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 "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.

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 and ongoing 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 second quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the second 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 third quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the third quarter of fiscal 2023:

Previous wording

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

Current wording

•Consolidated revenue was $105 million, a decrease of 6%.

Previous wording

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

Current wording

•Consolidated gross profit was $62 million, a decrease of 2%.

Previous wording

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

Current wording

•Gross profit margin was 59.2%, an increase of 230 basis points.

Previous wording

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

Current wording

•Net income was $10 million, compared to net income of $7 million.

Previous 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.

Current wording

•Adjusted net income and adjusted net income per share was $18.5 million, or $0.50 per diluted share, compared to $18.5 million, or $0.50 per diluted share.

Previous wording

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

Current wording

•Adjusted EBITDA was $25 million, or 23.5% of revenue, compared to $24 million or 21.7% of revenue.

Previous wording

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

Current wording

•ARR was $113 million at quarter end, an increase of 9%.

Previous wording

In recent periods, we have experienced longer than expected sales cycles with respect to many contracts and projects of potential significance. We believe this is related to macroeconomic conditions and are uncertain as to when and to what degree sales cycles will return to more normal conditions, but expect this to adversely impact our results in the second half of fiscal 2024.

Current wording

In recent periods, we have experienced longer than expected sales cycles with respect to many contracts and projects of potential significance. We believe this is related to macroeconomic conditions and are uncertain as to when and to what degree sales cycles will return to more normal conditions, but expect this to adversely impact our results for at least the remainder of fiscal 2024.

Previous wording

IoT Products & Services revenue decreased $4.8 million for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of an approximate $8.8 million decrease in product sales volume, with no material impact from pricing, from our Console Server and Cellular product lines partially offset by growth in OEM and $4.0 million in service revenue growth.

Current wording

IoT Products & Services revenue decreased $7.4 million for the three months ended June 30, 2024, as compared to the same period in the prior fiscal year. The decrease consisted of a $7.9 million decline in one-time sales, with no material impact from pricing, partially offset by $0.5 million of recurring revenue growth.

Previous wording

IoT Products & Services revenue decreased $2.5 million for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of an approximate $4.6 million decrease in product sales volume, with no material impact from pricing, from our Console Server and Cellular product lines partially offset by growth in OEM and $2.1 million in service revenue growth.

Current wording

IoT Products & Services revenue decreased $12.2 million for the nine months ended June 30, 2024, as compared to the same period in the prior fiscal year. The decrease consisted of a $15.1 million decline in product sales volume, with no material impact from pricing, partially offset by $2.9 million of service revenue growth.

Previous wording

IoT Solutions revenue decreased $0.9 million for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of a $1.0 million decrease in one time services volume and a $0.8 million decrease in hardware sales offset by a $0.9 million increase in recurring revenue.

Current wording

IoT Solutions revenue increased $0.3 million for the three months ended June 30, 2024, as compared to the same period in the prior fiscal year. The increase consisted of a $1.7 million rise in recurring revenue, partially offset by a $0.8 million decrease in hardware sales and a $0.6 million decrease in one time services volume.

Previous wording

IoT Solutions revenue decreased $1.8 million for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year, consisting of a $2.3 million decrease in one time services volume and a $1.0 million decrease in hardware sales offset by a $1.5 million increase in recurring revenue.

Current wording

IoT Solutions revenue decreased $1.5 million for the nine months ended June 30, 2024, as compared to the same period in the prior fiscal year. The decrease consisted of a $2.9 million decline in one time services volume and a $1.9 million decrease in hardware sales offset by a $3.3 million increase in recurring revenue.

Previous 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.

Current wording

ARR was $113 million as of June 30, 2024, compared to $104 million as of June 30, 2023. IoT Products & Services ARR was $23 million as of June 30, 2024, compared to $22 million as of June 30, 2023. This increase was due to growth in the subscription base across extended warranty offerings and remote management platforms. IoT Solutions ARR was $90 million as of June 30, 2024, compared to $82 million as of June 30, 2023, driven by growth in SmartSense.

Previous 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.

Current wording

IoT Products & Services gross profit margin decreased 50 basis points for the nine months ended June 30, 2024 as compared to the same period in the prior fiscal year. This decrease was driven by decreased volume as well as changes in mix, partially offset by a reduction in inventory adjustments and reduced inflationary pressures.

Previous 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.

Current wording

The IoT Solutions gross profit margin increased 770 basis points for the three months ended June 30, 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.

Previous wording

The IoT Solutions gross profit margin increased 910 basis points for the six 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.

Current wording

The IoT Solutions gross profit margin increased 870 basis points for the nine months ended June 30, 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.

Previous wording

The $2.9 million increase in operating expenses for the six months ended March 31, 2024, as compared to the same period in the prior fiscal year was primarily the result of was primarily the result of a $6.3 million increase to litigation reserves partially offset by a $2.1 million gain on the sale of an intangible asset and $1.3 million decrease in non-labor expenses.

Current wording

The $2.0 million decrease in operating expenses for the three months ended June 30, 2024, as compared to the same period in the prior fiscal year was due to $1.0 million decreases in each of labor and non-labor expenses.

Previous wording

The $3.5 million increase in operating expenses for the three months ended March 31, 2024, as compared to the same period in the prior fiscal year was primarily the result of a $6.3 million increase to litigation reserves partially offset by a $2.1 million gain on the sale of an intangible asset and $0.7 million decrease in non-labor expenses.

Current wording

The $0.9 million increase in operating expenses for the nine months ended June 30, 2024, as compared to the same period in the prior fiscal year was the result of a $6.3 million increase to litigation reserves partially offset by a $2.1 million gain on the sale of an intangible asset, a $2.3 decrease in non-labor expenses and a $1.0 million decrease in labor expenses.

Previous 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).

Current wording

Other expense, net, decreased $3.3 million for the three months ended June 30, 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 $3.5 million for the nine months ended June 30, 2024, as compared to the same period in the prior fiscal year. This increase was driven by the $9.7 million 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

(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.

Current wording

(2)For the three andnine months ended June 30, 2024 and 2023, discrete tax expenses (benefits) are a result of changes in excess tax benefits recognized on stock compensation.

Previous wording

On December 7, 2023, we entered into a credit agreement. The Credit Agreement provides Digi with a $250 million senior secured revolving credit facility, with an uncommitted accordion feature that provides for additional borrowing capacity of up to the greater of $95 million or one hundred percent of trailing twelve month adjusted earnings before interest, taxes, depreciation, and amortization. The Credit Facility also contains a $10 million letter of credit sublimit and $10 million swingline sub-facility. Digi used the proceeds to retire the remaining balance of the prior credit agreement may use the proceeds in the future for general corporate purposes. For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 5 to our condensed consolidated financial statements.

Current wording

On December 7, 2023, we entered into a credit agreement. The Credit Agreement provides Digi with a $250 million senior secured revolving credit facility, with an uncommitted accordion feature that provides for additional borrowing capacity of up to the greater of $95 million or one hundred percent of trailing twelve month adjusted earnings before interest, taxes, depreciation, and amortization. The Credit Facility also contains a $10 million letter of credit sublimit and $10 million swingline sub-facility. Digi used the proceeds to retire the remaining balance of the prior credit agreement and may use the proceeds in the future for general corporate purposes. For additional information regarding the terms of our Credit Facility, including the Revolving Loan and its subfacilities, see Note 5 to our condensed consolidated financial statements.

Previous wording

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

Current wording

Our condensed consolidated statements of cash flows for the nine months ended June 30, 2024 and 2023 are summarized as follows:

Previous wording

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

Current wording

Cash flows from operating activities increased $28.9 million as a result of:

Previous 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,

Current wording

•a $0.2 million increase in net operating assets for the first nine months of fiscal 2024 compared to a $19.4 million increase in the first nine months of fiscal 2023,

Previous wording

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

Current wording

•a $9.7 million debt issuance cost write-off included in net income in the first nine months of fiscal 2024,

Previous wording

•and a $6.3 million litigation accrual in included in net income.

Current wording

•a $6.3 million litigation accrual included in net income in the first nine months of fiscal 2024

Previous wording

•and a $2.2 million increase in gains from the sale of assets.

Current wording

•and a $2.2 million increase in gains from the sale of assets in the first nine months of fiscal 2024.

Previous wording

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

Current wording

Cash flows used in investing activities decreased $4.8 million as a result of:

Previous wording

•a $2.1 million increase in proceeds from the sale of property, equipment, improvements and certain other intangible assets

Current wording

•a $2.2 million increase in proceeds from the sale of property, equipment, improvements and certain other intangible assets

Previous wording

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

Current wording

•and a $2.6 million decrease in purchases of property, equipment, improvements and certain other intangible assets.

Previous wording

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

Current wording

Cash flows used in financing activities increased $33.7 million as a result of:

Previous 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

Current wording

•debt payments of $276.2 million in the first nine 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 payments of $60.7 million against our new credit facility, compared to debt payments of $29.4 million in the first nine months of fiscal 2023

Previous wording

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

Current wording

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

Previous wording

•and decreases in proceeds from stock option plan and employee stock purchase plan transactions.

Current wording

•and an increase in proceeds from employee stock purchase plan transactions.