Digi International, Inc.

Transcription

1 Feltl and Company Research Department 225 South Sixth Street, Suite 4200 Minneapolis, MN Jay M. Meier Digi International, Inc. Company Description: Digi International is a worldwide leader in commercial grade device connectivity. Its products connect devices to networks, including wired and wireless networks. Available in more than 65 countries through a broad network of distributors, system integrators, and solution providers as well as direct to OEM, government and commercial partners, Digi is the proverbial safe choice gold standard of device networking. Networking-M2M January 22, 2010 Strong Q1 10, beating views on Smart Grid pull. Raising estimates. Reiterate BUY. (DGII - $9.84) BUY Key Points Stronger than expected Q1 10 results, driven by channel pull and Smart Grid demand, marks a nice rebound in Digi International (DGII). Digi entered Q2 with the highest backlog in Company history. Management s presentation was much better, more confident, adding clarity to Digi s significant role in the Smart Grid. We are tweaking FY 10 and FY 11 estimates higher. Reiterate our BUY rating and $16.00 target. Investors should continue to buy here and on any weakness. Digi s Q1 10 results were stronger than expected. Sales of roughly $43mm grew fractionally, year over year, 7% sequentially and beat the $41mm consensus and our $40mm estimate. Higher sales were driven primarily by strong channel pull, including higher than expected Smart Grid demand. North American sales grew 10%, while European sales fell 18% and Asian sales grew 39%. Gross margin of 50.5% beat our 46.8% estimate, fell from 51.4% in Q1 09, but improved from 48.5% in Q4 09. OpEx of $19.9mm exceeded our estimate on higher sales. Q1 10 EPS of $0.05 beat our $0.02 estimate and the $0.04 consensus and grew from $0.04 last year. Operating cash flow was $3.9m and the Company closed Q1 with roughly $79mm in cash and no debt. DSOs were 46 days, while DPOs were 13 days. Inventory turns increased sequentially to 1.7x from 1.5x and Digi s backlog is the highest on record, according to management. Digi s book value is $9.33/share and its current ratio is 7.3. We are pleased with a solid rebound in both demand and financial results. The conference call was among the strongest we ve heard from management. The presentation was confident, detailed and bullish. Focus verticals include Fleet Management, Tank Monitoring and The Smart Grid. Management shared many details regarding key partners and customers, including Duke Energy, FPL, TXU, Progress Energy, Itron, Comverge, Elster and others. Further, management suggested that several integrator/resellers have incorporated several Digi products into their offerings and frequently standardized on those components. Timing major growth expectations is difficult. We continue to believe the major ramp begins in 2H 10. Management targets EBITDA margins of 15-20% and in 3-5 years and guided Q2 10 sales and EPS to $43mm-$47mm and $0.04- $0.09, in line with our $44.1mm and $0.05 estimate. Consensus is at the low end of this guidance range and could increase. Management guided FY 10 to $170mm-$190mm and $0.18-$0.42. We have adjusted our estimates as follows: Q3 10 sales/eps to $48.6mm/$0.09 from $53.5mm/$0.14 Q4 10 sales/eps to $52.3mm/$0.11 from $49.4mm/$0.09. FY 10 sales/eps to $187.9mm/$0.30 from $187.2mm/$0.30. FY 11 sales/eps to $221.6mm/$0.56 from $220.3mm/$0.53. We believe shares of DGII could move significantly higher as additional Smart Grid visibility emerges. In our opinion, DGII is undiscovered. We expect the Company to emerge as a leading supplier of Smart Grid technology. We believe DGII will return to meaningful organic growth in 2H 10 that will accelerate into FY 11 and beyond. Further, given Digi s consistent cash generation, along with its high book value and exceptional balance sheet, we believe downside risk to DGII is limited. We believe investors have a limited window of opportunity, potentially 6 months, to buy DGII before Smart Grid related growth emerges. Given the potential upside to numbers, we recommend buying DGII at current levels and on any weakness. We reiterate our BUY rating and $16.00 price target. Please see important disclosures on pages 4 to 6. Financial Summary Rev(mil) 2009A 2010E 2011E Dec $41.4 $43.0A Mar $40.1 $44.1E Jun $44.5 $48.6E Sep $40.0 $52.3E FY $165.9 $187.9E $221.6E P/Sales 1.5x 1.3x 1.1x EPS E 2011E Dec $0.04 $0.05A Mar $0.03 $0.05E Jun $0.06 $0.09E Sep $0.04 $0.11E FY $0.16 $0.30E $0.56E P/E 60.4x 32.2x 18.3x Price: $ Week Range: $ $6.40 Target: $16.00 Rating: BUY Shares Outstanding: 24.7 mil Mkt. Capitalization: $243 mil Ave. Volume: 135,000 Instit. Ownership: 70% BV / Share: $9.33 Debt / Tot. Cap.: 0%

2 September year-end Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Q1 Q2 Q3 Q4 Fiscal Q1 Q2E Q3E Q4E Fiscal Fiscal (in thousands) Dec-08 Mar-09 Jun-09 Sep Dec-09 Mar-10 Jun-10 Sep E 2011E TOTAL SALES 130, , , , , , , ,056 41,361 40,085 44,470 40, ,928 42,968 44,058 48,610 52, , ,550 Cost of Goods 66,193 45,962 41,580 43,442 49,516 63,609 81,917 87,187 20,113 20,916 23,033 20,601 84,663 21,255 23,433 23,944 25,944 94, ,717 GROSS PROFIT 64,212 55,574 61,318 67,784 75,682 81,054 91,346 97,869 21,248 19,169 21,437 19,411 81,265 21,713 20,625 24,666 26,339 93, ,832 Margin % 49.2% 54.7% 59.6% 60.9% 60.4% 56.0% 52.7% 52.9% 51.4% 47.8% 48.2% 48.5% 49.0% 50.5% 46.8% 50.7% 50.4% 49.7% 52.7% Expenses: Selling 30,716 28,807 24,733 25,555 26,340 28,281 33,499 36,879 9,625 8,976 8,624 8,079 35,304 9,240 8,500 10,300 11,000 39,040 46,550 % 23.6% 28.4% 24.0% 23.0% 21.0% 19.5% 19.3% 19.9% 23.3% 22.4% 19.4% 20.2% 21.3% 21.5% 19.3% 21.2% 21.0% 20.8% 21.0% G&A 16,252 13,125 8,972 8,066 10,005 10,193 10,694 13,195 3,193 2,724 2,743 3,125 11,785 3,442 3,300 3,500 3,700 13,942 16,085 % 12.5% 12.9% 8.7% 7.3% 8.0% 7.0% 6.2% 7.1% 7.7% 6.8% 6.2% 7.8% 7.1% 8.0% 7.5% 7.2% 7.1% 7.4% 7.3% R&D 18,335 19,530 15,968 17,159 16,531 20,603 24,176 27,040 6,974 6,196 6,823 6,388 26,381 6,486 6,600 6,900 7,000 26,986 30,275 % 14.1% 19.2% 15.5% 15.4% 13.2% 14.2% 14.0% 14.6% 16.9% 15.5% 15.3% 16.0% 15.9% 15.1% 15.0% 14.2% 13.4% 14.4% 13.7% Non-cash Op Ex. 1,121 16,314 5,886 5,222 5,849 8,755 2,649 4, , , ,966 3,000 Total Operating Expenses 66,424 77,776 55,559 56,002 58,725 67,832 71,018 81,344 20,482 18,570 20,835 18,308 78,195 19,884 19,150 21,450 22,450 82,934 95,910 % 50.9% 76.6% 54.0% 50.3% 46.9% 46.9% 41.0% 44.0% 49.5% 46.3% 46.9% 45.8% 47.1% 46.3% 43.5% 44.1% 42.9% 44.1% 43.3% OPERATING INCOME (2,212) (22,203) 5,759 11,782 16,957 13,222 20,328 16, ,103 3,070 1,829 1,475 3,216 3,889 10,410 20,922 Margin % -1.7% -21.9% 5.6% 10.6% 13.5% 9.1% 11.7% 8.9% 1.9% 1.5% 1.4% 2.8% 1.9% 4.3% 3.3% 6.6% 7.4% 5.5% 9.4% Other Income (expense) 2,396 1, ,025 2,045 3,421 3, ,512 AetherWorks net loss/gain Other Income (expense) 1,068 (43,379) (25) (1,029) 559 (301) PRETAX INCOME 184 (19,880) 6,054 12,151 17,982 15,267 23,749 18,915 1, , ,282 1,832 1,778 3,530 4,246 11,387 22,434 Margin % 0.1% -19.6% 5.9% 10.9% 14.4% 10.6% 13.7% 10.2% 2.5% 2.5% 3.1% 2.2% 2.6% 4.3% 4.0% 7.3% 8.1% 6.1% 10.1% Taxes 66 (6,818) (23) 3, ,154 3,951 6, (24) (65) ,200 1,444 3,882 7,628 Tax rate 35.7% 34.3% -0.4% 28.7% 1.8% 27.2% 16.6% 34.7% 0.9% 28.1% -1.8% -7.3% 4.6% 34.6% 34.0% 34.0% 34.0% 34.1% 34.0% NET INCOME 118 (13,062) (37,302) 8,664 17,665 11,113 19,773 12,351 1, , ,083 1,199 1,174 2,330 2,802 7,505 14,807 Margin % 0.1% -12.9% -36.3% 7.8% 14.1% 7.7% 11.4% 6.7% 2.5% 1.8% 3.1% 2.4% 2.5% 2.8% 2.7% 4.8% 5.4% 4.0% 6.7% EPS Reported $0.01 ($0.66) ($1.7640) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Shares Average 15,255 19,674 21,146 21,809 23,389 23,809 26,050 26,347 25,679 24,953 24,875 24,981 25,183 24,701 25,200 25,500 25,700 25,110 26,320 Non-GAAP EPS EBITDA Assets Current Assets: Cash & mktable securities ,167 50,174 58,881 87,567 74,077 70,244 63,637 66,909 75,808 75,808 78,528 89,204 88,079 90,783 90, ,642 Acct receivables, net 16, ,897 20,305 21,022 24,310 19,824 20,762 25, ,032 21,846 20,500 22, ,425 24,818 Inventories, net ,527 21,911 26,130 30,240 35,157 34,212 29, ,619 25,245 23,500 24, ,268 25,919 Other ,094 5,528 6,719 5,106 6,834 5,358 4, ,259 5,891 3,461 3, ,163 2,566 Total current assets 93, , , , , , , , , , , , , , , ,945 Property, Plant & equip ,808 19,488 19,987 16,255 16,334 16,304 16,187 16,678 16,678 16,851 16,177 15,530 14,909 14,909 12,663 Intangible assets, net ,017 96,597 91, , , , , , , , , , , , ,054 Other assets ,093 2,026 1, ,162 1,191 1, ,117 1,059 1,300 1, ,500 2,000 Total Assets 139, , , , , , , , , , , , , , , ,661 Liab. & Shr. Equity AP 15, ,272 6,748 6,554 10,343 11,302 8,033 10,141 5,567 5,567 6,292 9,500 10,500 11,500 11,500 15,290 Line of Credit Current portion of debt Taxes payable ,306 4,712 3, , Acc Advertising Acc Compensation ,726 11,443 7,080 5,981 4,045 6,753 2,685 3,275 3,275 3,928 7,500 5,000 4,800 4,800 5,000 Restructuring 1, , Other ,727 4,160 1,230 4,053 3,180 6,971 6,971 7,059 7,000 7,250 6,850 6,850 6,979 Total current Liabilities 18, ,764 23,284 21,896 20,933 19,573 19,043 17,525 16,534 16,534 17,915 24,327 23,071 23,465 23,465 27,562 Long-term liabilities 8, ,135 6,897 9,149 10,967 10,764 10,167 3,591 4,331 4,331 3,568 3,241 2,920 2,605 2,605 7,993 Other - Deferred tax , ,582 6,567 3,555 9,535 8,497 8,497 8,962 4,653 4,850 5,500 5,500 4,968 Total Liabilities 26, ,073 30,906 31,403 39,482 36,904 32,765 30,651 29,362 29,362 30,445 32,221 30,841 31,570 31,570 40,523 Stockholder's equity 112, , , , , , , , , , , , , , , ,139 Total Liabs. & SE 139, , , , , , , , , , , , , , , ,661 Balance Sheet Ratios Cash Per Share (avg) $ 3.68 $ 2.96 $ 2.73 $ 3.63 $ 2.15 $ 2.47 $ 3.36 $ 2.81 $ 2.74 $ 2.55 $ 2.69 $ 3.03 $ 3.01 $ 3.18 $ 3.54 $ 3.45 $ 3.53 $ 3.62 $ 4.01 Book value (avg shares) $ 7.40 $ 7.67 $ 5.01 $ 5.83 $ 6.56 $ 8.14 $ 8.56 $ 8.80 $ 8.81 $ 8.82 $ 9.21 $ 9.19 $ 9.12 $ 9.33 $ 9.21 $ 9.12 $ 9.06 $ 9.28 $ 8.93 Tangible book value (avg shar $ 5.99 $ 3.97 $ 3.89 $ 4.90 $ 3.78 $ 4.08 $ 5.05 $ 4.23 $ 4.39 $ 4.36 $ 4.56 $ 4.65 $ 4.61 $ 4.82 $ 4.84 $ 4.86 $ 4.88 $ 5.00 $ 5.06 Working capital $67,174 $55,869 $57,793 $82,090 $69,793 $76,444 $110,393 $101,833 $101,722 $94,759 $105,618 $106,853 $106,853 $110,027 $109,097 $111,599 $114,568 $114,568 $123,390 Current ratio Debt/total cap 0.0% 2.8% 0.0% 0.0% 0.6% 3.1% 3.6% 4.0% 4.1% 4.0% 1.4% 1.7% 1.7% 1.4% 1.2% 1.1% 1.0% 1.0% 2.9% Days Sales #REF! Inv turns 2.0x 2.4x 2.4x 2.6x 1.9x 1.8x 1.7x 1.5x 1.2x 1.2x 1.5x 1.5x 1.6x 1.7x 1.9x 2.0x 2.2x 1.9x 2.1x Days Payable Feltl and Company Research Department Digi International, Inc. (DGII) Page 2

3 January 21, 2010 Comp Table (prev close Market Shares Book Px/ EPS-est 5yr P/E EBITDA Enterprise EV/EBITDA Sales Px/ Ticker Company Name Price Value Out Value Book Trail TY NY Grwth NY Trail TY NY Value NY NY NY rev TECD TECH DATA CORP , % , IM INGRAM MICRO , % , IBM INTERNATIONAL BUSINE , , % , , , NCR NCR CORPORATION , % , SCSC SCANSOURCE INC % ELON ECHELON CORPORATIO (0.83) (0.86) (0.47) 10% na (19.6) (27.0) (15.0) ITRI ITRON INCORPORATED , % , ORBC ORBCOMM INC (0.43) (0.46) (0.04) na COMV COMVERGE INC (1.16) (1.24) (0.29) 22% na (11.9) (14.6) % DGII DIGI INTL INC % Relative Growth Rate: 1.35 Px Targets implied by group averages: $29.95 $8.34 $13.67 $12.48 Ave Px Tgt applied to DGII: $16.11 Data supplied by Thomson First Call Feltl and Company Research Department Digi International, Inc. (DGII) Page 3

4 Analyst Certification I, Jay M. Meier, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report. Important Disclosures: The analyst or any member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). As of the end of the month preceding the date of publication of this report, Feltl and Company did not beneficially own 1% or more of any class of common equity securities of the subject company. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Feltl and Company has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. Feltl and Company has not served as a broker, either as agent or principal, buying back stock for the subject company s account as part of the company s authorized stock buy-back program in the last twelve months. No director, officer or employee of Feltl and Company serves as a director, officer or advisory board member to the subject company. Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months. Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds. Publicly Traded Companies in this Report: 1/21/2010 Ratings Distribution for Feltl and Company Investment Banking Number of Percent Number of Percent of Rating Stocks of Total Stocks Rating category SB/Buy 31 69% 2 6% Hold 12 27% 0 0% Sell 2 4% 0 0% % 2 4% The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months. Feltl and Company Research Department Digi International, Inc. (DGII) Page 4

5 10/31/08 STR.BUY Target: $ /06/09 BUY Target: $ /08/09 BUY Target: $ /16/09 BUY Target: $ /24/09 BUY Target: $16.00 Feltl and Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl and Company could act as principal or agent with respect to the purchase or sale of those securities. Valuation and Price Target Methodology: Date Nature of Report Rating Price Target 2/13/09 Smart Grid Str. Buy $ /8/09 Q2 09 Preview; Lowering estimates, target and rating Buy $ /24/09 Q2 09 Update Buy $ /9/09 Mobiapp Buy Buy $ /15/09 I-Digi Update Buy $ /24/09 Itron/Comverge Integration Buy $ /21/09 Q3 09 Preview Buy $ /24/09 Q3 Report; Raising price target to $16 from $15.50 Buy $ /8/09 XATA/DGII telematics platform release Buy $ /27/09 Q4 09 Report Preview Buy $ /30/09 Q4 09 Report Buy $ /13/10 Q1 10 Report Preview Buy $ /22/10 Q1 10 Report Buy $16.00 On 01/21/10, our research showed that comparable companies currently traded at roughly 3.4x book value, 15.7x next years EPS, 1.4x next years sales and at an EV/EBITDA multiple of 14.7x. Applying these metrics to DGII provided a range of potential share price targets of $8.34-$29.95, with a $16.11 average. We have rounded this average price target to $ Feltl and Company Research Department Digi International, Inc. (DGII) Page 5

6 Risks to Achievement of Estimates and Price Target: Digi is dependent on new product development and rapid technological change characterizes its industry. If it fails to keep up with the evolving technology and is ineffective at introducing new products it could lose business to competitors. Digi s has several products considered mature that are declining in revenue. While this decline is expected to taper off, it represents a risk factor. If this decline occurs faster than anticipated and Digi does not introduce new products to make up for the loss, its growth could slow potentially resulting in lower earnings and a lower stock price. Digi has made a number of acquisitions and acquisitions are likely to be a continuing part of its strategy. If management makes poor acquisitions or does not integrate acquisitions efficiently, results and the stock could suffer. Digi uses stock options in compensating its employees and is expected to continue doing so in the future. Other Disclosures: The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Additional information is available upon request. Feltl and Company Research Department Digi International, Inc. (DGII) Page 6

7 EQUITY CAPITAL MARKETS DIRECTORY RESEARCH DEPARTMENT INSTITUTIONAL SALES: (866) Brent R. Rystrom Director of Equity Research (612) Ernest W. Andberg, CFA (612) Jay M. Meier (612) Mark E. Smith (612) Joshua J. Elving (612) Scott R. Berg (612) Shawn P. Bitzan (612) TRADING: (866) William W. Koop Director of Equity Trading (612) Thomas J. Walters Equity Trading (612) Elliott M. Randolph Institutional Sales Trading (612) Cory N. Carlson Institutional Sales Trading (612) Luke J. Weimerskirch Institutional Sales Trading (612) Thomas J. Pierce (612) Mark A. Hagen (612) Ryan M. Quade (612) Brandt B. Wendland (612) John E. Stratton (612) Jeff R. Sonnek (612) Matt J. Rasmussen (612) SOUTH SIXTH STREET SUITE 4200 MINNEAPOLIS, MINNESOTA (612) (866) MEMBER SIPC & FINRA