Digi International Inc. (NASDAQ:DGII) Q1 2023 Earnings Call Transcript

Digi International Inc. (NASDAQ:DGII) Q1 2023 Earnings Call Transcript February 2, 2023

Operator: Good day, ladies and gentlemen and thank you for standing by. Welcome to the First Fiscal Quarter 2023 Digi International Incorporated Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Jamie Loch. Sir, you may begin.

Jamie Loch: Thank you. Good day, everyone. It’s great to talk to you again and thanks for joining us today to discuss the earnings results of Digi International. Joining me on today’s call is Ron Konezny, our President and CEO. We issued our earnings release before the market opened this morning and we’ve posted a shareholder letter this morning as well. You may obtain a copy of the press release and shareholder letter through the Financial Releases section of our Investor Relations website at digi.com. This morning, Ron will provide a comment on our performance and then we will take your questions. Some of the statements that we make during this call are considered forward-looking and 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. While 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 statements section in our earnings release today and the Risk Factors section of our most recent Form 10-K and subsequent reports on file with the SEC. Finally, certain financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures are included in the earnings release.

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The earnings release is also furnished as an exhibit to Form 8-K that can be accessed through the SEC filings section of our Investor Relations website. Now, I’ll turn the call over to Ron.

Ron Konezny: Thank you, Jamie. Good morning, everyone. Before we jump into Q&A, just a few highlights. I sound like a broken record, but we set new quarterly records for revenue, annualized recurring revenues, or ARR and adjusted EBITDA. We sustained first, the first of our three 100 goals with another quarter of over $100 million in revenues. We climb closer to our remaining goals of $100 million in ARR and $100 million of annualized adjusted EBITDA. We are excited to play a leading role in our customers’ digital transformation, which has become increasingly important in unpredictable macro environments. We continue to see elevated demand as evidenced by a strong backlog, while a gradually improving supply chain has helped us exceed our expectations.

We expect those dynamics to continue throughout the balance of our fiscal year. Lastly, we are making tremendous progress with our processes, systems and services to enable superior customer experiences and accelerate the delivery of differentiated solutions driving increased ARR growth. At this time, I’d like to turn the call back to the operator for our questions and answers session. Thank you, operator.

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Q&A Session

Operator: Our first question or comment comes from the line of Tommy Moll from Stephens. Mr. Moll, your line is open.

Tommy Moll: Good morning. Thanks for taking my questions.

Ron Konezny: Good morning, Tommy.

Tommy Moll: So I wanted to start off, Ron, I think I saw some of the language in your letter about having stronger confidence in the €˜23 outlook. And I was curious, is that primarily related to the fact that you just beat the first quarter or if you look at the demand and supply chain dynamics, have those gotten better versus when we spoke a quarter ago? And if they have, any context would be appreciated?

Ron Konezny: Yes, Tommy very good question. We really feel like demand continues to be robust. So, our performance has been more dictated by the availability of supply. And you saw that happen in the first fiscal quarter, we had more supply that enabled us to exceed some expectations there. We do still have supply chain challenges. We are seeing less of them that we saw in a period or a year ago, but they are not €“ they are not alleviated yet. So the extent that we get additional supply we can meet and potentially exceed expectations.

Tommy Moll: That’s helpful. Thank you. And then zooming in on the next quarter outlook you have given for the second fiscal quarter. With that backdrop, you just outline which sounds fairly constructive. Can you walk us through why you would expect revenue to be down quarter-over-quarter? Is there some conservatism in there or any assumptions?

Ron Konezny: Yes, it’s really our visibility supply chain it’s not a demand issue. We have got a robust backlog. So it’s really getting access to key components that we can turn into finished goods. So we like to make sure that we’ve had expectations that are consistent with our supply chain visibility. If that improves, certainly, we would be communicating that.

Tommy Moll: And the associated compression in EBITDA margin quarter-over-quarter, is that simply a function of lower volumes on that supply chain constraint or is there any other noise you would want to call out?

Ron Konezny: No, we continue to make investments to the business. And we don’t want to slow down those investments, especially those associated with improving the customer experience. And again, to the extent that we can get access to components, we do have some I think some very considerate assumptions we have put in there for costs. There are still some components that are coming at increased costs. And although we work to mark those down, we don’t want to make sure we get too far ahead of ourselves.

Tommy Moll: I appreciate the context and I’ll get back in line. Thank you.

Ron Konezny: Thanks, Tommy.

Operator: Thank you. Our next question or comment comes from the line of Harsh Kumar from Piper Sandler. Mr. Kumar, your line is now open.

Harsh Kumar: Yes. Hey, guys. Congratulations on yet another solid quarter. Ron, let me start off with something simple. Are you guys still leaving revenues on the table and could you characterize for us how much that might be?

Ron Konezny: Yes, we absolutely are. It’s still in the double-digits, millions of dollars that we are not able to ship in any given period. We do think as the supply chain eases, there could be some normalization that occurs. But right now, we are still not able to meet all of our customer demand.

Harsh Kumar: Okay, great. And then I had a question on your cold chain business. So everybody is out eating out people are out milling around and that should be a tremendous tailwind for your cold chain business. I was curious if you could frame for us, how you see the growth in that business. And I know there was an angle on international expansion, particularly maybe in the European side, curious if you can talk to that?

Ron Konezny: Yes, we were really happy with this quarter, Harsh and that we have got balanced contributions from really all of our offerings across all of our geo. So it was a rewarding quarter and that included, of core SmartSense. And you’re absolutely right, Harsh, food has been a big part of that business’ success, not just the restaurant side, but grocery continues to be a strong vertical for us as well. On the international expansion, we want to be very considerate. We have plenty of opportunity domestically. We still look towards international expansion. Europe would be the most likely scenario, especially as we land multinational customers that want us to have a broader presence. But we are being very considerate and calculated about geographic expansion.

Harsh Kumar: And then I had a very similar question, Ron, on integration of Ventus. I was curious if it’s all done at this point in time or how far along are you? And then do you think there was an international angle to that as well? And then if you think with maybe Ventus under control and sort of taken care of from an integration angle, if it’s time for you to start thinking about adding something else to your portfolio or maybe other uses of cash at this time?