Q3 2022 Digi International Inc Earnings Call
Yeah.
Okay.
Hello, Thank you for standing by and welcome to the fiscal third quarter 2020 to Digi International Earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star.
One one on your telephone please be advised that today's conference is being recorded I would now.
Now I'd like to hand, the conference over to your Speaker today, Jamie Loch Chief Financial Officer.
Please go ahead.
Thank you Hello, everyone. Good day, it's great getting to talk to you again, thanks for joining us on today's call to discuss the earnings results of Digi International.
Joining me on today's call is Ron <unk>, our president and CEO .
We issued our earnings release before the market opened this morning, we've also posted a shareholder letter and a supplemental presentation. This morning, you may obtain a copy of the press release shareholder letter and supplemental presentation through the financial releases section of our Investor Relations website at Digi Dot com.
This morning, Ron will provide a comment on our performance and then we'll take your questions.
Some of the statements that we make during this call are considered forward looking and are subject to significant risks and uncertainties.
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 factor 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 measure are included in the earnings release the.
The earnings release is also an exhibit to a form 8-K that can be accessed through the SEC filings section of our Investor Relations website.
Now I'll turn the call over to Ron.
Thank you Jamie good morning, everyone.
I hope everyone gets a chance to review our 2022 fiscal third quarter shareholder letter.
Before we jump into Q&A, a few comments on the quarter.
I'm incredibly proud of the Digi team performed exceptionally well in challenging conditions.
Demand for our leading industrial Internet of things offerings remains robust with.
With another strong quarter of bookings leading to increased backlog.
It is particularly rewarding to achieve the first of $3 100 objectives, we covered last quarter.
By exceeding $100 million in quarterly revenues for the first time in the company's history.
Access to critical components remains our biggest challenge.
Highlights from the quarter.
We set new quarterly records in revenue.
Annualized recurring revenue adjusted EBITDA and adjusted earnings per share.
We grew 31% year over year.
Gross margin increased 170 basis points from last year.
Annualized recurring revenue now exceed $92 million as of the end of the quarter.
Up over $2 million from last quarter.
Adjusted EBITDA was up 82% year over year.
We paid down $20 million of debt in the quarter.
Adjusted EPS increased 80% from last year.
Details of our fiscal fourth quarter guidance have been provided in our press release and in our shareholder letter.
Published earlier this morning, showing our continued confidence.
At this time I'd like to turn the call back to the operator for our questions and answer session. Thank you operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone. Please standby, we compile the Q&A roster.
Our first question comes from harsh Kumar with Piper Sandler you May proceed.
Yeah, Hey, guys first of all.
Huge congratulations on a number of achievements the $1 billion market cap, Ron and all the other things you mentioned like like strong growth in IRR.
I guess, just jumping to the quarter Bryan Jamie.
The console growth surprised us a little bit this quarter. It was quite strong much stronger than I thought.
I'm just curious.
What led to that and then do you think you are a proxy for the data center growth.
And what Youre seeing contemplates to the strength in the data center or any color that you can give us I would appreciate it very much yes. Thanks, Sarah Good question open gear team, which the brand name that our console server pipeline goes to Mark on there has done a tremendous job they've really established themselves as a leading provider in that industry and we really.
See growth on both the data center side, which is about half of the revenues that we receive as well as on the edge.
And there's been as much excitement on the edge, where people are wanting remote access to that footprint.
In a retail store or an office and so we've also seen really good growth internationally.
So we used to be more of an America story, and we're increasingly broadening our footprint around the world.
Understood Ron. Thank you and then if I can ask just one more and I'll get back in queue.
On the on the solution side.
The World has opened up I'll try to go to a restaurant and I always have to have a booking our tower cranes that everything is sort of like back the way it should be.
I know they are people are calling for concerns around the economy, but people seem to be wanting to go out post COVID-19. This is supposed to be really good for your Iot solutions cold chain business I'd be curious if you share my viewpoint, and if youre seeing the kind of traction that we're seeing with people flocking to restaurants.
Yes.
It's a really good question and a keen observation as you know during Covid. There was a lot of pressure on the health care system and they were key in delivering temperature sensitive vaccines and so that really helped fuel the growth of smart sense during that period and now we've added a much stronger food sector and youre absolutely onto something in the food sector. While it has been.
Strong as everybody knows has been hit hard by inflation, whether that's an input prices as well as labor and so theyre as interested in asset protection as they are in optimizing that labor and so we do see a really.
Good.
The increase in interest from that food sector, which represents about half of the Tam for smart sense. So it's a welcome sign.
Last one for you guys that don't mean to hog up the podium, but you mentioned you brought up supply run in Europe .
Our comments earlier on.
That's like the biggest challenge is there is it specific to a few items, let's say chips or is it just across the board things are kind of tight on supply yes.
Yes.
Another good question harsh we've seen some.
Relief on the transportation side costs really spiked up at the end of last year. The beginning of this year they have moderated, albeit at a higher level than certainly pre COVID-19 and pre pandemic. So the transportation costs have moderated.
The biggest challenges availability of components.
There has been some softening in the consumer segments as some people have read the industrial segments do still remain under pressure. So it's trying to really compete for as many parts as we can and oftentimes in those hard to find components. There is a is a premium you have to pay for those parts. So that's really the biggest thing holding us back is.
Access to enough parts in it.
Complicated by the fact that our demand has increased so much. So we don't know it need just what we've got used to get we need to get more parts than traditionally and that's the big constraint.
And the reason in part for the growing backlog.
Understood guys. Thank you, so much and congratulation and I'll get back in line.
Harsh.
Thank you one moment for questions.
Our next question comes from Tommy Moll with Stephens you May proceed.
Good morning, and thanks for taking my questions.
Good morning, Jeremy.
Brian I wanted to stick on supply chain for a minute.
It's something that you've been dealing with for some time pretty well.
But it's still a challenge so I just wondered can you talk qualitatively today versus last quarter say better worse same.
Just any color you can give there would be helpful. And then as you look into Q4 you indicated.
And the guidance that there would be some revenue constraints again due to supply chain is there any way to frame.
Quantitatively, what that looks like or if not just any context, you can give there would be helpful as well. Thanks.
Yes, very good question Tommy so on the first point, we have seen some very modest improvements qualitatively on the supply chain front.
Now with that said you Miss one part instead of four parts you still can't complete the products. So.
While we've seen some modest improvements.
We're not at a point where were running any victory laps.
And to put into some context for you.
With our FQ4 guidance.
In excess of $30 million of revenue that if we had the parks, we would be able to ship them. So it gives you.
Our scope of both how well the team is performing but some of the challenges on the supply chain front.
And we've got to work tirelessly because although.
Our customers can tolerate some delays we can't delay it indefinitely and I'm confident we'll be able to do that but but it is still a tall order.
Yeah. Thanks, Ron that's helpful and as a follow up I'll ask a two parter on on the solutions business.
First just a housekeeping item on the number of sites I think last quarter. It was 280000 I didn't see it in today's materials. If you can update us on that that'd be helpful.
A higher level strategic question on Ventas, you talked about both from a revenue and cost of goods synergies.
Curious for any more detail you can share there can you quantify it maybe talk qualitatively.
And give us a sense, where you are in the process of discerning all of those and the potential to two.
<unk>.
The upsides whatever your expectation is as you as you proceed. Thank you yeah, absolutely. So traditionally we've provided sites in our site count has been in our solutions segment.
We are really putting increased focus on building across.
Across the company of course solutions has been the leader in that but we have a tremendous opportunity to grow.
In our product and services business segment as well.
That has a different set of subscriber dynamics and <unk> et cetera.
So we have been really wanting to emphasize <unk> and the growth of IRR because the dynamics of the subscriber bases are quite different.
Both in number of subscribers and average revenue per unit.
On the solution side, we did grow subscribers quite a bit.
But it's becoming less relevant as we as we get more and more of our product and service business. So it was it was very deliberate in our intent there.
Using really <unk> that metric.
That will judge our progress on our journey.
On the second question.
We're seeing great synergies on Ventas that the growth synergies do take time to play out.
<unk> solution is.
A very thorough solution it demands really understanding customers needs and making sure they have the right.
Technical fit as well as the right service levels in place, we've got some exciting trials and proof of concepts and we think that will add in particular to our IRR and we will take opportunities in our cellular solutions group that maybe traditionally went to another competitor or was in express and the term of onetime revenue in.
Youre going to see that really start to contribute to <unk>.
In FY 'twenty three on the cost of goods side, we're enjoying some increased synergies on of course, the manufacturing front, but also in the cost of goods to provide the service. So we've actually made some progress there we're going to start to see some impact here yet before the end of fiscal 'twenty two.
But the growth synergies are clearly the ones that we're most excited about.
Thank you Ron I appreciate it I'll turn it back.
Thank you one moment for questions.
Our next question comes from Mike Walkley with Canaccord Genuity you May proceed.
Great Thanks, and congrats on hitting the $100 million quarterly revenue Mark.
Brian just kind of high level question building off harsh. This question on the solutions, but just for your overall business.
While we realized no industries are recession proof I have to thank industrial Iot it may be more recession resilient.
Can you talk about.
Digital transformation the supply chain issues in our Apio shortage. It seems like what you provide should have strong demand for the next several years.
Given whereas a recession are you seeing any parts of your business, whether it's in Europe or certain products any signs of weakening trends due to worries about a recession.
Mike It's such a good question, it's something we watch carefully because you see headlines of companies, taking some cost actions anticipating slowdowns and again youre seeing a little bit more in the consumer side than you are seeing on the industrial side and we don't want to put our head in the sand there to date as I mentioned bookings once again exceeded.
Our revenues.
In fiscal Q3, and so our backlog has continued to grow which and if you look at our pipeline.
And our estimate for future bookings remain very confident but again, we are looking very very closely and talking to a lot of people in industry to make sure. We're not the last to know if there is a slowdown what one thing I'll say about digi to your point.
Been public since 19 nine so the company has seen a lot of different economic conditions.
And I will describe digi as resilience, we are very distributed in our vertical markets were distributed in our offerings.
And you combine that with this urgency to transform our customers' businesses. We do feel like this is a longer term megatrend if you will.
That will sustain economic condition.
Although again, we're not we're not immune to slowdowns, we do think we are resilient.
Okay. Thanks.
Follow up question is on the Big picture of the Iot market.
<unk> successfully integrated I think maybe nine acquisitions in your tenure Syntech, just announced they're taken on at Sierra wireless.
Thanks.
And consolidation within the Iot industry, what are your views of the competitive landscape. How do you feel your scale as compare to some of the companies consolidating and any thoughts on your competitive position in cellular router and gateway with Genentech taken on <unk>, yes.
Yes, it's a really good question Akshay fresh off the press this week.
With the new so were we.
We're right now working to better understand the combination and what it means Sierra as a supplier to us as well as our competitors. So we have that co-opetition theme.
They've been a very reliable supplier for us in a really strong competitor as well and we do expect despite that continue with these big transactions two companies that have been around for a while different businesses, although in the same.
Meg up marketplace of Iot it will be interesting to see how the company manages the change and what if any strategic decisions are made after the combination is complete which I think is expect to be January but I do think it points to a larger item that you bring up which is that industrial Iot has been plagued by some fragmentation you see.
Some companies start to emerge and become a bigger players and it really should be to the customer's benefit that we can provide more of the solution get them to their endgame faster get them out of making this solution versus gaining the solutions return on that investment and early on we saw a lot of customers trying.
To get themselves and quite frankly, a lot of them struggled to.
To reach their objectives and I think as the industry has matured they've found even greater success partnering with companies like <unk>.
GE to help get that implementation again, starting them to drive unique insights and business outcomes. So I think it's the.
Consolidation is probably inevitable, but.
But still it's still early to understand what it means for <unk> on the <unk> combination in particular.
Alright. Thanks last question for me and I'll pass on Jamie just in the implied guidance from my math it seems too.
0.2 stable to maybe slightly up gross margins can you maybe talk about gross margins or maybe mix between the two divisions assumed in your guidance.
Thanks, Mike.
I think the gross margin story is is it still is a good one for <unk>. The supply chain really can can put a hammer on that as you know.
As you are after those those spaces you can all of a sudden incur some incremental costs depending on how you are acquiring inventory freight does seem to have come down that definitely helps.
So.
But it's really dynamic out there so the way that we're really looking at it is.
Slight to moderate incremental sequential growth I think the team has done a nice job that's really driven by a host of factors mix definitely comes in there I think we've done a good job on the pricing side I think our operations team has done a good job on the procurement side to really avoid some of the price increases that you could get especially if you have to go out into that.
Oakridge space.
So I think it is a combination of all three I do think as we've talked about where where the current dynamics are.
Maybe keeping digi from realizing their full potential with.
That would be true, both topline and at that margin rate.
Given some of those dynamics, but I think we've done a nice job managing through and I think we've got a handful of things that are giving us positive influences, we as we move forward.
Great. Thanks for taking my questions and reports from you guys next week.
Thanks, Mike.
Yes.
Thank you one moment for questions.
Our next question comes from Anthony Stoss with Craig Hallum, You May proceed.
Hey, guys my congrats as well and I would assume that the <unk> is probably your second $100 million goal to hit to that Enron can you talk about.
Growth rates on the Iot solutions business and I think in the past you've talked about.
<unk> kind of adding maybe $2 million to $4 million.
Per quarter or any new thoughts on that also Ron on the router side I know thats been an issue in getting supply anything changed there and then I had a couple of follow ups for Jamie.
Yes.
Tony I think I think you framed correctly that two to four range is still a good range.
Looking hard to get towards that upper end of the range, especially with continued growth on solutions as well as.
I think accelerating growth on the product services side, where we've got some real opportunity to provide more value to our customers.
I apologize what was the second question again.
Just kind of a growth rate overall of the Iot solutions business and then also on the router side, if youre seeing more components, where the rest of the solutions, we absolutely expect double digit growth, there and expect <unk> to grow faster than that.
And on the router side, we've seen a nice improvement with Justin Schmidt in charge of that business about a year now and we have been going through a.
Platform change from R. R.
<unk> operating system to Dow and so that's had some choppiness as we work through supply chain and of course educate our channel partners and our customers about the transition some of them were used to the way that those devices were compared to new ones, but there's just a tremendous number of benefits by moving to the new platform. So theres certainly extra work for that team as they continue to feel that year over year growth.
<unk>.
Okay. Thanks, and then Jamie any thoughts on on Opex going forward you guys have done a really good job with the growth rate keeping opex down just curious your thoughts on a go forward basis. So really good question, Tony because I think theres a couple of different things right. We're very closely as Ron alluded to we're really keeping an eye on macro trends and we're making.
Sure that.
As a company you don't get out ahead of your skis yet at the same time.
The supply chain has.
That's really not allowed us to recognize the full potential.
Where were at you also have to weigh when is the right time to be making investments to continue that driving that growth in fueling that that machine that can get double digits.
A standardized basis so.
I think we're in a good position, where we really evaluate that as we deploy capital on those investments. We've got a model that we look at returns on those investments.
Track the success of each of those and so I think we will continue to look at opportunities.
For the right time, and the right type of investments with is really forward and forward past quarter forward path.
Even two or three quarters to really drive incremental growth over say, a three and five year periods. So we're evaluating all of that and it's not really a definitive answer because I think macro trends.
Or something Thats worth keeping an eye on but were definitely ice forward on how we can continue to deploy capital in the best ways possible and that could include some investments that are reflected in the opex line in the future periods.
Got it thanks, Jamie and again guys congrats on the tremendous execution.
Thanks, Tony.
Thank you one moment for questions.
Our next question comes from Scott <unk> with Roth Capital Partners. You May proceed hey, good morning, Congrats on the quarter guys. Thanks for taking the questions maybe just to dive in and follow up on a couple of points related to supply chain and outlook Bryan I think last quarter, you talked about being constrained to the tune of <unk> <unk>.
$10 million to $20 million from a topline perspective, and I think you just said.
$30 million in September I guess, what did the June quarter look like and in terms of the guidance.
Are you factoring into the guidance relative to that potential $30 million of upside is any of that and do you have to be able to supply some of that and then on the gross margin front.
Gross margin is actually did pretty well I think they were up sequentially in June .
Are you guys doing in terms of passing along price increases.
And I think from an inventory standpoint, you've actually done pretty well I think this quarter. Our inventories were up about 10 million. So it seems like you are pretty well positioned on that front, but you are still missing in a couple of areas. So I was wondering if you could kind of synthesize that into the sequential outlook on the product side yeah.
I remember all those questions, which are good ones. The first one is we left at least $20 million on the table last quarter.
Our parts that we did not able to secure to meet our customer demand again, good communications with our customers and our channel partners. So they know what's going on.
And if you think about next the current quarter's guidance September quarters guidance.
We're really giving you things that we feel confident we can we can meet and like we experienced last quarter. If we can get through the hard work of our collective team access to components above and beyond our expectations, we have the potential to unlock some of that revenue.
We don't have that visibility, we did not feel comfortable of course, putting that in our outlook, but there certainly is potential.
Should we be able to to achieve that.
The other question on pricing.
We really go product line by product line to best understand the conditions, both the cost challenges we have.
Our competitors are doing what our customers are doing I would say we are towards long term relationships with our customers and try not to take advantage of any chan.
Challenges that arent there so I'd say, we're generally a little bit behind our cost increases some pipelines are keeping pace better than others.
But I do feel good about making sure that our customers are taken care of first and foremost and then secondarily, we try to hold serve on our cost increases in our margins.
Okay, great very helpful and if I could on the IR front, you talked a little about Iot solutions and on the product front I think it was $15 million. This quarter open gear sounds like it's doing well, but you are starting to get some more attach rates.
Call it the core.
Digi Gateway side. So I'm wondering if you could give us some idea about what the attach rates look like today and what the potential for that business is to kind of more for more ventas like as well. So you think about the installed base.
Recurring revenue look like in the existing open gear.
And traditional gateway market for Digi.
We are making some progress on attach rate but to be candid.
I would like US to go further first and foremost because it's in the customer's best interest the experience our customers have when they purchase a more complete solution is hands down better both in implementation, but of course in the lifecycle and so I think you can expect us to be much more aggressive there than we've been in the past, but we're still in that 30% type.
Range on attach rates. So if you think about an ideal where we have a higher attach rate we should be at growing three times the rate that we are right now.
I am less optimistic Scott.
Going back to install based customers that have had product I think we're going to be more successful on on newer shipments in newer relationships because those customers have adjusted to their quote normal whatever that is.
So im less optimistic and going back to the base at this point because I think we have such a great opportunity to enhance the attach rate on new shipments moving forward. So I think you can expect better performance out of us.
Very helpful and if I could one last one.
You provided some color in terms of where the opening gear demand is coming from I Wonder if you could provide some end market demand in color as it relates to the gateway market.
Smart cities have been strong some other markets as well in the past I'm wondering how that's that's kind of shaping up.
Maybe kind of synthesize that into the competitive landscape I think it was following up on Mike's question around the Sierra wireless acquisition.
Yes, the two areas that we see strength in cellular one is certainly in our transportation product line, where were going for smart city mass transit type of opportunities as you know mass transit really suffered during COVID-19, it's gotten some stimulus in ridership.
It is increasing and so theres increased investments both in new projects as well as quite frankly, some refreshes from projects that were implemented years ago, and we also have traditional strength in our industrial product line, our IX product line, where we've been a leader in the machine to machine communication and.
Quite frankly, we see Sierra and much more on the industrial side than we do on the transportation to the enterprise side. The enterprise side is where credit point is very strong.
But we're excited about the industrial opportunities as well.
Great. Thank you and congrats thanks Scott.
Thank you and as a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from harsh Kumar with Piper Sandler you May proceed.
Yeah, Hey, guys first one.
If you could refresh the 400 goals.
Do you have and then maybe talk about the order of importance that you are tackling goes in or how you view them yes.
Yeah. Thanks, <unk>, yes, we.
We do have we did talk about last quarter three 100 goals.
<unk> revenues, which we're happy to have achieved last quarter. The second would be annualized recurring revenue, which of course, we just reported over $92 million.
As of the end of June and then the last would be adjusted EBITDA and so those are the three.
Big objectives, we have in the near term and you can see some of the progress we're making we talked about what we can add on a quarterly basis for <unk>. So you can kind of start to project I think as Tony mentioned, how quickly we can get there and then of course adjusted EBITDA, having hit $21 million.
We're on a quarterly basis on a run rate basis were $4 million away from that goal.
So that gives you a little bit of context on those big near term goals that we are really pushing hard to achieve.
Understood Ron Thanks, guys and congratulations.
Sorry.
Thank you and I'm not showing any further.
Congratulations.
Thanks harsh.
Thank you and I'm not showing any further questions at this time I would now like to turn the call back over to Ron <unk>.
Can you give me with for closing remarks.
Thank you Josh this is an exciting time for the industrial Iot market and for Digi.
We are working tirelessly to connect the world's machines and people to transform their work.
And make a difference. Thank you again to blame for the industrial Iot market and for Digi.
We are working tirelessly to connect the world's machines and people to transform their work.
And make a difference.
Thank you again to the wonderful Digi team digitally attending the 40 <unk> annual Canaccord growth Conference August 10th and 11th in Boston, and we will be attending the Piper Sandler Sandler growth Frontiers Conference September . Thank you for participating you may now disconnect. We look forward to our next earnings call.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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