EXHIBIT 13
[DIGI INTERNATIONAL LOGO] [PICTURE]
CONNECTWARE(TM)
To our Stockholders,
Fiscal 2003 was a very good year for Digi and its shareholders. The company
maintained a steadfast focus on its objectives, and as a result, the
company met or exceeded its revenue and profitability guidance throughout
the year. Digi achieved a revenue increase of 1.4 percent to $102.9 million
and a gross margin increase to 59.6 percent from 54.7 percent a year ago.
Digi achieved strong cash flows from operations totaling $15.8 million in
fiscal 2003. Additionally, Digi maintained a strong balance sheet through
continued asset management, ending the year with a cash and marketable
securities balance of $57.6 million. The company accomplished these strong
results by focusing on the following key objectives throughout fiscal 2003:
- Revenue Growth
- New Product Introduction
- Maintain Strong Balance Sheet
- Make Device Networking Easy
We believe Digi made good progress in all of these areas over the past
year.
Revenue growth was an important goal in fiscal 2003. Over the prior three
years in executing the turnaround strategy we divested a complete business
and two product lines and acquired three new businesses. Fiscal 2003 was
the first year without major acquisition or divestiture activity and we
felt that it was important to drive some level of revenue growth, even in
the face of a slow economy. We finished the year with revenue of $102.9
million, which was at the high end of our $101-$103 million fiscal 2003
guidance. We were very happy with the revenue numbers posted in our
NetSilicon, Device Server, and USB product lines, offsetting the natural
decline that we see in the mature Async Serial Port Expansion product line.
In 2003, Digi continued to place a high priority on new product
introduction. The year started on a strong note with the Digi One IA
RealPort receiving the Control Engineering Editors Choice Award in January.
NetSilicon added three very important products to its portfolio during the
year, introducing the 7520 Networked Processor, the 9750 Networked
processor, and the Net+Works
6.0 Software Suite for embedded device networking. These product additions
provide the global NetSilicon OEM sales force a broader product line to
achieve its design win objectives. Digi introduced several products with
wireless capability in fiscal 2003. The Digi TS W product line of 1, 2, and
4-port wireless device servers provide serial to 802.11 wireless
connectivity combined with Digi's patented RealPort technology and powerful
security features. The Wavespeed S wireless device server provides serial
to bluetooth wireless connectivity for mission critical cable replacement
applications. Digi introduced the Digi Connect ME module, which we believe
is the most powerful and customizable embedded network solution available,
as well as one of the smallest. The addition of the Digi Connect ME module
allows Digi to realize its strategy to provide its customers with a
complete set of connectivity solutions that have a common core technology
base. This means that a Digi customer can seamlessly migrate from an
external box to a board or module and eventually to a fully integrated chip
without making major changes to their software platform. In addition to new
products that provide leading edge connectivity technologies to the
marketplace, Digi made some tactical R&D expenditures to extend the life of
our heritage Asynchronous Serial Port Expansion (DigiBoard) product line.
We added Universal PCI (3.3V or 5V), Low-Profile PCI, and PCI-X compliant
products that will allow us to maintain our leadership position while
extending the life of this product line.
Digi continued to maintain a strong balance sheet throughout fiscal 2003.
Digi finished fiscal 2003 with a cash and marketable securities balance of
$57.6 million, slightly below the 2002 year end balance of $58.2 million.
We achieved this result despite major expenditures for financing activities
related to our repurchase of significant amounts of our common stock and
our early repayment of debt which totaled $15.3 million during fiscal 2003.
Digi reduced its Days Sales Outstanding (DSO) balance from 33 days to 32
days in 2003 compared to 2002. Digi reduced its inventory balance from
$12.5 million at the end of 2002 to $10.4 million at the end of 2003.
Additionally, as a result of restructuring activities that took place at
the end of fiscal 2002, and a very strong expense control discipline
throughout the year, we reduced our expense run rate in 2003 for sales and
marketing, research and development, and general and administrative by
$11.7 million, which exceeds the expectation we communicated in last year's
annual letter.
Over the past four years we have been executing on a plan to leverage the
Digi brand into key vertical markets such as point of sale and industrial
automation. Our strategy has been to extend the value of the Digi brand
into these verticals by acquiring or organically developing growth products
that will extend the value of the brand. In 2003, we augmented that
strategy with the vision and message "making device networking easy". We
made good progress both extending our vertical focus and driving the
"making device networking easy" vision in 2003. This is manifested in many
ways today. The NetSilicon value proposition is to make device networking
easy by providing the core technology and the tools to reduce time to
market for its customers. In all product lines we are working on continuous
improvement of our installation and configuration software and
documentation to make device networking easier for our customers. The easy
migration path for our customers from box to board or module to chip is
also focused on this objective for our customers. We have made very good
progress with these and many other initiatives to make device networking
easy for our customers in fiscal 2003.
In summary, I am very proud of the accomplishments of the Digi team in
fiscal 2003 and I believe that the future is much brighter as this team
addresses the opportunities and challenges of 2004 and beyond.
Joseph T. Dunsmore
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Joseph T. Dunsmore
Chairman, President and Chief Executive Officer