Digi International Reports Second Fiscal Quarter 2014 Results


The following excerpt is from the company's SEC filing.

(Minneapolis, MN, April 24, 2014) - Digi International® Inc. (NASDAQ: DGII, www.digi.com) reported revenue of $45.9 million for the second fiscal quarter of 2014, compared with $48.2 million for the second fiscal quarter of 2013. Net income was $0.7 million, or $0.03 per diluted share, in the second fiscal quarter of 2014 compared to $1.0 million, or $0.04 per diluted share, in the year ago comparable quarter.

“Our overall revenue was in line with guidance provided when we announced earnings last quarter,” said Joe Dunsmore, President and Chief Executive Officer. “However, we were disappointed by the miss on our second quarter operating margins.”

On April 23, Mr. Dunsmore announced his intention to retire as Digi’s CEO and Chairman. He will remain fully focused on driving the execution of the company’s operations through the end of the calendar year while the Board of Directors conducts a search for his successor.

Net income in the second fiscal quarter of 2014 was positively impacted by a reversal of certain tax reserves in connection with the conclusion of a federal income tax audit more fully described later in this earnings release, resulting in a tax benefit of $1.1 million, or $0.04 per diluted share. Net income in the second fiscal quarter of 2013 was unfavorably impacted by a legal settlement with U.S. Ethernet Innovations, LLC of $1.0 million, net of taxes, or $0.04 per diluted share.

Non-GAAP Results*(in thousands, except per share data) Q2 2014 Q2 2013 YTD 2014 YTD 2013Operating (Loss) Income $(649) $1,907 $60 $3,579Net (Loss) Income $(367) $1,591 $159 $2,677Net (Loss) Income per Diluted Share $(0.01) $0.06 $0.01 $0.10* A table with a detailed reconciliation to non-GAAP information is provided at the end of this earnings release.

Revenue from our hardware products for the second fiscal quarter of 2014 was $40.6 million, compared to product revenue of $43.1 million for the second fiscal quarter of 2013, a decrease of $2.5 million or 5.9%. Revenue from growth hardware products was $20.8 million in the second fiscal quarter of 2014, compared to $22.0 million in the second fiscal quarter of 2013, a decrease of $1.2 million or 5.4%. Revenue from mature hardware products was $19.8 million in the second fiscal quarter of 2014, compared to $21.1 million in the second fiscal quarter of 2013, a decrease of $1.3 million or 6.5%.

Revenue from our service offerings, which are part of our growth portfolio, was $5.3 million in the second quarter of fiscal 2014, compared to $5.1 million in the year ago comparable quarter, an increase of $0.2 million or 4.6%.

Revenue in North America was $27.4 million in the second fiscal quarter of 2014 compared to $28.6 million in the second fiscal quarter of 2013, a decrease of $1.2 million or 4.3%. Revenue in EMEA (Europe, Middle East and Africa) was $11.9 million in the second fiscal quarters of both 2014 and 2013. Revenue in the Asia Pacific region was $5.0 million in the second fiscal quarter of 2014, compared to $6.3 million in the second fiscal quarter of 2013, a decrease of $1.3 million or 20.3%. Latin American revenue was $1.6 million in the second fiscal quarter of 2014, compared to $1.4 million in the comparable quarter a year ago, an increase of $0.2 million or 14.0%.

Gross profit was $21.8 million in the second fiscal quarter of 2014, compared to $25.0 million in the same period of the prior year, a decrease of $3.2 million or 12.7%. The gross margin was 47.5% in the second fiscal quarter of 2014. compared to 51.8% in the second fiscal quarter of 2013.  The gross margin was lower in the second fiscal quarter of 2014 than in the comparable period a year ago primarily due to lower gross margins from our services offerings as well as hardware product mix.

Total operating expenses in the second fiscal quarter of 2014 were $22.4 million, or 48.9% of revenue, compared to $24.5 million, or 50.9% of revenue, in the second fiscal quarter of 2013. Operating expenses in the second fiscal quarter of 2013 included $1.5 million, or 3.2% of revenue, relating to the settlement of a patent infringement lawsuit with U.S. Ethernet Innovations, LLC.

Digi reported an operating loss of $0.6 million, or 1.4% of revenue, in the second fiscal quarter of 2014, compared to operating income of $0.4 million, or 0.9% of revenue, in the second fiscal quarter of 2013. Operating income for the second fiscal quarter of 2013 included the settlement of the aforementioned patent infringement lawsuit of $1.5 million. Please refer to the table reconciling operating (loss) income to non-GAAP operating (loss) income, which is provided later in this earnings release.

Net income was $0.7 million in the second fiscal quarter of 2014, or $0.03 per diluted share, compared to $1.0 million, or $0.04 per diluted share, in the second fiscal quarter of 2013. In conjunction with a federal income tax audit that was settled during the second fiscal quarter of 2014, certain reserves were remeasured and reversed resulting in a discrete tax benefit of $1.1 million, or $0.04 per diluted share. Net income in the second fiscal quarter of 2013 included a charge for the settlement of a patent infringement lawsuit of $1.0 million, net of taxes, or $0.04 per diluted share, partially offset by a tax benefit of $0.4 million, or $0.01 per diluted share, resulting from legislation that was enacted that allowed Digi to record tax credits for the last three quarters of fiscal 2012. Please refer to the table reconciling net income and net income per diluted share to non-GAAP net (loss) income and net (loss) income per diluted share, which is provided later in this earnings release.

Earnings before interest, taxes, depreciation and amortization in the second fiscal quarter of 2014 were $1.2 million, or 2.7% of revenue, compared to $2.8 million, or 5.9% of revenue, in the second fiscal quarter of 2013.

For the six months ended March 31, 2014, Digi reported revenue of $93.2 million, compared to revenue of $95.2 million for the six months ended March 31, 2013.

Revenue from our hardware products for the first six months of fiscal 2014 was $82.5 million, compared to $86.2 million in the first six months of fiscal 2013, a decrease of $3.7 million or 4.2%. Revenue from growth hardware products for the first six months of fiscal 2014 was $42.6 million, compared to $43.8 million for the first six months of fiscal 2013, a decrease of $1.2 million or 2.6%. Revenue from mature hardware products was $39.9 million for the first six months of fiscal 2014, compared to $42.4 million in the first six months of fiscal 2013, a decrease of $2.5 million or 5.8%.

Revenue from our service offerings was $10.7 million for the first six months of fiscal 2014, or 11.4% of revenue, compared to $9.0 million for the first six months of fiscal 2013, or 9.5% of revenue, an increase of $1.7 million or 17.9%.

For the six months ended March 31, 2014, Digi reported net income of $1.4 million, or $0.05 per diluted share, compared to net income for the six months ended March 31, 2013 of $2.2 million, or $0.08 per diluted share. Net income was favorably impacted for the first six months of fiscal 2014 by the aforementioned reversals of tax reserves related to a federal income tax audit as well as the expiration of the statutes of limitation in the U.S., totaling $1.3 million, or $0.05 per

diluted share. Net income was unfavorably impacted for the first six months of fiscal 2013 as a result of the aforementioned patent infringement settlement of $1.0 million, net of tax, or $0.04 per diluted share, which was partially offset by a benefit of $0.5 million, or $0.02 per diluted share, resulting from the enactment of legislation that allowed Digi to record tax credits for the last three quarters of fiscal 2012, and the reversal of tax reserves for the expiration of the statute of limitations for both U.S. and foreign jurisdictions.

Digi’s cash and cash equivalents and marketable securities balance, including long-term marketable securities, was $99.4 million at March 31, 2014, a decrease of $6.3 million from September 30, 2013, primarily resulting from repurchases of common stock. Please refer to the Condensed Consolidated Statements of Cash Flows that are included in this earnings release for additional cash flow details. At March 31, 2014, Digi’s current ratio was 8.1 to 1 compared to 7.0 to 1 at September 30, 2013.

•Digi International and Arrow Electronics Inc. signed a global distribution agreement expanding their existing successful North American distribution alliance. Arrow will offer leading Digi embedded products and Device Cloud by Etherios™, which allows any device to communicate with any application anywhere in the world. Previously available to Arrow customers in North America, these solutions now are available globally. This strategic relationship strengthens Digi’s worldwide channel strategy and increased ability to service large multi-national projects outside of North America.

•OEM Technology Solutions, a Digi International customer of over 20 years, announced that it will use Device Cloud by Etherios to further its offerings in preventative customer service and condition-based monitoring on rail systems throughout the world. OEM Technology Solutions equipment powers over 20,000 systems in rail cars in 20 countries. The company first turned to Digi International for its hardware, such as the ConnectCore® Wi-9C embedded wireless module and Digi TransPort® WR44 cellular gateway, to enable its products wirelessly. Now, Device Cloud makes that information even more accessible and actionable by making it available via the web.

•Etherios will develop a system to maximize solar power generation. The system calculates the amount of energy needed per residence and transfers unused solar power to those in need by way of the smart grid. The Etherios Wireless Design Services group will develop the hardware and software, including a wireless gateway that will connect the energy monitoring system and Device Cloud by Etherios. The gateway will monitor electrical energy generation, storage and consumption, and export to the electrical utility.

•The leading information system provider for the taxi business will use the ConnectCore® Wi-i.MX53 in solutions related to online card payment, intelligent positioning systems, and data collection systems. The company provides system and software integration services in demanding mobile system ventures.

•In February, Digi International announced the release of the Digi TransPort® WR11, a cellular router that provides a secure and reliable connection for retail and point-of-sale applications. The Digi TransPort WR11 connects ATMs, lottery terminals, payment kiosks, vending machines, and digital signs with cellular networks. The WR11 helps retailers and payment network operators increase network uptime and reduce costs associated with disconnected stores and payment terminals. The WR11 is part of the Digi TransPort family of 3G/4G cellular routers that provide flexible, enterprise level cellular routers for remote and mobile networking applications. Many are used in large-scale secure electronic payment networks for point-of-sale, lottery, self-service kiosks, and off-premise ATM machines.

•In February, Digi International announced the ConnectCore® 6, the world’s first surface mount multi-chip module with built-in wireless connectivity. The ConnectCore 6 provides access to all of the features of the Freescale® i.MX 6 Quad, i.MX 6 Dual and i.MX 6 Solo processors, making it the ideal solution for M2M applications. The module’s small form factor and design, which requires no connectors, reduces manufacturing costs and makes it easier than ever to add wireless capabilities to portable devices.

 Three months ended March 31, Six months ended March 31, 2014 2013 2014 2013   % of totalrevenue   % of totalrevenue   % of totalrevenue   % of totalrevenueOperating (Loss) Income$(649) (1.4)% $419 0.9% $(21) — % $2,091 2.2 %Legal settlement— — % 1,525 3.2% — — % 1,525 1.6 %Restructuring reserve— — % (37) —% 81 0.1 % (37) — %Non-GAAP operating (loss) income*$(649) (1.4)% $1,907 4.0% $60 0.1 % $3,579 3.8 %

 Three months ended March 31, Six months ended March 31, 2014 2013 2014 2013Net income and net income per common share, diluted$738 $0.03 $1,000 $0.04 $1,426 $0.05 $2,230 $0.08Legal settlement, net of taxes— — 991 0.04 — — 991 0.04Restructuring reserve, net of taxes— — (24) — 53 — (24) —Discrete tax benefits for extended research and development tax credits, re-measurement and reversal of certain tax reserves as a result of a federal income tax audit, and expiration of statute of limitations in various tax jurisdictions(1,105) (0.04) (376) (0.01) (1,320) (0.05) (520) (0.02)Non-GAAP net (loss) income and net (loss) income per diluted share *$(367) $(0.01) $1,591 $0.06 $159 $0.01 $2,677 $0.10Diluted weighted average common shares  26,144   26,476   26,189   26,474

*Earnings per share presented are calculated by line item and certain amounts may not add due to use of rounded numbers.

 Three months ended March 31, Six months ended March 31, 2014 2013 2014 2013   % of totalrevenue   % of totalrevenue   % of totalrevenue   % of totalrevenueTotal revenue$45,882 100.0 % $48,197 100.0 % $93,204 100.0 % $95,188 100.0 %Net income738 1.6 % 1,000 2.1 % 1,426 1.5 % 2,230 2.3 %Interest income, net(49) (0.1)% (13) — % (92) (0.1)% (65) (0.1)%Income tax (benefit) provision(1,317) (2.9)% (130) (0.3)% (1,241) (1.3)% 488 0.6 %Depreciation and amortization1,870 4.1 % 1,990 4.1 % 3,719 4.0 % 3,909 4.1 %Earnings before interest, taxes, depreciation and amortization*$1,242 2.7 % $2,847 5.9 % $3,812 4.1 % $6,562 6.9 %

For the third fiscal quarter of 2014, Digi projects revenue in a range of $46.5 million to $49.5 million with a most likely revenue of approximately $48.0 million. Digi projects net income per diluted share for the third fiscal quarter of 2014 in a range of ($0.02) to $0.02, with a most likely net income per diluted share of $0.00.

For the full fiscal year 2014, Digi now projects revenue in a range of $188.0 million to $194.0 million with a most likely annual revenue of approximately $191.0 million. Digi now projects annual net income per diluted share to be in a range of $0.06 to $0.12, with a most likely net income per diluted share of $0.09.

Digi invites all those interested in hearing management's discussion of its quarter, on Thursday, April 24, 2014 after market close at 5:00 p.m. EST (4:00 p.m. CST), to join the call by dialing (866) 318-8612 and entering passcode 78419801. International participants may access the call by dialing (617) 399-5131 and entering passcode 78419801. A replay will be available two hours after the completion of the call, and for one week following the call, by dialing (888) 286-8010 for domestic participants or (617) 801-6888 for international participants and entering access code 17707936 when prompted. Participants may also access a live webcast of the conference call through the investor relations section of Digi's website, www.digi.com. The webcast will remain on our website for one week after the live session is completed.

A copy of this earnings release can be accessed through the financial releases page of the investor relations section of Digi’s website at www.digi.com.

Digi International is the M2M solutions expert, combining products and services as end-to-end solutions to drive business efficiencies. Digi provides the industry’s broadest range of wireless products, a cloud computing platform tailored for devices and development services to help customers get to market fast with wireless devices and applications. Digi’s entire solution set is tailored to allow any device to communicate with any application, anywhere in the world. For more information, visit Digi’s website at www.digi.com, or call 877-912-3444 (U.S.) or 952-912-3444 (International).

This press release contains forward-looking statements that are based on management’s current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "anticipate," "believe," "estimate," "may," "will," "expect," "plan," "project," "should," or "continue" or the negative thereof or other variations thereon or similar terminology. Among other items, these statements relate to expectations of the business environment in which the company operates, projections of future performance, perceived marketplace opportunities and

statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, including risks related to the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, delays in product development efforts, uncertainty in user acceptance of our products, the ongoing shift of our sales efforts to focus more on the delivery of broader based solutions which can be a more complex sales process, has not been a historical sales focus of our company and can involve longer sales cycles than the sale of our legacy hardware products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, the ability to achieve the anticipated benefits and synergies associated with acquisitions, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control. These and other risks, uncertainties and assumptions identified from time to time in our filings with the Securities and Exchange Commission, including without limitation, our annual report on Form 10-K for the year ended September 30, 2013 and other subsequent filings, could cause the company's future results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are beyond our ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

This release includes historical non-GAAP operating income and net income and net income per diluted share data, and earnings before interest, taxes, depreciation and amortization (EBITDA), which is a non-GAAP measure.

We understand that there are material limitations on the use of non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures, such as operating income or net income, for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that were actually recognized by the company. These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, we understand that EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs.

We believe that providing historical and adjusted operating income and net income and net income per diluted share exclusive of legal settlements, restructuring expenses, and reversals of tax reserves and discrete tax benefits permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of matters such as the impact of decisions relating to taxes and restructuring, which while important, are not central to the core operations of our business. We believe that the presentation of EBITDA as a percentage of revenue is useful to investors because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps investors compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired. EBITDA is used as an internal metric for executive compensation, as well as incentive compensation for the rest of the employee base, and it is monitored quarterly for these purposes.

 Three months endedMarch 31, Six months endedMarch 31, 2014 2013 2014 2013Revenue:       Hardware product$40,560 $43,111 $82,549 $86,154Service5,322 5,086 10,655 9,034Total revenue45,882 48,197 93,204 95,188Cost of sales:       Cost of hardware product20,012 20,122 40,275 40,248Cost of service4,090 3,114 8,241 5,500Total cost of sales24,102 23,236 48,516 45,748Gross profit21,780 24,961 44,688 49,440Operating expenses:       Sales and marketing10,399 10,414 20,618 20,688Research and development7,411 7,775 14,668 15,192General and administrative4,619 6,390 9,342 11,506Restructuring charges, net— (37) 81 (37)Total operating expenses22,429 24,542 44,709 47,349Operating (loss) income(649) 419 (21) 2,091Other income, net:       Interest income50 50 93 102Interest expense(1) (37) (1) (37)Other income, net21 438 114 562Total other income, net70 451 206 627(Loss) income before income taxes(579) 870 185 2,718Income tax (benefit) provision(1,317) (130) (1,241) 488Net income$738 $1,000 $1,426 $2,230Net income per common share:       Basic$0.03 $0.04 $0.06 $0.09Diluted$0.03 $0.04 $0.05 $0.08Weighted average common shares:       Basic25,644 26,138 25,680 26,163Diluted26,144 26,476 26,189 26,474

 Three months endedMarch 31, Six months endedMarch 31, 2014 2013 2014 2013Net income$738 $1,000 $1,426 $2,230Other comprehensive (loss) income, net of tax:       Foreign currency translation adjustment(181) (3,090) 162 (3,379)Change in net unrealized gain (loss) on investments26 (61) 64 (59)Less income tax (provision) benefit(10) 24 (25) 23Other comprehensive (loss) income, net of tax(165) (3,127) 201 (3,415)Comprehensive income (loss)$573 $(2,127) $1,627 $(1,185)

 March 31,2014 September 30,2013ASSETS   Current assets:   Cash and cash equivalents$43,557 $41,320Marketable securities45,035 47,006Accounts receivable, net25,900 26,829Inventories30,592 26,140Deferred tax assets3,435 3,174Other5,261 4,835Total current assets153,780 149,304Marketable securities, long-term10,804 17,389Property, equipment and improvements, net13,673 13,910Identifiable intangible assets, net8,309 9,728Goodwill104,045 103,569Deferred tax assets6,520 5,832Other419 221Total assets$297,550 $299,953LIABILITIES AND STOCKHOLDERS’ EQUITY   Current liabilities:   Accounts payable$9,114 $8,906Accrued compensation6,198 7,410Accrued warranty972 1,063Other2,725 3,911Total current liabilities19,009 21,290Income taxes payable2,387 3,903Deferred tax liabilities330 415Other noncurrent liabilities124 79Total liabilities21,850 25,687    Total stockholders’ equity275,700 274,266Total liabilities and stockholders’ equity$297,550 $299,953

 Six months endedMarch 31, 2014 2013Operating activities:   Net income$1,426 $2,230Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation of property, equipment and improvements1,828 1,705Amortization of identifiable intangible assets1,891 2,204Stock-based compensation2,070 1,914Excess tax benefits from stock-based compensation(44) (53)Deferred income tax benefit(1,065) (1,079)Bad debt/product return (recovery) provision(151) 285Inventory obsolescence409 554Restructuring charges, net81 —Other46 (307)Changes in operating assets and liabilities (net of acquisition)(9,681) (4,103)Net cash (used in) provided by operating activities(3,190) 3,350Investing activities:   Purchase of marketable securities(5,157) (37,337)Proceeds from maturities of marketable securities13,778 38,161Acquisition of business, net of cash acquired— (12,919)Purchase of property, equipment, improvements and certainother intangible assets(1,921) (2,080)Net cash provided by (used in) investing activities6,700 (14,175)Financing activities:   Excess tax benefits from stock-based compensation44 53Proceeds from stock option plan transactions3,209 590Proceeds from employee stock purchase plan transactions561 248Purchases of common stock(5,416) (6,765)Net cash used in financing activities(1,602) (5,874)Effect of exchange rate changes on cash and cash equivalents329 (1,190)Net increase (decrease) in cash and cash equivalents2,237 (17,889)Cash and cash equivalents, beginning of period41,320 60,246Cash and cash equivalents, end of period$43,557 $42,357    Supplemental schedule of non-cash investing activities:   Issuance of common stock for business acquisition$— $6,804

The above information was disclosed in a filing to the SEC. To see this filing in its entirety, click here. Digi International Inc. next reports earnings on April 24, 2014.

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