DIGI INTERNATIONAL INC

Previous wording

Our management's discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, as well as our subsequent reports on Form 10-Q and Form 8-K and any amendments to these reports.

Current wording

Our management's discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2024, as well as our subsequent reports on Form 10-Q and Form 8-K and any amendments to such reports.

Previous wording

This Form 10-Q contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Current wording

This Quarterly Report on Form 10-Q contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

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 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.

Current wording

This report contains forward-looking statements, which are statements 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, debt repayments, attributions of potential acquisitions 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 and trade policies of governments globally as well as present and ongoing concerns about a potential recession, the potential for longer than expected sales cycles, 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, regulatory risks that include, but are not limited to, the potential expansion of tariffs, risks related to cybersecurity, risks arising from the present military conflicts 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

These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, those set forth in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended September 30, 2023, subsequent filings, as well as this filing on Form 10-Q and other filings, could cause our actual 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.

Current wording

These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, those set forth in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended September 30, 2024, subsequent filings, as well as this Quarterly Report on Form 10-Q and other filings, could cause our actual 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.

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 third quarter of fiscal 2024 that we feel are most important in these evaluations, with comparisons to the third 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 first quarter of fiscal 2025 that we feel are most important in these evaluations, with comparisons to the first quarter of fiscal 2024:

Previous wording

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

Current wording

•Consolidated revenue was $104 million, a decrease of 2%.

Previous wording

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

Current wording

•Consolidated gross profit was $64 million, an increase of 5%.

Previous wording

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

Current wording

•Net income was $10 million, compared to a net loss of $3 million.

Previous 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.

Current wording

•Adjusted net income and adjusted net income per share was $19 million, or $0.50 per diluted share, respectively, compared to $18 million, or $0.48 per diluted share, respectively.

Previous wording

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

Current wording

•Adjusted EBITDA was $26 million, or 24.7% of revenue, compared to $23 million or 22.0% of revenue.

Previous wording

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

Current wording

•Annualized Recurring Revenue (ARR) was $120 million at quarter end, an increase of 11%.

Previous 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.

Current wording

IoT Products & Services revenue decreased $4.2 million for the three months ended December 31, 2024, as compared to the same period in the prior fiscal year. The decrease consisted of a $4.7 million decline in one-time sales, with no material impact from pricing. This was driven by lower demand for some products, as some customers bled down inventory stockpiled from when supply chains were stressed. This decrease was partially offset by $0.5 million of recurring revenue growth.

Previous 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.

Current wording

IoT Solutions revenue increased $2.0 million for the three months ended December 31, 2024, as compared to the same period in the prior fiscal year. The increase consisted of a $2.1 million increase in recurring revenue, , driven by growth in both SmartSense and Ventus, partially offset by a $0.1 million decrease in one-time sales.

Previous 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.

Current wording

ARR was $120 million as of December 31, 2024, compared to $108 million as of December 31, 2023. IoT Products & Services ARR was $27 million as of December 31, 2024, compared to $23 million as of December 31, 2023. This increase was due to growth in the subscription base across extended warranty offerings and remote management platforms. IoT Solutions ARR was $93 million as of December 31, 2024, compared to $85 million as of December 31, 2023, driven by growth in both SmartSense and Ventus.

Previous wording

IoT Products & Services gross profit margin increased 30 basis points for the three months ended June 30, 2024 as compared to the same period in the prior fiscal year. This increase was driven by a reduction in inventory adjustments and reduced inflationary pressures.

Current wording

IoT Products & Services gross profit margin increased 510 basis points for the three months ended December 31, 2024 as compared to the same period in the prior fiscal year. This increase was driven by a favorable margin mix among product sales partially offset by an increase in inventory related adjustments.

Previous 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.

Current wording

The IoT Solutions gross profit margin increased 60 basis points for the three months ended December 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.

Previous 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.

Current wording

The $2.1 million increase in operating expenses for the three months ended December 31, 2024, as compared to the same period in the prior fiscal year was due to a $2.9 million increase in labor expenses and a $0.8 million decrease in non-labor expenses.

Previous 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).

Current wording

Other expense, net, decreased $13.1 million for the three months ended December 31, 2024, as compared to the same period in the prior fiscal year. This decrease was driven by a write-off of debt issuance costs in 2024 and a reduction in interest expense due to a decrease in average debt outstanding and our effective interest rate (see Note 5 to the condensed consolidated financial statements for additional information).

Previous wording

ARR represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either of these items. Digi management uses ARR to manage and assess the growth of our subscription revenue business. We believe ARR is an indicator of the scale of our subscription business.

Current wording

Annualized Recurring Revenue (ARR) represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either of these items. Digi management uses ARR to manage and assess the growth of our subscription revenue business. We believe ARR is an indicator of the scale of our subscription business.

Previous wording

Reconciliation of Net Income to Adjusted EBITDA

Current wording

Reconciliation of Net Income (Loss) to Adjusted EBITDA

Previous wording

Reconciliation of Net Income and Net Income per Diluted Share to

Current wording

Reconciliation of Net Income (Loss) and Net Income (Loss) per Diluted Share to

Previous 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.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

Cash flows from operating activities increased $11.0 million as a result of:

Previous 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,

Current wording

•a $7.0 million decrease in net operating assets for the first quarter of fiscal 2025 compared to a $0.4 million decrease in the first quarter of fiscal 2024,

Previous wording

•and a $3.0 million increase in deferred income tax benefit for the first nine months of fiscal 2024 compared to a $6.5 million increase in the first nine months of fiscal 2023.

Current wording

•and a $0.5 million decrease in deferred income tax benefit for the first quarter of fiscal 2025 compared to a $0.3 million decrease in the first quarter of fiscal 2024.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

Cash flows used in investing activities decreased $0.3 million as a result of:

Previous wording

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

Current wording

•a $0.3 million decrease in purchases of property, equipment, improvements and certain other intangible assets.

Previous wording

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

Current wording

Cash flows used in financing activities increased $10.2 million as a result of:

Previous wording

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

Current wording

•net proceeds of $214.1 million from the issuance of a new credit facility in the first quarter of fiscal 2024 that did not repeat in 2025,

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

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 $2.3 million as of June 30, 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.

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 $0.1 million as of December 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.