Digi International, Inc. (DGII, $16.68): “Cold-Chains are Heating Up”
By: Nicholas Rohrer, AIM Student at Marquette University
Summary
- Digi International, Inc. (NASDAQ: DGII) provides business and mission-critical Internet of Things (IoT) connectivity products, services, and solutions. Digi operates through the following segments: IoT Products and Services (84.7% of FY19 revenues) and IoT Solutions (15.3%). Digi was founded in 1985 and is headquartered in Hopkins, MN.
- Despite significant macroeconomic headwinds taking a toll on financial markets, Digi has returned 12.55% thus far over the holding period, while the Russell 2000 benchmark has returned -2.97%.
- Digi recorded its best fiscal third quarter performance in the company’s history. Revenues for the quarter totaled $70.3 million, yielding $0.06 GAAP EPS. Further, Digi paid down $30 million of its long-term debt during the quarter, strengthening its balance sheet going forward.
- Q3 results were driven by strong demand for Digi’s SmartSense solutions. Now totaling 69,300 subscribers, Digi is generating ~$17 million in annualized recurring revenue with ~80% gross margins through SmartSense.
- A multi-year deal with the largest direct-to-home food delivery provider in the United States, Schwan’s Home Delivery, is a significant win for Digi’s cold-chain solutions.
Key points:
Despite global disruptions caused by COVID-19, Digi recorded its best fiscal third quarter performance in the company’s history. Digi grew revenue to $70.3 million, up 15% YoY, and improved gross margins to 53.1%, yielding a 15% EBITDA margin and $0.06 GAAP EPS. Digi also paid down $30 million, or $1/share in debt, lowering expense and strengthening their balance sheet.
These results were fueled by strong demand in medical, safe work from home, business continuity, data center, and solar energy sectors. Digi’s SmartSense IoT solutions added ~1,000 subscribers during 3Q20, with high retention rates among existing subscribers. Now totaling 69,300 subscribers, Digi is generating ~$17 million in annualized recurring revenue with ~80% gross margins.
Digi also launched SafeTemps, a cloud-based wellness and monitoring solution which captures temperatures, records entry and exit, and tracks conditions of on-site resources for customers. Digi has already booked its first customers and has garnered strong interest in this solution.
Digi is becoming an industry leader in the cold-chain monitoring business. The cold-chain TAM is estimated to be $3.5 billion, which is currently less than 10% penetrated. Digi has made four strategic acquisitions of cold-chain related businesses: bluenica, FreshTemp, SMART Temps, and TempAlert.
On September 29, Digi announced a multi-year deal with Schwan’s Home Delivery, the largest direct-to-home food delivery provider in the United States, with more than 3,0000 delivery vehicles and about 300 depots. Each of Schwan’s trucks will be outfitted with two SmartSense sensors to protect product while trucks are precooling in the yard overnight. While on the delivery route, temperatures will be logged and then automatically uploaded to the SmartSense Dashboard upon return to the yard. Finally, all on-site freezers at Schwan’s 300 depots will be equipped with the same continuous monitoring to ensure product is safe and of the highest quality. SmartSense will collect, analyze, and report on more than 23 million monthly data points while monitoring Schwan's Home Delivery’s mobile and fixed assets. The Schwan’s deal is a significant win in the cold-chain market, which will have significant recurring revenue implications likely coming to fruition beginning 1Q21.
What has the stock done lately?
DGII is currently trading for $16.68. As financial markets have recovered since bottoming in March, Digi has performed well relative to the Russell 2000 benchmark. Since reporting 3Q20 earnings on August 7, 2020, the stock is up 30.72%, while the benchmark is up 6.02%.
Past Year Performance:
Over the last 52 weeks, Digi is up 24.57%, but still down from its 52-week high of $18.99 reached in December 2019. Over the same period, the Russell 2000 is up 10.25%.
Source: FactSet
My Takeaway
Digi was added to the AIM Small Cap Equity Fund on February 18, 2020 at a price of $14.82 with a price target of $19.74, representing a 33.19% potential upside. The stock is currently trading at $16.68, up 12.55% over the holding period. Over the same period, the benchmark has returned -2.97%. The original investment thesis is still intact; therefore, the buy rating and price target of $19.74 is reiterated.
Source: FactSet
