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FOIA Confidential Treatment of Limited Portions Requested by Digi International Inc., pursuant to  Rule 83 (17 C.F.R. § 200.83) A0001

April 2, 2024

VIA EDGAR

U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Technology
100 F Street, NE
Washington, D.C. 20549
Attention:    Dave Edgar

Re:    Digi International Inc.
Form 10-K for the fiscal year ended September 30, 2023
Form 8-K furnished on January 31, 2024
File No. 001-34033

Ladies and Gentlemen:

Set forth below is the response of Digi International Inc. (“we”, “us”, “our” or “Digi”) to the comments raised by the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) in a letter to us dated March 6, 2024 (the “Comment Letter”).  For your convenience, the text of the comment in the Comment Letter has been duplicated in bold type to precede our response.

The Company is requesting confidential treatment for certain figures included in the Company’s response to the SEC’s comment, which have been redacted and replaced with bracketed asterisks (“[***]”). Pursuant to Rule 83 of the SEC’s Rules on Information and Requests (17 C.F.R. §200.83), the Company has provided the unredacted response to the Staff under separate cover and a separate letter to the Office of Freedom of Information and Privacy Act Operations in connection with the confidential treatment request.

Form 10-K for the Fiscal Year Ended September 30, 2023

Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Revenue Recognition, page 44

1. We note your response to prior comment 4 where you indicate contracts with multiple

performance obligations that include implementation fees are isolated to SmartSense

arrangements in which you do not retain ownership. However, SmartSense appears to be

part of your IoT Solutions segment while your proposed revised discussion of multiple

performance obligations refers to Digi Remote Manager, which appears to be part of your

IoT Product and Services segment. Please explain this apparent inconsistency. In addition,

we note from your response to prior comment 5 that customers in your IoT Products and

Services segment can purchase services such as Digi Remote Manager, Lighthouse

FOIA Confidential Treatment of Limited Portions Requested by Digi International Inc., pursuant to  Rule 83 (17 C.F.R. § 200.83) A0002

Management software or technical services. Tell us whether you have other multiple performance obligations besides SmartSense arrangements and if so, tell us the amount of

such arrangements for each period presented. Lastly, revise your proposed disclosures to

include a discussion of how you determine standalone selling price for such contracts as

indicated in your response. Refer to ASC 606-10-50-20.

We respectfully advise that contracts with multiple performance obligations are nearly exclusive to IoT Products and Services with a limited number of SmartSense contracts in Solutions. In these SmartSense contracts, hardware is sold to a customer with an associated implementation fee, that covers the initial set-up of purchased equipment. In our prior response, we assessed these SmartSense contracts to be immaterial and they were not disclosed in the proposed revised disclosure regarding contracts with multiple performance obligations.

[***]

Going forward, we will expand our discussion like the below example based upon our fiscal 2023 10-K:

Contracts with Multiple Performance Obligations

Some of our contracts with customers in IoT Products and Services and, to a much lesser extent, in IoT Solutions include multiple performance obligations. In these contracts, each performance obligation is recognized at the amount of the allocated transaction price, which is determined based on each performance obligations standalone selling price (SSP) for the distinct obligation. The best evidence of SSP is the observable price of a product or service when we sell the goods separately in similar circumstances and to similar customers. In instances where SSP is not directly observable, we estimate SSP using information that may include market conditions. In some of our IoT Solution contracts we are providing subscription services, while retaining ownership of the equipment, we have determined there is a single performance obligation encompassing the various activities that are inputs into the service. As such, all revenue derived from the service is recognized over the subscription term of the contract ratably as a series. We have made an accounting policy election to exclude from the measurement of our revenues any sales or similar taxes we collect from customers.

[***]

Note 4. Segment Information and Major Customers, page 53.

2.Please address the following as it relates to your response to prior comment 5:

-You state that end users purchase the hardware products in your IoT Products and Services segment (P&S segment) based on consideration of the hardware products technical features and functionality. Provide us with a discussion of the features and functionalities separately for the products in each of the operating segments and explain how any differences in features and functionalities factored into your qualitative analysis.

FOIA Confidential Treatment of Limited Portions Requested by Digi International Inc., pursuant to  Rule 83 (17 C.F.R. § 200.83) A0003

All of the products within our IoT Products and Services segment drive towards one common function: enabling machine to machine connectivity and communications. This functionality is the singular purpose for customers to purchase IoT Products and Services segment products. Not only do products in the IoT Products and Services segment all have the same function, but there are also no significant differences in the features of these products. The commonality of function and features was the driving consideration in our qualitative analysis when considering whether to aggregate operating segments within the IoT Products and Services reportable segment.

The four operating segments within our IoT Products and Services segment are divided by families of products that are based on how the products interface with an end customer’s application of the equipment to enable machine-to-machine communication. While all products drive towards common functionality, our operating segments better refine technical expertise for end users. However, our customers regularly purchase products and services across all four operating segments within our IoT Products and Services reportable segment. The operating segments are:

•Cellular Routers are fully enclosed box devices that rest outside the device for which they provide connectivity. The devices for which they provide connectivity interface with the router via a cord – i.e., they are plugged into the router. As their name implies, the routers provide communication via cellular protocols for the device into which they are plugged.

•Console Servers are very similar to cellular routers. The primary difference is that these products are exclusively offered for edge computing installments and data center usage (i.e., they serve specific markets with specific product feature needs and use cases).

•Infrastructure Management utilizes connect sensors, cellular enabled devices that are battery operated, as well as other types of console server applications that utilize our Digi Accelerated Linux operating system. These products are offered for edge computing installments and data center usage. There are some products that do not use cellular communications, but those are a small part of the product mix. Similar to console servers and cellular routers, the devices for which they provide connectivity interface via a cord – i.e., they are plugged into the device.

•OEM are smaller form factor module products that the customer purchases to embed into their own device to enable connectivity. These modules can utilize either cellular or another wireless communication protocol (e.g., ZigBee, Bluetooth, Radio-Frequency) based on the end user’s needs and preferences.

Other than the nature of their interfaces, product feature differences are insignificant between operating segments and all the product families within each operating segment have features designed to address:

•Environmental conditions, such as indoor or outdoor use, operating temperature range, and whether the product operates in an exposed or enclosed setting.

FOIA Confidential Treatment of Limited Portions Requested by Digi International Inc., pursuant to  Rule 83 (17 C.F.R. § 200.83) A0004

•Number of customer devices that can connect to the Digi product for network access.

•Security capabilities such as whether communications are encrypted or unencrypted.

•The communications protocol the customer wants to utilize.

•Power needs and usage.

•Product dimensions.

•Capacity for remote firmware upgrades.

Each operating segment has products that span across all of these differences. Accordingly, there are no significant differences in the features of products across the operating segments.

-Quantify the portion of revenue attributable to products and to services within each of the operating segments aggregated in the P&S segment, explain any differences between the operating segments, and tell us how such differences were considered as part of your analysis.

We respectfully advise the Staff that we do not consider differences in the composition of products and services revenue across the operating segments in our IoT Products and Services reportable segment in our analysis.

The Chief Operating Decision Maker (“CODM”) uses operating income as a percentage of revenue to assess the performance of our IoT Products and Services reportable segment.

Hardware in our IoT Products and Services segment can operate entirely independent of any additional services. Services within IoT Products and Services are primarily related to remote manager platforms, which offer the same service across all operating segments. A full description of services is provided in our prior response beginning on page 8. A remote manager platform allows customer to remotely monitor and track assets. These services are not required to operate any of our hardware products and are just another benefit a customer can choose to purchase. Our customers may elect these services as a stand-alone transaction any time between the initial purchase and the end of the operating life of the hardware.

Services in our IoT Products and Services segment are not required for the hardware to operate as designed. Any differences in revenue mix between hardware and software among operating segments are exclusively due to customers decisions whether to purchase services and has no impact on the functionality of the hardware to connect and enable machines to communicate over networks. For this reason, we do not consider the differences in revenue attributable to products and to services as part of our analysis.

[***]

-You state all P&S product lines leverage third-party contract manufacturers that typically supply a range of products that cut across the operating segments. Tell us whether each of your operating segments use contract manufacturers for the supply of all products or whether any are manufactured by the company, and if so, to what

FOIA Confidential Treatment of Limited Portions Requested by Digi International Inc., pursuant to  Rule 83 (17 C.F.R. § 200.83) A0005

extent. Tell us more about the mix of contract manufacturers, including whether certain manufacturers are primarily responsible for supplying products to a particular segment, and if so, why. Describe further the manufacturing process performed by these third parties for each operating segment and how they are similar and whether there are any differences. Also, provide further detail regarding the range of products provided by the contract manufacturers and the specific segments to which they relate.

-Describe the manufacturing process performed by third-party contract manufacturers for each of the Solutions operating segments, and whether there are any differences. Tell us more about the mix of contract manufacturers, including whether certain manufacturers are primarily responsible for supplying products to a particular segment, and if so, why. In this regard, we note your disclosure on page 6 that Ventus relies almost exclusively on a manufacturer in China for the production of the hardware it provides to its customers.

Across both of our reportable segments:

-Digi leverages third-party contract manufacturers (each a “CM”) for the full scope of our products.

-Digi does not manufacture any of the finished goods sold to customers.

-The CM process for manufacturer is the same across all CMs as below described.

-Digi could use any of its CMs to produce all of its products but has elected not to do this for a range of reasons below described.

The manufacturing process performed by these third parties is standard for all Digi contract manufacturers:

-Digi is the designer of the product, and maintains the bill of materials, software, and manufacturing test processes.

-Digi issues a purchase order to the CM.

-The CM procures all required components.

-The CM assembles and tests the product.

-The CM issues us a finished good invoice.

-The CM ships product in the quantity and to a designated destination per Digi’s direction.

This is the high-level process for all of Digi’s CM relationships, agnostic of operating segment or reportable segment.

[***]

There is nothing unique about the products in either of our reportable IoT Products and Services segment or our reportable IoT Solutions segment that would restrict all products across both reportable segments from being manufactured by any single one of our CMs. Digi elects to leverage several CM relationships as a business decision for cost efficiency, minimization of risk and to avoid potential disruption to our operations that could result from moving long-standing and successful relationships.

FOIA Confidential Treatment of Limited Portions Requested by Digi International Inc., pursuant to  Rule 83 (17 C.F.R. § 200.83) A0006

The CMs Digi utilizes do not provide products exclusively to any one operating segment except for a CM who works on Ventus products. Ventus was acquired by Digi in November 2021 and had used a single CM to produce products for an extensive period of time prior to acquisition. The long-standing relationship has worked well for Ventus. A combination of factors including overall inventory balances, the well documented supply chain challenges around semiconductors and microprocessors that commenced during the COVID-19 pandemic as well as other integration priorities led to our business decision to not consider moving this relationship until a later date. Digi would benefit from a multi-CM approach for this operating segment. There is nothing limiting our ability to expand Ventus manufacturing into a different CM, but to date we have elected for business reasons, including those mentioned above, to not do so.

-You indicate that distributors and resellers are typically your customer in the P&S segment. Describe any differences between the industries served by the distributor and reseller customers of each operating segment, and how any differences were considered in your analysis. Also describe the types or classes of customers for each segment other than distributors and resellers, and the types of products and services they purchase.

The industries a particular distributor or reseller serves is not a factor in our decision to retain them, nor do we consider this in our analysis. All our distributors and resellers are specialists in selling electronics and/or communications equipment, including our products and services. In addition, the distributors and resell