Time Is on This Small-Cap's Side
As I add to my SoFi and Palantir positions, a relatively unknown name gets set to report earnings this week.
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Talk about selling off into earnings. Gee whiz. After the closing bell on Wednesday, Digi International DGII will post its fiscal third-quarter financial performance. Expectations are for adjusted EPS of $0.49, and GAAP EPS of $0.22 on revenue of close to $106 million. These numbers, if realized, would look like an adjusted earnings contraction of 1% year over year on a revenue contraction of 6%.
Back on May 1, the company guided the fiscal third (June) quarter towards revenues between $103 million and $107 million. Adjusted EBITDA was expected to print between $24 million and $25.5 million, as adjusted EPS was projected at $0.47 to $0.51.
The company had been growing nicely in terms of profitability since round 2017, only to hit stall speed in 2024. The growth is projected to return in 2025.
Who the Heck Is Digi International?
I am brought back to a cartoon that my kids watched when they were kids, Digimon, a knockoff of sorts of Pokémon. Well, these guys are not those guys.
Digi International is a Hopkins, Minnesota-headquartered IoT (Internet of Things) small-cap company. The company provides business and mission-critical IoT products, services and solutions to customers in the U.S., Europe, the Middle East. Africa and beyond. It offers cellular routers for wireless connectivity, cellular modules to embed cellular communications abilities into the products to deploy and manage intelligent and secure cellular connected products and remote access to network equipment in data centers.
The company also offers Digi Remote Manager and Lighthouse, which is a recurring revenue cloud-based service that provides a secure environment for customers to manage their connected device deployment and network devices. Digi's SmartSense service wirelessly monitors the temperature of foods and/or other perishable or sensitive goods. Lastly, Digi provides professional services such as site planning, implementation management, customer training and enhanced technical support.
Underlying Fundamentals
For the 12 months ended with the March quarter, Digi generated $58.9 million in operating cash flow. Out of that, the company only spent $2.3 million in capital expenditures. This leaves a fairly beefy $56.6 million in fee cash flow for the four quarters. Digi does not pay out a cash dividend.
Turning to the balance sheet, at least as of the end of the March quarter, Digi held a cash position of $23.8 million and inventories of $62.2 million, which left current assets at $166.4 million. Current liabilities added up to $81.1 million, including no short-term debt, but $32.2 million in unearned revenue. That results in current and quick ratios of 2.07 and 1.28, respectively. These ratios would be strong enough, but adjusted for unearned revenue, which is not a financial obligation, these ratios rose to 3.42 and 2.13. That's mighty.
Total assets amounted to $825.3 million in March, but that does include $606.9 million in goodwill and other intangibles. At 73.5% of total assets, I'll admit to looking at those numbers a little sideways. Total liabilities less equity came to $275M, including $171.8 million in long-term debt.
Clearly, while the balance sheet is very solid for the short-term (12 months out), the longer-term health of this balance sheet requires some serious work.
My Thoughts
Operating and free cash flow are in a good place. The business is stagnating this year, meaning that these times could be times of opportunity in a profitable company expected to resume growth next year.
The longer-term picture is going to require some finesse, but time is on Digi's side given that there are profits, the cash flow is green, and the current picture is not going to force the company into a disadvantageous position in order to maintain operations.
Readers will see on this almost two-year chart, above, that DGII developed a double-bottom reversal almost immediately upon coming out of a double-top reversal.
Relative strength is not very powerful looking. The daily Moving Average Convergence Divergence (MACD) is softening, with both the 12- and 26-day exponential moving averages (EMAs) in positive territory, but the histogram of the 9-day EMA dipping below zero.
If the stock can retake its 50- and 200-day simple moving average (SMAs) upon this week's earnings, that could be the push needed to get to the pivot of the double-bottom pattern, which is at the $33 level. That would put our price target at just about $39. A long way off, but technically possible, which would not be bad for a stock trading around $22 right now.
Small Cap/Stocks Under $10 Notes
I added to SoFi Technologies SOFI in Monday morning's pre-opening session, as the shares have come in and readers know I am a SOFI bull.
I also added to Palantir Technologies PLTR at what was a 10% discount at the time. Remember, Palantir reports Monday evening.
At the time of publication, Guilfoyle was long SOFI and PLTR equity.
