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Digi International Reports First Fiscal Quarter 2013 Results



  Digi International Reports First Fiscal Quarter 2013 Results

Business Wire

MINNEAPOLIS -- January 24, 2013

Digi International® Inc. (NASDAQ: DGII, www.digi.com) reported revenue of
$47.0 million for the first fiscal quarter of 2013, compared with $46.7
million for the first fiscal quarter of 2012. Net income for the first fiscal
quarter of 2013 was $1.2 million, or $0.05 per diluted share, compared to $0.7
million or $0.03 per diluted share in the prior year comparable quarter. First
fiscal quarter 2013 results include the operations of Etherios, Inc. beginning
November 1, 2012. Etherios contributed $1.4 million in revenue for the two
months since the date of acquisition.

"I am satisfied with meeting our guidance expectations for the quarter and, in
particular, I am pleased with the revenue contribution from Etherios," said
Joe Dunsmore, President and Chief Executive Officer. "We believe that this
acquisition adds significantly to our end-to-end value proposition in the M2M
networking solutions space."

Business Results for the Three Months Ended December 31, 2012

Revenue from growth products in the first fiscal quarter of 2013, including
$1.4 million of revenue from Etherios' consulting services, was $25.8 million,
or 55.0% of net sales, compared to $23.8 million, or 51.0% of net sales, in
the first fiscal quarter of 2012, an increase of $2.0 million, or 8.6 %.
Revenue from mature products was $21.2 million, or 45.0% of net sales, in the
first fiscal quarter of 2013 compared to $22.9 million, or 49.0% of net sales,
in the first fiscal quarter of 2012, a decrease of $1.7 million, or 7.1%.
Digi's growth products portfolio includes all wireless products, as well as
the ARM-based embedded module product line, which leverages the iDigi platform
with both wireline and wireless connectivity.

Revenue in North America was $27.0 million in the first fiscal quarter of
2013, compared to $27.8 million in the first fiscal quarter of 2012, a
decrease of $0.8 million, or 2.7%. Revenue in EMEA (Europe, Middle East and
Africa) was $12.0 million in the first fiscal quarter of 2013 compared to
$11.6 million in the comparable quarter a year ago, an increase of $0.4
million, or 3.5%. Revenue in the Asia Pacific region was $6.5 million in the
first fiscal quarter of 2013 compared to $5.6 million in the first fiscal
quarter of 2012, an increase of $0.9 million, or 15.4%. Latin American revenue
was $1.5 million in the first fiscal quarter of 2013 compared to $1.7 million
in the comparable quarter a year ago, a decrease of $0.2 million, or 10.8%.

During the first quarter of fiscal 2012, the flooding in Thailand impacted the
operations of Digi's contract manufacturer near Bangkok, resulting in lower
revenue for Digi of approximately $3.0 million.

Gross profit was $24.5 million in the first fiscal quarter of 2013 compared to
$24.4 million in the same period of the prior year, an increase of $0.1
million. The gross margin was 52.1% in the first fiscal quarter of 2013
compared to 52.4% in the first fiscal quarter of 2012. The gross margin was
lower in the first fiscal quarter of 2013 than in the comparable period a year
ago primarily due to the inclusion of gross margins from Etherios' consulting
services which are generally lower than Digi products margins, and
manufacturing expense increases as a percent of net sales, offset partially by
favorable product mix and reduced amortization of purchased and core
technology. The gross margin in the first fiscal quarter of 2012 reflected an
impact of less than one percentage point as a result of the Thailand flooding.

Total operating expenses in the first fiscal quarter of 2013 were $22.8
million, or 48.6% of revenue, compared to $23.6 million, or 50.6% of revenue,
in the first fiscal quarter of 2012. The decrease in operating expenses in the
first fiscal quarter of 2013 compared to the same quarter of the prior year
primarily is due to cost containment measures that were put in place to
achieve targeted expense levels. Total operating expenses for the first fiscal
quarter of 2012 included a charge of $0.2 million related to the restructuring
of the Breisach, Germany manufacturing operations, which resulted in a
workforce reduction of 25 positions.

Net income was $1.2 million in the first fiscal quarter of 2013, or $0.05 per
diluted share, compared to $0.7 million, or $0.03 per diluted share, in the
first fiscal quarter of 2012. Etherios generated a net loss that impacted
earnings per diluted share by less than one-half of a cent for the first
fiscal quarter of 2013. Net income in the first fiscal quarter of 2013
included a tax benefit of $0.1 million, or $0.01 per diluted share, resulting
from the reversal of tax reserves for the expiration of the statutes of
limitation for various U.S. and foreign jurisdictions. Net income in the first
fiscal quarter of 2012 included a restructuring charge of $0.2 million, net of
taxes, or $0.01 per diluted share, offset by a tax benefit of $0.1 million, or
$0.01 per diluted share, resulting from the reversal of tax reserves for
closure of various jurisdictions' tax matters, and a gain on sale of an
investment of $0.1 million, net of taxes, with no earnings per diluted share
impact. Digi previously estimated that the flooding in Thailand had an
approximately $0.05 impact on earnings per diluted share in the first fiscal
quarter of 2012.

Earnings before interest, taxes, depreciation and amortization in the first
fiscal quarter of 2013 were $3.7 million, or 7.9% of revenue, compared to $3.0
million, or 6.4% of revenue in the first fiscal quarter of 2012.

Digi's cash and cash equivalents and marketable securities balance, including
long-term marketable securities, was $104.8 million at December 31, 2012, a
decrease of $15.8 million over the comparable balance at September 30, 2012.
Digi purchased Etherios, Inc. for $20.5 million as of October 31, 2012, of
which $12.9 million was paid in cash, net of cash acquired. The purchase price
allocation is preliminary and subject to change before finalization later in
this fiscal year. Digi also repurchased 458,007 shares of its common stock for
$4.3 million, of which 10,400 shares at $0.1 million were not settled at
December 31, 2012. Please refer to the Condensed Consolidated Statements of
Cash Flows that are included in this earnings release for additional cash flow
details. At December 31, 2012, Digi's current ratio was 8.3 to 1 compared to
9.5 to 1 at September 30, 2012.

First Fiscal Quarter 2013 Business Highlights:

iDigi Device Cloud and M2M Expertise

  * Digi entered the saleforce.com ecosystem with the acquisition of
    salesforce.com Platinum Partner Etherios. The Etherios Social Machine® is
    a new cloud-based method for integrating machines into core business
    processes via the Salesforce Service Cloud. Combining the iDigi Device
    Cloud with The Social Machine will enable virtually any machine, anywhere
    in the world, to connect rapidly and easily to the Service Cloud.
  * Validating the iDigi Device Cloud's market leadership position, the
    solution was named the “Best Overall Platform” at the 2012 M2M Evolution
    Conference in October. Digi was honored among nine participants of the
    “Battle of the Platforms Contest” for its ability to enable M2M solutions
    in an easy, scalable, reliable and secure manner.
  * Enhancing its M2M market leadership position in Europe, Digi collaborated
    with Deutsche Telekom to enable easy access and control of remote devices
    used in M2M applications throughout the continent. Digi is the first
    wireless gateway and router manufacturer to integrate Deutsche Telekom's
    industrial-grade SIM chips into its products. Digi also integrated
    Deutsche Telekom's SIM management functionalities into the iDigi Device
    Cloud.

Key Wireless Product Announcements

  * Digi shows further commitment to its Freescale relationship with the
    introduction of the ConnectCard for i.MX28 module, a compact wireless
    system-on-module for developing connected portable devices based on
    Freescale technology.
  * Digi shows innovation with the new XBee PRO 900HP wireless module, a
    wireless module that offers three times the range of comparably priced
    solutions.

Reconciliation Tables:

                        
Reconciliation of Net Income and Net Income per Diluted Share
to Non-GAAP Net Income and Net Income per Diluted Share
                          
                         Three months ended December 31,
(In thousands,
except per share         2012                           2011
amounts)
Net income and net
income per common        $ 1,230         $ 0.05         $ 724         $ 0.03
share, diluted
Restructuring
reserve, net of          —               —              153           0.01
taxes
Gain on sale of
investment, net of       —               —              (88   )       0.00
taxes
Discrete tax
benefits for
reversal of tax
reserves for
closure of various
jurisdictions’ tax
matters and for          (144    )       (0.01  )       (123  )       (0.01  )
extended research
and development
tax credit
recorded in the
first quarter of
fiscal 2011
Non-GAAP net
income and net           $ 1,086         $ 0.04         $ 666         $ 0.03  
income per diluted
share
                                                                       
Diluted weighted
average common                           26,434                       26,143  
shares
                                                                              

                                                                     
Reconciliation of Net Income to Earnings Before Interest, Taxes, Depreciation
and Amortization
(In thousands of dollars)
                                                                       
                    For the                          For the
                    three                            three
                    months                           months
                    ended                            ended
                    December          % of net       December         % of net
                    31,                              31,
                    2012              sales          2011             sales
Net sales           $  46,991         100.0 %        $ 46,662         100.0 %
Net income          1,230             2.6   %        724              1.6   %
Interest            (52       )       (0.1  )%       (72      )       (0.2  )%
income, net
Income tax          618               1.3   %        311              0.7   %
provision
Depreciation
and                 1,919             4.1   %        2,029            4.3   %
amortization
Earnings
before
interest,
taxes,              $  3,715          7.9   %        $ 2,992          6.4   %
depreciation
and
amortization
                                                                             

Guidance

For the second fiscal quarter of 2013, Digi projects revenue in a range of $47
million to $49 million with a most likely revenue of approximately $48
million. Digi projects net income per diluted share to be in a range of $0.06
to $0.08 for the second fiscal quarter of 2013.

Digi had previously projected revenue for the full fiscal year 2013 in a range
of $198 million to $220 million and net income per diluted share in a range of
$0.28 to $0.48. In light of the first fiscal quarter 2013 results and guidance
for the second fiscal quarter 2013, Digi expects the most likely revenue and
net income per diluted share for the full fiscal year 2013 to be in the bottom
half of these previously announced ranges.

The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013,
extended the research and development tax credit for two years retroactively
from January 1, 2012 through December 31, 2013. Digi plans to record the
benefit for research credits earned for the last three quarters of fiscal 2012
as a discrete tax benefit in the second quarter of fiscal 2013. The discrete
tax benefit is expected to be approximately $0.4 million, or $0.01 per diluted
share, which has been included in our guidance. Beginning with the second
fiscal quarter of 2013, our effective tax rate will include a tax benefit for
the projected credit for the full year fiscal 2013.

First Fiscal Quarter 2013 Conference Call Details

Digi invites all those interested in hearing management's discussion of its
quarter, on Thursday, January 24, 2013 after market close at 5:00 p.m. EST
(4:00 p.m. CST), to join the call by dialing (800) 798-2801 and entering
passcode 26573925. International participants may access the call by dialing
(617) 614-6205 and entering passcode 26573925. A replay will be available two
hours after the completion of the call, and for one week following the call,
by dialing (888) 286-8010 for domestic participants or (617) 801-6888 for
international participants and entering access code 62406575 when prompted.
Participants may also access a live webcast of the conference call through the
investor relations section of Digi's website at www.digi.com. The webcast will
remain on our website for one week after the live session is completed.

A copy of this earnings release can be accessed through the financial releases
page of the investor relations section of Digi's website at www.digi.com.

About Digi International

Digi International is the M2M solutions expert, combining products and
services as end-to-end solutions to drive business efficiencies. Digi provides
the industry's broadest range of wireless products, a cloud computing platform
tailored for devices and development services to help customers get to market
fast with wireless devices and applications. Digi's entire solution set is
tailored to allow any device to communicate with any application, anywhere in
the world. For more information, visit Digi's website at www.digi.com, or call
877-912-3444 (U.S.), or 952-912-3444 (International).

Forward-Looking Statements

This press release 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,"
"believe," "estimate," "may," "will," "expect," "plan," "project," "should,"
or "continue" 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 the company operates, projections of future
performance, perceived marketplace opportunities and statements regarding our
mission and vision. Such statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions, including risks
related to 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, delays in product development efforts,
uncertainty in user acceptance of our products, the ongoing shift of our sales
efforts to focus more on the delivery of broader based solutions which can be
a more complex sales process, has not been a historical sales focus of our
company and can involve longer sales cycles than the sale of our legacy
hardware 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 defend or settle satisfactorily any litigation,
uncertainty in global economic conditions and economic conditions within
particular regions of the world which could negatively affect product demand
and the financial solvency of customers and suppliers, the impact of natural
disasters and other events beyond our control that could negatively impact our
supply chain and customers, the ability to achieve the anticipated benefits
and synergies associated with acquisitions such as our recently announced
purchase of Etherios, Inc., and changes in our level of revenue or
profitability which can fluctuate for many reasons beyond our control. 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, our annual report on Form 10-K for the year
ended September 30, 2012 and subsequent quarterly reports on Form 10-Q and
other filings, could cause the company's future 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.

Presentation of Non-GAAP Financial Measures

This release includes historical non-GAAP net income and net income per
diluted share data, and earnings before interest, taxes, depreciation and
amortization (EBITDA).

We understand that there are material limitations on the use of non-GAAP
measures. Non-GAAP measures are not substitutes for GAAP measures, such as net
income, for the purpose of analyzing financial performance. The disclosure of
these measures does not reflect all charges and gains that were actually
recognized by the company. These non-GAAP measures are not in accordance with,
or an alternative for measures prepared in accordance with, generally accepted
accounting principles and may be different from non-GAAP measures used by
other companies. In addition, these non-GAAP measures are not based on any
comprehensive set of accounting rules or principles. We believe that non-GAAP
measures have limitations in that they do not reflect all of the amounts
associated with our results of operations as determined in accordance with
GAAP and that these measures should only be used to evaluate our results of
operations in conjunction with the corresponding GAAP measures. Additionally,
we understand that EBITDA does not reflect our cash expenditures, the cash
requirements for the replacement of depreciated and amortized assets, or
changes in or cash requirements for our working capital needs.

We believe that providing historical and adjusted net income and net income
per diluted share exclusive of restructuring expenses, gain on sale of
investments, and reversals of tax reserves and discrete tax benefits permits
investors to compare results with prior periods that did not include these
items. Management uses the aforementioned non-GAAP measures to monitor and
evaluate ongoing operating results and trends and to gain an understanding of
our comparative operating performance. In addition, certain of our
stockholders have expressed an interest in seeing financial performance
measures exclusive of the impact of matters such as the impact of decisions
relating to taxes and restructuring, which while important, are not central to
the core operations of our business. We believe that the presentation of
EBITDA as a percentage of net sales is useful because it provides a reliable
and consistent approach to measuring our performance from year to year and in
assessing our performance against that of other companies. We believe this
information helps compare operating results and corporate performance
exclusive of the impact of our capital structure and the method by which
assets were acquired. EBITDA is also used as an internal metric for executive
compensation, as well as incentive compensation for the rest of the employee
base, and it is monitored quarterly for these purposes.

                                     
Digi International Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
                                       
                                      Three months ended December 31,
                                      2012                   2011
Net sales                             $  46,991              $ 46,662
Cost of sales                         22,512                 22,232
Gross profit                          24,479                 24,430
Operating expenses:
Sales and marketing                   10,274                 10,099
Research and development              7,417                  8,232
General and administrative            5,116                  5,047
Restructuring                         —                      236
Total operating expenses              22,807                 23,614
Operating income                      1,672                  816
Other income (expense), net:
Interest income                       52                     72
Other income, net                     124                    147
Total other income, net               176                    219
Income before income taxes            1,848                  1,035
Income tax provision                  618                    311
Net income                            $  1,230               $ 724
Net income per common share:
Basic                                 $  0.05                $ 0.03
Diluted                               $  0.05                $ 0.03
Weighted average common shares:
Basic                                 26,188                 25,639
Diluted                               26,434                 26,143
                                                              

                                              
Digi International Inc.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
                                                
                                               Three months ended December 31,
                                               2012                 2011
Net income                                     $  1,230             $ 724     
Other comprehensive income (loss), net
of tax:
Foreign currency translation adjustment        (289      )          (1,783   )
Net unrealized gain on investments, net
of related tax effect of ($1) and ($9),        1                    14
respectively
Reclassification of realized loss
included in net income, net of related         —                    7         
tax effect of ($0) and ($5),
respectively
Other comprehensive loss, net of tax           (288      )          (1,762   )
Comprehensive income (loss)                    $  942               $ (1,038 )
                                                                              

                                                                
Digi International Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
                                                                  
                                              December 31,       September 30,
                                              2012               2012
ASSETS
Current assets:
Cash and cash equivalents                     $  52,010          $   60,246
Marketable securities                         49,512             58,372
Accounts receivable, net                      24,704             24,634
Inventories                                   25,360             24,435
Deferred tax assets                           3,449              3,389
Other                                         3,562              2,493
Total current assets                          158,597            173,569
Marketable securities, long-term              3,278              2,016
Property, equipment and improvements,         15,534             15,157
net
Identifiable intangible assets, net           13,021             10,629
Goodwill                                      103,391            86,209
Deferred tax assets                           4,158              5,010
Other                                         498                494
Total assets                                  $  298,477         $   293,084
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable                              $  8,469           $   6,040
Income taxes payable                          —                  1,269
Accrued compensation                          5,780              5,744
Accrued warranty                              935                1,021
Accrued professional fees                     986                695
Other                                         2,826              3,423
Total current liabilities                     18,996             18,192
Income taxes payable                          3,128              3,294
Deferred tax liabilities                      576                630
Other noncurrent liabilities                  107                111
Total liabilities                             22,807             22,227
                                                                  
Total stockholders’ equity                    275,670            270,857
Total liabilities and stockholders’           $  298,477         $   293,084
equity
                                                                      

                                                  
Digi International Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
                                                    
                                                   Three months ended
                                                   December 31,
                                                   2012             2011
Operating activities:
Net income                                         $ 1,230          $ 724
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property, equipment and            848              784
improvements
Amortization of identifiable intangible            1,071            1,245
assets
Stock-based compensation                           955              931
Excess tax benefits from stock-based               (28      )       (13      )
compensation
Deferred income tax benefit                        (542     )       (583     )
Bad debt/product return provision                  221              323
Inventory obsolescence                             250              476
Restructuring                                      —                236
Other                                              38               (274     )
Changes in operating assets and liabilities        (1,755   )       (3,607   )
(net of acquisition)
Net cash provided by operating activities          2,288            242       
Investing activities:
Purchase of marketable securities                  (9,873   )       (22,789  )
Proceeds from maturities of marketable             17,473           12,298
securities
Proceeds from sale of investment                   —                135
Acquisition of business, net of cash               (12,919  )       —
acquired
Purchase of property, equipment,
improvements and certain other intangible          (1,427   )       (1,624   )
assets
Net cash used in investing activities              (6,746   )       (11,980  )
Financing activities:
Excess tax benefits from stock-based               28               13
compensation
Proceeds from stock option plan transactions       169              150
Proceeds from employee stock purchase plan         248              314
transactions
Purchase of treasury stock                         (4,226   )       —         
Net cash (used) provided by financing              (3,781   )       477
activities
Effect of exchange rate changes on cash and        3                (855     )
cash equivalents
Net decrease in cash and cash equivalents          (8,236   )       (12,116  )
Cash and cash equivalents, beginning of            60,246           54,684    
period
Cash and cash equivalents, end of period           $ 52,010         $ 42,568  
                                                                     
Supplemental schedule of non-cash investing
activities:
Issuance of common stock for business              $ (6,804 )       $ —       
acquisition
                                                                              

Contact:

Investors:
Digi International
Steve Snyder, 952-912-3637
steve.snyder@digi.com
or
Dian Griesel Inc.
Tom Caden, 212-825-3210
tcaden@dgicomm.com
or
For more information, visit our Web site at www.digi.com, or call 877-912-3444
(U.S.) or 952-912-3444 (International).
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