Digi International Reports Second Fiscal Quarter 2019 Results

Date : 05/02/2019 @ 9:05PM
Source : Business Wire
Stock : Digi International Inc. (DGII)
Quote : 13.01  0.14 (1.09%) @ 11:00PM

Digi International Reports Second Fiscal Quarter 2019 Results

Digi International Inc. (NASDAQ:DGII)
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Transformation Initiatives Drive Record Quarterly Revenues

Digi International® Inc. (NASDAQ: DGII), a leading global provider of mission critical Internet of Things ("IoT") products, services, and solutions, reported revenue of $65.8 million for the second fiscal quarter of 2019 compared to $54.5 million in the second fiscal quarter of 2018 and compared to our guidance range of $59.0 million to $63.0 million. This reflects a 20.6% growth rate compared to the prior year quarter.

Net income for the second fiscal quarter of 2019 was $1.3 million, or $0.05 per diluted share, compared to a net loss of $0.1 million, or $0.00 loss per diluted share in the second fiscal quarter of 2018 and compared to our guidance range of $0.01 per diluted share to $0.05 per diluted share.

Adjusted EBITDA in the second fiscal quarter of 2019 was $6.5 million, or 10.0% of total revenue, compared to our guidance range of $4.5 million to $6.5 million. In the second fiscal quarter of 2018, our adjusted EBITDA was $5.2 million, or 9.6% of total revenue.

Reconciliations of GAAP and non-GAAP financial measures appear at the end of this release.

"Our results reflect the investments we have made to simplify our business and drive success with our customers, distribution partners, and new products" said Ron Konezny, President and Chief Executive Officer. "We remain squarely focused on building off these results to complete a record fiscal 2019."

Financial Results

GAAP Results   Three months ended March 31,   Six months ended March 31,   2018   2018 (in thousands, except per share data) 2019 (as adjusted)* 2019 (as adjusted)* Total Revenue $ 65,764 $ 54,548 $ 128,077 $ 99,503 Gross Profit $ 30,329 $ 26,834 $ 60,112 $ 48,793 Gross Margin 46.1 % 49.2 % 46.9 % 49.0 % Operating Income (Loss) ** $ 785 $ 818 $ 6,343 $ (1,181 ) Operating Income as % of Total Revenue 1.2 % 1.5 % 5.0 % (1.2 )% Net Income (Loss) ** $ 1,342 $ (126 ) $ 6,024 $ (4,613 ) Net Income (Loss) per Diluted Share $ 0.05 $ — $ 0.21 $ (0.17 )

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.** The six months ended March 31, 2019 includes a gain of $4.4 million ($3.4 million net of tax) on the sale of our corporate headquarters reported in general and administrative expense on the Condensed Consolidated Statements of Operations.

Non-GAAP Results**   Three months ended March 31,   Six months ended March 31,   2018   2018 (in thousands, except per share data) 2019 (as adjusted)* 2019 (as adjusted)* Adjusted Net Income (Loss) $ 1,140 $ 65 $ 2,300 $ (1,657 ) Adjusted Net Income (Loss) per Diluted Share $ 0.04 $ — $ 0.08 $ (0.06 )   Adjusted EBITDA 6,548 5,245 $ 12,709 $ 8,208 Adjusted EBITDA as % of Total Revenue 10.0 % 9.6 % 9.9 % 8.2 %

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.** A reconciliation of GAAP to non-GAAP financial measures appears at the end of this release.

Business Results for the Three Months Ended March 31, 2019 and 2018

Revenue Detail   Three months ended March 31,       2018 (in thousands) 2019 (as adjusted)* Change % Change Product $ 52,097 $ 47,588 $ 4,509 9.5% Services 3,942 2,237 1,705 76.2% Solutions 9,725 4,723 5,002 105.9% Total revenue $ 65,764 $ 54,548 $ 11,216 20.6%   North America, primarily United States $ 48,869 $ 39,169 $ 9,700 24.8% Europe, Middle East and Africa 10,764 9,504 1,260 13.3% Other 6,131 5,875 256 4.4% Total revenue $ 65,764 $ 54,548 $ 11,216 20.6%

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

Total revenue increased 20.6% to $65.8 million in the second fiscal quarter of 2019 from $54.5 million in the second fiscal quarter of 2018.

Product

Product revenue increased by $4.5 million, or 9.5%, in the second fiscal quarter of 2019 compared to the second fiscal quarter of 2018. We experienced growth compared to the second fiscal quarter of 2018 across most of our product categories, with the largest growth in our cellular product offerings, partially offset by a decline in our network products.

Services

Services revenue increased by $1.7 million, or 76.2%, in the second fiscal quarter of 2019 compared to the second fiscal quarter of 2018, related to increased revenues from our Digi Remote Manager® and support services.

Solutions

Solutions revenue increased by $5.0 million, or 105.9%, in the second fiscal quarter of 2019 compared to the second fiscal quarter of 2018. This increase was driven by new customer deployments, additional purchases and equipment upgrades from existing customers, and an increase in our recurring revenue base. We are serving just over 57,000 sites as of March 31, 2019, compared to nearly 42,000 sites a year ago.

Gross profit was $30.3 million, or 46.1% of revenue in the second fiscal quarter of 2019 compared to $26.8 million, or 49.2% of revenue for the second fiscal quarter of 2018. This $3.5 million increase was driven primarily by increased sales from our IoT Solutions segment. Our gross margin decline was primarily a result of product and customer mix and costs associated with our transition to third-party manufacturing.

Operating income was $0.8 million, or 1.2% of revenue for the second fiscal quarter of 2019 and $0.8 million, or 1.5% of revenue, for the second fiscal quarter of 2018. Our operating income was driven by our $3.5 million gross profit increase, offset by an increase in operating expenses of $3.5 million. The increase in operating expenses primarily included $1.9 million of additional employee-related costs, $0.8 million in acquisition-related expenses and $0.6 million of adjustments to contingent consideration.

Net income was $1.3 million in the second fiscal quarter of 2019, or $0.05 per diluted share, compared to a net loss of $0.1 million, or $0.00 loss per diluted share, in the second fiscal quarter of 2018.

Adjusted EBITDA in the second fiscal quarter of 2019 was $6.5 million, or 10.0% of total revenue, compared to $5.2 million, or 9.6% of total revenue, in the second fiscal quarter of 2018.

Business Results for the Six Months Ended March 31, 2019 and 2018

Revenue Detail   Six months ended March 31,       2018 (in thousands) 2019 (as adjusted)* Change % Change Product $ 102,909 $ 86,042 $ 16,867 19.6% Services 6,424 4,663 1,761 37.8% Solutions 18,744 8,798 9,946 113.0% Total revenue $ 128,077 $ 99,503 $ 28,574 28.7%   North America, primarily United States $ 95,204 $ 68,506 $ 26,698 39.0% Europe, Middle East and Africa 20,868 19,660 1,208 6.1% Other 12,005 11,337 668 5.9% Total revenue $ 128,077 $ 99,503 $ 28,574 28.7%

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

Total revenue increased 28.7% to $128.1 million in the first six months of fiscal 2019 from $99.5 million in the first six months of fiscal 2018.

Product

Product revenue increased by $16.9 million, or 19.6%, in the first six months of fiscal 2019 compared to the first six months of fiscal 2018. This increase included $5.4 million of incremental revenue from Accelerated Concepts, Inc. ("Accelerated"), a provider of cellular (LTE) networking equipment, since the acquisition in January 2018. Additionally, we experienced growth compared to the first six months of fiscal 2018 within our industrial cellular products, RF products and our embedded modules, partially offset by a decline in sales of terminal servers.

Services

Services revenue increased by $1.8 million, or 37.8%, in the first six months of fiscal 2019 compared to the first six months of fiscal 2018, related to increased revenues from our Digi Remote Manager and support services.

Solutions

Solutions revenue increased by $9.9 million, or 113.0%, in the first six months of fiscal 2019 compared to the first six months of fiscal 2018. This increase was driven by new customer deployments, additional purchases and equipment upgrades from existing customers, and an increase in our recurring revenue base. We are serving just over 57,000 sites as of March 31, 2019, compared to nearly 42,000 sites a year ago.

Gross profit was $60.1 million, or 46.9% of revenue in the first six months of fiscal 2019 compared to $48.8 million, or 49.0% of revenue for the first six months of fiscal 2018. This $11.3 million increase was driven primarily by our acquisition of Accelerated, increased sales from our IoT Solutions segment, and increased sales from most of our IoT Products. Our gross margin decline was primarily a result of product and customer mix, increased costs associated with our transition to a third-party manufacturer and increased amortization expense associated with the Accelerated acquisition.

Operating income for the first six months of fiscal 2019 was $6.3 million, or 5.0% of revenue, as compared to an operating loss of $1.2 million, or 1.2% of revenue, for the first six months of fiscal 2018, an increase of $7.5 million. This increase was a result of increased gross profit of $11.3 million described above, offset by an increase in operating expenses of $3.8 million. The increase in operating expenses included $2.8 million of incremental costs, primarily employee-related, associated with Accelerated, $3.7 million of additional employee-related costs and $1.2 million of increased contingent consideration expense. These were mostly offset by a $4.4 million gain from the sale of our corporate headquarters in October 2018 and lower acquisition-related expenses of $0.8 million.

Net income was $6.0 million in the first six months of fiscal 2019, or $0.21 per diluted share, compared to a net loss of $4.6 million, or $0.17 loss per diluted share, in the first six months of fiscal 2018.

Adjusted EBITDA in the first six months of fiscal 2019 was $12.7 million, or 9.9% of total revenue, compared to $8.2 million, or 8.2% of total revenue, in the first six months of fiscal 2018.

Balance Sheet, Liquidity and Capital Structure

Digi continues to maintain a strong balance sheet with no debt. As of March 31, 2019, Digi had:

  • Cash and cash equivalents and marketable securities balance of $72.1 million, an increase of $9.3 million from the end of fiscal 2018. The increase includes $10.0 million of proceeds received in the first fiscal quarter of 2019 for the sale of our corporate headquarters.
  • Current contingent consideration liabilities of $8.5 million.

Customer Highlights

IoT PRODUCTS & SERVICES

  • A North American provider of personal transportation solutions selected Digi’s XBee Cellular LTE Cat 1 embedded modem and connectivity services, including Digi Remote Manager, for the primary communication path on a mobility project. The XBee modem and connectivity offering from Digi provides robust communications and enabled a rapid pace of development to production without the time risks of regulatory and carrier certifications.
  • A large manufacturer of people moving systems has selected Digi cellular routers to provide core systems communications for their IoT deployments. The Digi routers enable real-time collection of usage and wear data that help accelerate a move to a more predictive global maintenance model. Digi is also providing key IoT connectivity that enhances rider experience and system safety and was chosen for our industrial reliability and security focus in our Digi Remote Manager platform.
  • A leading provider of solar energy products has selected Digi’s XBee3 ZigBee module for solar tracking systems. The XBee3 ZigBee will enable reliable communication with gateways for remote management.

IoT SOLUTIONS

  • Two large school districts, one in Colorado and the other in Texas, selected Digi SmartSense for food safety monitoring across all of their respective campuses, approximating 480 sites in total.
  • A leading grocery chain in the western United States selected Digi to provide task management in all 300+ of their stores.
  • A large regional hospital in Canada, is using Digi SmartSense to monitor all lab and pharmacy locations across its entire campus.

Fiscal 2019 Guidance

For the third fiscal quarter of 2019, Digi projects revenue to be in a range of $60 million to $64 million. EPS is projected to be in a range of $0.02 per diluted share to $0.06 per diluted share. Adjusted EBITDA is projected to be between $4.5 million and $6.5 million.

For the full fiscal year 2019, Digi projects revenue to be in a range of $248 million to $258 million. EPS is projected to be in a range of $0.27 per diluted share to $0.37 per diluted share. Adjusted EBITDA continues to be projected in a range of $24 million to $28 million.

Second Fiscal Quarter 2019 Conference Call Details

As announced on April 4, 2019, Digi will discuss its second fiscal quarter 2019 results on a conference call on Thursday, May 2, 2019 after market close at 5:00 p.m. ET (4:00 p.m. CT). The call will be hosted by Ron Konezny, President and Chief Executive Officer and Brian Ballenger, Acting Principal Financial Officer and Acting Principal Accounting Officer.

Digi invites all those interested in hearing management's discussion of its quarter to access a live webcast of the conference call through the investor relations section of Digi's website at www.digi.com. Participants may also join the call directly by dialing (855) 638-5675 and entering passcode 2443699. International participants may access the call by dialing (262) 912-4765 and entering passcode 2443699. A replay will be available within approximately three hours after the completion of the call, and for one week following the call, by dialing (855) 859-2056 for domestic participants or (404) 537-3406 for international participants and entering access code 2443699 when prompted. A replay of the webcast will be available for one week through Digi's website.

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.

For more news and information on us, please visit www.digi.com/aboutus/investorrelations.

About Digi International

Digi International (NASDAQ: DGII) is a leading global provider of Internet of Things ("IoT") connectivity products, services and solutions. We help our customers create next-generation connected products and deploy and manage critical communications infrastructures in demanding environments with high levels of security and reliability. Founded in 1985, we’ve helped our customers connect over 100 million things, and growing. 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," "looking forward," "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. Among others, these include 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 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, potential unintended consequences associated with restructuring or other similar business initiatives that may impact our ability to retain important employees, the ability to achieve the anticipated benefits and synergies associated with acquisitions or divestitures, 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, 2018 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 adjusted net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and amortization ("adjusted EBITDA"), each of which is a non-GAAP measure.

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 or presented by us in prior reports. 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, Adjusted 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 income and income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits and restructuring 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 related to taxes and restructuring, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and recoveries, and gains from the disposition of our former corporate headquarters is useful to investors to evaluate the Company’s core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the Condensed Consolidated Statements of Operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue 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.

For more information, visit Digi's website at www.digi.com, or call 877-912-3444 (U.S.) or 952-912-3444 (International).

Digi International Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

    Three months ended Six months ended March 31, March 31,   2018   2018 2019 (as adjusted)* 2019 (as adjusted)* Revenue: Product $ 52,097 $ 47,588 $ 102,909 $ 86,042 Services and solutions 13,667   6,960   25,168   13,461   Total revenue 65,764 54,548 128,077 99,503 Cost of sales: Cost of product 28,496 23,080 54,309 42,290 Cost of services and solutions 6,214 3,864 12,191 7,043 Amortization of intangibles 725   770   1,465   1,377   Total cost of sales 35,435   27,714   67,965   50,710   Gross profit 30,329 26,834 60,112 48,793 Operating expenses: Sales and marketing 11,534 11,175 23,191 20,935 Research and development 9,569 8,617 19,087 16,368 General and administrative 8,441 6,224 11,558 12,671 Restructuring reversal —   —   (67 ) —   Total operating expenses 29,544   26,016   53,769   49,974   Operating income (loss) 785 818 6,343 (1,181 ) Other income, net: Interest income, net 142 34 258 239 Other income (expense), net 257   (527 ) 305   (572 ) Total other income (expense), net 399   (493 ) 563   (333 ) Income (loss) before income taxes 1,184 325 6,906 (1,514 ) Income tax (benefit) expense (158 ) 451   882   3,099   Net income (loss) $ 1,342   $ (126 ) $ 6,024   $ (4,613 )   Net income (loss) per common share: Basic $ 0.05   $ —   $ 0.22   $ (0.17 ) Diluted $ 0.05   $ —   $ 0.21   $ (0.17 ) Weighted average common shares: Basic 27,866   27,084   27,687   26,914   Diluted 28,438   27,084   28,289   26,914  

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

Digi International Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

    Three months ended March 31, Six months ended March 31,   2018   2018 2019 (as adjusted)* 2019 (as adjusted)* Net income (loss) $ 1,342 $ (126 ) $ 6,024 $ (4,613 ) Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment (83 ) 1,787 (1,652 ) 2,058 Change in net unrealized gain (loss) on investments 9 (19 ) 14 (40 ) Less income tax (expense) benefit (2 ) 5 (4 ) 8 Reclassification of realized loss on investments included in net income (1) — 31 — 31 Less income tax benefit (2) —   (8 ) —   (8 ) Other comprehensive (loss) income, net of tax (76 ) 1,796   (1,642 ) 2,049   Comprehensive income (loss) $ 1,266   $ 1,670   $ 4,382   $ (2,564 ) (1)   Recorded in Other income (expense), net in our Condensed Consolidated Statements of Operations. (2) Recorded in Income tax (benefit) expense in our Condensed Consolidated Statements of Operations.  

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

Digi International Inc.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

    March 31, September 30, 2018 2019 (as adjusted)* ASSETS Current assets: Cash and cash equivalents $ 69,593 $ 58,014 Marketable securities 2,497 4,736 Accounts receivable, net 53,493 49,819 Inventories 44,035 41,644 Other current assets 5,549 2,613 Assets held for sale —   5,220   Total current assets 175,167 162,046 Property, equipment and improvements, net 13,926 8,354 Intangible assets, net 34,807 39,320 Goodwill 154,049 154,535 Deferred tax assets 5,236 6,600 Other non-current assets 350   1,291   Total assets $ 383,535   $ 372,146   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 14,628 $ 12,911 Accrued compensation 6,991 8,190 Unearned revenue 6,576 3,177 Contingent consideration on acquired businesses 8,527 5,890 Other current liabilities 4,369   5,405   Total current liabilities 41,091 35,573 Income taxes payable 759 851 Deferred tax liabilities 317 334 Contingent consideration on acquired businesses — 4,175 Other non-current liabilities 530   720   Total liabilities 42,697 41,653 Stockholders’ equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding — — Common stock, $.01 par value; 60,000,000 shares authorized; 34,471,378 and 33,812,838 shares issued 345 338 Additional paid-in capital 262,392 255,936 Retained earnings 157,985 151,961 Accumulated other comprehensive loss (25,168 ) (23,526 ) Treasury stock, at cost, 6,412,682 and 6,385,336 shares (54,716 ) (54,216 ) Total stockholders’ equity 340,838   330,493   Total liabilities and stockholders’ equity $ 383,535   $ 372,146  

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

Digi International Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

    Six months ended March 31,   2018 2019 (as adjusted)* Operating activities: Net income (loss) $ 6,024 $ (4,613 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation of property, equipment and improvements 2,217 1,546 Amortization of intangible assets 4,609 4,287 Stock-based compensation 2,707 2,378 Deferred income tax provision 1,338 2,808 Gain on sale of property, equipment and improvements (4,395 ) 5 Change in fair value of contingent consideration 810 (425 ) Provision for bad debt and product returns 568 395 Provision for inventory obsolescence 900 900 Restructuring reversal (67 ) — Other (116 ) 25 Changes in operating assets and liabilities (net of acquisitions) (8,393 ) (12,287 ) Net cash provided by (used in) operating activities 6,202   (4,981 ) Investing activities: Proceeds from maturities and sales of marketable securities 2,252 29,513 Proceeds from sale of business — 2,000 Acquisition of businesses, net of cash acquired — (56,588 ) Proceeds from sale of property and equipment 10,047 — Purchase of property, equipment, improvements and certain other intangible assets (7,346 ) (785 ) Net cash provided by (used in) investing activities 4,953   (25,860 ) Financing activities: Acquisition earn-out payments (2,348 ) — Proceeds from stock option plan transactions 3,751 3,427 Proceeds from employee stock purchase plan transactions 549 618 Purchases of common stock (1,044 ) (681 ) Net cash provided by financing activities 908 3,364 Effect of exchange rate changes on cash and cash equivalents (484 ) 1,646   Net increase (decrease) in cash and cash equivalents 11,579 (25,831 ) Cash and cash equivalents, beginning of period 58,014   78,222   Cash and cash equivalents, end of period $ 69,593   $ 52,391     Supplemental schedule of non-cash investing and financing activities: Transfer of inventory to property, equipment and improvements $ (654 ) $ (827 ) Accrual for purchase of property, equipment, improvements and certain other intangible assets $ (20 ) $ (27 ) Liability related to acquisition of business $ —   $ (2,300 )

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

                Accumulated Additional Other Total Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders’ (in thousands) Shares Par Value Shares Value Capital Earnings* Loss Equity Balances, September 30, 2017 33,008 $ 330 6,437 $ (54,533 ) $ 245,528 $ 150,363 $ (22,659 ) $ 319,029 Cumulative-effect adjustment from adoption of ASU 2016-09 52 (33 ) 19 Net loss (4,613 ) (4,613 ) Other comprehensive income 2,049 2,049 Employee stock purchase plan issuances (74 ) 631 (13 ) 618 Repurchase of common stock 68 (681 ) (681 ) Issuance of stock under stock award plans 573 6 3,421 3,427 Stock-based compensation expense         2,378       2,378   Balances, March 31, 2018 33,581   $ 336   6,431   $ (54,583 ) $ 251,366   $ 145,717   $ (20,610 ) $ 322,226     Balances, September 30, 2018 33,813 $ 338 6,385 $ (54,216 ) $ 255,936 $ 151,961 $ (23,526 ) $ 330,493 Net income 6,024 6,024 Other comprehensive loss (1,642 ) (1,642 ) Employee stock purchase plan issuances (63 ) 544 5 549 Repurchase of common stock 91 (1,044 ) (1,044 ) Issuance of stock under stock award plans 658 7 3,744 3,751 Stock-based compensation expense         2,707       2,707   Balances, March 31, 2019 34,471   $ 345   6,413   $ (54,716 ) $ 262,392   $ 157,985   $ (25,168 ) $ 340,838  

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

Non-GAAP Financial Measures

TABLE 1

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

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share

(In thousands, except per share amounts)

    Three months ended March 31, Six months ended March 31,   2018   2018 2019 (as adjusted)* 2019 (as adjusted)* Net income (loss) and net income (loss) per diluted share $ 1,342   $ 0.05 $ (126 )   $ — $ 6,024   $ 0.21 $ (4,613 )   $ (0.17 ) Restructuring reversal — — — — (67 ) — — — Gain on sale of building — — — — (4,396 ) (0.16 ) — — Tax effect from restructuring reversal and gain on sale of building — — — — 1,047 0.04 — — Discrete tax (benefits) expense (1) (202 ) (0.01 ) 191   0.01   (308 ) (0.01 ) 2,956   0.11   Adjusted net income (loss) and adjusted net income (loss) per diluted share (2) $ 1,140   $ 0.04   $ 65   $ —   $ 2,300   $ 0.08   $ (1,657 ) $ (0.06 ) Diluted weighted average common shares 28,438 27,084 28,289 26,914

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

(1)   For the three and six months ended March 31, 2019, discrete tax expense primarily includes reversals of tax reserves due to the expiration of statutes of limitation. For the three and six months ended March 31, 2018, discrete tax expense primarily includes one-time adjustments for the re-measurement of deferred tax assets and the impact of ASU 2016-09 relating to the accounting for the tax effects of stock compensation. This was partially offset by reversals of tax reserves due to the expiration of statutes of limitation. (2) Adjusted net income per diluted share may not add due to the use of rounded numbers.  

TABLE 2

Reconciliation of Net Income to Adjusted EBITDA

(In thousands)

    Three months ended March 31, Six months ended March 31,   2018   2018 2019 (as adjusted)* 2019 (as adjusted)*   % of   % of   % of   % of total total total total revenue revenue revenue revenue Total revenue $ 65,764   100.0 % $ 54,548   100.0 % $ 128,077   100.0 % $ 99,503   100.0 %   Net income $ 1,342 $ (126 ) $ 6,024 $ (4,613 ) Interest income, net (142 ) (34 ) (258 ) (239 ) Income tax (benefit) expense (158 ) 451 882 3,099 Depreciation and amortization 3,153 3,380 6,826 5,833 Stock-based compensation 1,293 1,325 2,707 2,378 Gain on sale of building — — (4,396 ) — Restructuring reversal — — (67 ) — Acquisition expense 1,060   249   991   1,750   Adjusted EBITDA $ 6,548   10.0 % $ 5,245   9.6 % $ 12,709   9.9 % $ 8,208   8.2 %

*Prior period information has been restated for the adoption of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which we adopted on October 1, 2018.

Brian G. BallengerVice President of Finance and Accounting, Acting PrincipalFinancial Officer, Acting Principal Accounting Officer andInterim TreasurerDigi International952-912-3070Email: brian.ballenger@digi.com

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