Digi International Inc.

Ladies and gentlemen, thank you for standing by and welcome to DIGI International third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that portion of the call, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star and 0. Now it's my pleasure to turn the conference over to Jamie Loch, Chief Financial Officer. Please go ahead.

Thank you, Carmen. Good afternoon, everyone, and thank you for joining us today to discuss the fiscal 2020 third quarter results of Digi International. Joining me on today's call is Ron Konezny, our President and CEO. Ron will provide his thoughts on our business, and I will follow with highlights of our financial performance. Following our prepared remarks, we'll take your questions. We issued our earnings release shortly after the market closed today. You may obtain a copy through the financial releases section of our investor relations website at digi.com. Some of the statements that we will make during this call are considered forward looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward looking statements. While we believe the expectations reflected in our forward-looking statements are reasonable, we give no assurance such expectations will be met or that any of our forward-looking statements will prove to be correct. For additional information, please refer to the forward-looking statements section in our earnings release today and the risk factor section of our 2019 Form 10-K and subsequent reports on file with the SEC. Certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP GAAP measures, are included in the earnings release. The earnings release is also an exhibit to a form 8K that can be accessed through the SEC filing section of our investor relations website. Now I'll turn the call over to Ron.

Thank you, Jamie, and welcome to Digi International's 2020 third fiscal quarter earnings call. Before covering our business results and outlook, I'd like to comment on the pandemic and our initiatives around diversity and inclusion. Unfortunately, COVID-19 has been a difficult disease for us to suppress on a global basis. It's contagious and cunning, putting our society in a difficult position to balance our personal and economic well-being. With the exception of DIGI's own heroes that must be physically present at our offices, the vast majority of our team is working productively from their homes. We have had a handful of positive cases within Digi, but all have recovered safely and have not impacted others, in big part due to our policies and our great team's consideration for each other's safety. Our employees' safety remains our top priority. Leadership meets frequently to steward both our team and our company's health. While hope will never fade, we increasingly believe that this new normal of social distancing, mask wearing, distributed working, and limited travel will be with us for some time. Thank you for joining us today. I join the CEO Action Pledge working to improve our diversity and inclusion. We have formed an employee-led committee that is focused on promoting and cultivating an inclusive and diverse culture which welcomes everyone without bias and fosters active engagement in our communities to promote and social equity. In turn, we are baselining our company, planning for continuous learning and taking other actions to promote these aims. We look forward to these initiatives positively impacting DIGI and our society. On to our business. We are very pleased with our results, given the tremendous impact the virus-induced recession has had on the global economy, including a record decline in US GDP. DIGI's core value proposition of enabling remote work and enhanced productivity resonates in the urgency of our customers' need for technology to create more productive and safe environments. We believe strongly these trends and investments have both accelerated and that these businesses are looking to experts like Digi to solve their business and mission critical challenges. With over 35 years of experience, success across thousands of customers, and having provided millions of solutions, Digi is uniquely positioned to power the market's IoT solutions. With our best fiscal third quarter performance in the company's history, occurring in the most severely virus impact quarter to date, Digi's business model showed the same resilience that our solutions, products, and services show for our customers. We grew revenues 15% from last year, recorded gross margins in excess of 50%, and attained a 15% adjusted EBITDA margin to highlight our consolidated results. In addition, we paid down over a dollar a share in debt while maintaining our cash position, lowering our expense, and strengthening our balance sheet. Our Council Server product line, which includes OpenGear, drove a 25% increase in IoT products and services revenues from last year. This growth was moderated by a modest decline in other products and services offerings as the pandemic impacted some of our customers during the quarter. This revenue increase plus gross margin increase and good expense controls led to an 84% increase in adjusted EBITDA. Next, I'll provide some specific updates. We achieved over $46 million in new product revenue fiscal year to date, which is up over 40% from the comparable period in fiscal 2019. We launched the ConnectCore 8 embedded family, the iX20 industrial cellular router, and enhanced console server resiliency products. We are doubling our efforts to improve our channel program. from partner support, deal registration to simplifying our processes. We finalized deployment of our Smart City project and have closed additional business in this vertical. We have opportunities to increase the tax rates of software and services and improving our overall customer experience. IoT products and services has business application and vertical diversification. We experienced strong demand in medical, safe work from home, business continuity, data center, and solar energy sectors. We have seen some business improvement as economies have reopened and business travel is reemerging. Our SmartSense IoT solutions business added about 1,000 subscribers to the quarter, driven by healthcare and retail verticals. Retention remained high, proving the value of our offering. Approximately 69,300 subscribers power 17 million in annualized recurring revenue with approximately 80% gross margins. SmartSense 4, the destination consolidation of the cloud and mobile interface, now services over 1,000 sites. We expect to have approximately 5,000 sites on this platform by fiscal year-end and all of our sites by the end of fiscal 2021. This will unlock tremendous efficiency for our customers and for Digi. We launched Safe Temps, a cloud-based wellness and monitoring solution which captures temperatures, records entry-exit, and tracks conditions of on-site resources for our customers. We onboarded our first customers and generated strong interest in the solution. We are starting to see larger enterprise opportunities re-engage in rollout discussions, which is encouraging and key for us to return to adding 3,000 to 4,000 sites per quarter. The pandemic is dynamic and both easing and tightening business restrictions at a high frequency. However, we've noticed a general trend toward a return to improved business and operations. We believe our offering will be more considered over time and that we'll be able to grow our business in tandem with an increased confidence in the economy. At the corporate level, we continue to progress Digi's efficiency and effectiveness. Software, services, and subscription continue to differentiate our offerings. Thank you for joining us. Thank you. Thank you, Ron.