DGII - Earnings call transcript Q3 2019

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Operator

Good day, ladies and gentlemen, and welcome to the Q3 2019 Digi International Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded.

to call like now would turn over the I

you Jamie Loch, begin. Sir, CFO. To may

Jamie Loch

Good thank quarter afternoon us Sydney. you, Thank and discuss International. fiscal Digi today you the XXXX of third results to joining for

Joining me Konezny, and follow our Ron CEO. with on is the provide thoughts our I our financial his performance. President will business. today's on call Ron will highlights of

our prepared we'll closed. take earnings issued release remarks, We market shortly our Following questions. the after your

Financial the Releases of You may through obtain digi.com. copy Relations Investor at section website a our

date. Some this expectations of update to and and to make as and the revise We uncertainties. or statements statements. that publicly today's and future risks about call are forward-looking undertake we during performance no significant our forward-looking are only financial considered obligation reflect these operating These statements speak subject of

in we be met will forward-looking our statements expectations are that expectations statements or prove the any forward-looking While we such be no our will believe assurance reflected give reasonable, correct. of to

For our please today factors with our SEC. risk in and and the forward-looking earnings of the additional the statements refer Form reports on release XX-K subsequent file information, XXXX section to

release be the that Relations to also reconciliations comparable X-K section of includes this disclosed the information measures. Information is Investor an are included measures, Form non-GAAP measures, GAAP our exhibit through website. a can release. requires of on earnings to earnings SEC certain be Finally, The these financial about most to disclosed call including accessed the Filings the in

to Ron. turn over Now I'll the call

Ron Konezny

call our who's and you, welcome Jamie, Thank everyone joined to today.

deliver revenues secured our We $XX with order million revenue. & our our a delivered IoT business, expect IoT revenue in Solutions We record and earnings overall and will with we meeting which results are Services Products over in purchase business expectations. in quarterly pleased

fiscal quarter. revenue improvement In year fiscal had fourth expectations anticipated in based for sequential on addition, meet expect we earnings to the our we and the set XXXX

our at distribution hosted stronger early XXX our our shine. second June here This our We event and relationships and customer customers, event allowed to IoT and partners stakeholders. over in to with team, including Minneapolis asset, best key annual partner Global attendees, led

segments Now on initiatives. business our updates company and on to

our & softer were anticipated, than quarter IoT previous third quarter. Services As Products results fiscal our

purchase driving our our However, the direct sustaining large objectives earlier driven rates the order opportunity, win backlog demonstrates mentioned we quarters. future by force, will success. for key key sales high opportunities that on Large future drive are

opportunity New anchored by of product routers. one this newest introduction, is cellular our

console recently and products cellular introduced in IT we product which family, our AnywhereUSB updated server Connect modules. network addition, core In added

be $XX great Recurring software, services revenues, Digi not recurring products, revenues. and will by Increasingly, we anticipate but approximately with defined annual in complementary million support. only

build model, will Opportunity on as simplified, drive win to technology, we deliver to replicate, experience scalable customer a we cumulative more and results. this to continue

have combination We continue and product over optimization margins, gross work a pricing time reduction to initiatives. of cost on we improve and to margins gross to based respect will do with expect

improvement expect product we the versus the fiscal top in router in cellular softness guidance, drove line line quarter Our current but quarter.

and best excellent making cloud. the accelerated of progress combining in on Digi the and device both We're the technologies,

of subscription in experienced this and and leading growth We our customer revenues higher to services support. in strong business, have improved levels both satisfaction

added in over site to base SmartSense quarter, building a churn significantly nearly minimal revenues new the and quarterly record sites. during Our Solutions with business IoT We sites grew X,XXX achieved XX,XXX year-over-year. our

add new unified with the build recurring in progress food the we We towards consolidation will introduced service first in which existing annualized health million We public and with over of way. to leading services exited strong and are growth and all platform. expect verticals view quarter of expand platform experienced revenue, our a sites. We the our as technology $XX we making

we of will quality which improve customer remove Lastly, version time the installations. friction, the mobile first and onboarding, our our site of for application introduced

customer segment and to to Solutions ROI, contributed our continued our continuous and this amount a While growth. experience analytics modest quarter, sustain of future adjusted innovation in invest EBITDA we

the corporate Jamie level, few the Loch Officer Financial our company At a as highlights the in quarter from include Chief May. joined

about at role. and excited a are strong enthusiasm, We this important ethic McLeodUSA Ernst Jamie's of & to He Honeywell, Young, Nilfisk. results work experience, combination to brings background and commitment

our are We increasing our We implementation inventory on XXXX. next quarter reducing system, the during position. first sheet significantly complete the track launched the of ERP CRM by and for of strengthened we phase cash and fiscal balance our

on towards at fund acquisitions appointment Digi. to using are experienced have we biased our the help with capital since my based We success five additional acquisitions the

now turn Jamie our to more financial on call for detail I over performance. the

Jamie Loch

third me. more Digi Ron, be great on the to for as we I help our you contributions wrapping strategy move of take you, communicate a feel into our afternoon, drive for my as value me wanted and looking for and tell you to future. how Digi Thank I and as match am with our be I've make encouraged customers, experiences bring in to quick a month execute good and I a and of excited investment value shareholders here, pleased. performance, my to to great working to Digi match and everyone. couldn't into growth background all Digi right I'm and moment community up I Ron well now. making a immediate continuing the part forward our our some teammates each

our financial that contributed to I'll the results financial turn Now some key of quarter. the of fiscal third highlights to

recurring quarter. surpassed in finished or with or purchases, $XX When you annualized the IoT third Solutions, million. year with XX.X% exiting XX,XXX Ron double-digit new combine our Solutions from $XX.X ARR, sites, first revenue, revenue an and quarter increase deployments with one that over the quarter additional of IoT fiscal quarter million As customer of mentioned, we ago

of range results quality million from of $XX continues quarter, guidance to our delivering $XX the dependable the within Digi. for was performance revenue million Our trend which

be to continue We profitable.

was for EBITDA at million of XX% was of adjusted revenue end our Our the or high quarter. and $X.X the guidance

the share points third diluted $X.XX of well was of of adjusted per Included expense income guidance net range. related high the acquisition-related as our $XXX,XXX approximately XX quarter approximately impacts to also basis earn-out at is Our EBITDA China as fiscal figure in end from tariffs.

we to through we collections Year-to-date, our million from Finally, through third management receivable $XX.X have cash drove good and fiscal strong generated cash payable $XX.X related million accounts and from inventory. to operations. the quarter, accounts

fiscal like to majority $XX.X products of IoT revenue the from Services customer. network of our year-over-year Products discuss decline of million. now segment Services a business. has I'd loss one Products decreased on quarter that & XXXX results primarily The from the to & X.X% our in third our starting with and basis come year-over-year,

our These decline Partially products. minimal slow in are & was in growth have for offsetting and XXXX, We and the since been Products made our that we decline. investments these RF this products Services like products team. an ongoing experiencing embedded have our outlook

Services Our XX.X% was driven QX margins gross in compared to in fiscal aforementioned network were IoT of products. by drop our XX.X% Products & the XXXX. This

third the Solutions as quarter as of the revenue record IoT level ARR to This same approximately improve. business our was to we period execution move is the Solutions million and fiscal XX% $XX.X year XXXX million If segment, revenue fiscal at date and is a in quarter. our highest third previously our revenue one continue the the discussed, compared total IoT was of momentum solutions ago. quarter for to in to in $X.X

well and as upgrades the as This additional our deployments, from in existing increase customers base. purchases was driven equipment by recurring revenue new customer increase

that QX in Our growth. of reflective to IoT on our demonstrates XXXX. Solutions that gross margin be was XX.X% would in ARR of the expected our XX.X% growth compared leverage and revenue That's

to few balance items sheet mention. additional Finally, a

continue free. First, be to debt we

at our our an quarter-over-quarter strong cash of quarter and beginning million year. XX% levels from inventory second by And down $X.X increase the at $XX.X the million. Second, came XX% balance the third, and are remained fiscal of fiscal now $XX.X from million,

anticipate our optimize As this and to refine balance down. drive manufacturing to transition, we continuing continue we

and Now I'd our quarter like guidance to ranges. fourth full XXXX year provide

revenue $XX we quarter XXXX, million fiscal $XX of to For the million. expect fourth of

income our acquisition-related $X.XX. We $X.XX $X.XX or expect to $X.X share. EBITDA our and is $X.X approximately diluted be of earn-out diluted expenses million of in to to per we net per expect $X.X adjusted Included guidance million million, share

For $XXX million. we to $XXX fiscal expect XXXX, year range the the revenues million full of to be in

$X.XX EBITDA expect or rate to XX%. to XX% share in We of adjusted $XX.X million we the $X.XX Included we $X be expect share. in acquisition-related expect our $XX.X million, Included per approximately be income of effective per tax year and XXXX are fiscal million our guidance $X.XX. to diluted diluted of range full annual in expenses fiscal our our to to earn-out net guidance,

please Ron and time, Sydney, completes remarks. to our your you are prepared this Instructions. questions. could take At That I pleased provide

Operator

question first of comes our the Greg Company. Burns And Instructions] from with line [Operator Sidoti Yes. &

open. is line Your

Greg Burns

afternoon. Good

a dig deals type this the Just time some like of maybe of project on in margins are wanted what little $XX you And the that you large million compared smaller that to frame on expect to over? realize as do won, to the large you bit what projects do?

Ron Konezny

are question. Yes, Greg. goods Those

margins in So XXXX Service this period. margins Products the above reported. will the our company be the that fiscal are deployed IoT project and we The margins just bulk of & above

Greg Burns

you last that the and It's kind like one how you of what won we of of largest about translated you pipeline just done at of of when look you've type looks I've terms in these the of how seen of deals it I've over that you? How optimize replicable maybe can maybe the you the talk covering to business for frame about a years since is been company. – And can and into this deals Okay. deal just deal? talk winning what this kind size? few But the

Ron Konezny

Yes.

opportunity that make should our user Another make that we're appropriately we're would disclosures in their preface and on we coordinating and we're keying to detail, this good considered with our partner off desires. to And sure more and question. I describe in their sync to sure of this love disclosures by end

that obtain, of But a in of Ueland, tell President demands Services leverages available, execution. we Mike excited can on. led over and our prepared recurring; able group. my that very to the becomes of that program remarks, about exacting I to newest as It high-profile by more a this to Products one program. a revenue our $X account. period. be be our that cellular combination been million I of key We're a as it's So you, mentioned that more it It's working we has & we're It's expect we've expect and routers, in descriptive a It's things complicated project. five-year

and partner more – think resources take progress in existing talk we we do – that a can do this be because new and team application, we of working sorry, advantage can to a type opportunity about detail, replicated. partners program of this type project think We of hope replicate. We with that can which it's are to we have our of

Greg Burns

Okay. over for should Solutions seems it the Great. And then level just that like about more to very the What's a high Solutions business. Obviously, hardware strong Because IoT a outlook sales we nonrecurring quarter quarter. it pretty look think there. like of XQ sequentially? How switching business? this the for

Ron Konezny

of had subscriber a retention. will high X,XXX both do strong approximate that quarter number the high we really We adds, as current subscribers high. quarter, quite We be Yes. anticipate had fiscal and a with

well some and – the past vary. can subscribers, recurring about talking both – as of the have as subscribers as Transportation mix XX, onetime we're can So fees.

and warehousing subscribers drive expect the one-time X,XXX add up. that that more we'll recurring equipment much X,XXX that associated the as some have healthy a revenue to their well. But sites and and annualized required. of be continue are – continue amount grocery services do in amount with to intense of quarter to We And also to next in can

Greg Burns

you. thank Okay,

Operator

line following with our And Mike the Walkley you. from Genuity. Canaccord Thank of question comes

line is Your open.

Mike Walkley

and and meeting see attending was year our Ron for of to and Thanks this your Jamie guidance. congrats quarter great week. full execution It on you, conference strong another

project doing about investment in in product on of you corporate just in the how little base new initiatives products this deeper. pipeline? again, your above new great project Can is margins. Clearly, overall is hear pipeline touch for to talk the deals? gross kind of see you well. new And wanted average And the your to a kind just that large Just digging

Ron Konezny

performed. that has It done anchored technology but Yes. customer, on to our our cellular behind the important, scenes, not amount software, side device think and really been our more is newest that's framework and put of the Digi SIT routers. This by I I one as in across common the this one cloud combining combining of of new team incredible introduction which spent AnywhereUSB device but mentioned, of pipeline, side not cloud-based same is Accelerated a only acknowledgment between with And hard work device software. the efforts of router is common most only the being And project, we management also great the that's an work the apply we of software get that internally, of have and software. platform, benefits

confidence excited very you as we're been think innovation lead repeated good that forward-looking to is that [indiscernible]. this. be we cumulative sustainability So about revenue in can particular, and objective of can additional this I of real that And has And a think Digi. us know, emblematic also give and

Mike Walkley

you. just Thank follow-up for question. a And

rate? kind a we Jamie, it trend to is quarter. run You new year-end? or expect – very in we should have the expense the management up Or OpEx this operating during of here

Jamie Loch

Mike. Yes. Thanks

I not little a bit up to but going material. anything year-end, going it's to that's be at trend think

the a the I job of done has managing day-to-day think nice team expenses.

And short could some I so establishing swing rate of kind think run those onetime a there of But little bit or events higher adjustments. we're a little that operationally, lower. bit be a will

Mike Walkley

to And in generation very to and somebody balance. cash Ron, cash, question quarter, last cash the generate I'll at strong continue airport. on the from Great. me, it pass a have strong here

the Just maybe integrate You that maybe deploy successful how can deals? of maybe that for smaller you that you've M&A. about to acquisition given size highlighted Board to appetite you tuck-ins, a now the what's talk you appetite larger or Can areas it proven the five want interest? or cash in these

Ron Konezny

having always again favorites. not Again, Yes. Thanks, our which Mike, your of one did is and thanks for this us year. at disappoint conference,

In opportunities. business as strong terms towards to our – be for at of recurring revenue. those both have of opportunities We demonstrated, biased that we'll look acquisitions, we sides we've continue

deals, cash. We have probably as especially generate terms in our we increased appetite additional size of of

And we work put to for capital in to as in low from expect you can projecting, million bigger with to expenditure We're like Jamie's quarters be very to revenue. future a comments, capital approximately generate budget. $XXX We'd tell more some cash that opportunities.

the that bigger past ourselves are what challenging more So on things we're looking at and in opportunity. to than we've done take

Mike Walkley

Thank very you much.

Operator

Street. Instructions] you. question Our [Operator Thank Schmidt Lake following comes Jaeson from with

open. Your line is

Jaeson Schmidt

Hey, for taking guys. questions. Thanks my

pipeline, any the the won. big seeing you're just the big have if seen in project size overall as the in wondering Just any of you But you in change as deals the maybe not uptick size?

Ron Konezny

Yes. That's a good question.

is we're things of about excluded One able digits. are eight-digit number about although opportunity the winning we're least in that we're opportunities two the think we've excited at this that I we terms of pipeline the we're And seeing grow. deal, is, the seven-digit routinely that deals very, to been excited seven continue secondly pipeline. very secure. about to talked But

see on rate and excited quarters been success. to from as And win well. our that those has of win we're large part And that sustained key previous a so – opportunities rate

Jaeson Schmidt

products from the really software you're Okay. customers pushing that And bundling now services? and with feedback update any on

Ron Konezny

Yes.

It we're and way A lot I getting reception. past. in industrial, they takes of are heavy think a our purchased some that good products customers commercial, haven't time. the

so we services roll support. solution think, I being, software, that and bundled how considerate And a are more we in out includes

opt-out. of more it making are opt-in an an versus We

of patient also with the reception, model. going And transition we're so customers to but that by encouraged our the it's take to we're some to time

Jaeson Schmidt

last me. Okay. one And the from

to How expect half the business, bit this continue Or the business should to here of the that that muted about Regarding is we to remain network should year? a this second decline? in in near-term? think we going

Ron Konezny

Yes.

to expect will over users. to assumption takes that exposed in do updated soften that it that get bet I potentially We've time, can we some decline. It end to decline. revenue time get continue And to continue products. certainly introduced flatten safe anticipate and is think revenue. products have to even some we those and the term, channel to for the we decline near into that an the the do But

Jaeson Schmidt

lot, a guys. thanks Okay,

Operator

Thank First comes you. David question from And our Analysis. with Gearhart following

open. is Your line

David Gearhart

kind any for but to know I XXXX mostly deal QX? taking just afternoon. that's you revisit $XX you event, get my just questions. QX. good the on guide want contribution from this a Thank to million some that. Hi, and include in I deal the be color I Does wanted to mentioned on fiscal of clear

Ron Konezny

is the David, good in some the end but being Yes. of majority It delivered the fiscal question. XXXX. vast of does include before the yet fiscal opportunity really year,

David Gearhart

Got it. because units in X,XXX of XXX And gaining that talked you not side do be customer? Where – recapturing decided that mentioned partner the on solutions about deal lost the that And those a a part was terms past, the big back. in had to units X,XXX-unit was the then of a in quarter? quarters business. we in that unit units from of stand And X,XXX you

Ron Konezny

like Yes. this units. expect that we've about original directly back end customer the got and double to the the what was gained subscribers back think to we versus think and as the prices large I differences – But going in contract revenue. about calling We are didn't pricing going the one talked gain feel half we've we past those that of for. We back through because all at that users, we've

from that applications, onetime ARPUs most quite they much and warehouse associated had as business data health than been that aren't trailer But overall. strength exception bigger current lower comments transportation health did of quite revenue with driven well, our and unit don't the with implementations. a of foodservice averages. them had logger are subscribers have as The health saw and in certainly – for the the my We foodservice. contribution in by mentioned more I and but As the we quarter have contribution

David Gearhart

customers IoT or that ordering of reported seen side, produced. have inventory much then the being transportation in weakness some on whether some it. too have Got seen players to have And that's the – regards already over

So a a the give I sense vertical the terms of trending various health just the that And of wondered in if side Digi us business. on verticals maybe for just has been side can general how transportation on the you product the update Digi's product supports.

Ron Konezny

Yes.

see van a indicator that Transportation a going viewed spot that's economy. the SmartSense observation, as more And where as rates David. the to to to think volatility, in leading keen of side. going up see work is you're we're Most of direction dry the oftentimes I refrigerated and tends on downside. not have That much on in the our is volatility. of both the oftentimes

we So refrigeration. in as of haven't seen much that

a exposed do our Product transportation of as to a That a infrastructure investments. buses. in We & not the are in work and rail, of transit, Services some from subway, vertical public perspective investments cities our as mass with as On peers. to their to upgrade business, combine element number economy them we the of look trucking make continues technology of lot

we you mass So yet will, if not transportation of portion on, business. transit seen impact our have an

David Gearhart

of you the could that But what recognized. line on in be other of queue. million I'm quarterly I'll when Solutions? recurring services and services an device outside if with professional assuming the roughly and deal, give going more, is expected pass percentage management And Can the a it. for on revenue in Got sneak IoT of is it's basis update us one that's to $XX in just I $X recurring the that million

Ron Konezny

have and don't the blend two. services & the Services it it but would business. I in device for combination figure don't you. a management I Product for the is have good it, it is And of the But a side exact of service. data And a It's reported be right, that Yes. professional question. you're of

David Gearhart

it Thank line. I’ll it. for me. you, pass Got that’s the

Operator

our Dick And comes Thank Dougherty. of question from you. Ryan the following with line

Your line is open.

Dick Ryan

And one that? the get goal possibly Thank by integration your further? that get in solutions you. year-end. platform where acquisitions, help in solutions the you down does business Hey, when four Ron, that that to drive point, of you was think stand to to do I

Ron Konezny

I unveiling this remarks, past a Yes. very of and in in we our had fact, Dick, initial – platform was had IoT Digi how at event that prepared some a in question. we've And well combined platform. quarter. the received, first my mentioned June, on our customers that's great it And

of And combined platform. there We the of We're we here two right expect over to through that before every the It incremental the end XXXX progress quarter. parity main progress of as essentially now. be two significant selling but it year. across be will likely take expect the on the platform, four platforms finish all do the be work us platforms, this systems we'll migrating feature get to the will we

platform over And selling then platforms And platform customers to selling, exclusively platform. on the your new from as time marketing, advancing in new gets XXXX new some and the innovating migrating point, from benefits legacy time we'll customers business tremendous and in start be the well. one

that do so And towards will we contribute rates. think higher growth

Dick Ryan

Okay, thank you.

Operator

closing Instructions] I'm like I the [Operator no you. to any Konezny now further remarks. this Thank questions for back would time. And to call at Ron showing turn

Ron Konezny

you, your of next appreciate and in On team, a XXXX to we excited to Thank forward Digi the look our finish Digi. Sydney. trust and fiscal great we entire update. year, We're support behalf

Operator

for have a the you and all conclude Everyone, disconnect. This day. in conference. thank Ladies may program, great gentlemen, today's and you participating does

Digi International (DGII) 9 Aug 192019 Q3 Earnings call transcript