What changed in this filing

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Item 1. Business

2023-11-22 compared with 2022-11-23 · 58 added, 77 removed, 135 unchanged (50% of the section changed)

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("Digi ® ," "we," "our," or "us") was incorporated in 1985 as a Minnesota corporation.

We were reorganized as a Delaware corporation in 1989 in conjunction with our initial public offering.

Our common stock is traded on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC under the symbol DGII.

We reorganized as a Delaware corporation in 1989 in conjunction with our initial public offering.

Our common stock trades on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC under the symbol DGII.

Our World Headquarters is located at 9350 Excelsior Blvd., Suite 700, Hopkins, Minnesota 55343.

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We help our customers deploy, monitor and manage critical communications infrastructures that deliver important information in demanding environments with high levels of security and reliability.

We have two reportable operating segments under applicable accounting standards:

We have two reportable segments under applicable accounting standards:

(i) IoT Products & Services;

and (ii) IoT Solutions.

Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions.

From embedded and wireless modules to console servers as well as enterprise and industrial routers, we provide a wide variety of communication sub-assemblies and finished products to meet our customers' IoT communication requirements.

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 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.

Our IoT Products & Services segment offers products and services that help original equipment manufacturers ("OEMs") as well as enterprise and government customers create and deploy secure IoT connectivity solutions.

These include embedded and wireless modules, console servers, enterprise and industrial routers as well as other infrastructure management equipment to meet our customers' IoT communication requirements.

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

Our IoT Solutions segment consists of our SmartSense by Digi ® business and our Managed Network–as–a-Service (“MNaaS”) business acquired via our November 2021 acquisition of Ventus Wireless, LLC and affiliated entities ("Ventus").

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

These solutions focus on the following vertical markets:

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

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.

These solutions are focused on the following vertical markets:

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

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.

Our corporate website address is www.digi.com.

In the "Company - Investor Relations" section of our website, we make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement and any amendments to these reports available free of charge as soon as reasonably practicable after these reports are filed with or furnished to the United States Securities and Exchange Commission ("SEC").

In the "Company–Investor Relations" section of our website, we make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our annual proxy statement and any amendments to these reports available free of charge as soon as reasonably practicable after they are filed with or furnished to the United States Securities and Exchange Commission ("SEC").

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 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, 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.

In some instances, these disruptions have been material and it is possible more material disruptions will occur.

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.

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

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Our IoT Products & Services segment represented the majority of our sales in fiscal 2023.

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

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

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

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.

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.

This segment grew during fiscal 2023, led by increases in our OEM and Infrastructure Management revenues.

Historically the revenues from this segment have been based on one-time product sales.

More recently we have placed greater emphasis on selling subscription-based solutions across this product portfolio.

Our IoT Solutions segment is comprised primarily of our SmartSense by Digi and Ventus offerings.

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

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.

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

While our business performed well in fiscal 2023 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, supply chain disruptions globally and the uncertain status of large project-based customer deployment opportunities, our results during fiscal 2024 may be inconsistent quarter to quarter or with historical results.

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

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

This includes continuously reviewing and managing the product, service 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.

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IoT Products & Services Segment

Our IoT Products & Services segment is being managed so our product management and sales personnel are aligned along specific product lines to bring greater market focus and potential growth to the product lines.

Our IoT Products & Services segment is managed so our product management and sales personnel are aligned along specific product lines.

We believe this management structure brings greater market focus and potential growth to our product lines.

We also continue to drive efforts to pair our hardware offerings with our Digi Remote Manager ® device management platform as well as other support services.

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

These bundled offerings are sold on a subscription basis and allow customers to monitor and manage the performance of our hardware remotely.

This segment generated over $22 million in annualized recurring revenue ("ARR") as of September 30, 2023.

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IoT Solutions Segment

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.

Our IoT Solutions segment is managed with a focus on recurring traditionally high margin subscription-based revenues.

We believe capturing enterprise-level deals should be a driver of growth, leveraging our direct sales model to achieve this.

Our offerings provide comprehensive hardware-enabled software solutions.

The segment represents nearly 25% of total revenues.

This segment generated $84 million in ARR as of September 30, 2023.

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.

Our efforts have created a market-leading, high-growth hardware enabled service business with a significant recurring revenue base.

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.

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

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

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.

We have long-term high organic growth expectations and we will continue to explore added scale through acquisitions for this segment.

Acquisitions and Dispositions

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.

("Opengear ® "), a provider of secure IT infrastructure products and software.

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

In addition to our fiscal 2022 acquisition of Ventus disclosed above, we have made the following acquisitions during our fiscal years 2021 through 2023:

In March 2021, we acquired Haxiot, Inc.

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These third parties accounted for 59.9%, 50.0% and 47.0% of our total consolidated revenue in fiscal 2023, 2022 and 2021, respectively.

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 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.

Our IoT Solutions segment does not sell through these channels.

The remaining 40.1%, 50.0% and 53.0% of our total consolidated revenue in fiscal 2023, 2022 and 2021, respectively is sold through our dedicated sales organization.

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

We also maintain relationships with many other distributors both domestically and internationally.

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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, among others, AT&T, T-Mobile and Verizon.

Our products utilize 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 2023, 2022 or 2021.

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

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, the quality and reliability of our offerings, 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.

With respect to many of our product and service offerings, we face competition from companies who dedicate more resources and attention to that particular offering than we are able to do given the breadth of our business.

As the marketplace for IoT connectivity products and solutions continues to grow, we expect to encounter increased competition.

Some of these competitors may have access to significantly more financial and technical resources than we possess.

Some of these competitors may have access to significantly more financial and technical resources than we possess which could give them advantages in their ability to develop new and better offerings, to meet customer demands, to comply more quickly with new regulatory regimes and to promote and sell their products.

Manufacturing Operations

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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").

These foundries are located primarily in Taiwan.

We also outsource printed circuit board production.

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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 relationships 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, like us, are subject to potential 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 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.

In an effort to mitigate supply chain exposure, we have increased our amount of inventory on hand from historical levels and will monitor whether adjustments to inventory levels are necessary to mitigate any future exposures.

Further, a range of conditions and circumstances beyond our control such as global conflicts, recessionary economic conditions in various regions of the world or a recurrence of the Covid-19 pandemic could disrupt the availability of raw materials and components as well as our capacity to make and distribute our products.

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.

In recent periods, as a result of supply chain constraints, a significant portion of our research and 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.

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HUMAN CAPITAL RESOURCES

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

Digi’s workforce consists of 822 employees globally as of September 30, 2023.

We consider our relationship with our employees to be good.

As employees of Digi we are all expected to uphold the following core values that drive our culture:

• Accountability

• Respect and open communication

At Digi we promote cultural imperatives that drive our approach to our daily work and our customer care:

• Customer focus

• Start-up urgency

• Positive Energy - Bring solutions to problems

• Commitment to outcomes & results

• Embrace Diversity & Inclusion

These core values define the way we do business in our everyday actions and choices.

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PRINCIPAL PRODUCTS AND SERVICES

Our primary products and services for each operating segment are:

Our primary products and services for each reportable segment are:

IoT Products & Services Segment

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Designed with security, scalability and automation in mind, Lighthouse allows engineers to control every aspect of their network through a central hub.

Technical Services - Our Technical Services provide professional services, data plan subscriptions and enhanced technical support offers to customers.

Technical Services – Our Technical Services provide professional services, data plan subscriptions and enhanced technical support to customers.

Professional services include solution planning and implementation services to customers who purchase our products such as site planning, implementation management, application development and customer training.

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(i) monitor wirelessly the temperature of food and other perishable or sensitive goods, (ii) monitor facilities or pharmacies by tracking the completion of operating tasks by employees, and (iii) have visibility in the supply chain to product temperature through an end-to-end system for quality control and incident management.

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

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.

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

SmartSense by Digi is increasingly pivoting to providing a comprehensive Sensing-as-a-service solution to better address customers' needs and expand its role as a leader in this solution space.

Ventus – 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, access control, EV charging, hospitality and other sectors.

Supporting ATMs, gaming, point-of-sale, kiosks, digital signage 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