Digi International Inc. (DGII) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Digi International Acquires Ventus Holdings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ron Konezny. Please go ahead.

Thank you, and welcome to Digi International's presentation regarding the Ventus Holdings acquisition. This is Ron Konezny, the President and CEO of Digi. I'm joined by Jamie Loch, our CFO. We're going to spend a few moments talking about the Ventus Holdings acquisition. We've posted a brief investor deck on our Investor Relations website that we'll be referencing, if you have a chance to download that document. I want to emphasize that because we have earnings on November 10, we are in a quiet period. This call, we will be describing our Ventus Holdings acquisition, the rationale, the background and some of the attributes of this acquisition and its financing. We will not be talking about our results or any projections for FY '22, and we look forward to discussing those on our November 10 earnings call. But again, thank you for joining the call. As a brief reminder, the company raised approximately $75 million earlier this year for general purposes, but we did talk about the use of some of those proceeds could be to advance our acquisition strategy. And this acquisition is really a direct result of that enabling activity in the first quarter. The other thing I want to emphasize is that the Ventus Holdings acquisition is very consistent with what we've talked about with our investors during our earnings calls about wanting to leverage Digi's 30-plus years of hardware excellence and expertise and add more customer value through software, services and subscription. As you'll see, Ventus Holdings really fits that strategy within the Digi framework. As a reminder, on Slide 3, really, our mission is to transform our customers' work by connecting their people and their machines. We particularly excel at mission- and business-critical applications in really demanding environments. We differentiate based on software and services. We combine reliability, scalability, security and management to differentiate and add more customer value. And we've had the good fortune of doing it for thousands of customers for decades, with 650 plus employees around the world helping our customers succeed. On Slide 4, reminding you of our IoT business segments. We report 2 business segments, IoT Products and Services, that has both embedded and fully enclosed devices to help our industrial IoT customers realize their visions. And IoT Solutions where we're offering a full turnkey solution that is heavily recurring revenue oriented. And our top level objective is we want to grow annualized recurring revenue faster than our top line growth and grow profits as well faster than our top line growth, which we've been able to demonstrate both organically as well as with the help of acquisitions. And so I have a bit about Ventus. Ventus is a leader in managed network-as-a-service. Managed networking services is a large market, and it's growing rapidly. More and more applications for, in particular, wireless applications and sometimes combined with wired applications are growing in popularity. We've all seen the rise of the unattended machine and those machines all need connectivity to realize their potential. Managed network-as-service really combines technical design, implementation, and expert support of WAN solutions. And Ventus really is a leader at these elements. We offer Edge intelligence, both custom as well as third-party solutions. We offer accelerated provisioning and extensive performance reporting. We look at the various connectivity options, primarily wireless, but oftentimes with wireless or wired failover. We also offer WiFi solutions. And the management is really critical, is a lot of our customers are looking for us to manage the uptime of this implementation to ensure that they capture their optimal business results and leverage the expertise of our 24/7 expert support center. On Slide 6, it really is a great way for Digi to accelerate our transformation. As I mentioned, we're building off decades of experience and reliable Edge compute and enabling software services and subscription. The companies have a commitment to long-lasting, high-retention value propositions and relationships. This transaction, as you can see, more than doubled the company's ARR. Our ARR as of June 30 was $36 million. So the company we acquired, Ventus, had $45 million as of the same period. The company is profitable and generates cash. It will be immediately accretive to adjusted EPS and will be expected to be accretive to EPS in FY '23. But the big difference in the EPS is really the -- of course, the financing on the debt that Jamie will touch on next. We've got meaningful growth and R&D synergies. We share customers like IGT. We have the opportunity to offer the Ventus model to several Digi's customers that are in gaming, ATMs, financial services, digital signage and retail applications. And we do expect Ventus' reports -- sorry, results to be reported within our IoT Solutions business segment. If you look at the end points that -- and the sites that Ventus serves, combined with the sites that SmartSense serves, it has a lot of parallels with the economic attributes, the average revenue per unit. And so we feel like that's the best way to express the Ventus results within the Digi financial picture. We've had a great time. We've known Ventus for several years. We've got a chance to, of course, conduct extensive due diligence given the relative size of the transaction, including talking to many of their leading customers. We're extremely confident of the fit of Ventus within Digi. We're confident on our ability to execute given our track record. And this really helps drive meaningful scale, both on the top line, on recurring, as well as profit and cash. Let me pass this over to Jamie for a few comments on our terms and financing and some of our experience on integrating these acquisitions.

Yes. Thanks, Ron. Good afternoon, everyone. On the deal with Ventus Holdings, this was an all-cash deal. You can see the purchase price in the press release was $347.4 million. There is no earnout in this acquisition, and that price represents over 8x recurring revenue amount. In order to finance the deal, we have taken on a new debt facility. We are taking on a $350 million Term B loan that is currently being held by BMO Harris and its affiliates. There will be work to be syndicated here in the very near future. We have also retired our existing debt facility. Our existing debt facility was a $200 million revolver that had $48 million outstanding on it. We have paid that facility down and expired it. We are replacing it with a $35 million revolver, untapped revolver, that will become available to us, but it was not necessary for us to be able to execute on the closing of this transaction. The deal itself officially closed on November 1, and will be reflected in our results as we talk about next week, but you will see November and December results for Ventus Holdings inside of Digi's results for FQ1. When we get to that earnings call, we will obviously provide more information on combined financials. We'll provide leverage information at that point in time. We find ourselves a little bit of an awkward period here, being a week out from earnings and in the middle of our play period. But we felt it was important due to the size and the significance of this deal to be able to get in front of you today and talk about why this is an attractive deal, why this makes sense for Digi and how we went about executing on that. This transaction really fits the path that Digi has been on now for the better part of 6 years. If you look at our acquisition history going back to 2015, we really focused on the creation of our SmartSense business inside of IoT Solutions. We then made acquisitions that went into the Products and Services space. The theme in those acquisitions has always been accelerating our road maps with products and offerings that also accelerated our ability to have recurring revenue. And if you compare historically, this deal probably is most similar to our Opengear acquisition in 2019. This will be the second acquisition that we have taken on, where we have taken on debt. Opengear was the first. In that time period, we went to a net cash positive position inside of those first 2 years. And I believe that our ability and approach and how we pay down debt and how we handle having debt on the books and how we apply our cash is well founded and is extremely successful. And I believe that will be a blueprint for success and repeatability here as we take on the Ventus Holdings acquisition.

Yes, Jamie, I think this represents really an affordable entry point for a company this size with this level of recurring revenue. We're paying just over 8x recurring revenue for this business. It's a business that's been growing. And again, we're going to detail more of that in our results next week. But we feel confident based on our track record now. This is our ninth acquisition that we can deliver on the integration. And as we've done in the past, Jamie, to your point on Opengear, have a step-level improvement in our financial performance, results and scale and continue to build value for our shareholders. So listen, I would like to thank everyone who had an opportunity to join the call today. Again, as Jamie mentioned, it's a bit of an awkward period for us because we're just prior to our earnings release next week. We look forward to detailing this transaction next week in more color for you. We're excited about the Ventus team joining us and looking forward to more success in the future.

I would just like to add, we will not be taking questions here on this call today given the fact that we're in the quiet period. We know that there are lots of questions that you have. I'm sure a lot of those questions are around the areas that we cannot comment on until we talk about our earnings. So we'll not be taking questions at this time. Hopefully, this has given you good insight into who Ventus Holdings is, how it fits into our -- into Digi, our success at being able to take on an acquisition of this kind and its depth and we're really excited to be able to talk to you again next week.

Thanks, everybody. Have a good evening.

Thank you.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.