed so we're hopeful and cautiously optimistic that as more and more people will get treated that they'll feel more comfortable and those settings and and now maybe some potential stimulus that comes from the current administration as well. So we really net debt transportation piece to rebound in order to hit our expectations and that router group.

Thanks for the color on best of luck. Thank you. Thanks.

Thanks, Tony.

Thank you. Our next question comes from the line of Jason.

Great.

Question. Please.

Hey, guys. Thanks for taking my questions just following up on the subscriber growth I think last quarter. You said you expect it to add three to 4000 sites per.

For quarter, just curious what sort of the incremental demand from the pharmacy side of things. If you think thats still a good range or if there could be upside to that.

Yes, Thanks, Jason for the question and we do still think that's a good range. We are seeing increased demand both from existing customers that are looking to add locations and to service.

But we do expect to add three to 4000 sites on average there is certainly always some upside.

It's going to be balanced somewhat by our ability to implement the customers and get the proper equipment needed for.

For those rollouts, but I think thats still a good expectation.

Okay. That's helpful and just curious if you could comment on what Youre seeing from a lead time perspective, and Relatedly I know youre, not providing guidance, but directionally for March anything historically marches up sequentially is that sort of a good baseline we should think about vickery.

And quarter.

Yeah. So on the supply chain side as many of US know that theres been a lot of pressure on the supply chain and driven in some part by the automotive sector and <unk>.

And the tremendous demand for for up for for microprocessors and Gpus, driven by the gaming sector as well we've been very fortunate to have an incredibly strong supply chain team that's been able to fight through the supply chain constraints that are out there and I'm confident that that team will continue to deliver it won't be a golden road, but.

But we do think we can we can fight through those challenges and meet our customers' needs.

In terms of guidance, we do we have and offer guidance as you mentioned.

Our expectations were bad debt, we want to build on the success that we saw in FQ one.

Were temporary and that a bit with how much demand got it got it.

Leaked from F Q2 into FQ, one, but we still think we can grow sequentially and <unk> and one other things the hallmarks of FQ. One we did have strong gross margins as you saw from Jamie's remarks, and and that was a little bit of a weighting towards some of the console server and other high margin products that weighting may change a bit here and.

And the current quarter and so gross margins may come down a little bit, which may temper, our adjusted EBITDA expectations in terms of quarter over quarter, but we do think we can growth sequentially. The office FQ one base.

Okay I appreciate the color thanks, guys.

Thanks, Jason.

Thank you. Our next question comes from Mike Walkley Canaccord Genuity your question. Please.

Hey, guys. Good evening and this is Daniel on for Mark Thanks for taking my question.

So I was just wondering if you could just provide some color for us on.

Sort of how to for MBR strong adjusted EBITDA margins and free cash flow generation, how do you plan on balancing investments for growth moving forward.

Hey, Daniel afternoon, Hey, good questions one is as I mentioned.

Two adjacent question, we did have some some mix that favored the gross margin side in particular <unk> had a strong comp performance that console server product line comes with strong margins and additions you saw real nice contribution from the solutions and recurring revenue segments, which both have very strong margins. So we do feel.

And this new model of <unk>.

Above 50% gross margins, 15% plus adjusted EBIT margins.

Waiver between low to mid <unk>, depending upon some mix I'll, let Jamie comment on the free cash flow yes.

Yes, good afternoon, I think from a free cash flow perspective, our model still holds true adjusted EBITDA and free cash flow our close cousins.

Keep in mind that for the fiscal quarter.

The reference to the earn out is cash that will be paid and the quarter side I would expect Q2 to be in line with our Q1 less and earn out payments.

And then for the <unk>.

For the remainder of the year projecting free cash flow to line up pretty closely to adjusted EBITDA for the rest of the way true.

Okay.

Helpful.

Thank you.

And as a reminder, ladies and gentlemen.

I have a question simply press star one on your telephone.

Our next question comes from Scott Searle with Roth Capital. Your question. Please hey, good.

Good afternoon, and thanks for taking my question.

Nice job on the quarter guys know its difficult operating environment out there and I hope you and your families are doing well.

Hey, just to follow up on the gross margins as it relates to the products side of the equation huge quarter, you've addressed it I think a couple of different ways and I just want to hit it one more time. It sounds like this is purely related to mix console has much stronger gross margins from the rest of the business, that's really what's driving it it's console and recurring that's driving that gross.

Arjun performance or are there sort of some one time items or benefits and Theyre just trying to calibrate for this as we're going forward because it sounds like it's and possibly and unsustainable level.

Yes, Scott good to hear your voice and these are good questions and yes, definitely fueled by a mix and the mix was weighted.

Higher than we would've expected going into the quarter on console server and recurring recurring is more sustainable that build net revenue, we expect to build quarter over quarter console servers like a lot of our products.

Got you perfect and maybe to follow up on the solutions opportunity. It seems like vaccine has certainly started to kick in as an opportunity I wonder if you could put some more color around that kind of remind us through some of the customers might be and in terms of.

Debt segment of the healthcare market and then if there is there is a way you could kind of quantify what that pipeline looks like today broadly speaking for Iot solutions and cold chain kind of what youre, saying it sounds like it's starting to fill up and over the past six months or so it's really been driven home the value of cold chain, not just and vaccine, but in other areas and so just kind of wondering if.

You could put some soft numbers or qualitative comments around that.

Yes, Scott really really important question first and foremost we're just we're still thrilled to be a part of.

The vaccine rollout, albeit a small part we take our role incredibly seriously we know that if we can help our customers keep these vaccines and the proper conditions that and incredible lifeline to people may go to waste and so we're thrilled to be a part of <unk>.

Solving the pandemic challenge our society has been been working through and so we have both existing customers that are adding equipment and the case of and particular the mrna vaccines they need ultra low temperature refrigerators.

Lot of our customers were relying on some guidance that they could potentially do without those that equipment and and just rely on dry ice and as they got into the operational challenges and quite frankly, some of the safety hazards of handling dry ice and getting access to your eyes. They became aware of those logistical challenges and especially if you're saving dosed.

As for that second shot that's a long time to be keeping medicine at a temperature that most of us are not accustomed to managing and so our customers had to pivot towards this equipment and balanced the lead times and the cost of that equipment with availability of our monitoring solutions. So that's certainly one piece of this.

Second piece is and acceleration of business that we have been discussing with customers and they needed that extra push to make that investment and this customer base. This includes not only pharmacist retail pharmacy chains like Wal.

Walgreens, and Cvs and Rite aid, but also hospitals clinics and.

And and other non traditional sites, we're very involved in the supply chain and warehouses and trucks, but we're also involved and the number of these sites that have been set up to help administer the vaccine and as we've seen from a slower start and rollout we think it actually will get bigger and the near term as more and more people look to equip sites that they.

Don't have use for like convention centers, and hotels are or shopping centers and convert them into vaccination sites and we've got a great solution to get people up and running quickly and make sure patients are getting safe.

A medicine that will be effective and we think that trend will continue and we're happy to be participating and that in terms of sizing the pipeline as it is.

Been very very strong recently and one of the strength. We've seen in particular is net grocery segment. We've seen a couple of press releases out of us.

Hugo's market and recently Cockburn's. These are great opportunities because we can help these customers and so many ways co barns for example, where not only in their retail food for.

Footprint Freezers refrigerators were also and their pharmacies and their delis and their transportation and even in their car washes and for those of you that live and northern climates.

And not unusual for a car wash to be closed because it's too cold and it makes sure that equipment doesn't have any channel and so.

So we're thrilled to be helping our customers because theyre kind of super sites and that grocery segment.

Perfect and lastly, if I could just to follow up on the recurring revenue that's outside of the cold chain management.

I think the number is about $13 million on annualized basis indicated.

And kind of coupling that with the rater router and the gateway market.

Yes, Scott really good questions and.

And I can't stress enough how important it is for us to provide more and more value to our customers through innovation through service and through subscription and software and.

And we're starting to become much more.

How much more progress we can make our attach rates are and the 30% to 40% rate on the on the enterprise router side, you'll hear sides, a little bit higher more like 40% to 50%, but we have a tremendous amount of opportunity to go to get to a 100% attach rate and really deliver more value to our customers. So those are going to be the primary drivers the other leg.

And the recurring revenue stool for product and services is connectivity services and we're increasingly being asked to provide connectivity services as we ship our device our equipment to our customers. So they can plug and play and operate configure and get the ROI out of the solutions versus they get the device and then they have to do staging so youre going to see us become much more.

Relevance and helping bring the total solution when its and the customers' best interest.

Great. Thank you.

Yeah.

Thank you.

Now I would like to turn the call back to La and connect for his final remarks.

Thank you Carmen and.

In closing we are pleased with the start of our fiscal 2021 year. Our team is working tirelessly on behalf of our customers distributors and each other digi.

We'll be participating and Roth Capital's 2021 virtual conference on March 15th and 16th please contact your Roth representative to schedule time with us.

We are cautiously optimistic on the successful rollout of vaccines across the globe, helping and gain control of the pandemic and the meantime stay safe and healthy. Thank you for your time today.

Thank you, ladies and gentlemen, and for your participation in today's conference and you may.

And now disconnect.

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