Item 5. Market for Registrant’s Common Equity
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Listing
Our common stock is listed under the symbol DGII on the Nasdaq Global Select Market tier of the Nasdaq Stock Market LLC. On November 20, 2023 there were 97 stockholders of record.
Issuer Repurchases of Equity Securities
The following table presents the information with respect to purchases made by or on behalf of Digi International Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the fourth quarter of fiscal 2023:
Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of a Publicly Announced Program Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
July 1, 2023 - July 31, 2023 — $ — — $ —
August 1, 2023 - August 31, 2023 8,841 $ 30.61 — $ —
September 1, 2023 - September 30, 2023 — $ — — $ —
Total 8,841 $ 30.61 — $ —
(1) All shares reported were forfeited by employees in connection with the satisfaction of tax withholding obligations related to the vesting of restricted stock units.
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Performance Evaluation
The graph below compares the total cumulative stockholders’ return on our common stock for the period from the close of the Nasdaq Stock Market - U.S. Companies on September 30, 2018 to September 30, 2023, the last day of fiscal 2021, with the total cumulative return for the Nasdaq U.S. Benchmark TR Index (the "U.S. Benchmark Index") and the Nasdaq Telecommunications Index (the "Peer Index") over the same period. We have determined that our line of business is mostly comparable to those companies in the Peer Index. The index level for the graph and table was set to $100 on September 30, 2018, for our common stock, the U.S. Benchmark Index and the Peer Index and assumes the reinvestment of all dividends.
FY18 FY19 FY20 FY21 FY22 FY23
Digi International Inc. $ 100.00 $ 101.26 $ 116.21 $ 156.65 $ 257.03 $ 200.74
Nasdaq U.S. Benchmark TR Index $ 100.00 $ 102.97 $ 118.89 $ 156.96 $ 128.70 $ 155.13
Nasdaq Telecommunications Index $ 100.00 $ 114.51 $ 118.16 $ 130.21 $ 94.60 $ 112.75
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our management’s discussion and analysis should be read in conjunction with our consolidated financial statements and other information in this Annual Report on Form 10-K.
We have omitted discussion of the earliest of the three years covered by our consolidated financial statements presented in this report because that disclosure was already included in our Annual Report on Form 10-K for fiscal 2022, filed with the SEC on November 23, 2022. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for fiscal 2021 compared to fiscal 2022.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-K contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-Looking Statements
This discussion contains forward-looking statements that are based on management’s current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "anticipate," "intend," "estimate," "target," "may," "will," "expect," "plan," "potential," "project," "should," or "continue," or the negative thereof or other variations thereon or similar terminology. Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary policies of governments globally as well as present concerns about a potential recession and the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, risks arising from the present war in Ukraine and the Middle East, the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.
These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, those set forth in Item 1A, Risk Factors, of this Annual Report on Form 10-K, subsequent filings on Form 10-Q and other filings, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are beyond our ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading global provider of business and mission-critical IoT connectivity products, services and solutions. Our business is comprised of two reporting segments: IoT Products & Services and IoT Solutions.
In fiscal 2023, our key operating objectives included:
• continuing to transition to complete solutions with software and service offerings included with our products, as this drives ARR, which provides more predictable and higher margin revenues; and
• delivering a higher level of services across our businesses.
During fiscal 2023 we delivered on these objectives by increasing ARR by 12% from the end of fiscal 2022 to the end of fiscal 2023. This included an increase of 47% in our Products and Services business segment and 5% in our Solutions business segment. We also believe our high service levels are evidenced by an overall increase in revenues of 15% from fiscal 2022 to fiscal 2023.
We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for fiscal 2023 that we feel are most important in these evaluations, with comparisons to fiscal 2022:
• Consolidated revenue was $445 million, an increase of 15%.
• Consolidated gross profit was $252 million, an increase of 17%.
• Gross profit margin was 56.7% versus 55.7%.
• Net income was $25 million, compared to $19 million, an increase of 28%.
• Diluted earnings per share was $0.67, compared to $0.54, an increase of 24%.
• Adjusted net income was $74 million , or $1.99 per diluted share, compared to $60 million , or $1.66 per diluted share, an increase of 20% .
• Adjusted EBITDA was $97 million , or 21.7% of revenue, compared to $79 million or 20.5% of revenue.
• ARR was over $106 million at the end of the fiscal year, an increase of 12%.
Key trends regarding our existing business
There are a number of circumstances globally that we are monitoring for potential impacts on our business. While the Covid-19 pandemic has ceased disrupting daily life, new variants of the virus continue to emerge. If any of these are considered dangerous, governments may react with a return to more restrictive policies. Global economic conditions and political tensions also have the ability to cause business disruptions. For instance, because of the war in Ukraine sanctions remain imposed on trade with Russia and Belarus which has the potential to disrupt the supply of raw materials needed to make components. Political tensions between China and western governments have become more heightened which could lead to similar disruptions. And the ongoing war in the Middle East could have a range of negative impacts for the global economy such as increases in the price of oil which could impact transportation costs. Central banks globally have increased interest rates significantly in an effort to combat inflation which has heightened concerns of recession in many regions of the world. These situations could all lead to potential adverse impacts on a wide range of businesses and could disrupt supply chains and impact the businesses of our vendors and customers in ways that could impact our sales.
With respect to supply chain, conditions did improve during fiscal 2023, but we still experience shortages of some important components. These supply chain shortages have led to component purchases at levels that were higher than historical trends to assure we could meet customer demand which drove higher levels of inventory. We increased our inventory write downs in the fourth fiscal quarter of 2023. We expect the supply chain to continue to normalize in fiscal 2024 as we work through elevated inventory levels.
In addition, to the above macro conditions, we believe the following trends will continue to impact our business in fiscal 2024 and beyond:
• We believe the market for Industrial IoT products and services is in the midst of a long-term expansion across a broad range of industries and solutions.
• As recurring revenue from subscription and cloud monitoring services becomes a greater portion of our overall revenue, delivering at higher gross margins rates than one-time revenue, we expect gross margin rates to expand.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth selected information derived from our consolidated statements of operations, expressed as a percentage of revenue and as a percentage of change from year-to-year for the years indicated:
Year ended September 30, % Increase (decrease)
2023 2022 2023 compared to 2022
Revenue 100.0 100.0 —
Cost of sales 43.3 44.3 (1.0)
Gross profit 56.7 55.7 1.0
Operating expenses 45.4 45.9 (0.5)
Operating income 11.3 9.8 1.5
Other expense, net (5.7) (5.0) (0.7)
Income before income taxes 5.6 4.8 0.8
Income tax benefit — (0.2) 0.2
Net income 5.6 % 5.0 % 0.6
REVENUE BY SEGMENT
Year ended September 30,
($ in thousands) 2023 2022 % Increase (decrease)
Revenue
IoT Products & Services $ 345,680 77.7 % $ 297,645 76.7 % 16.1
IoT Solutions 99,169 22.3 90,580 23.3 9.5
Total revenue $ 444,849 100.0 % $ 388,225 100.0 % 14.6
IoT Products & Services
IoT Products & Services revenue increased 16.1% for fiscal 2023, as compared to fiscal 2022. This primarily was the result of growth in the volume of sales in our OEM and Infrastructure Management product lines.
IoT Solutions
IoT Solutions revenue increased 9.5% for fiscal 2023, as compared to fiscal 2022. This was the result of growth in the volume of sales in both our SmartSense by Digi and Ventus offerings, as well as 2022 results excluding the results of Ventus prior to our November acquisition.
ARR
ARR was $106 million as of September 30, 2023, compared to $95 million as of September 30, 2022. IoT Products & Services ARR was $22 million as of September 30, 2023, compared to $15 million as of September 30, 2022. IoT Solutions ARR was $84 million as of September 30, 2023, compared to $80 million as of September 30, 2022. These increases in ARR in both business segments were driven by the expansion of business with existing customers who purchase on a subscription basis as well as sales to new customers. While it is possible to experience a loss of subscription based customer business due to contraction of a customer’s business or through competition, in general we believe if we provide a high level of service to our subscription based customers our level of ARR will continue to increase over time.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COST OF GOODS SOLD AND GROSS PROFIT BY SEGMENT
Below are our segments' cost of goods sold and gross profit as a percentage of their respective total revenue:
Year ended September 30, Basis point increase (decrease)
($ in thousands) 2023 2022
Cost of Goods Sold
IoT Products & Services $ 157,722 45.6 % $ 137,528 46.2 % (60)
IoT Solutions 34,924 35.2 % 34,411 38.0 % (280)
Total cost of goods sold $ 192,646 43.3 % $ 171,939 44.3 % (100)
Year ended September 30, Basis point increase (decrease)
($ in thousands) 2023 2022
Gross Profit
IoT Products & Services $ 187,958 54.4 % $ 160,117 53.8 % 60
IoT Solutions 64,245 64.8 % 56,169 62.0 % 280
Total gross profit $ 252,203 56.7 % $ 216,286 55.7 % 100
IoT Product & Services
IoT Products & Services gross profit margin increased 60 basis points for fiscal 2023 as compared to the prior fiscal year. This increase was primarily the result of a reduction in the price of component purchases due to eased inflationary pressures partially offset by write-downs of inventory.
IoT Solutions
The IoT Solutions gross profit margin increased 280 basis points for fiscal 2023 as compared to the prior fiscal year. This increase was primarily the result of growth in higher margin ARR subscription revenues.
OPERATING EXPENSES
Below are our operating expenses and operating expenses as a percentage of total revenue:
Year ended September 30,
($ in thousands) 2023 2022 $ increase (decrease) % Increase (decrease)
Operating expenses:
Sales and marketing $ 81,681 18.3 % $ 70,366 18.1 % $ 11,315 16.1 %
Research and development 58,648 13.2 55,098 14.2 3,550 6.4
General and administrative 61,779 13.9 58,802 15.2 2,977 5.1
Change in fair value of contingent consideration — — (6,200) (1.6) 6,200 N/M
Total operating expenses $ 202,108 45.4 % $ 178,066 45.9 % $ 24,042 13.5 %
The $24.0 million increase in operating expenses in fiscal 2023 from fiscal 2022 primarily was the result of no fair value changes of contingent consideration in 2023 compared to a $6.2 million gain in 2022, incremental investments in Opengear and SmartSense by Digi, an increase in stock-based compensation expense and an increase in costs associated with ongoing litigation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER EXPENSE, NET
Year ended September 30,
($ in thousands) 2023 2022 $ increase (decrease) % Increase (decrease)
Other expense, net:
Interest expense, net $ (25,236) (5.7) % $ (19,690) (5.1) % $ (5,546) 28.2 %
Other expense, net 59 — 98 — (39) (39.8)
Total other expense, net $ (25,177) (5.7) % $ (19,592) (5.1) % $ (5,585) 28.5 %
The $5.6 million increase in other expense in fiscal 2023 from fiscal 2022 primarily was the result of an increase in our interest expense due to an increase in our effective interest rate (see Note 7 to the condensed consolidated financial statements).
INCOME TAXES
Our effective income tax benefit rates were 0.6%, (4.1)% and (15.2)% for fiscal 2023, 2022 and 2021, respectively. Our effective tax rate will vary based on a variety of factors. These include our overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and discrete events, such as settlement of audits (see Note 12 to our consolidated financial statements).
KEY BUSINESS METRICS
Annualized Recurring Revenue, or ARR, represents the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. Subscriptions primarily include contracts for term-based equipment usage, the delivery of data insights, extended warranty coverage or customer service coverage. ARR excludes one-time items such as non-bundled hardware sales, professional services and wireless design services. Contracts with known, future expiration dates are included in ARR through their expiration date as long as collection is deemed likely. ARR should be viewed independently of revenue and deferred revenue and is not intended to replace or forecast either item. Digi management uses ARR to manage and assess the growth of our subscription revenue business. Because ARR does not have a consistent definition, it is unlikely to be compared to the similarly titled measurements of other companies. We believe ARR is an indicator of the scale of our subscription revenue business and is less subject to seasonality and contract term changes than other metrics.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL INFORMATION
This report includes adjusted net income, adjusted net income per diluted share and adjusted earnings before interest, taxes and amortization ("Adjusted EBITDA"), each of which is a non-GAAP financial measure.
Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that actually were recognized by Digi. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. We believe these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs.
We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation expense, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense related to acquisition permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals and changes in fair value of contingent consideration is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired.
Below are reconciliations from GAAP to Non-GAAP information that we feel is important to our business:
Reconciliation of Net Income to Adjusted EBITDA
(In thousands)
Year ended September 30,
2023 2022
% of total
revenue % of total
revenue
Total revenue $ 444,849 100.0 % $ 388,225 100.0 %
Net income 24,770 5.6 % $ 19,383 5.0 %
Interest expense, net 25,236 19,690
Income tax (benefit) 148 (755)
Depreciation and amortization 31,979 33,839
Stock-based compensation expense 13,286 8,578
Changes in fair value of contingent consideration — (6,200)
Restructuring charge 141 275
Acquisition and integration expense 940 4,605
Adjusted EBITDA $ 96,500 21.7 % $ 79,415 20.5 %
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reconciliation of Net Income and Net Income per Diluted Share to
Adjusted Net Income and Adjusted Net Income per Diluted Share
(In thousands, except per share amounts)
Year ended September 30,
2023 2022
Net income and net income per diluted share 24,770 $ 0.67 $ 19,383 $ 0.54
Amortization 25,226 0.68 27,195 0.76
Stock-based compensation expense 13,286 0.36 8,578 0.24
Other non-operating expense (59) — (98) —
Acquisition and integration expense 940 0.03 4,605 0.13
Changes in fair value of contingent consideration — — (6,200) (0.17)
Restructuring charge 141 — 275 0.01
Interest expense, net 25,236 0.68 19,690 0.54
Tax effect from above net income adjustments (1)
(18,488) (0.50) (9,901) (0.28)
Discrete tax benefits (2)
2,490 0.07 (3,933) (0.11)
Adjusted net income and adjusted net income per diluted share (3)
$ 73,542 $ 1.99 $ 59,594 $ 1.66
Diluted weighted average common shares 36,869 35,995
(1) The tax effect from the above adjustments assumes an estimated effective tax rate of 18.0% for fiscal 2023 and 2022 based on adjusted net income.
(2) For the twelve months ended September 30, 2023 and September 30, 2022, discrete tax benefits include excess tax benefits recognized on stock compensation and expiring statute of limitations.
(3) Adjusted net income per diluted share may not add due to the use of rounded numbers.
LIQUIDITY AND CAPITAL RESOURCES
Historically we have financed our operations and capital expenditures principally with funds generated from operations. In fiscal 2021 we issued an equity offering and in fiscal 2022 we issued debt to fund our acquisition of Ventus. Our liquidity requirements arise from our working capital needs, and to a lesser extent, our need to fund capital expenditures to support our current operations and facilitate growth and expansion.
During the second quarter of fiscal 2021 we sold 4,025,000 shares of our common stock and received net proceeds of $73.8 million (see Note 13 to our consolidated financial statements).
Our outstanding debt as of September 30, 2023 was issued under a third amended and restated credit agreement Digi entered with BMO on December 22, 2021. Digi refinanced the Term Loan Facility and Revolving Loan Facility under its existing credit agreement entered into on November 1, 2021, but did not receive any additional proceeds from nor modify the amounts of any facilities or subfacilities contained within that credit agreement. The credit agreement consists of a $350 million term loan B secured loan and a $35 million revolving credit facility. The $35 million revolving credit facility, which presently has no outstanding balance, includes a $10 million letter of credit subfacility and $10 million swingline subfacility. As of September 30, 2023, $35.0 million remained available under the Revolving Loan, which included $10 million available for a letter of credit subfacility and $10 million available under a swingline subfacility, the outstanding amounts of which decrease the available commitment. For additional information regarding the terms of our Credit Facility (see Note 7 to our consolidated financial statements).
We expect positive cash flows from operations. We believe that our current cash and cash equivalents balances, cash generated from operations and our ability to borrow under our credit facility will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As follows, our consolidated statements of cash flows for the years ended September 30, 2023 and 2022 is summarized:
Year ended September 30,
($ in thousands) 2023 2022
Operating activities $ 36,751 $ 37,740
Investing activities (4,345) (349,528)
Financing activities (34,500) 192,782
Effect of exchange rate changes on cash and cash equivalents (1,113) 1,474
Net decrease in cash and cash equivalents $ (3,207) $ (117,532)
Cash flows from operating activities decreased $1.0 million primarily as a result of:
• an increase in net operating assets and liabilities (net of acquisitions) during fiscal 2023 of $19.1 million, compared to $18.4 million in fiscal 2022,
• a decrease in amortization expense, and
• increases in deferred income tax benefits (provisions) and provisions for bad debt.
These decreases were partially offset by:
• no changes in the fair value of contingent consideration in fiscal 2023 compared to a decrease of $6.2 million in fiscal 2022, and
• increases in stock compensation expense and net income.
Cash flows used in investing activities decreased $345.2 million primarily as a result of:
• no acquisitions occurring in fiscal 2023 compared to $347.5 million used for acquisitions in fiscal 2022, primarily related to our November 2021 acquisition of Ventus (see Note 2 to the consolidated financial statements).
This increase was partially offset by:
• an increase in purchases of property, equipment, improvements and certain other intangible assets.
Cash flows from financing activities decreased $227.3 million primarily as a result of:
• no proceeds from loans in fiscal 2023 compared to $350.0 million in proceeds from the Term Loan issued in November 2021 in fiscal 2022, and
• a reduction in proceeds from stock plan transactions.
This decrease was partially offset by:
• payments on debt of $36.4 million in fiscal 2023 compared to $148.1 million in fiscal 2022,
• no payments of debt issuance costs in fiscal 2023 compared to $13.4 million in fiscal 2022,
• an increase in ESPP proceeds, and
• a decrease in taxes paid for net share settlements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at September 30, 2023:
Payments due by fiscal period
($ in thousands) Total Less than 1 year 1-3 years 3-5 years Thereafter
Operating leases $ 20,276 $ 3,999 $ 6,634 $ 3,938 $ 5,705
Revolving loan 213,625 17,500 35,000 35,000 126,125
Interest on long-term debt 90,492 21,978 37,442 29,977 1,095
Total $ 324,393 $ 43,477 $ 79,076 $ 68,915 $ 132,925
The operating lease agreements included above primarily relate to office space. The table above does not include our possible payments for uncertain tax positions. Our reserve for uncertain tax positions, including accrued interest and penalties, was $3.2 million as of September 30, 2023. Due to the nature of the underlying liabilities and the extended time often needed to resolve income tax uncertainties, we cannot make reliable estimates of the amount or timing of future cash payments that may be required to settle these liabilities. The above table also does not include those obligations for royalties under license agreements as these royalties are calculated based on future sales of licensed products and we cannot make reliable estimates of the amount of cash payments.
FOREIGN CURRENCY
We are not exposed to a significant amount of foreign currency transaction risk associated with sales transactions as the majority of our sales are denominated in U.S. Dollars. We are exposed to foreign currency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We manage our net asset or net liability position for non-functional currency accounts, primarily the U.S. Dollar accounts in our foreign locations to reduce our foreign currency risk. We have not implemented a formal hedging strategy.
During 2023, 2022 and 2021, we had approximately $121.1 million, $85.8 million and $80.7 million, respectively, of revenue related to foreign customers including export sales, of which $0.8 million were denominated in foreign currencies, predominantly the Canadian Dollar. In future periods, we continue to expect that the majority of our sales will be in U.S. Dollar.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions. We base our estimates on historical experience and various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVENUE RECOGNITION
We recognize hardware product revenue upon transfer of control of goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We determine the amount of revenue to be recognized through application of the following steps:
• identification of the contract, or contracts with a customer;
• identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation of the transaction price to the performance obligations in the contract; and
• recognition of revenue when or as we satisfy the performance obligations.
Hardware Product Revenue and SmartSense by Digi Equipment Revenue and Associated Installation Fees
Our hardware product revenue is derived primarily from the sale of wired and wireless hardware products to our distributors and direct/original equipment manufacturer (“Direct/OEM”) customers. Product revenue generally is recognized upon shipment of the product to a customer. Sales to authorized domestic distributors and Direct/OEM customers typically are made with certain rights of return and price adjustment provisions. Estimated reserves for future credit returns and pricing adjustments are established based on an analysis of historical patterns of credit returns and price adjustments compared to received credit returns and distribution sales for the current period. Estimated reserves for future credit returns and price adjustments are charged against revenue in the same period as the corresponding sales are recorded. Estimated sales returns for our distributor stock rotation program are accounted for under the guidance of ASC 845 Nonmonetary Transactions . Material differences between the historical trends used to determine estimated reserves and actual credit returns and pricing adjustments could result in a material change to our consolidated results of operations or financial position.
Equipment revenue from SmartSense by Digi within our IoT Solutions segment is recognized upon shipment of the equipment to a customer. Installation service charges from these sales are recorded when the product is installed.
Subscription and Support Services Revenue
Our SmartSense by Digi ® and Ventus subscription revenue is based on contracts with at least an annual term and is recorded on a monthly basis. These subscriptions are generally in a range from one to five years, and may contain an evergreen renewal provision. Generally, our subscription renewal charges per month are the same as the original contract term.
We also derive service revenue from our Digi Remote Manager, a platform-as-a-service (“PaaS”) offering, whereby customers pay for services consumed based on the number of devices being managed or monitored. This revenue is recognized over the life of the service term and is included in our IoT Products & Services segment.
Digi Support Services revenues are recognized over the life of the support contract and included in our IoT Products & Services segment. Some of Digi Support Services revenue is one-time in nature for training and this revenue is recognized as the services are performed.
Professional Services Revenue
Professional services revenue is derived from our Digi Wireless Design Services contracts on either on a time-and-materials or a fixed-fee basis. These revenues are one-time in nature, are included in our IoT Products & Services segment and are recognized as the services are performed for time-and-materials contracts or as invoiced for fixed-fee contracts.
Contracts with Multiple Performance Obligations
From time to time we have contracts from customers with multiple performance obligations. Our hardware products may be combined with our Digi Remote Manager PaaS offering as well as other support services in an individual contract. Our SmartSense by Digi revenues typically are derived from contracts with multiple performance obligations. These obligations may include: delivery of monitoring equipment that the customer purchases out-right, monitoring services, providing condition alerts of assets being monitored, and recertification of sensor equipment. When we retain ownership of the equipment, we charge an implementation fee to the customer so they can begin using the equipment. In these instances, all revenue derived from the above obligations is recognized over the subscription term of the contract. If the customer purchases the equipment out-right, that portion of the revenue is recognized at the stand-alone selling price at the time the equipment is shipped and all
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