Digi International Inc. (NASDAQ:DGII) Q1 2024 Earnings Call Transcript

Digi International Inc. (NASDAQ:DGII) Q1 2024 Earnings Call Transcript February 1, 2024

Digi International Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by and welcome to the Fiscal Q1 2024 Digi International Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jamie Loch, CFO. Please go ahead.

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 after the market closed yesterday. You may obtain a copy of the press release 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’ll 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 and the Risk Factors section of our most recent Form 10-K and subsequent reports on file with the SEC. Finally, certain of the 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.

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 will turn the call over to Ron.

Ron Konezny: Thank you, Jamie. Good morning, everyone. Before we jump into Q&A, a few comments. We have begun our next journey to double ARR and adjusted EBITDA to $200 million in the next five years. The first quarter in our journey resulted in ARR of 13% year-over-year, now exceeding our quarterly revenue for the first time in the company’s history. ARR demonstrates Digi’s progression from a product to a solution provider and significantly improves our visibility and profitability. ARR was the primary driver, helping Digi set a quarterly gross margin record. We’ve adopted stronger cost controls enabling strong profitability in the quarter. Our efforts to optimize our supply chain brought our inventory levels down, and helped us generate significant free cash flow.

We expect our debt refinancing will reduce the amount of cash needed to service our debt by at least $4 million this year. During our first fiscal quarter, we paid off approximately $0.50 a share in debt to reduce our gross debt to approximately $195 million. Digi’s portfolio of Industrial Internet of Things Solutions is broad and deep, enabling us to service the most demanding applications and customers around the world. We will relentlessly innovate and service our customers in an ever-changing security, regulatory, technology, and business environment helping our customers adapt and succeed. At this time, I’d like to turn the call back to the operator for our questions-and-answer session. Thank you, operator.

See also 15 High Quality Flannel Shirts for Men and 15 Countries With Highest Mortgage Rates.

Q&A Session

Operator: Thank you. [Operator Instructions] And one moment for our first question. And our first question comes from Tommy Moll from Stephens, Inc. Your line is now open.

Tommy Moll: Good morning and thank you for taking my questions.

Ron Konezny: Good morning, Tommy.

Tommy Moll: I wanted to start on the ARR trends for solutions, so you’re up a little bit quarter-over-quarter, up year-over-year, but in the low to mid singles range on a percentage basis, which is below the long-term trend and aspiration. So I wonder if you could just unpack some of the dynamics there and do you have any visibility into seeing some of the higher growth rates returning anytime soon. Thanks.

Ron Konezny: Yeah. Thanks, Tommy. Good question. We do think solutions has a bright future. We, in the recent quarters, been dealing with delayed decision-making that we think are going to be improving here. In addition to, I’d say some rightsizing especially in the financial services sectors with ATM networks, but we think the combination of Ventus and SmartSense really over the long-term are going to be producing that strong double-digit growth.

Tommy Moll: Thank you, Ron. As a follow-up, I wanted to turn to capital structure. Looks like the cash flow management in Q — in the quarter you just completed was pretty strong, it allowed you to pay down some debt, and then there was also the refinancing. So it’s really a two-part question, as we go forward, how do you think about the level of debt outstanding as we progress through the year? How aggressively do you want to continue to pay that down? And then just a level set everyone on your run rate interest expense now. Maybe your best guess on the second fiscal quarter, just give us something to work with given the changes that have gone on there. Thank you.

Jamie Loch: Yeah, Tommy, I think it’s — the restructuring of the debt was a great deal for us, it lowers our interest rate, it puts it in a more flexible structure that we can be more aggressive on the pay-downs and not leave ourselves overly exposed from a capital perspective. So, I would anticipate similar to FQ1 continued aggressiveness and paying down the debt. It’s our primary objective with our working capital allocation and so, we will continue that on for the foreseeable future. In terms of interest expense, I would round about just do the math and say that we could reasonably expect about a $4 million interest bill here at FQ2 based on debt levels and where the rate is at, all part of why we would aggressively pay that down to continue to work that down sequentially as we move through the year.

Tommy Moll: Thank you. Jamie, I’ll turn it back.

Jamie Loch: Thanks, Tommy.

Operator: Thank you. And one moment for our next question. And our next question comes from Scott Searle from ROTH MKM. Your line is now open.

Scott Searle: Hey, good morning. Thanks for taking the questions. Hey, Ron. I’m wondering as we look sequentially into the March quarter, it sounds like there’s some stabilization in some of the channels and end markets. So, I was wondering if you could kind of walk through where you’re seeing demand strength, where there is still some pockets of inventory how you’re feeling overall about that and also wondering if you’re seeing an impact as it relates to some of the China Quectel/Fibocom issues, are you seeing some benefits related to demand on that front?

Ron Konezny: Hey, good morning, Scott. Thanks for the question. One of the things about Digi that I think is a unique attribute is that we’re a very broad company. We service a number of companies across different industrial verticals, across different geographies, and that portfolio really holds up well in good times and bad, and so there are certain sectors that are softer, residential solar for example is a soft area, but commercial solar, solar farms is very strong. Medical devices remains really consistent strong, mass transit is coming back after being really shattered during COVID. So, we think that portfolio really holds up well for Digi and we’ve oftentimes stated, we don’t necessarily run as fast as the cheetahs, but we’re much slower than the turtles.

Now, on your second question, we haven’t seen a dramatic impact on, say, Quectel and Fibocom and the concern around Chinese-sourced cellular radios. There’s certainly are pockets of them and obviously, those — the competitors to those companies are advocating for their case to be made. I do think it’s good for us to have choice, both from western suppliers and some suppliers out east, but, it hasn’t been a dramatic impact on the business as of yet.

Scott Searle: Great. And as a follow-up, one of my multipart questions, but in the quarter IoT Solutions had a tremendous step-up in terms of gross margins. I’m wondering if you could dive into that a little bit, is that sustainable? It sounds like a lot more improved profitability on the SmartSense front, I’m assuming there’s less hardware in there. As part of that, Ventus was down in the quarter. I’m wondering what you could see from a visibility standpoint, the recovery, kind of what are the headwinds, specifically on that front. And then on the other side of the table with products, console server I think you had called out last quarter as being a little bit soft, some inventory in the channel. I’m wondering if that is starting to rectify itself when we start to see a recovery of growth there and on the cellular products front. Thanks.