With the help of some acquisitions, Digi international (DGII) aims to become a major player in the Industrial Internet of Things. It seems that DGII equity investors are closing in on this view.
In 2021, DGII shares gained about 30% due to the coronavirus pandemic. And so far in 2022, DGII shares are up 62%, battling a stubborn bear market.
So now, the Minnesota-based company may be able to put the state — once home to computer industry icons like Control Data, Univac and Cray Research — back on the high-tech map alongside California or Texas.
Formed in 1985, before the birth of the Internet, the company went public in 1989. In the beginning, the company sold Digiboards, serial port expansion cards for personal computers or for connecting PCs to multiple peripheral devices.
During the dot.com boom of the late 1990s, DGII stock posted some modest gains as most of the tech companies flourished. So investors forgot about Digi stock for about two decades.
DGII Stocks: Acquisition spree aims for recurring revenue
Beginning around 2015, a new Digi began making acquisitions targeting the Industrial Internet of Things: Web-connected devices in factories, agriculture, telehealth, retail, food service, and other applications. The company also expanded into selling cellular routers and console servers, essentially hardware that provided wireless connectivity to the Internet.
The acquisitions of Bluenica, FreshTemp, Smart Temps and TempAlert from 2015 to 2017 expanded Digi’s business into food services and pharmacy monitoring. Clients include Subway, Arby’s, by Albertson (ACI) Safeway subsidiary, Cheers CVS (cvs extension), Help rite (RAD) And Walgreens Boots Alliance (WBA).
Additionally, the acquisitions of Opengear, Haxiot, Ctek and Ventus Holdings since 2019 have transformed Digi into an end-to-end solution provider for the Industrial Internet of Things. It sells data collection sensors, network routers and gateways, and software. Additionally, the Ventus deal made Digi a managed IoT service provider.
Meanwhile, Digi has expanded into multiple markets: energy, transportation, medical devices, agriculture, ATM monitoring, and retail. Customers now include Chevrons (CVX extension), Exxon (XOM), Pacific Union (UNP extension), CSX extension (CSX extension), Medtronic (MDT extension) And Boston Scientific (bsx extension).
“Diversity, I think, has proven to be a really nice asset for us,” Digi CEO Ronald Konezny said on the company’s September quarter earnings call. He took over as CEO of Digi in 2014.
Stock DGII: Large Order Backlog
He cited strong customer demand amid concerns that the US economy could plunge into a recession. Additionally, he noted that Digi had an order backlog of $300 million as of Sept. 30, the end of fiscal 2022, up from $250 million at the end of fiscal 2021.
During the earnings call, Konezny also touted Digi’s progress in meeting three goals involving quarterly revenue, annual recurring subscription-based revenue, and adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA.
In the June and September quarters, Digi achieved one goal: exceeding $100 million in quarterly revenue. Additionally, it finished fiscal 2022 with $94 million in annual recurring revenue, or ARR. Now, Digi is expected to exceed $100 million in ARR starting in fiscal 2023.
The company now gets 24% of its total revenue from ARR subscription services, up from 4% five years earlier.
“Acquisitions have steadily improved growth and margins,” Stephens analyst Tommy Moll said at the start of DGII stock coverage in June.
Ventus acquisition is key to margin growth
Digi acquired Ventus Holdings in 2021 for $347.4 million in cash. Ventus sells managed services for monitoring ATMs in retail stores and train stations, retail outlets and digital signage.
“With the Ventus acquisition helping to generate a broader mix of recurring revenue and shifting corporate culture, management is transforming its sales force and go-to-market strategies to generate a broader mix of recurring revenue “, said T. Michael Walkley, analyst at Cannacord Genuity. in a recent note to customers.
To Piper Sandler, analyst Harsh Kumar said in a statement, “Digi has built a strong, sustainable, high-growth ARR business over the past few years.”
Digi’s third goal is to acquire more than $100 million in annual Adjusted EBITDA. But it finished fiscal 2022 with $70 million.
Including Ventus, the company gets approximately 25% of its revenue from high-margin software-based IoT solution services.
Prudent guidance on revenue?
Analysts expect covert acquisitions to continue. Kumar met with management in September.
“Management has a strong focus on the ARR,” the DGII stock analyst said in his note. “The goal is to combine existing ARR growth with profitable growth organically and/or through acquisitions. Management has clarified that future acquisitions must have a high ARR angle to qualify for a first look.”
In its fiscal fourth quarter, Digi posted adjusted earnings growth of 80% year over year at 45 cents a share. Additionally, revenue increased 34% to $105.7 million. Its results beat analyst estimates by 41 cents of earnings per share on $100.4 million in revenue.
For fiscal 2023, Digi expects revenue growth of 10% due to continued supply chain constraints.
Edge Computing to power the IoT
IoT implementations have depended on wireless networks, long distance cellular or local Wi-Fi. The rollout of 5G wireless networks is expected to give a boost to IoT applications.
Additionally, Digi is seeing increased demand for private enterprise 5G networks, Konezny told DGII equity analysts.
Additionally, 5G networks improve latency, the time it takes for networks to respond. Analysts expect a synergy between 5G networks and edge computing, the next generation of cloud computing.
Edge computing implements data processing, storage and networking near sensors and where other data originates. The goal is to process and analyze data locally in real time rather than sending it to distant data centers in the internet cloud.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity, and cloud computing.
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