What changed in this filing

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Item 1. Business

2022-11-23 compared with 2021-11-24 · 66 added, 102 removed, 146 unchanged (54% of the section changed)

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In addition, this segment provides our customers with a device management platform and other professional services to enable customers to capture and manage data from devices connected to networks.

Our IoT Solutions segment primarily consists of our SmartSense by Digi® business.

Our IoT Solutions segment primarily consists of our Managed Network-as –a-Service (“MNaaS”) business acquired last year via our acquisition of Ventus Wireless, LLC and affiliated entities (“Ventus”) and our SmartSense by Digi ® business.

Ventus is a leader in the provision of MNaaS solutions that simplify the complexity of enterprise wide area network (“WAN”) connectivity for customers.

The Ventus portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

SmartSense offers wireless temperature and other condition-based monitoring services as well as employee task management services.

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food service, healthcare (primarily pharmacies and hospitals) and supply chain.

We initially formed, expanded and enhanced our SmartSense by Digi business through four acquisitions.

Following the conclusion of our fiscal 2021, we acquired Ventus Holdings in November 2021.

Ventus makes us a leader in the provision of Managed Network-as-a-Service ("MNaaS") solutions that simplify the complexity of enterprise wide area network ("WAN") connectivity for our customers.

Ventus’s portfolio includes cellular wireless and fixed line WAN solutions for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

We are analyzing the business segment placement of Ventus's business.

At present, we expect it will be included in our IoT Solutions segment, but a final determination is still pending.

For more in-depth descriptions of our products and services, please refer to the heading "Principal Products and Services" at the end of Part I, Item 1 of this Form 10-K.

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Information on our website is not incorporated by reference into this report or any other report we file with or furnish to the SEC.

Ongoing Impacts of COVID-19

The ongoing pandemic continues to create significant uncertainty regarding the nearer term outlook for our operations and the markets where we provide products and services.

While the rollout of vaccines is well underway in many parts of the world, the pandemic (including the recent spread of more contagious variants of the virus) and related economic volatility it has caused still represents a fluid situation that presents a wide and changing range of potential impacts on our own business and those of our customers, vendors and other business partners.

We continue to take a range of actions to assure we comply with government restrictions and guidelines as well as strong practices to protect the health and well-being of our employees and our ability to continue operating our business effectively.

To date, we have been able to operate our business effectively using these measures and to maintain all internal controls as documented and posted.

For example, we have successfully operated in a remote environment to prioritize employee safety without adversely impacting our day-to-day operations.

We also have not experienced challenges in maintaining the continuity of our day-to-day business operations and do not expect to incur material expenditures to do so.

We continue to monitor travel restrictions, and border closures closely so we are positioned to mitigate the negative impacts of any future restrictions or closures.

We also continue to monitor government restrictions, mask mandates, and vaccine mandates in the locations where

we have operations.

Since the start of the pandemic there have not been any material changes to our assets on our balance sheet and, at present, we do not expect there to be material adverse changes.

During fiscal 2021, we reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and determined there to be no material impact at that time .

We also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business related items.

No significant changes to these reserves have been made.

Supply Chain Disruptions

Like many companies, we are experiencing disruptions in our supply chain for a variety of reasons, including the COVID-19 pandemic, container ship backlogs, energy shortages in certain parts of the world, and components and material shortages.

Ongoing Impacts of Global Macro-Economic Conditions

The impacts of global macro-economic conditions, driven largely by the war in Ukraine and the impacts of the Covid-19 pandemic have disrupted supply chains for a range of goods and services, continue to create significant uncertainty regarding the nearer term outlook for our operations and the markets into which we sell.

To date these conditions have primarily impacted our supply chain in adverse ways that include container ship backlogs, energy shortages in certain parts of the world, and components and material shortages.

This has led to shortfalls in available components we need to make products as well as increased costs both to obtain components and to transport components and products.

It has also lengthened the timelines for us to fulfill customer orders.

It has also lengthened the timelines for us to fulfill customer orders, increasing our backlog, and in some cases has led to an inability to meet an increasing level of demand for our products.

The severity of the disruptions is changing continuously, meaning the impact on our ability to meet demand for particular products in a timely manner has been subject to ebb and flow.

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We are taking steps to attempt to mitigate the impact of the disruptions such as placing inventory demand further out into the future to secure our allocations of components, negotiating and engaging with suppliers to reserve components, encouraging customers to place orders earlier than normal due to longer lead times and attempting (in conjunction with customers) to influence political leaders to assure components needed to make products that are essential to the health and well-being of society are prioritized to our customer’s needs by suppliers.

Some of our suppliers are also experiencing supply chain disruptions which in turn has, and may continue to, disrupt our operations.

At present the ongoing duration and severity of these disruptions is not known.

As such, we are unable to predict the ultimate impact of these disruptions on our business and financial results, which could be material.

We also continuously monitor customer demand for the products and services we sell and have not seen material decreases in demand.

Industry and Marketplace Conditions

We believe the IoT industry is in the midst of a multi-year expansion as many industries are undergoing a digital transformation within their business that drives demand for IoT capabilities across a broad spectrum of services.

Among others, IoT use cases include automating workflows, condition-based monitoring and asset tracking.

Our IoT Products & Services segment represented the significant majority of our sales in fiscal 2021.

Among others, IoT use cases include condition-based monitoring of perishable goods, enabling remote work by employees, automating workflows and operations and providing and maintaining secure connectivity and monitoring of operating assets.

Our IoT Products & Services segment represented the majority of our sales in fiscal 2022.

This segment sells both wired and wireless products that are either embedded into the products of OEMs or as stand-alone products.

These offerings allow our customers to connect a wide range of assets to networks.

This segment grew during fiscal 2021, led by increases in our embedded and console servers revenues.

This segment grew during fiscal 2022, led by increases in our cellular and console server revenues.

The segment includes some products that are in the mature phase of their life cycle and have been experiencing sales declines for several years.

We manage this segment with more focus on profitability and more modest revenue growth expectations relative to our IoT Solutions segment.

Our IoT Solutions segment grew significantly in fiscal 2021 primarily because of increased demand for our SmartSense by Digi offerings.

In large part, the increased demand arose because for much of fiscal 2020 some customers in our target markets for these offerings paused new or expanded operating initiatives due to significant uncertainty caused by the onset of the ongoing pandemic.

During fiscal 2021 we added approximately 11,000 new sites that use our SmartSense monitoring services and now monitor in excess of 80,000 locations.

Ventus presently serves over 170,000 sites.

We manage this segment with more focus on revenue growth with more modest profitability growth relative to our IoT Product & Services segment.

On November 2, 2021 we announced our acquisition of Ventus Holdings.

This acquisition makes us a market leader in the provision of MNaaS solutions that simplify the complexity of enterprise WAN connectivity for an array of connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors.

Ventus presently serves over 170,000 sites.

We are in the process of confirming the segment reporting for this business, but presently expect it will be included in our IoT Solutions segment.

While we expect an ongoing long-term trend of marketplace growth, each of our business segments is susceptible to downturns either because of general macro-economic conditions, the continued development of technology that can make products less competitive or even obsolete and uncertainty or changes in regulatory environments.

Given the current uncertainty in macro-economic conditions initiated by the ongoing pandemic, including, but not limited to, ongoing supply chain disruptions globally and the uncertain status of large project-based customer deployment opportunities, our results during fiscal 2022 may be inconsistent.

Recently we have begun to place more emphasis on the delivery of subscription-based solutions offerings for many of these products.

Our IoT Solutions segment grew significantly in fiscal 2022 primarily because of our acquisition of Ventus in our first fiscal quarter.

The segment is comprised primarily of our SmartSense and Ventus offerings.

SmartSense provides condition-based monitoring services for perishable goods such as food and medicines for health-care, pharmaceutical and food industry.

Ventus provides MNaaS offerings to manage and maintain network connectivity for assets such as ATMs and lottery kiosks.

The offerings in this segment are offered on a subscription model and provide us with a stable base of recurring higher-margin revenues.

While our business performed well in fiscal 2022 and we expect an ongoing long-term trend of marketplace growth, each of our business segments is susceptible to downturns either because of general macro-economic conditions, the continued development of technology that can make products less competitive or even obsolete and uncertainty or changes in regulatory environments.

Given the current uncertainty in macro-economic conditions, including, but not limited to, potential recessionary conditions, ongoing supply chain disruptions globally and the uncertain status of large project-based customer deployment opportunities, our results during fiscal 2023 may be inconsistent.

We remain focused on taking steps that we believe will deliver consistent, long-term growth with higher levels of profitability.

Over the last six years, acquisitions have helped significantly advance our strategy for growth and profitability, in both business segments.

This includes continuously reviewing and managing the product and solution offerings we provide to align with customer interests and meet market demand.

In addition, acquisitions have helped significantly advance our offerings and driven growth and profitability, in both business segments.

Over time we expect to continue to be active in making further acquisitions.

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These bundled offerings allow customers to monitor and manage the performance of our hardware remotely.

During fiscal 2021 we made two acquisitions in this segment designated to improve our market position and enhance our path to recurring revenue.

On March 26, 2021, we acquired Haxiot, Inc.

("Haxiot"), a Dallas-based provider of low power wide area ("LPWA") wireless technology.

This acquisition enhanced our IoT Products & Services segment by enhancing Digi's embedded systems portfolio and immediately extending the company's market reach with a complete LoRaWAN®-based solutions offering.

On July 6, 2021, we acquired Ctek, Inc.

("Ctek"), a San Pedro, California-based provider that specializes in solutions for remote monitoring and industrial controls.

Through the acquisition of Ctek, Digi is uniquely positioned to provide customers with both battery and hardwired options for the control and monitoring of critical infrastructure, from complex off-shore oil rig locations to localized deployments such as municipal park lighting.

In addition, Ctek’s offering and existing client portfolio is set to further Digi’s reach in a rapidly expanding market.

This segment generated over $14 million in annualized recurring revenue (ARR) as of September 30, 2022.

Please see "Key Business Metrics" section in Part II, Item 7 for additional details on how ARR is measured.

IoT Solutions Segment

Our IoT Solutions segment is being managed primarily for revenue growth.

This segment was formed through four acquisitions.

Since the last acquisition in October 2017, it has grown through sales growth.

While this segment still represents a modest overall portion of total revenues, we have high organic growth expectations and we will continue to explore added scale through acquisitions.

Our IoT Solutions segment is driven by recurring traditionally high margin subscription-based revenues.

Following our acquisition of Ventus in the first quarter of fiscal 2022, the segment now represents approximately 25% of total revenues.

This segment generated $80 million in ARR as of September 30, 2022.

We have high organic growth expectations and we will continue to explore added scale through acquisitions.

SmartSense by Digi helps customers monitor temperature and other conditions important to preserve the quality of perishable or other sensitive inventories and tracks the completion of employee tasks.

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At present, this marketplace primarily is served by smaller companies that lack the infrastructure to provide hardware-enabled implementation services to customers in as effective and efficient a manner as we are able to do because of our long-standing history as an IoT hardware provider.

As of September 30, 2021, SmartSense by Digi served nearly 81,000 customer sites for many leading brands in the following vertical markets:

SmartSense by Digi presently serves many leading brands in the following vertical markets:

food service, healthcare (primarily pharmacies) and supply chain.

We entered these markets aggressively as they share similar needs for continuous monitoring and asset tracking for compliance and regulatory purposes.

We believe these markets comprise a large addressable market with low customer penetration.

Recent Acquisition of Ventus Holdings

On November 2, 2021 we announced our acquisition of Ventus Holdings.

This acquisition makes a us a leader MNaaS solutions that simplify the complexity of enterprise WAN connectivity for an array of applications in banking, healthcare, retail, gaming, hospitality and other sectors.

Ventus presently provides services to over 170,000 sites.

We are in the process of confirming the segment reporting for this business, but presently expect it will be included in our IoT Solutions segment.

These markets share similar needs for continuous monitoring and asset tracking for compliance and regulatory purposes and we believe they comprise a large addressable market with low customer penetration.

In November 2021, we acquired Ventus Holdings.

Ventus is a leader MNaaS solutions that simplify the complexity of enterprise WAN connectivity for an array of applications in banking, healthcare, retail, gaming, hospitality and other sectors.

Acquisitions and Dispositions

In addition to our fiscal 2021 acquisitions of Haxiot and Ctek and our recent acquisition of Ventus disclosed above, we have made the following acquisitions from fiscal 2016 through fiscal 2020.

We completed the following four acquisitions that served as the basis for our SmartSense by Digi business and our IoT Solutions Segment:

In October 2015, we acquired Ontario-based Bluenica Corporation ("Bluenica").

Bluenica focused on temperature monitoring of perishable goods in the food industry by using wireless sensors to ensure that quality, freshness and public health requirements are met.

In November 2016, we acquired Pittsburgh-based FreshTemp, LLC ("FreshTemp®").

FreshTemp® offered restaurants, convenience stores and other retailers the ability to monitor the temperature of food products automatically through the use of wireless sensors.

The company also enabled these businesses to track the completion of operational tasks by their employees that could impact human health and safety in real time.

In January 2017, we acquired Indiana-based SMART Temps,LLC (" SMART Temps®").

SMART Temps® provided real-time temperature management for restaurant, grocery, education and healthcare settings.

The acquisition significantly expanded our customer base, especially in the pharmacy and education marketplaces.

In October 2017, we acquired Boston-based TempAlert, LLC ("TempAlert"), a provider of automated, real-time temperature monitoring and task management solutions for the healthcare, industrial and food service industries.

This acquisition more than doubled the number of customer sites we monitored while enhancing our ability to analyze data collected from our services.

We also completed the following two acquisitions that augmented product offerings in our IoT Products & Services segment:

In January 2018, we acquired Tampa-based Accelerated Concepts, Inc.

("Accelerated"), a provider of secure, enterprise-grade, cellular (LTE) networking equipment and backup connectivity applications.

This acquisition expanded our IoT Products & Services segment by enhancing our existing cellular product lines and extended our market reach with a line of commercial routers and network appliance products.

In addition to our fiscal 2022 acquisition of Ventus disclosed above, we have made the following acquisitions from fiscal 2020 through fiscal 2021.

In December 2019, we acquired New Jersey-based Opengear, Inc.

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This acquisition provides products that are complementary to our IoT Products & Services segment.

In March 2021, we acquired Haxiot, Inc.

("Haxiot ® "), a provider of low power wide area ("LPWA") wireless technology.

In July 2021, we acquired Ctek, Inc.

("Ctek"), a provider that specializes in solutions for remote monitoring and industrial controls.

Through the acquisition of Ctek, Digi is uniquely positioned to provide customers with both battery and hardwired options for the control and monitoring of critical infrastructure, furthering Digi’s reach in a rapidly expanding market.

Sales Channels

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Our IoT Solutions segment historically has not sold through these channels.

We also complete sales of both IoT Products & Services and IoT Solutions through our own dedicated sales organization to OEMs, large enterprise customers and other end user customers which accounted for 53.0%, 62.5% and 53.9% of our total consolidated revenue in fiscal 2021, 2020 and 2019, respectively.

We also complete sales of both IoT Products & Services and IoT Solutions through our own dedicated sales organization directly to a wide range of end user customers.

This dedicated sales team accounted for 50.0%, 53.0% and 62.5% of our total consolidated revenue in fiscal 2022, 2021 and 2020, respectively.

Our larger distributors, by sales volume, include Arrow Electronics, Avnet, Bressner Technology GmbH, Digi-Key, Express Systems & Peripherals, Ingram Micro, Mouser Electronics, Solid State Supplies, Symmetry Electronics, Synnex, Tech Data, Tokyo Electron Device and Venco Electrónica S.A.

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Among others, relationships include:

AT&T, NXP, Orange, Rogers, Silicon Laboratories, T-Mobile, Telus, Telit, T-Mobile, Verizon, Vodafone and several other cellular carriers worldwide.

AT&T, NXP, Orange, Rogers, Silicon Laboratories, T-Mobile, Telus, Telit, Verizon, Vodafone and several other cellular carriers worldwide.

We have established relationships with equipment vendors in a range of industries such as energy, industrial, retail, transportation, medical, and government that allow these partners to ship our products and services as component parts of their overall solutions.

Our products are used by many of the world’s leading telecommunications companies and Internet service providers, including AT&T, T-Mobile and Verizon.

No single customer comprised more than 10% of our consolidated revenue for any of the years ended September 30, 2021, 2020 or 2019.

Our products are used by many of the world’s leading telecommunications companies and Internet service providers, including, among others, AT&T, T-Mobile and Verizon.

No single customer comprised more than 10% of our consolidated revenue for any of the fiscal years 2022, 2021 or 2020.

We compete primarily in the communications technology industry.

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In addition, we may compete with other companies to acquire new businesses or technologies and the competition to secure such assets may be intense.

We compete for customers on the basis of existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliance relationships, quality and reliability, product development capabilities, price and availability.

We compete for customers on the basis of

existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, alliance relationships, quality and reliability, product development capabilities, price and availability.

While no competitor offers a comparable range of products and services, various companies do compete with us with respect to one or more of our products or solutions.

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Manufacturing Operations

We outsource our manufacturing operations to certain contract manufacturers, which are located primarily in Thailand, China, Mexico and Taiwan.

We outsource our manufacturing operations to certain contract manufacturers, which are located primarily in Thailand, Mexico, Taiwan and China.

We rely on third party foundries or companies who rely on third party foundries for our semiconductor devices that are Application Specific Integrated Circuits ("ASICs").

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We have several single-sourced supplier relationships, either because alternative sources are not available or because the relationship is advantageous to us.

As disclosed elsewhere, our manufacturing operations, like those of other companies, are dependent on relationship s with these suppliers who are also experiencing supply chain disruptions.

As disclosed elsewhere, our manufacturing operations, like those of other companies, are dependent on relationships with these suppliers who are also experiencing supply chain disruptions.

If these suppliers are unable to provide a timely and reliable supply of components, we could experience manufacturing delays that could adversely affect our consolidated results of operations in a material way.

In addition, since the onset of the global pandemic there has been increased attention focused on actions of the Chinese government with respect to a wide range of businesses in that country.

It is possible that changes in government policy in China could also disrupt the supply of components or end products we produce.

In general, our business is not considered to be highly seasonal, although our first fiscal quarter revenue is often less than other quarters due to holidays and fewer shipping days.

In an effort to mitigate supply chain exposure, we have increased our amount of inventory on hand.

In addition, as a result of the global pandemic, there has been increased attention focused on actions of the Chinese government with respect to how they attempt to mitigate the impacts of the pandemic.

Also, as a result of the war in Ukraine, governments around the world have imposed sanctions on Russia and Belarus.

These situations could lead to potential adverse impacts on a wide range of businesses and could disrupt the supply of components or end-products that we produce.

In general, our business is not considered to be highly seasonal, although our first fiscal quarter revenue is often less than other quarters due to holidays and fewer business days.

Research & Development and Intellectual Property Rights

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While we dedicate significant resources to research and development, many of our competitors are focused on a smaller set of products than us and are likely able to dedicate more resources than us toward the portions of the market in which we compete with them.

In recent periods, as a result of supply chain constraints, a significant portion of our research & development spending has been focused on the re-design or reconfiguration of existing products using different components.

This has lowered our ability to focus on new product development.

Our proprietary rights and technology are protected by a combination of copyrights, patents, trade secrets and trademarks.

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Our patents are applicable to specific technologies and are valid for varying periods of time based on the date of patent application or patent grant in the U.S.

and the legal term of patents in the various foreign countries where patent protection is

and the legal term of patents in the various foreign countries where patent protection is obtained.

We believe our intellectual property has significant value and is an important factor in the marketing of our company and products.

HUMAN CAPITAL RESOURCES

Digi International’s workforce consists of approximately 659 employees globally as of September 30, 2021.

Digi’s workforce consists of approximately 790 employees globally as of September 30, 2022.

We consider our relationship with our employees to be good.

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Hardware Products

Cellular Products – We provide a range of products that use cellular technology such as Long Term Evolution (“LTE”) and LTE Advance Pro to communicate with networks.

These products provide a cost-effective alternative to landlines for primary

or backup connectivity.

They are trusted by global leaders in agricultural, energy medical, lighting, transportation and other industrial markets and include:

• Cellular routers that help enterprise, government and OEM customers with their mission-critical wireless connectivity needs in challenging environments.

Cellular Products – We provide a range of products that use cellular technology such as Long Term Evolution (“LTE”), LTE Advance Pro and 5 th Generation wireless protocols to communicate with networks.

These products provide a cost-effective, more flexible alternative to landlines for primary or backup connectivity.

They are trusted by global leaders in agricultural, energy medical, lighting, digital signage, gaming, electric charging and transportation, as well as other industrial and enterprise markets including:

• Cellular routers that help enterprise, government, industrial, transportation and OEM customers with their mission-critical wireless connectivity needs in challenging, remote and mobile environments.

• Cellular modules that help OEM customers embed cellular communications abilities into their products so they can deploy and manage intelligent and secure cellular connected products.

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These products also include battery and hardwired options for the control and monitoring of critical infrastructure.

Digi Remote Manager® - Digi Remote Manager® is a recurring revenue cloud-based service that provides a secure environment for customers to manage their connected device deployment.

This service allows customers to activate, monitor and diagnose a large number of mission-critical devices from a single point of command.

Through a "single pane of glass," network managers can edit configurations, update firmware, and schedule and automate tasks from their desktop, tablet or phone.

Digi Remote Manager - Digi Remote Manager is a recurring revenue cloud-based service that provides a secure environment for customers to manage their connected device for the full deployment lifecycle.

This service enables customers to activate, monitor, diagnose, reset, update and/or upgrade their entire network of mission-critical devices from a single point of command.

Through a "single pane of glass," network managers can manage configurations, update firmware, add features and schedule and automate tasks from their desktop, tablet or phone.

Lighthouse ® Management Software - Lighthouse is a recurring revenue cloud-based service that provides a secure environment for customers to manage their network devices by providing secure access to remote networks regardless of how they are connected or how a user interacts with the system.

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Typically, customers receive hardware up-front, including gateways and sensors, and pay for an annual subscription for monitoring sensor data.

Recent Acquistion of Ventus Holdings

We announced our acquisition of Ventus Holdings on November 2, 2021.

This acquisition makes us a leader in the provision MNaaS solutions that simplify the complexity of both wireless and fixed-line WAN connectivity.

Our portfolio includes an array of connectivity applications in the banking, healthcare, retail, gaming, hospitality and other sectors.

Supporting ATMs, gaming, point-of-sale, kiosks, digital signing and retail applications, Ventus works closely with its customers to customize innovative MNaaS solutions.

We are in the process of confirming the segment reporting for this business, but presently expect it will be included in our IoT Solutions segment.

Ventus is a leader in providing comprehensive MNaaS solutions that simplify the complexity of both wireless and fixed-line WAN connectivity.

With comprehensive end-to-end security, our portfolio includes an array of connectivity applications in the banking, healthcare, retail, gaming, hospitality and other sectors.

Supporting ATMs, gaming, point-of-sale, kiosks, digital signing and retail applications, Ventus works closely with its customers to customize innovative long-term MNaaS solutions.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business