Q3 2019 Earnings Call
Thank you Cindy.
Good afternoon, and thank you for joining us today to discuss the fiscal 2019 third quarter results of Digi International.
Joining me on today's call is Ron Konezny, our president and CEO , Ron will provide his thoughts on our business 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 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 are subject to significant risks and uncertainties.
These statements reflect our expectations about future operating and financial performance and speak only as of today's date.
We undertake no obligation to update publicly or revise these forward looking statements.
Well, we believe the expectations reflected in our forward looking statements are reasonable we give no assurance such expectations will be met or that any of our forward looking statements will prove to be correct.
For additional information please refer to the forward looking statement section in our earnings release today and the risk factors of our 2018 Form 10-K , and subsequent reports on file with the FCC.
Finally, certain of the financial information disclosed on this call includes non-GAAP measures.
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 FCC filing section of our Investor Relations website.
Now I'll turn the call over to Ron.
Thank you, Jamie and welcome everyone, who has joined our call today.
We are pleased with our overall results with revenue and earnings many expectations.
We delivered record quarterly revenues and our I O T solutions business and secured a purchase order in a variety of products and services business, which we expect will deliver over $20 million in revenue.
In addition, we expect to meet the revenue and earnings <unk> earnings expectations. We had set for the 2019 fiscal year based on anticipated sequential improvement in our fourth fiscal quarter.
We hosted our second annual global I don't she event in early June here in Minneapolis with over 400 attendees, including our customers distribution partners and key stakeholders. This event, that's a stronger customer and partner relationships and a lot our best asset our team to shine.
Now onto the updates on our business segments and company initiatives.
As anticipated our allergy products and services third quarter results were softer than our previous fiscal quarter.
However, the large purchase order mentioned earlier demonstrates the key objectives that will drive our future success.
Large opportunity driven by our direct Salesforce, we're sustaining high win rates on key opportunities driving backlog for future quarters.
New product introduction.
This opportunity is anchored by one of our newest cellular routers. In addition, we recently introduced updated anywhere U.S.B. and connect I T console server products and our network product family, which added core cellular modules.
Recurring revenues.
We anticipate approximately $11 million in annual recurring revenues.
Increasingly digital will be defined.
Customer experience and results.
We have work to do with respect to gross margins.
We continue to expect gross margins will improve over time.
Based on a combination of pricing optimization and product cost reduction initiatives initiatives.
Our cellular router product line.
Joe topline softness in the quarter versus guidance.
We expect improvement.
In the current fiscal quarter.
We are making excellent progress combine the best of dengue and accelerated technologies, both on the device and in the cloud.
We've experienced strong growth in both our services and subscription revenues in this business, we need to higher levels of customer satisfaction and improved support.
Our Smartstrand Aiotv solutions business achieved a quarterly record revenues and grew significantly year over year.
We added nearly 40 4500, new sites with minimal sight churn during the quarter building our base to over 61000 sites.
We experienced growth in all of our verticals with health services and foodservice, leading the way.
We introduced the first public view of our technology platform consolidation and are making strong progress towards a unified platform.
We exited the quarter with over $14 million in annualized recurring revenue, which we expect to build as we will add new and expand existing sites.
Lastly, we introduced the first version of our mobile application for site, Onboarding, which removes friction time and improve the quality of our customer installations.
Well our solutions segment contributed a modest amount of adjusted EBITDA. This quarter, we continue to invest in our customer experience and ROI.
Continuous innovation and analytics to sustain future growth.
At the corporate level, a few highlights from the quarter include.
Jamie locked joined the company as our Chief Financial Officer in May we are excited about Jamie his background at Ernst and young Honeywell Macleod USA and Nilfisk. He brings a combination of experience enthusiasm commitment to results and strong work work ethic to this important role.
We launched the next phase of our CRM ERP system and we're on track for the complete implementation during the first fiscal quarter of 2020.
We strengthened our balance sheet by reducing inventory and significantly increasing our cash position.
We are biased toward using our capital to help fund additional acquisitions based on the success, we have experienced with the five acquisitions since my appointment as Vicki.
I'll now turn the call over to Jayme for more detail on our financial performance.
Thank you Ron and good afternoon, everyone I wanted to take a quick moment to tell you all how excited I am to be a part did you right now.
Wrapping up my third month year, and I couldn't be more pleased.
I feel my experiences background make me a great match for Digi.
And did you get a great match for me.
I've leverage that into making some immediate contributions to drive value for our customers, our shareholders and our teammates and I'm looking forward to continuing to bring value as well as working with each of you in the investment community. So we communicate our performance execute on our growth strategy and help move digi into the future.
Now I will turn to some of the key financial highlights that contributed to the financial results of our fiscal third quarter.
As Ron mentioned I O T solutions surpassed 61000 sites.
Exiting the third fiscal quarter with annualized recurring revenue or in our our of over $14 million.
When you combine that with new customer deployments and additional purchases. We finished the quarter with our first double digit revenue quarter, and I would see solutions $10.7 million or an increase of 35.5% from one year ago quarter.
Our revenue performance was within our guidance range of $60 million to $64 million for the quarter, which continues a trend of delivering dependable quality results from did you.
We continue to be profitable, our adjusted EBITDA was 6.1 million or 10% of revenue.
It was at the high end of our guidance for the quarter.
Our net income per diluted share of six cents was also at the high end of our guidance range.
Included in the fiscal third quarter adjusted EBITDA figure is approximately $600000 of acquisition related earn out expense.
As well as approximately 20 basis points related to impacts from China tariffs.
Finally, we drove our cash to $86.3 million through strong collections from accounts receivable and good cash management related to accounts payable and inventory.
Year to date through the third fiscal quarter, we have generated $22.5 million from operations.
I'd like to now discuss our results on a segment basis, starting with our products and services business.
I don't see products and services revenue decreased year over year, 7.2% in the third fiscal quarter of 2019.
To $50.5 million.
The majority of that year over year decline has come from our network products and primarily from a loss of one customer.
These are products that we have made minimal investment since 2008.
And these products have been experiencing an ongoing slow decline.
Partially offsetting this decline this decline was growth in our embedded in our RF products.
We like the outlook for our products and services team.
Our I O T products and services gross margins were 45.7% compared to 47.6% in fiscal Q3 of 2018.
This was driven by the aforementioned drop in our network products.
If we move to oncology solutions segment as previously discussed our E. RR is at the highest level to date.
And as approximately 35% of the total revenue in the fiscal third quarter.
I O T solutions revenue in the third fiscal quarter of 29 gene was $10.7 million compared to $7.7 million in the same period, one year ago.
This was a record revenue quarter for our solutions business has momentum and execution continued to improve.
This increase was driven by new customer deployments additional purchases and equipment upgrades from existing customers as well as an increase in our recurring revenue base.
Our loyalty solutions gross margin was 49.5% compared to 41.3% in Q3 and 2018.
That's reflective of our growth in our our art and demonstrates the leverage that would be expected on that revenue growth.
Finally, a few additional balance sheet items to mention first we continue to be debt free.
Second our cash balance remains strong at $86.3 million, an increase of 20% quarter over quarter and 38% from the beginning of the fiscal year.
And third our inventory levels came down by $2.2 million from the second fiscal quarter and are now at $41.8 billion.
As we continue to optimize refiner manufacturing transition, we anticipate continuing to drive this balance down.
Now I'd like to provide our fourth quarter and full year 2019 guidance ranges.
For the fourth fiscal quarter of 2019, we expect revenue of $60 million to $64 million.
We expect adjusted EBITDA of 6.5 million to $7.5 million.
And we expect our net income per diluted share to be.
Four to seven cents.
Including our guidance is acquisition related earn out expenses of approximately one half million or two cents per diluted share.
For the full fiscal year 2019, we expect revenues to be in the range of 249 million to $253 million.
We expect adjusted EBITDA of 25.5 million to $26.5 million.
And we expect our net income per diluted share to be 31 cents to 34 cents.
Included in our full fiscal year guidance, our acquisition related earn out expenses of approximately $2 million or six cents per diluted share.
Included in our guidance, we expect our fiscal 2019 annual effective tax rate to be in the range of 10% to 15%.
That completes our prepared remarks at this time, Ron and I are pleased to take your questions. Sidney could you. Please provide instructions.
Yes, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your telephone keypad.
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And our first question comes from the line of Greg Burns with Sidoti and company. Your line is open.
Good afternoon.
Just wanted to dig in a little bit on the.
Large projects that you won.
What timeframe do you.
We expect to realize that 20 million over and.
One of the margins like on this type of.
Large project as compared to maybe some of the smaller smaller deals you do thanks.
Hi, Greg those are good questions that the bulk of this project will be deployed in our fiscal 2020 period.
The margins are are above the company margins and above the IP products and service margins that we just reported.
Okay and.
When we look at.
Maybe can you just talk about.
How you won this this deal it's kind of one of the larger deals I've seen you talk about since I've been covering the company, but can you just kind of frame it in terms of.
What you've done.
Over the last few years to optimize that business and how maybe that translated into winning a deal of this size how Russell global is this and what the pipeline of these type of deals looks like for you. Thanks.
Yes, another good question and shifts rapidly, but we would love to describe this in more detail and work.
Keying off our end user and our partner on this opportunity to make sure that we're coordinating disclosure is appropriately and in sync with their disclosures to make sure that were considered of.
Of of their desire so as that becomes more available we expect to see more descriptive of this project.
But I can tell you as I mentioned in my prepared remarks that we're excited about the combination of things that we've been working on.
Really led by Mike you want our president of our products and services group that said Thats a key accounts, it's a complicated.
Program its a very high profile program that demands exacting execution. It leverages one of our newest cellular routers and and it has a million dollars in in recurring revenue that we expect to be able to obtain it and it's over a five year period.
We do think this this application, which we hope to say talk about in more detail, but can be replicated we do have a a team of resources that.
We're working with our existing partner and new partners to.
Take advantage of this type of opportunity because.
It's the type of projects and progress sorry program that we can we think we can replicate.
Okay, great. Thanks, and then just.
Switching over to the CIO to solutions business, obviously very.
Strong quarter, there how should we think about that sequentially because it seems like you had a pretty high level of more nonrecurring.
Hardware sales this quarter.
What's the outlook look like for for Threeq you.
The solutions business.
Yeah, right, we had a strong quarter and we do anticipate.
That the current fiscal quarter.
Well be quite as high as we had both a high number of subscribers with 4500 approximate subscriber adds really high retention, so and the mix of subscribers as we talk about ask Ken and very transportation subscribers can have some some both lower one time as well as recurring fees and some subscribers in grocery and warehousing can be much more intense in there and there the amount of equipment and services that are that are that are required.
We do expect to continue to add three to 4000 sites next quarter, it and continue to drive the annualized recurring revenue up.
But we'll also have a healthy amount of onetime associated with with that as well.
Okay. Thank you.
Thank you. Our following question comes from the line of Mike Walkley with Canaccord Genuity.
In his open.
Great.
Thanks, Brian James for attending our conference. This week it was great to see you and congrats on another strong quarter of execution and meeting your full year guidance. Just just wanted to touch base on that on the large project again, just just kind of dig in a little deeper.
Clearly your investment in new a new products. It is doing well can you talk just about the new product initiatives in your pipeline.
And how you you kind of see the overall pipeline for deals and in great to hear this new project is above corporate average gross margins.
Yeah. This this new project as I mentioned is really anchored by one of our newest cellular routers and.
Behind the scenes the team has done an incredible amount of work between accelerated at Digi, combining device software combining cloud based software and I think this is a as it is a great.
Acknowledgement of that hard work that's been performed it not only benefits the customer which is the most important but internally we get to have more effort spent on one set of technology that can be applied not only across our site a router product line, but with our introduction of the anywhere you at EQT I T platform. That's also be put in that same framework.
Device software and common cloud device management software. So we're very excited about this and in particular as you know sustainability has been a real quick objective and this also is I think emblematic of.
Shipment of innovation that we think can be repeated and can lead to additional.
Forward looking revenue and give us that confidence.
Good morning.
For for Sharks in San Francisco.
Just a great quarter. Thank you and just for just for a follow up question very strong upticks management during the quarter.
Jamie this kind of a new operating expense run rate or should we expect it to trend up here into year end.
Yes, Thanks, Mike I think it's going to trend a little bit up at year end, but not anything that's going to be material.
I think the team has done a nice job of managing the day to day expenses and.
But there could be some one time events that will that will swing a little bit higher a little bit lower but operationally I think I think we're we're establishing at run rate shorted those kind of adjustments.
Great. Thanks last question for me and I'll pass it onto them here at the airport.
You are on very strong cash generation in the quarter continue to generate cash have a strong cash balance you highlighted how your view.
Want to deploy that cash may be an M&A can you talk about maybe size or appetite or areas of interest just given the five smaller successful tuck ins.
What's the appetite maybe for a larger acquisition now that Youve proven it's the board that you can integrate these deals. Thank you very much.
Yes, Thanks, Mike and thanks again for for having US at your conference, which is always one of our favorites again did not disappoint this year.
In terms of acquisitions, we continue to be biased towards.
Opportunities that have strong recurring revenue we as we've demonstrated we will look at both sides of our business for those opportunities. We have probably increased our appetite in terms of the size of deals, especially as we generate additional cash should we.
Expect to generate more cash in future quarters, with very low capital expenditure budget, we'd like to put that capital worse views on bigger bigger opportunities. We're projecting as you can tell from jamie's comments to be approximately 250 million in revenue. So we're looking at things that are bigger than what we've done in the past and and and challenging ourselves to take on to take on more opportunity.
Thank you very much.
Thank you.
A reminder, ladies and gentlemen.
Any background noise.
What's your question essence stated our following question comes from Jason Smith with Lake Street. Your line is open.
Hey, guys. Thanks for taking my questions just wondering if you're seeing any change in the size of the deals in the pipeline, maybe not as big as the Big project just.
One, but have you seen any uptick in the overall size.
Yes, it's a good question I think the two things that were excited about in terms of the pipeline. One is is that we're we're seeing this pipeline continued to grow but secondly is a winning.
Opportunities that are routinely at least seven digits and although the the.
The opportunity we talked about excluded eight digit deal. We're very very excited about the number of seven digit deals that we've been able to secure and so and that win rate on those large opportunities has been.
Part of our success and we're excited to see that when rates sustain from previous quarters as well.
Okay and any update on the feedback from customers now that you are really pushing bundling products with software and services.
Yes, I think we're getting good reception. It takes some time a lot of our customers are industrial heavy commercial and they haven't purchased products that way in the past.
And so we are being I think more considerate and how we roll out a bundled solution that includes software services and support.
We up where we are making it more of a of up of an opt in versus an opt out and so we're encouraged by the reception, but we're also patient with the time, it's going to take to to transition some of our customers that model.
Okay and the last one from me regarding the network business should we expect that to remain a bit muted here in the near term or is this going to continue to decline how should we think about that business in the second half of this year.
I think the safe bet is to have the assumption that it will continue to decline we have introduced some updated products. It takes some time for those products to get into the channel and to get exposed to end users and we do anticipate.
That overtime, we can we can certainly soften the decline in potentially even even flatten that revenue, but in the near term we do expect that revenue to the continued decline.
Okay. Thanks, a lot guys.
Thank you and our following question comes from David Gearhart with first analysis. Your line is open.
Hi, good afternoon, and thank you for taking my questions I kind of wanted to revisit the 20 million dollar deal and just to get some color on Q4 does the guidance include any any contribution from the steel in Q4 I know you mentioned, that's mostly a fiscal 20 of that but I just wanted to be clear on that.
Yeah, Hi, David. Good question does include some of the opportunity being delivered yet before the end of the fiscal year, but the vast majority is really in fiscal 2020.
Got it and then in quarters past you talked about a 3000 unit deal on the solution side that was lost because of a partner decided not to be in the business and you had mentioned gaining 500 of those units back where do we stand in terms of cap recapturing that 3000 units.
Units from that customer and was that a big part of the 4500 units in the quarter.
Yes, we feel like we've gained back the revenue we as I think we've talked about in the past that we would then expect to gain back all the units, but because of the pricing differences in going through this one large customer versus going directly to end users. We think we've got about half those subscribers back and at prices that are double what what that original contract was calling for.
As I mentioned my comments that most of the the strength we saw in the current quarter have been driven more by health and food service. We certainly did have contribution from transportation as well, but foodservice in health had a bigger contribution overall health subscribers are aren't quite up.
And that they don't quite have as much revenue. So she is associated with them with the exception of warehouse implementations, but for a trailer and data logger applications, the onetime and the ARPU is lower than our than our.
And our business unit averages.
Got it and then you know some of.
Two players I have seen that have already reported have seen some weakness on the transportation side.
Whether that's in regards to the customers over ordering or too much inventory being produced so just wondered.
Summation, David Transportation is oftentimes viewed as a leading indicator of the direction of the economy, and we're going to see that oftentimes in drive and spot rates, where where you're going to see more volatility most of our work in smart sensors on the refrigerated side that tends not to have as much volatility both on the up and the downside. So we haven't seen as much of that in refrigeration on our prime services business, we are not as exposed to the transportation vertical from a trucking perspective as some of our public peers. We do a lot of work in mass transit and rail subway buses that elements of the economy continues to make investments as a number of cities look to upgrade their infrastructure and combine them with technology investments.
So we have not yet seen an impact on if you will mass transit portion of our transportation business.
Got it and if I could sneak in just one more and I'll pass the Q.
With the $1 million and recurring that's expected on the 20 million dollar deal Im assuming that is going to be.
And the profit in the excuse me the professional services line. When it's recognized can you give us an update of what percentage roughly.
Of that revenue on a quarterly basis is for device management and other recurring services.
Outside.
That's a good question I don't have that data for you, but it is a combination of device management and professional services.
So I don't have that exact figure forward, but it is a blend of the two and and you're right. It would be reported on the services side of the products and services.
Business.
Got it thank you thats it for me.
I'll pass the line.
Thank you and our following question comes from the line of <expletive> Ryan with Dougherty. Your line is open.
Thank you.
Hey, Ron you may have been in the integration of the.
For solutions acquisitions, where are you doing a stand on that I think your goal was to get down to one platform by year end and when you get to that point.
Does that.
Possibly help drive that solutions business further.
Yes, Thats a great question and in my prepared remarks, I mentioned, how we add up the first unveiling of our combined platform.
This past quarter and at Baghdad, Our Digi Aiotv event in June and it was very well received and we've had some initial customers on that platform. We're essentially selling two systems right now and as we finish the work on the combined platform will be trends will be migrating.
Two of the platforms over this main platform.
We do expect there to be significant progress here before the end of the year. It will likely take us through 2020 to get all of that feature parity that we expect across the four platforms, but it won't be incremental progress every quarter and to your point, we'll start selling new customers on the new platform exclusively sometime in 2020, and then the migrating customers from.
Legacy platforms, the new platform up overtime as well as the business gets tremendous benefits from from marketing selling.
Innovating and advancing one platform and so we do think that will contribute towards higher growth rates.
Okay. Thank you.
Thank you and once again, ladies and gentlemen, if you have a question at this time, please press the star and the number one.
Your telephone keypad.
And I'm showing no further questions at this time I would now like to turn the call back to Ron Konezny for any closing remarks.
Thank you Stephanie I mean, the entire team we appreciate your support and trust and Veggie.
We're excited to finish a great fiscal 2019 year and we look forward to our next update.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.
Everyone have a great day.