Q2 2021 Digi International Inc Earnings Call
[music].
Good day, and thank you for standing by and welcome to the fiscal second quarter 2021 did you International earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised and today's conference is being recorded if you require any further assistance. Please press star zero and I wouldn't.
Now I'd like to hand, the conference over to your Speaker today, Jamie Loch Chief Financial Officer. Please go ahead.
Thank you Grace.
Good afternoon, everyone and thank you for joining us today to discuss the fiscal 2021 second 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 on our business and I will follow with the highlights of our financial performance.
Following our prepared remarks, we will take your questions.
Issued our earnings release shortly after the market closed today.
You can obtain a copy through the financial releases section of our Investor Relations website at Digi Dot com.
So on 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 in 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 filings.
And of our Investor Relations website.
Now I will turn the call over to Ron.
Thank you, Jamie and welcome to Digi International 2021 second fiscal quarter earnings call.
Record quarterly revenue and record annualized recurring revenue headline and exciting and busy quarter.
We raised nearly $74 million and an equity offering to continue to fuel what has been a successful acquisition strategy, including our recent acquisition of <unk> yet.
We are targeting double digit topline growth with recurring revenue and profits growing out and even faster pace.
We have and organizational structure to support tuck in acquisitions like <unk> as well as potentially larger acquisitions the.
And the acquisition pipeline has never been more robust.
Even if the market is often very competitive.
As the global economy starts to recover from the pandemic seeing strong demand across our offerings record pipeline.
<unk> and engaged partners and customers.
The digital transformation of every business continues to accelerate and we believe <unk> core value proposition of resilient.
Zero touch intelligent automation is extremely well positioned.
In particular, we are seeing increased activity and smart city and mass transit opportunities after a year of duress.
We look forward to building on our success from last year's $20 million deployment as this market becomes more accessible.
Demand has not been a problem as you can hear from my comments, but the supply chain has been per day focus.
To date, we have navigated extremely challenging conditions to meet our customer commitments. These.
And these conditions are becoming more difficult or.
And our incredible supply chain team is up to the task, but there is a risk and our ability to secure the right components on a timely basis.
Fortunately, we've been a consistent customer for over three decades, and we service businesses and mission critical industries, helping prioritize our needs.
We will use our strong balance sheet to purchase critical components, if necessary to ensure we service our customers and.
In addition, like all companies, we are seeing increases and transportation charges.
Now a few comments on each of our business segments.
Lapping our last pre COVID-19 quarter, and comparable quarters, including console server product line, the Iot product and services segment declined about 2% year over year, but increased 6% sequentially.
OEM solutions infrastructure management and console servers grew cellular routers decline year over year as we deployed our large smart city project the year prior but showed strong quarterly sequential growth.
Recurring revenue of $12 million grew year over year, driven by enhanced attach rates of our device management offering across our cellular enabled products.
In conjunction with Earth day, we awarded six innovative customers with our first Green Tech awards across agriculture, and industrial and clean energy applications.
Our cellular router team announced the introduction of our first <unk> routers that target the enterprise and transportation markets.
OEM solutions has successfully integrated the <unk> team, we are already generating revenue from the Lora and Exxon and Iot platform.
Console service, followed a record breaking quarter with results above expectations, demonstrating their leadership position and smart out of band resilient offerings.
Infrastructure management has grown 10% year to date and is halfway to showing a full year of growth for the first time since 2016.
We are advancing our customer centric model with investments and improve customer on boarding easier product installation activation enhanced technical support customer and partner portals improved billing and payment processes.
We are committed to enhancing the customer experience and building World class service and support teams.
Smart Iot solutions added about 2000 and subscribers and the quarter driven by health care and retail verticals retention remains high showing and of our digital differentiation.
We ended the quarter with nearly $22 million annualized recurring revenue and nearly 77000 subscribers.
This represents 37% growth and <unk> over last year, and a 12% increase and our subscriber base.
Sure we are bringing on new customers at a higher <unk> than the installed base showing increased value of the offering.
One of our largest customers.
And who has been a value customer since 2015 renewed their partnership with smart sense for another five years.
Smartphones for the nation consolidation of the cloud and mobile interface now services, nearly 24500 subscribers or 32% of our total subscriber base.
We're slowing down on migration efforts to ensure customers get the best experience possible, but almost all new customers are going live on smartphones for.
We are pleased to see strong growth, but even more pleased with the strong pipeline as foodservice recover from the pandemic. We expect it will be a critical part of our growth objectives.
Smart our Iot solutions brand is extending its leadership leadership position and a market that is less and 15% penetrated and over $3 billion market for digital task management and intelligent condition monitoring.
At the corporate level, we had some notable achievements, we now have nearly $34 million and annual annualized recurring revenue across the company demonstrating increasing software take rates. This is up 27% from last year.
Our capital light model equity offering and our improved billing and collection processes generate significant putting our net cash position at nearly $80 million.
Combined with the new credit agreement, we have over $300 million of capital accessible.
A special thanks to our resilient supply chain team, who have worked safely on site to service our customers their jobs got even more thrilling for supply chain challenges mentioned earlier.
Macroeconomic conditions are becoming more favorable with a vaccine rollout opening of economies and people getting more comfortable gathering and moving around.
In addition, government stimulus efforts could directly benefit and many of our target markets, which could lead to improved results.
And so perhaps the digi team their adaptability and commitment to success has been and incredible light during a dark pandemic period.
I'll now turn the call over to Jamie for more detail on our financial performance.
Thanks, Ron and good afternoon, everyone today I'll start with some of the key financial highlights that contributed to the results of our second fiscal quarter. It was a significant and record quarter, which continues our trend of growth and profit expansion on.
On top of that our debt restructure and equity offering has provided us the flexibility to aggressively pursue our growth strategies organically and inorganically.
And while that activity took place and mid continued macroeconomic uncertainty exacerbated by the growing global supply challenges, we were able to post quality results.
The second fiscal quarter marked the first full quarter of entirely organic results our acquisition of open gear, having closed in fiscal Q1 of 2020.
As I mentioned this quarter marks a record revenue performance of $77 3 million, which represents five 2% growth over prior year.
Gross margins were in excess of 52% and led to adjusted EBITDA of $11 7 million or 15, 1% of our revenues.
Gross margin, excluding amortization were just shy of 54% for the quarter.
On a per diluted share basis, our GAAP EPS was <unk> and our non-GAAP EPS for the quarter was 27 <unk>.
Revenue and adjusted EBITDA, both beat consensus estimates for the quarter.
Consensus for EPS and <unk>.
And EPS is based off of share counts that were pre equity offering however, even after taking into account the additional shares issued and the operating we still beat consensus estimates.
We have reached record high and overall recurring revenue.
Total annual recurring revenue is now $33 8 million up 27% from prior year and 3% from prior quarter.
Regarding our solutions business increased to 37% year over year and 13% from prior quarter.
Recurring revenue and our Iot products and services business increased 11% year over year.
We did see sequential decrease entirely driven by reduced ABV.
From one significant customer excluding the overall consideration of this customer current revenue grew 22% year over year, and 7% from prior quarter, and our Iot products and services business.
Some of our other financial highlights and GE continues to generate strong cash flows and indicator of the value our customers receive from Digi services and products generated $21 3 million and operating cash flow for the second fiscal quarter, we maintain our expectation that we will continue to generate positive operating cash for the foreseeable future.
In addition, we issued approximately 4 million shares of common stock raising $73 8 million and capital ending the fiscal quarter with $107 2 million and cash.
That places digi into a net cash positive position of $79 1 million.
We also improved our capital flexibility by replacing our existing $47 $5 million term loan and $100 million senior secured revolver with a 200 million senior secured revolver and an option to increase by another $75 million.
Our ending debt position now stands at $48 1 million. These figures do not consider the treatment of leases, which based on for new standard will add $18 $8 million of what is now classified as debt on the books.
We are in compliance with our bank facilities covenants and we expect to remain in compliance.
Other balance sheet items of note our NDA, our position is $44 1 million down $8 4 million sequentially from our last fiscal quarter and with no material changes to our reserves.
Our ending inventory balance is 51 4 million down $3 4 million sequentially from our last fiscal quarter and with no material change to our channel reserves.
Current inventory and the channel is $27 8 million down $2 6 million, so quite from our last fiscal quarter, and we monitor our levels closely and regularly.
If we look into our segment performance Iot products and services revenue decreased one 9% year over year and the second fiscal 2021 to $65 6 million gross margin decreased 50 basis points to $52 five <unk>.
Gross margin, excluding amortization were 53 six for the quarter.
These results are all organic marking our first full quarter of comparison the year over year revenue impact was driven primarily by the significant revenue attributable to the installation of a large smart city project ladder that we have discussed previously.
For the decrease in margin rate is driven by an increase and the cost to fulfill demand due to increasing challenges and the supply chain.
Annual recurring revenue increased 11% from prior year to $12 million on.
Operating income decreased to $3 $8 million year over year to $4 6 million for the second fiscal quarter.
Driven partially by increased operating expenses, including items that are added back for adjusted EBITDA purposes, but not for sales and operating margins.
Iot solutions had a quarter for the record books recurring revenue increased 37% year over year to an annual recurring revenue number of $21 8 million.
And that is a key contributor to the overall revenue growth of 8% year over year in the second fiscal quarter of 2021 to $11 7 million delivering at 51, 4% gross margin.
Gross margins expand margin position were 55% for the quarter.
In addition to the substantial increase in recurring revenue well executed on large scale, new and existing customer deployments and equipment upgrades.
Our solutions cycle grew by approximately 2000 net sites pushing our total site count to nearly 77000.
We continue to invest to support the growth objectives of Iot solutions.
And the operating performance for solutions for the quarter improved $3 $4 million year over year, resulting in a $1 $2 million loss compared to the prior year loss of $4 6 million.
Now 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 have brought digi to a new level of level proven with another record quarter.
We believe and our new normal considering as we move through the fiscal year.
And while there continue to be broad economic uncertainty caused.
And just by the ongoing global pandemic, but by a new and growing supply chain challenge being felt around the world that makes long term predictability of challenge, we have confidence and our execution and our performance and we are providing guidance for our fiscal third quarter are as follows.
We expect revenue of 75% to $79 million, providing growth year over year of 7% to 12%, we expect our GAAP EPS to be between seven and 10 per diluted share.
We expect our adjusted EPS to be between 21% and 25 per diluted share with adjusted EBITDA to be between $10 nine to $11 9 million.
For our EPS calculations taken to increase and the total number of shares outstanding.
We believe that our strong balance sheet position combined with performance, we see and our pipeline are leading indicators of the value Digi provides to our customers and helping them deliver on their missions, particularly during a time of global capital and liquidity concerns.
That concludes our prepared remarks, we're now available to take your questions Grace. Please provide the instructions to our callers.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of harsh Kumar from Piper Sandler Your line is now open.
Yeah, Hey, guys congratulations on solid.
On a quarter a couple of questions you had 77000 sites for Iot product line.
Can you just.
And remind us what the opportunity here is and how we should think about growth.
From here on as we go forward, particularly Iran. In light of your comments about the economy opening up.
Hey, harsh welcome to your first Digi earnings call and thanks for the questions and.
Theres a theres over 2 million sites that are in our addressable market here domestically.
Very low penetration. So this is still early days.
We have been.
Suggesting that the group can add about three to 4000 sites per quarter that does vary quarter by quarter and since not all sites are created equal some sites generate much more recurring revenue and others will.
I'd like to emphasize that recurring revenue metric as well.
And three or four downsides of quarter, and probably about $1 million on a quarter last quarter was particularly.
Nice going from.
19 million for almost $22 million.
Credit and then for my follow up and then I'll get back in line, Ron you talked a lot about supply cramping.
And you do you sort of like.
Cited that as a product.
Substantial risk.
Can you talk about how you feel about where you are with your with your availability and supply I know <unk> been in business for a couple of decades, I know you've got a great balance sheet, but how do you feel about your ability to get what you want and does your guidance take into account any revenues that you think you might be leaving behind because of supply.
Yes, absolutely very topical question that you were hearing about supply chain issues across.
And many different industries and companies and we're no different the team has done a fantastic job to date, we really haven't been at that impacted to date.
But the supply chain is getting increasingly more complicated and more stressful our guidance does include.
The potential impact of the supply chain, especially the low end of our guidance.
There's really three factors going on one is certainly scarcity there has been incredible demand and so we're seeing more and more.
Component manufacturers began allocation and not necessarily fulfilling all the demand that's been requested that the second issue is transportation costs are increasing we're having to ship and expedite materials and some cases, because we're so committed to servicing our customers and meeting our commitments. So we are seeing transportation costs.
Increase in concert with that movement and then lastly is were starting to see price increases from some of our key suppliers and that combination of things makes it makes it very difficult we feel confident we'll be able to navigate through this but there is certainly increased risk and the big challenges.
Why change it doesn't flex on demand and so its uncertain how long this will continue.
Understood Ron I'll get back in line. Thanks.
Thank you Arthur a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from the line of Scott Searle.
And from Roth Capital. Your line is now open.
Hey, good afternoon.
Hi, Ron Hi, Jamie nice quarter, Thanks for taking my questions.
Hey, I apologize I got on a little bit late I think harsh hit on one of my question to just make sure dig in and supply chain issues. It sounds like Thats built into guidance was there any limitation and the March quarter relate.
Related to.
No we werent on out on the revenue side, we did really experienced the hit on the cost side.
It was about $1 8 million that had hurt us so that hurt our gross margin more so than our top line, we were able to fight through the challenges to date.
Great and just to clarify last year, you had the tough comps with the smart city is there a number around that.
To help us kind of understand what X and out smart city, what the growth was year over year and Iot.
We didn't call out a specific number the other $20 million for that project $15 million of it was related to products and it did ship over more than one quarter. Although this particular quarter had the the.
The largest share of that shipment gotcha, and then looking into the guidance real quickly nice demand that youre continuing to see there. It sounds like you are factoring in some element of some supply chain issues, but EPS are down a little bit. So I'm wondering are you anticipating some more impact on the gross margin or some other cost going up on kind of what.
Whats going into the thought process and the guidance sequentially as it relates to the bottom line from gross margin impact higher Opex is there something else going on there.
Scott, It's Jamie and I think if you look at the guidance our adjusted EBITDA as is hovering at that 15%.
And maybe it gets a little bit below in anticipation of some supply chain and maybe dips a little bit of Bob one of the biggest impacts so we're going to see particularly against what's out there on a lot of the consensus is the impact on the diluted share count on.
On <unk> on our EPS, so comparing what we would have thought a quarter ago to now on on the incremental shares is definitely having an impact.
Sure.
And Jamie what is the fully diluted share count what should we be using and the June quarter.
Yes, I think we used $34 million for the June quarter as the as the target perfect and Orion I think last quarter, you talked a little bit about attach rates.
As it relates to our products and solutions.
And for recurring revenue I'm wondering if there's any update on that front in terms of being able to attach that recurring revenue to any product that's going out the door and then I had a couple of less follow ups.
Yes, good questions that we did see some modest improvement.
And on our journey to a 100% attach rate.
And patient and want to have us go faster, but we.
We did see some modest improvement and attach rates in the product and services.
Our increase year over year is really driven by the software by the improved attach rates of our digi remote manager and lighthouse offerings great.
Great and lastly, if I could now with the balance sheet recapitalize. The guys are on strong footing in terms of generating positive free cash flow Brian.
And I Wonder if you could give us some updated thoughts in terms of what youre seeing from an M&A perspective kind of what the valuation expectations are out there if there's something for to make it could be opportunistic.
And as well as part of that.
With the balance sheet now with the $100 million and cash on the balance sheet and the ability to pursue some other revenue transitions not just.
Selling solutions and that's early but kind of bundling them for access services and revenues and things of that nature, which requires a balance sheet, which you know have so I'm kind of wondering how you see that evolution in terms of expanding.
The attach rates for access and AOR and growing that a little bit more aggressively do you use the balance sheet.
And to go after that opportunity and now all other cradle point model or look at Scott Some nice organic growth in terms of what youre seeing there, but are you looking to accelerate that a little bit with the balance sheet, thanks, and nice quarter, yes.
Yeah. Thanks, Thanks, Scott Yeah, absolutely. So first on the acquisition front very robust market out there, we really like the new organizational structure, we've put in place because it allows us to execute acquisitions like <unk> that fit very nicely into one of our businesses, but still allow us to pursue other opportunities across other businesses or in some cases.
And some cases as the case with open gear a brand new brand new business. So those brand new businesses, you should expect us to be looking at larger opportunities.
Whereas the businesses that are likely to be associated with one of our existing org.
Organizational structures would be on the smaller side in any case, we are looking for businesses that have recurring revenue either demonstrated a strong potential and <unk> certainly fits that bill.
And in terms of using our balance sheet, absolutely and the case of smart sense as.
As we look at the food sector really coming back here as we climb out of these lockouts and people are more comfortable eating out.
That bundled offering for smart sensitive food is going to be more and more attractive thats, how they buy their point of sale and that's how they buy a lot of other technology. So that's going to be likely a lead offering and take a bigger share of the overall smart sensor business, but will lead to higher annualized recurring revenue on similarly, and other other parts of our business, we're absolutely being <unk>.
Rest of about pushing that recurring revenue mainly on the software side and some cases connectivity.
Hey, Brian if I could just one last one.
Seems like foodservice is coming back, but obviously theres been a big build here for smart in terms of pharma is that sustainable or is there any fear that that source of rollover later in the year or does it stay at a nice sustained level here we.
We think we think and sustainable Scott and I know, it's a real concern of folks.
Certainly benefited from the vaccine and as I said in the past we benefited most by the awareness of the offering we benefited certainly directly from individual locations, adding ultra low low temperature or new sites popping up for vaccine administration, but the vast majority of the vaccine benefit has been this more macro.
So increase and awareness some of the business, we've been able to capture is and the retail and grocery store and convenience store areas that are not part of the vaccine.
Wave so as fluid opens up that just gives us another big chunk of market for us to attack. So we're excited about sustaining the success we've had recently.
Great. Thank you.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
At this time I am showing no further questions I would like to turn the call back over to Ron can open for <unk>.
Closing remarks.
Thanks Grace, we appreciate everyone joining our call today is an exciting time for Digi, our mission to connect the world's people and machines has never been more relevant we are blessed with a dedicated team focused on our customers' success.
Stay healthy everyone and consider vaccination, if you haven't been vaccinated already and we look forward to talking to you again at our next earnings call.
And this concludes today's conference call. Thank you for participating you may now disconnect.
And.
[music].
And.
Okay.
And then.
[music].
And then.
Yes.
[music].
[music].
[music].
[music].