Digi International Reports Second Fiscal Quarter 2008 Results

Digi International® Inc. (NASDAQ: DGII, http://www.digi.com) reported revenue of $43.1 million for the second fiscal quarter of 2008, compared with $42.9 million for the second fiscal quarter of 2007, an increase of $0.2 million, or 0.5%. Revenue in the Americas was $26.5 million in the second fiscal quarter of 2008 compared to $28.8 million in the second fiscal quarter of 2007, a decrease of $2.3 million, or 8.2%. Revenue in Europe was $12.6 million in the second fiscal quarter of 2008 compared to $10.8 million in the comparable quarter a year ago, an increase of $1.8 million, or 17.1%. Revenue in the Asia Pacific region was $4.0 million in the second fiscal quarter of 2008 compared to $3.3 million in the second fiscal quarter of 2007, an increase of $0.7 million, or 22.8%. "Strong international growth has served to offset the Americas’ weakness,” said Joe Dunsmore, Digi’s Chief Executive Officer. "While the economic slowdown in the U.S. has dampened overall growth, Digi is positioned very well to emerge from it in a strengthened competitive position.” Revenue from embedded products in the second fiscal quarter of 2008 was $21.7 million, compared to $18.4 million in the second fiscal quarter of 2007, an increase of $3.3 million, or 17.9%. Revenue from non-embedded products was $21.4 million in the second fiscal quarter of 2008, compared to $24.5 million in the second fiscal quarter of 2007, a decrease of $3.1 million, or 12.6%. The gross profit margin was $23.2 million, or 53.8% for the second fiscal quarter of 2008 compared to $22.5 million, or 52.5% for the second fiscal quarter of 2007, an increase of $0.7 million. The gross profit margin was higher than the comparable quarter a year ago by 1.3 percentage points, primarily due to product and mix changes within both the embedded and non-embedded product groups and a decrease in amortization of purchased and core technology. Amortization of purchased and core technology decreased by $0.2 million in the second fiscal quarter of 2008 compared to the same quarter a year ago, and accounted for a 0.5 percentage point increase in gross profit margin. Total operating expenses in the second fiscal quarter of 2008 were $19.5 million, or 45.3% of revenue, compared to $17.8 million, or 41.5% of revenue, in the second fiscal quarter of 2007. Operating expenses were higher in the second fiscal quarter of 2008 compared to the comparable quarter a year ago primarily as a result of incremental headcount resulting in increased compensation-related sales and marketing and research and development expenses, as well as increased expenses resulting from continuing investments in the Drop-In Networking initiative and international expansion. Digi reported operating income of $3.7 million, or 8.5% of net sales, in the second fiscal quarter of 2008 compared to $4.7 million, or 11.0% of net sales, in the second fiscal quarter of 2007. Net income was $3.1 million in the second fiscal quarter of 2008, or $0.12 per diluted share, compared to $3.6 million in the second fiscal quarter of 2007, or $0.14 per diluted share. For the six months ended March 31, 2008, Digi reported revenue of $87.6 million compared to revenue of $84.7 million for the six months ended March 31, 2007, an increase of $2.9 million, or 3.5%. Revenue in the Americas was $55.3 million in the first six months of fiscal 2008 compared to $58.4 million in the same period a year ago, a decrease of $3.1 million, or 5.2%. Revenue in Europe was $23.8 million for the first six months of fiscal 2008 compared to $19.6 million in the comparable period a year ago, an increase of $4.2 million, or 21.1%. Revenue in the Asia Pacific region was $8.5 million in the first six months of fiscal 2008 compared to $6.7 million in the first six months of fiscal 2007, an increase of $1.8 million, or 28.3%. Revenue from embedded products in the first six months of fiscal 2008 was $42.4 million, compared to $35.1 million in the first six months of fiscal 2007, an increase of $7.3 million, or 21.0%. Revenue from non-embedded products was $45.2 million in the first six months of 2008, compared to $49.6 million in the comparable period in 2007, a decrease of $4.4 million, or 8.9%. For the six months ended March 31, 2008, Digi reported net income of $6.8 million, or $0.26 per diluted share, compared to net income for the six months ended March 31, 2007 of $7.4 million, or $0.28 per diluted share. Net income benefited by $0.5 million, or $0.02 per diluted share, during the first six months of fiscal 2007 as a result of a retroactive benefit from the extension of the research and development credit. Digi's cash and cash equivalents and marketable securities balance, including long-term marketable securities, was $100.8 million at March 31, 2008, an increase of $13.2 million over the cash and cash equivalents and marketable securities balance at September 30, 2007, which includes 4.5 million Euros, or approximately $7.0 million, received from the sale of the building in Dortmund, Germany in March 2008. At March 31, 2008, Digi's current ratio was 7.3 to 1, and the Company had no debt other than capital lease obligations. Second Fiscal Quarter 2008 Business Highlights: Digi continues to expand its wireless Drop-in Networking product family, with several announcements: Digi extended its line of Drop-in Networking gateways with the launch of the ConnectPort X2 and ConnectPort X4. Gateways connect local area wireless networks such as ZigBee, 802.15.4, and 900 MHz, with IP networks. These IP networks can be Ethernet, Wi-Fi, or public cellular networks. With the previously launched ConnectPort X8, Digi now has basic, cellular cost optimized, and full featured gateways to meet virtually any Drop-in Networking application. Digi introduced the XBee-PRO ZNet 2.5, an extended-range wireless RF module designed for ZigBee mesh networking. With up to one mile line of sight range, ZigBee mesh networking can now be used for applications where there is a greater distance between nodes like automated meter reading, asset management and remote sensor management. With the Digi Connect WAN 3G, Digi launched an upgradeable third generation (3G) Wireless WAN router for primary and backup connectivity to remote sites and devices. The Digi Connect® WAN 3G targets simple Ethernet to high-speed cellular requirements and adds a cost optimized, high-speed solution to Digi’s industry leading line of cellular routers. Digi introduced the Digi Connect® WAN GPRS, a second generation (2G), commercial grade cellular router. It is ideal for applications requiring modem-like connection speeds of up to 40 kbps such as remote asset monitoring, meter reading, vehicle tracking, security and many more. Other launches included the following: Digi introduced the Digi Wi-Point 3G, a PC card based 3G cellular router with integrated Wi-Fi access point. The device works with more cellular PC data cards than any other cellular router; enabling Internet connectivity virtually anywhere a cellular signal is available. Digi launched the industry's first flexible Ethernet networking module, the ConnectCore™ 9P 9215. Customers can tailor the interfaces on this module for the specific needs of an application. Digi introduced the Digi ShowBox, a stand-alone presentation player for tradeshow exhibits, information displays, mobile workforce presentations or any other electronic exhibit. Revised Guidance Digi is revising its guidance for fiscal year 2008 as a result of the impact of the economic slowdown in the U.S., primarily due to weakness in revenue generated in North America, and the acquisition of Sarian Systems which was announced today in a concurrent press release. For the full fiscal year, Digi forecasts 2008 revenue to be in a range of $180 million to $192 million, or an increase over fiscal 2007 revenue of 4% to 11%. Fiscal 2008 revenue guidance includes estimated revenue from Sarian Systems from date of acquisition of approximately $6 to $8 million. Digi expects earnings per diluted share for fiscal 2008 to be in a range of $0.38 to $0.52, which includes estimated in-process research and development and other expenses totaling $0.08 to $0.10 associated with the acquisition of Sarian Systems as of April 28, 2008. Fiscal 2008 earnings per diluted share are expected to be in a range of $0.46 to $0.62, excluding estimated in-process research and development and other acquisition-related expenses. Digi anticipates that organic revenue growth rates will return to an estimated range of 10 – 20% when the North American economy returns to normal GDP growth. Below is a reconciliation of our reported earnings per diluted share guidance to the guidance excluding estimated in-process research and development and other acquisition-related expenses: Reconciliation of Reported Diluted Earnings per Share Guidance for Fiscal 2008 to Diluted Earnings per Share, Excluding Estimated In-Process Research and Development and other Acquisition-Related Expenses     FY 2008 - Estimated Range for EPS Guidance Low High Reported diluted earnings per share anticipated for fiscal 2008 $ 0.38 $ 0.52 Estimated impact of in-process research and development and other acquisition-related expenses   0.08   0.10 Diluted earnings per share anticipated for fiscal 2008, excluding the impact of estimated in-process research and development and other acquisition-related expenses $ 0.46 $ 0.62 Second Fiscal Quarter 2008 and Sarian Acquisition Conference Call Details Digi invites all those interested in hearing management’s discussion of its quarter and the Sarian acquisition, on Monday, April 28, 2008 after market close at 5:00 p.m. EDT (4:00 p.m. CT), to join the call by dialing (800) 237-9752 and entering passcode 17264102. International participants may access the call by dialing (617) 847-8706 and entering passcode 17264102. 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 44427522 when prompted. Participants may also access a live webcast of the conference call through the investor relations section of Digi's website, www.digi.com. About Digi International Digi International, based in Minneapolis, is the leader in device networking for business. Digi develops reliable products and technologies that enable companies to connect and securely manage local or remote electronic devices over the network or via the web. Forward-Looking Statements This press release contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which generally can be identified by the use of forward-looking terminology such as "anticipate," "believe," "target," "estimate," "may," "will," "expect," "plan," "project," "should," or "continue" or the negative thereof or other variations thereon or similar terminology. Such statements are based on information available to management as of the time of such statements and relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market and statements regarding the Company's 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 the Company operates, rapid changes in technologies that may displace products sold by the Company, declining prices of networking products, the Company's reliance on distributors, delays in the Company's product development efforts, uncertainty in consumer acceptance of the Company's products, continued or increasing weakness in North America and developing weakness in other regions due to changes in economic conditions, and changes in the Company's level of revenue or profitability. These and other risks, uncertainties and assumptions identified from time to time in the Company's filings with the Securities and Exchange Commission, including without limitation, its annual report on Form 10-K for the year ended September 30, 2007 and its quarterly reports on Form 10-Q, could cause the Company's future results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Many of such factors are beyond the Company's ability to control or predict. These forward-looking statements speak only as of the date for which they are made. The Company disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Digi International Inc. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited)         Three months ended March 31, Six months ended March 31, 2008 2007 2008 2007 Net sales $ 43,070 $ 42,855 $ 87,644 $ 84,666 Cost of sales (exclusive of amortization of purchased and core technology shown separately below) 18,986 19,215 38,529 37,865 Amortization of purchased and core technology   907   1,129   2,043   2,277 Gross profit 23,177 22,511 47,072 44,524   Operating expenses: Sales and marketing 9,034 8,427 17,720 16,585 Research and development 6,529 6,068 13,118 12,040 General and administrative 3,364 2,644 6,717 5,555 Intangibles amortization   596   658   1,265   1,325 Total operating expenses   19,523   17,797   38,820   35,505   Operating income 3,654 4,714 8,252 9,019 Other income, net   1,008   759   2,048   1,530 Income before income taxes 4,662 5,473 10,300 10,549 Income tax provision   1,565   1,876   3,533   3,150   Net income $ 3,097 $ 3,597 $ 6,767 $ 7,399   Net income per common share, basic $ 0.12 $ 0.14 $ 0.26 $ 0.29   Net income per common share, diluted $ 0.12 $ 0.14 $ 0.26 $ 0.28   Weighted average common shares, basic   25,714   25,186   25,666   25,131   Weighted average common shares, diluted   26,312   25,959   26,479   25,976 Condensed Consolidated Balance Sheets (In thousands) (Unaudited)   March 31, 2008   September 30, 2007 ASSETS   Current assets: Cash and cash equivalents $ 27,135 $ 18,375 Marketable securities 58,020 67,111 Accounts receivable, net 25,344 21,022 Inventories 26,804 26,130 Other   4,769   4,961 Total current assets 142,072 137,599   Marketable securities, long-term 15,682 2,081 Property, equipment and improvements, net 15,472 19,987 Identifiable intangible assets, net 21,032 24,214 Goodwill 67,320 66,817 Restricted cash - non-current 421 - Other   1,041   1,128   Total assets $ 263,040 $ 251,826   LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Capital lease obligations, current portion $ 380 $ 379 Accounts payable 8,929 6,554 Accrued compensation 5,545 7,080 Other accrued expenses 4,101 4,727 Income taxes payable   468   3,156 Total current liabilities 19,423 21,896   Capital lease obligations, net of current portion 179 358 Net deferred tax liabilities 4,648 6,667 Income taxes payable - long-term 3,990 - Deferred gain on building sale - leaseback   1,194   -   Total liabilities 29,434 28,921   Total stockholders' equity   233,606   222,905   Total liabilities and stockholders' equity $ 263,040 $ 251,826 Digi International Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)       Three months ended Six months ended March 31, 2008 March 31, 2008 Operating activities: Net income $ 3,097 $ 6,767 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, equipment and improvements 692 1,293 Amortization of identifiable intangible assets and other assets 1,603 3,499 Gain on sale of property, equipment and improvements (120 ) (120 ) Excess tax benefits from stock-based compensation (36 ) (165 ) Stock-based compensation 904 1,776 Deferred income taxes (685 ) (1,920 ) Other (10 ) 152 Changes in operating assets and liabilities: Accounts receivable (4,216 ) (3,549 ) Inventories (132 ) (752 ) Other assets (67 ) 237 Accounts payable and accrued expenses 5,127 978 Income taxes payable   (1,281 )   697   Net cash provided by operating activities   4,876     8,893     Investing activities: Purchase of held-to-maturity marketable securities (27,855 ) (51,691 ) Proceeds from maturities of held-to-maturity marketable securities 27,262 47,181 Contingent purchase price payments related to business acquisitions - (1,315 ) Increase in restricted cash - non-current (392 ) (392 ) Proceeds from the sale of property, equipment, improvements 6,954 6,954 Purchase of property, equipment, improvements and certain other intangible assets   (731 )   (1,908 ) Net cash provided by (used in) investing activities   5,238     (1,171 )   Financing activities: Payments on capital lease obligations and long-term debt (86 ) (188 ) Excess tax benefits from stock-based compensation 36 165 Proceeds from stock option plan transactions 412 1,636 Proceeds from employee stock purchase plan transactions   -     348   Net cash provided by financing activities 362 1,961   Effect of exchange rate changes on cash and cash equivalents   (1,119 )   (923 ) Net increase in cash and cash equivalents 9,357 8,760 Cash and cash equivalents, beginning of period   17,778     18,375   Cash and cash equivalents, end of period $ 27,135   $ 27,135