Digi International Reports Second Fiscal Quarter 2012 Results

Digi International® Inc. (NASDAQ: DGII) reported revenue of $49.0 million for the second fiscal quarter of 2012, compared with $49.7 million for the second fiscal quarter of 2011, a decrease of $0.7 million, or 1.4%.

Net income was $2.1 million, or $0.08 per diluted share, in the second fiscal quarter of 2012 compared to $2.2 million, or $0.09 per diluted share, in the year ago comparable quarter.

”We are disappointed with our most recent quarter financial results that were impacted by lower than expected revenue from our new business pipeline, particularly in the energy sector. We also experienced lower than expected revenue from specific legacy products,” said Joe Dunsmore, Digi’s Chief Executive Officer.

”Strategically, we were pleased with our progress during the quarter regarding the positioning of our iDigi platform for broad adoption. We announced key relationships with Freescale, Wind River and Intel to enable the iDigi Device Cloud in their products and applications. These relationships demonstrate our position as a leader in the ongoing transformation of the M2M marketplace that we believe is poised for solid growth in future years,” continued Dunsmore.

“As we continue to shift our business towards the delivery of end-to-end M2M solutions, we are taking steps to structure our operations to support those solutions more aggressively.”

Business Results for the Three Months Ended March 31, 2012
Revenue from embedded products in the second fiscal quarter of 2012 was $25.3 million compared to $22.4 million in the second fiscal quarter of 2011, an increase of $2.9 million, or 12.9%.
Revenue from non-embedded products was $23.7 million in the second fiscal quarter of 2012 compared to $27.3 million in the second fiscal quarter of 2011, a decrease of $3.6 million, or 13.1%.

Revenue from wireless products in the second fiscal quarter of 2012 was $21.8 million, or 44.5% of net sales, compared to $19.2 million, or 38.7% of net sales, in the second fiscal quarter of 2011, an increase of $2.6 million, or 13.6%.
Revenue from wired products was $27.2 million, or 55.5% of net sales, in the second fiscal quarter of 2012 compared to $30.5 million, or 61.3% of net sales, in the second fiscal quarter of 2011, a decrease of $3.3 million, or 10.8%.

Revenue in North America was $29.0 million in the second fiscal quarter of 2012, compared to $29.7 million in the second fiscal quarter of 2011, a decrease of $0.7 million, or 2.5%.
Revenue in EMEA (Europe, Middle East and Africa) was $12.1 million in the second fiscal quarter of 2012, compared to $12.0 million in the comparable quarter a year ago, an increase of $0.1 million, or 1.2%.
Revenue in the Asia countries was $6.2 million in the second fiscal quarter of 2012 compared to $6.8 million in the second fiscal quarter of 2011, a decrease of $0.6 million, or 8.4%.
Latin American revenue was $1.7 million in the second fiscal quarter of 2012 compared to $1.2 million in the comparable quarter a year ago, an increase of $0.5 million, or 39.1%.

Gross profit was $25.8 million in the second fiscal quarter of 2012 compared to $25.7 million in the same period of the prior year, an increase of $0.1 million, or 0.5%.
The gross margin was 52.6% in the second fiscal quarter of 2012 compared to 51.6% in the second fiscal quarter of 2011. The gross margin was higher in the second fiscal quarter of 2012 than in the comparable period a year ago primarily due to reduced amortization of purchased and core technology, as certain technologies are fully amortized, and manufacturing expense savings.

Total operating expenses in the second fiscal quarter of 2012 were $22.4 million, or 45.6% of revenue, compared to $22.0 million, or 44.2% of revenue, in the second fiscal quarter of 2011. The increase in operating expenses in the second fiscal quarter of 2012 compared to the same quarter of the prior year is primarily due to increased investment in the iDigi® device cloud platform and additional sales, marketing and business development expenses.

Digi reported operating income of $3.4 million, or 7.0% of net sales, in the second fiscal quarter of 2012 compared to $3.7 million, or 7.4% of net sales, in the second fiscal quarter of 2011.

Net income was $2.1 million in the second fiscal quarter of 2012, or $0.08 per diluted share, compared to $2.2 million, or $0.09 per diluted share, in the second fiscal quarter of 2011.

Earnings before interest, taxes, depreciation and amortization in the second fiscal quarter of 2012 were $5.5 million, or 11.1% of revenue, compared to $5.9 million, or 11.8% of revenue in the second fiscal quarter of 2011.

Business Results for the Six Months Ended March 31, 2012
For the six months ended March 31, 2012, Digi reported revenue of $95.7 million compared to revenue of $98.1 million for the six months ended March 31, 2011, a decrease of $2.4 million, or 2.4%.
Revenue from embedded products for the first six months of fiscal 2012 was $47.1 million compared to $43.5 million in the first six months of fiscal 2011, an increase of $3.6 million, or 8.3%.
Revenue from non-embedded products was $48.6 million in the first six months of fiscal 2012 compared to $54.6 million in the first six months of fiscal 2011, a decrease of $6.0 million, or 10.9%.

For the six months ended March 31, 2012, Digi reported net income of $2.8 million, or $0.11 per diluted share, compared to net income for the six months ended March 31, 2011 of $4.6 million, or $0.18 per diluted share. Net income for the first six months of fiscal 2012 benefited by $0.2 million, or $0.01 per diluted share, resulting from a reversal of tax reserves for various jurisdictions’ tax matters and the gain on sale of an investment, net of taxes, offset by expenses of $0.2 million, net of taxes, or $0.01 per diluted share, as a result of the restructuring charge for the Breisach, Germany manufacturing operations. Net income for the first six months of fiscal 2011 benefited by $0.6 million, or $0.02 per diluted share, resulting from a reversal of tax reserves for various jurisdictions’ tax matters and the enactment of legislation extending the research and development credit that allowed Digi to record tax credits earned during the last three quarters of fiscal 2010 in the first quarter of fiscal 2011.

Digi’s cash and cash equivalents and marketable securities balance, including long-term marketable securities, was $115.6 million at March 31, 2012, an increase of $9.4 million from December 31, 2011. Please refer to the Condensed Consolidated Statements of Cash Flows that are included in this earnings release for additional cash flow details. At March 31, 2012, Digi’s current ratio was 7.4 to 1 compared to 8.7 to 1 at December 31, 2011.

Second Fiscal Quarter 2012 Business Highlights:
iDigi Device Cloud

• Embedded industry market leaders including Intel, Wind River and Freescale further validated the iDigi Device Cloud’s™ market leadership position as indicated, with the following Digi announcements:
  • Freescale Semiconductor will integrate the iDigi Device Cloud into its Kinetis and Coldfire microcontrollers using the iDigi Connector. This means that any device with a Freescale microcontroller now will have access to the iDigi Device Cloud out of the box.
  • Digi and Wind River with support from Intel collaborated to create a complete end-to-end solution for developing cloud-connected wireless devices. The new M2M Solutions Builder Kit is based on Intel architecture, Wind River software and the iDigi Device Cloud.
• Digi extended the benefits of cloud connectivity to any device in the world with the introduction of the iDigi Connector, a free software download that allows any device, regardless of manufacturer, to connect to the iDigi Device Cloud.
• Digi’s new embedded application development kit for Android™ with cloud connectivity won VDC Research’s “Embedded Software Best of Show” at Embedded World 2012. The kit makes it easy to develop cloud connected embedded devices using Android and the iDigi Connector for Android.
• Building upon Digi’s ability to connect any device to any application, anywhere, Digi added Iridium satellite network support to the iDigi Device Cloud. Digi can now extend the benefits of cloud connectivity to devices located anywhere in world over the Iridium satellite network.

Smart Energy

• Leveraging its experience in launching tens of thousands of Smart Energy devices into people’s homes with its partners, Digi launched the ConnectPort X2e for Smart Energy, a low-cost, enhanced version of the company’s ZigBee Smart Energy gateway. The gateway makes it easier for utilities and application partners to establish and maintain large Smart Energy device deployments.

Key Wireless Product Announcements

• Demonstrating strong global wireless product innovation, Digi released a multi-channel wireless XBee module that operates on the 868 MHz frequency in Europe and the 865 MHz frequency in India.

Fiscal 2012 Guidance

For the third fiscal quarter of 2012, Digi projects revenue in a range of $46 million to $51 million. Digi projects net income per diluted share in a range of $0.03 to $0.10 cents. Projected net income per diluted share for the third fiscal quarter of 2012 includes the impact of an anticipated pre-tax restructuring charge of approximately $0.9 million to $1.1 million, or $0.02 to $0.03 per diluted share, pertaining to the North American region. The anticipated restructuring charge relates to changes being implemented to focus more aggressively on the shift to end-to-end M2M solutions, as discussed above.

For the full fiscal year 2012, Digi projects revenue in a range of $190 million to $200 million. Digi projects annual net income per diluted share to be in a range of $0.26 to $0.38, including the aforementioned restructuring charge. The full fiscal year 2012 revenue and net income per diluted share guidance have both decreased from the guidance provided in our first fiscal quarter 2012 earnings release and conference call.