DIGI INTERNATIONAL INC

Previous wording

This discussion 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," "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," "target," or "will" 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 Digi operates, projections of future performance, inventory levels, perceived marketplace opportunities, interest expense and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession, the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks related to cybersecurity, risks arising from the present wars in Ukraine and the Middle East, 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, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our 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 integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

Current wording

This discussion 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 "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," or "will" 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 Digi operates, projections of future performance, inventory levels, perceived marketplace opportunities, interest expense savings and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession, the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks related to cybersecurity, risks arising from the present wars in Ukraine and the Middle East, 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, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our 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 integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

Previous wording

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the first quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the first quarter of fiscal 2023:

Current wording

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the second quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the second quarter of fiscal 2023:

Previous wording

•Consolidated revenue was $106 million, a decrease of 3%.

Current wording

•Consolidated revenue was $108 million, a decrease of 3%.

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•Consolidated gross profit was $61 million, a decrease of 1%.

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•Consolidated gross profit was $62 million, a decrease of 1%.

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•Gross profit margin was 57.6%, an increase of 130 basis points.

Current wording

•Gross profit margin was 57.9%, an increase of 130 basis points.

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•Net loss was $3 million, compared to net income of $6 million.

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•Net income was $4 million, compared to net income of $6 million.

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•Adjusted net income and adjusted net income per share was $17.6 million, or $0.48 per diluted share, compared to $17.8 million, or $0.48 per diluted share.

Current wording

•Adjusted net income and adjusted net income per share was $17.9 million, or $0.49 per diluted share, compared to $18.2 million, or $0.50 per diluted share.

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•Adjusted EBITDA was $23 million, or 22.0% of revenue, compared to $23 million or 21.4% of revenue.

Current wording

•Adjusted EBITDA was $24 million, or 22.1% of revenue, compared to $24 million or 21.5% of revenue.

Previous wording

•ARR was $108 million at quarter end, an increase of 13%.

Current wording

•ARR was $110 million at quarter end, an increase of 11%.

Previous wording

ARR was $108 million as of December 31, 2023, compared to $96 million as of December 31, 2022. IoT Products & Services ARR was $23 million as of December 31, 2023, compared to $14 million as of December 31, 2022. IoT Solutions ARR was $85 million as of December 31, 2023, compared to $82 million as of December 31, 2022.

Current wording

ARR was $110 million as of March 31, 2024, compared to $99 million as of March 31, 2023. IoT Products & Services ARR was $23 million as of March 31, 2024, compared to $17 million as of March 31, 2023. This increase primarily was due to growth in the subscription base for Console Server services, complemented by growth in other business lines. IoT Solutions ARR was $87 million as of March 31, 2024, compared to $82 million as of March 31, 2023, primarily driven by growth in SmartSense.

Previous wording

IoT Products & Services gross profit margin decreased 110 basis points for the three months ended December 31, 2023 as compared to the same period in the prior fiscal year. This decrease was driven primarily by decreased volume in Console Server, partially offset by increased sales and higher margin mix in OEM.

Current wording

IoT Products & Services gross profit margin decreased 90 basis points for the three months ended March 31, 2024 as compared to the same period in the prior fiscal year. This decrease was driven by decreased volume as well as mix across Console Server and Cellular product lines. The change in unallocated gross profit as compared to the prior fiscal year is attributable to lower, unallocated inventory related expenses.

Previous wording

The IoT Solutions gross profit margin increased 950 basis points for the three months ended December 31, 2023 as compared to the same period in the prior fiscal year. This increase was primarily the result of increased revenue and margins in SmartSense.

Current wording

The IoT Solutions gross profit margin increased 860 basis points for the three months ended March 31, 2024 as compared to the same period in the prior fiscal year. This increase was the result of growth in higher margin ARR subscription revenues. The change in unallocated gross profit as compared to the prior fiscal year is attributable to lower, unallocated inventory related expenses.

Previous wording

Drivers for the changes in operating income for the periods presented are described above in the revenue and gross profit details.

Current wording

Drivers for the changes in operating income for the periods presented are described above in the revenue, gross profit and operating expenses details. The change in Unallocated IoT Products & Service operating income not explained by the change in gross profit is attributable to lower, unallocated incentive compensation for both the three months and six months ending March 31, 2024.

Previous wording

Other expense, net, increased $9.5 million for the three months ended December 31, 2023, as compared to the same period in the prior fiscal year. This increase was driven by the debt issuance cost expense realized upon the extinguishment of our prior credit facility (see Note 5 to the condensed consolidated financial statements for additional information).

Current wording

Other expense, net, decreased $2.6 million for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year. This decrease was driven by a reduction in interest expense due to a decrease in average debt outstanding and our effective interest rate. Other expense, net, increased $6.8 million for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year. This increase was driven by the debt issuance cost expense realized upon the extinguishment of our prior credit facility partially offset by a decrease in our average debt outstanding and our effective interest rate on debt (see Note 5 to the condensed consolidated financial statements for additional information).

Previous wording

Below are reconciliations from GAAP to non-GAAP information that we feel is important to our business:

Current wording

Below are reconciliations from GAAP to non-GAAP information that we feel are important to our business:

Previous wording

(2)For the three months ended December 31, 2023 and 2022, discrete tax (benefit) expense primarily are a result of changes in excess tax benefits recognized on stock compensation.

Current wording

(2)For the three andsix months ended March 31, 2024 and 2023, discrete tax expenses (benefits) primarily are a result of changes in excess tax benefits recognized on stock compensation.

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Our condensed consolidated statements of cash flows for the three months ended December 31, 2023 and 2022 are summarized as follows:

Current wording

Our condensed consolidated statements of cash flows for the six months ended March 31, 2024 and 2023 are summarized as follows:

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Cash flows from operating activities increased $16.0 million primarily as a result of:

Current wording

Cash flows from operating activities increased $22.1 million primarily as a result of:

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•a $0.4 million decrease in net operating assets for the first quarter of fiscal 2024 compared to a $15.4 million increase in the first quarter of fiscal 2023

Current wording

•a $4.6 million increase in net operating assets for the first six months of fiscal 2024 compared to a $22.6 million increase in the first six months of fiscal 2023,

Previous wording

•and a $9.7 million debt issuance cost write-off included in net loss in the first quarter of fiscal 2024.

Current wording

•a $9.7 million debt issuance cost write-off included in net income

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Cash flows used in investing activities decreased $0.7 million primarily as a result of:

Current wording

Cash flows used in investing activities decreased $4.3 million primarily as a result of:

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•a decrease in purchases of property, equipment, improvements and certain other intangible assets.

Current wording

•and a $2.2 million decrease in purchases of property, equipment, improvements and certain other intangible assets.

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Cash flows used in financing activities increased $14.5 million primarily as a result of:

Current wording

Cash flows used in financing activities increased $32.5 million primarily as a result of:

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•debt payments of $233 million in the first quarter of fiscal 2024, including $213.6 million to retire our prior credit facility, an early payment of $1.9 million against our prior credit facility and a payment of $17.5 million against our new credit facility, compared to debt payments of $4.4 million in the first quarter of fiscal 2023,

Current wording

•debt payments of $256 million in the first six months of fiscal 2024, including $213.6 million to retire our prior credit facility, an early payment of $1.9 million against our prior credit facility and a payment of $40.5 million against our new credit facility, compared to debt payments of $9.4 million in the first six months of fiscal 2023

Previous wording

•gross proceeds of $215.4 million from the issuance of a new credit facility and

Current wording

•net proceeds of $214.1 million from the issuance of a new credit facility

Previous wording

•a decrease in taxes paid for net share settlement of share-based payment options and awards.

Current wording

•and a decrease in taxes paid for net share settlement of share-based payment options and awards.

Previous wording

The operating leases included above primarily relate to office space. The table above does not include possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $3.1 million as of December 31, 2023. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities. The table above also does not include those obligations for royalties under license agreements as these royalties are calculated based on future sales of licensed products and we cannot make reliable estimates of the amount of cash payments.

Current wording

The operating leases included above primarily relate to office space. The table above does not include possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $2.3 million as of March 31, 2024. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities. The table above also does not include those obligations for royalties under license agreements as these royalties are calculated based on future sales of licensed products and we cannot make reliable estimates of the amount of cash payments.