Q1 2022 Digi International Inc Earnings Call

February 2, 2022

[music].

Good day, and thank you for standing by welcome to Digi International.

First quarter first fiscal quarter 2022 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 this session you will need to press star one on your telephone. Please be advised that today's conference may be recorded if you require any further assistance. Please press.

<unk> zero I would like to hand, the conference over to your host today, Jamie Loch Chief Financial Officer. Please go ahead.

Fiscal 2022 first quarter results of Digi International.

Joining me on today's call is Ron <unk>, our 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'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 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 sections of our 2021 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.

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's 2022 first fiscal quarter earnings call.

<unk> mission is to transform our customer's business by connecting their people and machines.

Our industrial Iot solutions are used in business and mission critical applications that are secure scaling.

Scale in numbers and across geographies reliable and easy to implement and manage.

Paired with our expert support and backed by a vibrant growing profitable company with decades of experience did you helped tens of thousands of customers around the world.

We are committed to ever increasing value by pairing software and services with our award winning products.

We have gotten off to a fast start and our commitment to set another record year with.

With the acquisition of Ventas on November one.

We are reporting two months of their results in combination with smart sense within the Iot solutions business segment.

We set several new records, including over $84 million in quarterly revenue up 15% from last year.

$17 million in quarterly adjusted EBITDA up 31% from last year over 20% adjusted EBIT margins up 240 basis points from last year.

Over 270000 subscribers power over $88 million in annualized recurring revenues up 170% from last year.

In addition, strong bookings added to R&R quarter billion dollar backlog.

Did you just benefiting from continued acceleration of digital transformation throughout the industrial economy.

We believe this trend will be sustained for the foreseeable future and that digi can play an increasing role in our customer success.

The continued pandemic and its impact on our supply chain remains our biggest challenge.

Demand continues to outstrip, our ability to access components and provide product to satisfy our order book.

We expect these conditions to persist through the first half of 2022.

With the potential for improvement thereafter.

We are working feverishly to obtain parks.

Sure our suppliers are safe and add capacity secure freight services.

Keep our supply chain team safe and healthy and worked with our customers to transition to new designs <unk> skus when appropriate.

Now a few comments on each of our two business segments.

And our Iot products and services business segment OEM solutions in cellular solutions product lines drove a 6% increase in revenues from last year.

Growth was moderated by a decline in our infrastructure product line.

All product lines would have been up year over year with a more conducive supply chain environment.

Record bookings across all product lines has created a record backlog and provides strong visibility into future periods.

Annualized recurring revenue was up 2% from last year at $14 million and we are investing in both software and sales as the potential for growth is evident.

Cellular solutions received the CES 2022 Innovation award and the 2021 Iot evolution in Iot Excellence Award.

In addition console service received the 2021, TMC cloud computing backup and disaster recovery work.

These awards provide excellent validation of <unk> offerings.

OEM solutions now has 27 customers with over $1 million in reoccurring annual revenues.

Up from eight in fiscal 2020.

<unk> revenues are those derived from design wins with customers that result in repeat orders each year.

We expect supply chain challenges to constrain our potential in our fiscal second quarter.

And our planning for gradual relief to improve our customer delivery lead times and financial results in the second half of our fiscal year.

We believe rising commodity and transportation costs could help bring supply and demand into better balance.

The Iot.

The Iot solutions business segment added over 190000 subscribers in the quarter driven primarily by the <unk> acquisition, we continue to see strong demand for the offerings of both smartphones as well as <unk> managed network as a service.

We are approaching $75 million in annualized recurring revenue up nearly 290% from last year with the addition of Ventas Iot solutions now is a significant contributor to adjusted EBITDA.

<unk> for the destination consolidation of the cloud and mobile interface now services over 60%.

Of our total customer base and we are on track to complete the migration by the end of our fiscal year.

<unk> added new customers and expanded business with existing customers to fueled double digit growth in recurring revenues.

We are heads down integrating the ventas team systems and processes into the Digi family. It's been a great start and we're confident in our ability to grow high quality recurring revenues faster than our topline growth we.

We are making additional investments in go to market resources to capture additional market share.

Okay.

We are ahead of schedule on all of our projections provided in last quarter's earnings call. The new Digi model has hit an inflection point.

It is here.

Now.

We are growing the topline double digits gross margins are moving towards 60% adjusted EBITDA margins have exceeded 20%.

Annualized recurring revenue exceeds 20% of our revenues and we are well on our way of exceeding $90 million in annualized recurring revenue by the end of our fiscal year.

Unfortunately, the pandemic is extended.

With the Omnicom variant, making its way through many countries. We continue to emphasize both the same mental and physical health of our employees.

We're embracing remote and office work, we're allowing for more work and personal life balance and communicating more and better than ever before.

We're grateful to be presenting the results of our teams great efforts that are squarely focused on our customers' needs.

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 key financial highlights that contributed to the results of our record first fiscal quarter, our new model has pushed our IRR to over $88 million, which is up 170% over prior year.

Sites in our solutions segment grew to 271000 sites with the addition of Ventas.

We delivered $84 $3 million in revenue, which is up 15% from prior year delivered adjusted EBITDA of over 20%, we paid $50 million of debt principle from debt incurred through the acquisition of Ventas and finished the quarter with over $47 million in cash.

Our $84 3 million in revenue in the first fiscal quarter represents 15% year over year growth.

Gross margins were 56, 8% and led to an adjusted EBITDA of $17.0 million or 21% of revenue.

Gross margins, excluding amortization were 58, 5% for the quarter.

On a per diluted share basis, with the diluted share count of $35 8 million or GAAP EPS was three <unk> and our non-GAAP EPS for the quarter was 36.

Revenue adjusted EBITDA and adjusted EPS, All beat analysts' consensus estimates for the quarter with adjusted EBITDA and adjusted EPS exceeding the high end of the ranges we provided in our guidance last call.

Some other financial highlights as we communicated in our last earnings call. We retired and replaced our expanding credit facility in conjunction with the <unk> acquisition.

Details of our new $350 million term loan B credit agreement were disclosed in our form 8-K on December 23 2021.

During the quarter as I mentioned, we made a $50 million payment against our new credit facility, which places our debt position at the end of F Q1 at $300 million. These.

These figures do not consider the treatment of leases, which based on the accounting standards, we will add $21 $1 million of what is now classified as debt on the books with $18 $2 million of that classified as long term.

During our first fiscal quarter of 2022, the acquisition of Ventas, along with associated cost of M&A and debt issuance costs combined with the aforementioned principal payment made against our outstanding debt facility, we consumed $105 $2 million in total cash.

From a GAAP perspective, which considers debt issuance cost as operating cash we consumed $9 9 million in operating cash excluding the $13 5 million of debt issuance costs, we would have generated positive operating cash.

Cash generation will remain a focus area for <unk> and we expect to continue to generate positive cash flow, our ending cash and cash position for fiscal Q1 of 2022 was $47 2 million.

We are in compliance with our bank facilities covenants and remained in compliance through the retirement of our old debt facility.

Some other balance sheet items of note our <unk> our position is $49 4 million up $5 6 million sequentially from our last fiscal quarter end with no material change to our reserves.

Our ending inventory balance was $51 9 million up $8 million sequentially and down $2 $9 million year over year, we have leveraged our cash position strategically to increase inventory supplies given the supply chain challenge in an effort to meet demand in the second fiscal quarter and beyond.

Current inventory in the channel is $27 million down $3 4 million sequentially from the prior quarter, we monitor our inventory levels closely and regularly.

Now for some segment performance, our Iot products and services revenue increased six 4% year over year in the first fiscal quarter of 2022 to $65 $7 million.

Gross margins decreased 349 basis points to 54, 3%.

The year over year revenue impact was driven primarily by sales in our cellular and OEM product lines.

The decrease in margin rates was driven by product and customer mix and increased production and distribution costs due to the continuing supply chain challenges.

Operating income in Iot products, and services increased $2 $8 million year over year to $4 1 million for the first fiscal quarter driven by the one time contingent consideration expenses in the prior year not repeating in the first fiscal quarter of 2022.

Iot solutions revenue increased 62, 9% year over year in the first fiscal quarter of 2022 to $18 $5 million gross margins increased nearly 1900 basis points to 65, 9%.

The increase in revenue was attributable is attributable primarily to the <unk> acquisition and is a reflection of our commitment to invest in the growth objectives of Iot solutions.

Operating income improved $1 $1 million year over year to $8.3 million loss for the first fiscal quarter driven by increased gross profit from the smart sense.

And aided by gross profit from Ventas.

Now as it relates to forward looking guidance, we have confidence in our execution and our performance even in the midst of the ongoing pandemic, coupled with supply chain and freight constraints.

We expect the supply chain challenges to impact our results for at least the first half of 2022 adversely.

And despite the record backlog mentioned by Ron and the increased demand from our customers, we do expect that impact.

At present, we do believe these challenges will begin to improve during the second half of fiscal 'twenty two.

Reflective of those supply chain challenges, we are providing the following guidance for our second fiscal quarter of 2022.

Using a fully diluted share count as of the end of Q1 'twenty two of approximately $35 8 million shares we expect revenue of $87 million to $91 million, providing growth year over year of 13% to 18%.

We expect our GAAP EPS to be between $1 <unk> per diluted share we expect our adjusted EPS to be between $33 37 per diluted share and we expect our adjusted EBITDA to be between 16, 3% and $17 $8 million.

The supply chain challenges limit us from providing specific annual guidance. However, we want to highlight the significant and positive impacts on <unk> financial model going forward through our acquisition of Venice.

We do not see any change in our outlook for fiscal 'twenty two in part because of the acquisition in fiscal 2022.

We continue to expect revenues will grow between 16, 5% and 23%.

We expect profitability at adjusted EBITDA, and adjusted EPS will grow faster than that between 35% and 55%.

We see our gross margins holding firm through the current supply chain challenges and we expect at the end of fiscal 2022, we will have annual recurring revenues of at least $90 million.

We expect to continue to Delever, our balance sheet. This year, we believe that our strong capital allocation combined with the opportunities we see in our pipeline are leading indicators of the value Digi provides to our customers.

We are helping our customers deliver and deliver on their missions, particularly during this time of uncertainty from several macro factors.

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

Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered very wish to remove yourself from the queue. Please press the pound key.

And our first question comes from the line of Mike Walkley with Canaccord Genuity. Your line is open. Please go ahead.

Hey, guys. Good afternoon. This is Daniel on for Mark Thanks for taking my question.

So congrats on the great quarter could you just give us a sense of.

Approximately how much the Brent this contribution was.

$75 million.

Iot solutions and there are a number.

Yes.

Hey, Dave Thanks for the call here.

Due to SEC business segment reporting we don't break out the results separately, but they do include two months of their effort you can kind of go back to.

What we declared on June .

Of the Ventas IRR and then look at of course the smart.

September quarter IRR to kind of.

Feeling for where we started the quarter at but but we can't share that information with the segment reporting.

Okay, great. Thanks for the details.

A follow up for Kurt.

I guess, given the higher margin contribution.

Your gross margins, how should we think about Iot solutions margins moving forward should we expect it to adjust.

Along the lines of the 65, 9% you just reported depending on mix.

Yes. This is Jamie I think the answer to that is yes, right. We've talked in the past that we see.

Recurring margins on the IRR is typically higher than the one time margins as that mix of skus to be in the solutions segment, a much higher percentage of the total revenue Youre right you would see that margin rate and I think you could reasonably expect that to wind its way through as well.

The recurring portion of the revenue is a high percentage of the total inside of solutions.

Great. Thank you very much.

Yes. Thank you.

Thank you and our next question comes from the line of harsh Kumar with Piper Sandler. Your line is open. Please go ahead, yeah, Yeah, Hey, guys first of all a tremendous.

Results and congratulations on being able to complete and disguise.

I had a handful of questions maybe Jamie I'll hit you first.

So strong strong gross margins up into the <unk>, 559% range versus the mid <unk> in the low Fifty's you started last year at.

Is this the new base for us that we should think about.

And maybe you could you could help us understand as you move forward through the year supply chain supply chain gentlemen, just sort of like go away or get better in the second half how should we think of this.

Gross margin number.

Yes, hi, it harsh thanks for the thanks for the comments.

<unk> the question I'm glad you're on today I do think.

This really is a representation of the new model I think what we talked about dentists and what Vince just brings financially.

It really brings a lot of recurring revenue with with characteristics that are very similar in our smarts business why that solutions add on really makes a lot of sense. So.

Youre seeing the impact of our as an overall company.

And a number of.

$88 million.

If you see as a percentage of our revenue the impact thats, having on the model. So I really do think that is reflected in this quarter and I think it's reasonable.

That you would see that high fifties between kind of where we're at now that would ride its way through given that mix and that real.

That significant change has happened to the financial model that that will carry itself forward.

Okay, and Jamie if I can put you on a little bit of a spot maybe comment on that supply chain challenges improve would that would be a benefit to you as well from the shuffle a bit yes.

It's a really good question.

It's hard to predict that.

There's really two or three factors that are there are kind of impacting that at a margin rate you've got the ongoing fleet.

Challenges, where freight rates are rising youre seeing a lot of surcharges that are being added in by the carriers.

And that's causing some challenges you are seeing some pricing change in in components and it's hard to know logic would follow that as that loosens up you'd see some of those prices coming back down which should provide for some.

Gross margin upside when that actually takes place it's hard to know if thats going to take place and in hand with when the supply chain loosens up or if one is going to lag versus the other so I.

I would say right now all of that.

As we commented on what we believe that the supply chain will loosen up in the second half of the year I am trying to planning that the pricing isn't going to really resolve itself until fiscal 'twenty three.

Okay Fair enough I know I know it was a tough tough tough question to answer a call a data set of <unk>.

But.

If I can.

<unk> asked the question Ron on the backlog. So you guys talked about a 250 I think quarter over $1 billion backlog.

If I heard that correctly, Ron Jim Yes.

Could you maybe talk about where that's concentrated is that or how that split. So what are the areas that are like normally good for you relative to others and maybe some other areas that are nacho just any kind of color you have would be I appreciate it.

Yes, absolutely the backlog is across the business, it's probably most pronounced in our embedded product lines OEM solutions, because <unk> got our solutions being designed in with our customers engineers, who have all of our customer segments. They appreciate the supply chain challenges. It also shows you how is limiting our full potential.

In the near term we've talked in the past about not be able to ship all of our orders due to supply chain challenges. So that backlog is both showing that bookings are significantly higher than our revenues in the same period and shows you that weren't able to deliver all of the product we'd like to but that backlog is concentrated in near <unk>.

But it goes all the way out into FY 'twenty three for us.

Great.

And then my last question I'll get back in line was in the past Ron you have I think chosen to take the pricing hit from inflation the supply in some of these some of these sort of factors outside your control, but then I think last quarter I got the sense that maybe you are leaning towards passing at least some of those cost.

Sure the customers Im curious if youre seeing any friction from the customer is that any resistance from our customers and taking those costs.

And what is the bias right now is at capacity as cost because he is on fairly coming to you or is it to take them internally.

Yes, it's a really good question, it's something we talk about quite a bit and we've really attacked.

The challenge on a pro product line basis.

Because we have to be relevant with our customers and our competitors in the marketplace for the most parts. We have been implementing single digit price increases have been very careful as to when we do it and how often is a notice period in which we provide so we've been very deliberate about.

Trying to keep our prices both competitive but also when possible sharing those cost increases with our customers for the most part the market has been very receptive as you can tell by that backlog in and.

In my comments around bookings it hasnt slowed our business down to.

To date.

Hey, guys. Congratulations on the new model Congratulations on Ventas, then I'll get back in line.

Hey, thanks.

Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.

And I'm showing no further questions and I'd like to turn the conference back over to Ron <unk> for any further remarks.

Thank you our sincere thank you to our shareholders research and banking communities and all of you that experienced our earnings calls.

<unk> joined <unk> recently to lead our Investor Relations efforts, Robyn I plan to attend in person the.

34th annual Roth Conference in Southern California March 13th and 14th we look forward to our next earnings call.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Okay.

Yes.

Okay.

Sure.

Okay.

Sure.

[music].

Good day, and thank you for standing by welcome to Digi International.

First quarter first fiscal quarter of 2022 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 that today's conference may be recorded if you require any further assistance. Please press.

Star then zero I would like to hand, the conference over to your host today, Jamie Loch Chief Financial Officer. Please go ahead.

Let's call. It 2022 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 on 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 Investor Relations website at <unk> 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.

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 <unk> International's 2022 first fiscal quarter earnings call.

<unk> mission is to transform our customer's business by connecting their people and machines.

Our industrial Iot solutions are used in business and mission critical applications that are secure scale.

Scale in numbers and across geographies reliable and easy to implement and manage.

Paired with our expert support and backed by a vibrant growing profitable company with decades of experience did you helped tens of thousands of customers around the world.

We are committed to ever increasing value by peering software and services with our award winning products.

We have gotten off to a fast start and our commitment to set another record year with.

With the acquisition of Ventas on November one.

We are reporting two months of their results in combination with smart sense within the Iot solutions business segment.

We set several new records, including over $84 million in quarterly revenue up 15% from last year.

$17 million in quarterly adjusted EBITDA up 31% from last year over 20% adjusted EBIT margins up 240 basis points from last year over 270000 subscribers power over $88 million in annualized recurring revenues up 170% from last year.

In addition to strong bookings added to R&R quarter $1 billion backlog did.

<unk> is benefiting from continued acceleration of digital transformation throughout the industrial economy.

We believe this trend will be sustained for the foreseeable future and that digi can.

Play an increasing role in our customer success.

The continued pandemic and its impact on our supply chain remains our biggest challenge customer demand continues to outstrip, our ability to access components and provide product to satisfy our order book.

We expect these conditions to persist through the first half of 2022.

With the potential for improvement thereafter.

We are working feverishly to obtain parks and show our suppliers are safe and add capacity secure freight services.

Keep our supply chain teams safe and healthy and worked with our customers to transition to new designs.

<unk> skus when appropriate.