Correspondence 0000854775-24-000022 from DIGI INTERNATIONAL INC (DGII) (CIK 0000854775) (DGII)
DIGI INTERNATIONAL INC (DGII) (CIK 0000854775)
Date: June 18, 2024 · CIK: 0000854775 · Accession: 0000854775-24-000022
AI Filing Summary & Sentiment
File numbers found in text: 001-34033
Referenced dates: April 24, 2024
Letter
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
Document
June 18, 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
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 April 24, 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.
Form 10-K for the Fiscal Year Ended September 30, 2023
Notes to Consolidated Financial Statements
Note 4. Segment Information and Major Customers, page 53
1.We note your breakdown of industry sectors that are served by each operating segment for both the IoT Product & Services (P&S) and IoT Solutions (Solutions) segments in response to prior comment 2. Please tell us whether sales for any of the operating segments included in each of your reporting segments are concentrated in a particular industry sector or sectors, and if so, why. In your response, provide us with a breakdown of revenue by operating segment for each industry served.
We respectfully advise the Staff that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
2.We note that while the CODM “focuses” on operating income as a percent of revenue for your P&S segments and gross profit margin for the Solutions segments, he receives both of these measures, as well as revenue, for each of your operating segments. Please explain how the CODM uses revenue for each of the operating segments, gross profit for the P&S segments, and operating income for the Solutions segments. For example, clarify whether he uses it to allocate resources, in discussions with segment managers, segment manager compensation, etc.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable. The data provided and used by the CODM is described in the discussion below.
3.You state in your response the primary measure of profit used by your CODM to make decisions in your P&S segments is operating income as a percent of revenue, excluding certain allocations. However, there do not appear to be unallocated expenses in the measure of profit disclosed in Note 4. We also understand that your CODM receives each of gross profit and operating income for each of your operating segments. Please tell us how you determined the measure of profit or loss required to be disclosed for each of your reportable segments. Refer to ASC 280-10-50-22 and 50-28.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable. Information on allocated expenses is described in the discussion below.
4.You state in your response to prior comment 3 that pricing for the product sales in your P&S segments can be variable, and the mix of product sales plays a heavy factor and does not always have consistency over reporting periods. Please explain further your references to variable pricing and to the mix of product and their impact on consistency over reporting periods. In this regard, clarify whether you are referring to variability for a particular operating segment period-over-period. If so, provide us with quantified information that supports such variability. To the extent you are referring to variability among the four operating segments in a given period, if any, explain further why such information would not be relevant in assessing performance and allocating resources for your P&S operating segments. In addition, tell us whether similar impacts from these factors would be observed in operating income, and if not, why not.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
5.Please provide us with an analysis of available quantified data as it relates to revenue, gross profit, and operating income for each individual operating segment aggregated within your P&S and Solutions reportable segments.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
6.You state that operating income as a percentage of revenue in fiscal 2021 and 2023 was similar for three of the four P&S operating segments. You further state that COVID-19 had a more significant impact on one operating segment than the other three in the P&S segment. For the one segment you indicate was outside of the band of operating income as a percentage of revenue for each year, please explain why
you believe it was impacted more by the COVID-19 pandemic, why you believe the other segments were not similarly impacted, and how this factored into your aggregation analysis. If this did not factor into your analysis, explain why. Also, provide us with quantitative information to support your assertions that historically this one segment has demonstrated economic similarity with the other three operating segments.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
7.You state that projected future performance for the P&S segments is not expected to change in a way that would impact your analysis other than in your Cellular segment, and that projected future performance is not expected to change for the Solutions segments. Please provide us with the quantitative data that supports your future expectations, including revenue, gross profit, and operating income, and explain how it was developed.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
Reorganization and the impact on segment identification
We restructured our organization effective the third quarter of fiscal 2024. The resulting structure has changed our conclusions with respect to our analysis under ASC 280. The reorganization, as approved by Digi’s Board of Directors on May 23, 2024, appointed two segment leaders: an IoT Products and Services (“IoT P&S”) Segment Leader and an IoT Solutions (“IoT Solutions”) Segment Leader.
Segment identification analysis effective Q3
Following the reorganization, we have two operating segments which are also reportable segments under ASC 280: (i) IoT P&S; and (ii) IoT Solutions. Each operating segment is led by a Segment Leader who reports directly to our CEO. The CODM views the Company and allocated resources and makes financing decisions at the IoT P&S and IoT Solutions level. Within each of the two segments, there are identified product lines that each have a product leader who reports directly to the respective Segment Leader. The following organizational structure took effect during the third quarter of fiscal 2024:
IoT P&S
Our IoT P&S segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions. From embedded and wireless modules to console servers as well as enterprise and industrial routers, we provide a wide variety of communication sub-assemblies and finished products to meet our customers' IoT communication requirements. In addition, this segment provides our customers with a device management platform to enable customers to capture and manage data from devices connected to networks. IoT P&S consists of the following product lines:
•Cellular Routers are fully enclosed devices that rest outside the machine for which they provide connectivity. The machines for which they provide connectivity interface with the router via a cable – i.e., they are plugged into the router. As their name implies, the routers provide communication via cellular protocols for the machine 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 offers connect sensors, cellular enabled devices that are battery operated, as well as other types of console server applications. These products are offered for edge computing 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 cable – i.e., they are plugged into the device.
•OEM solutions are smaller form factor module products that the customer purchases to embed into their own device to enable computer and/or connectivity. These modules utilize either cellular or another wireless communication protocol (e.g., ZigBee, Bluetooth, LoRa, WiFi) based on the end user’s needs and preferences.
IoT Solutions
Our IoT Solutions segment consists of Ventus’s Managed Network-as-a-Service (“MNaaS”) business acquired in the first quarter of fiscal 2022 and our SmartSense by Digi (“SmartSense”) business. Ventus is a leader in MNaaS solutions that simplify the complexity of enterprise-wide area network (“WAN”) connectivity for customers. The Ventus portfolio includes cellular wireless and fixed line WAN solutions for connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors. SmartSense offers wireless temperature and other condition-based monitoring services as well as employee task management services. These solutions are focused on the following vertical markets: food service, healthcare (primarily pharmacies and hospitals) and supply chain.
Determination of Operating Segments:
Accounting Guidance Considerations – ASC 280, Segment Reporting:
Digi uses the guidance in ASC 280, Segment Reporting, in identifying our operating segments. ASC 280-10-50-1 specifies that an operating segment is a component of a public entity if it has all the following characteristics:
a.It engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity);
b.Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and
c.Its discrete financial information is available.
If more than one operating segment is identified through applying the above guidance, then further analysis is completed to determine whether the segments can be aggregated (280-10-50-11) and whether the segments meet specified quantitative thresholds (280-10-50-12) that would make them a reportable segment.
Digi Analysis
1.Engagement in Business Activities
Each of Digi’s six product lines engages in business activities from which they can derive revenue and incur expenses. As such, all product lines meet this criterion. Management noted that while each product line can generate revenue independently, there are also shared headquarters and other functional costs that are not directly attributable to a specific product line and certain of those costs are not allocated to product lines. The unallocated cost centers do not engage in business activities as they support our segments and do not engage in any activities to generate revenue. As each of the product lines engage in business activities, each product line meets this criterion. However, note that nothing beyond Annualized Recurring Revenue (“ARR”)1 and revenue are provided to the CODM and all cost information at a product line level is only provided and reviewed by Segment Leaders.
2.The Chief Operating Decision Maker (“CODM”) Reviews Operating Results
Identification of the CODM and Segment Leadership
Ron Konezny, our CEO, is the Company’s CODM. While the Executive Leadership Team, defined as all individuals who report directly to the CODM (“ELT”), meets monthly as noted in 2(a and b) below and each member provides input to the ELT as it relates to their areas of responsibility, the final authority to make resource allocation decisions and assessing performance resides with our CODM.
We believe additional insight into the level at which our CODM reviews operating results to allocate resources and assess performance is evidenced by a variety of sources, including:
•information provided to and reviewed by our CODM (the “CODM package”);
•our organizational structure, including meetings between our CODM and the rest of the ELT;
•the level at which budgets are prepared and reviewed;
•the basis on which compensation is determined; and
•information provided to the board of directors.
No single factor is determinative in Digi’s analysis. Rather, we consider the totality of the information and carefully consider whether any of it may be inconsistent with the information used to identify our operating segments.
The CODM makes the key operating decisions for Digi, including decisions relating to significant contracts, market and product changes, capital expenditure deployment, marketing
1 Annualized Recurring Revenue is the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. This is a key business metric used by the Company and is not a number directly from the financial statements of Digi. The metric is only related to revenue expected to reoccur in the future and has no cost elements included in the metric.
strategies, hiring and firing of key personnel and approving operating budgets. We assessed each of these factors prior to reaching a conclusion of reportable segments.
a.Information Provided to and Reviewed by our CODM
The operating results regularly reviewed by our CODM take various forms. The financial results are regularly reviewed by the CODM through monthly business review (“MBR”) meetings with the ELT, among them the segment leaders (identified as Steve Ericson, Segment Leader of IoT P&S, and Tony Puopolo, Segment Leader of IoT Solutions). The CODM package is provided to the CODM by the Director of FP&A for review at the MBR meeting. The MBRs are led by the CFO with the two Segment Leaders providing additional commentary when needed over their respective Segment financials. This presentation details financial performance for the month for the operating segments through gross profit, key operational activities for the period and a reforecast for the remainder of the quarter. The focus of the CODM package and review by the CODM is centered around ARR and revenue.
The following information is reviewed and discussed at a Digi-only level, as part of the CODM package:
-Sales Operations data including, but not limited to
oPipeline data for new Annual Recurring Revenue for the current quarter plus the future three quarters
oPipeline data for new hardware transactions
oWeekly pipeline creation and weekly bookings
-Overall channel inventory
-Current quarter P&L forecast (including months of the quarter that are in actuals) down through Adjusted EBITDA
-Cash and working capital metrics
-Overall talent metrics, including adds, departures, time to fill and turnover data
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Document
June 18, 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 April 24, 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.
Form 10-K for the Fiscal Year Ended September 30, 2023
Notes to Consolidated Financial Statements
Note 4. Segment Information and Major Customers, page 53
1.We note your breakdown of industry sectors that are served by each operating segment for both the IoT Product & Services (P&S) and IoT Solutions (Solutions) segments in response to prior comment 2. Please tell us whether sales for any of the operating segments included in each of your reporting segments are concentrated in a particular industry sector or sectors, and if so, why. In your response, provide us with a breakdown of revenue by operating segment for each industry served.
We respectfully advise the Staff that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
2.We note that while the CODM “focuses” on operating income as a percent of revenue for your P&S segments and gross profit margin for the Solutions segments, he receives both of these measures, as well as revenue, for each of your operating segments. Please explain how the CODM uses revenue for each of the operating segments, gross profit for the P&S segments, and operating income for the Solutions segments. For example, clarify whether he uses it to allocate resources, in discussions with segment managers, segment manager compensation, etc.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable. The data provided and used by the CODM is described in the discussion below.
3.You state in your response the primary measure of profit used by your CODM to make decisions in your P&S segments is operating income as a percent of revenue, excluding certain allocations. However, there do not appear to be unallocated expenses in the measure of profit disclosed in Note 4. We also understand that your CODM receives each of gross profit and operating income for each of your operating segments. Please tell us how you determined the measure of profit or loss required to be disclosed for each of your reportable segments. Refer to ASC 280-10-50-22 and 50-28.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable. Information on allocated expenses is described in the discussion below.
4.You state in your response to prior comment 3 that pricing for the product sales in your P&S segments can be variable, and the mix of product sales plays a heavy factor and does not always have consistency over reporting periods. Please explain further your references to variable pricing and to the mix of product and their impact on consistency over reporting periods. In this regard, clarify whether you are referring to variability for a particular operating segment period-over-period. If so, provide us with quantified information that supports such variability. To the extent you are referring to variability among the four operating segments in a given period, if any, explain further why such information would not be relevant in assessing performance and allocating resources for your P&S operating segments. In addition, tell us whether similar impacts from these factors would be observed in operating income, and if not, why not.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
5.Please provide us with an analysis of available quantified data as it relates to revenue, gross profit, and operating income for each individual operating segment aggregated within your P&S and Solutions reportable segments.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
6.You state that operating income as a percentage of revenue in fiscal 2021 and 2023 was similar for three of the four P&S operating segments. You further state that COVID-19 had a more significant impact on one operating segment than the other three in the P&S segment. For the one segment you indicate was outside of the band of operating income as a percentage of revenue for each year, please explain why
you believe it was impacted more by the COVID-19 pandemic, why you believe the other segments were not similarly impacted, and how this factored into your aggregation analysis. If this did not factor into your analysis, explain why. Also, provide us with quantitative information to support your assertions that historically this one segment has demonstrated economic similarity with the other three operating segments.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
7.You state that projected future performance for the P&S segments is not expected to change in a way that would impact your analysis other than in your Cellular segment, and that projected future performance is not expected to change for the Solutions segments. Please provide us with the quantitative data that supports your future expectations, including revenue, gross profit, and operating income, and explain how it was developed.
We respectfully advise that the information provided within the Reorganization and the impact on the organization section below results in this question no longer being applicable.
Reorganization and the impact on segment identification
We restructured our organization effective the third quarter of fiscal 2024. The resulting structure has changed our conclusions with respect to our analysis under ASC 280. The reorganization, as approved by Digi’s Board of Directors on May 23, 2024, appointed two segment leaders: an IoT Products and Services (“IoT P&S”) Segment Leader and an IoT Solutions (“IoT Solutions”) Segment Leader.
Segment identification analysis effective Q3
Following the reorganization, we have two operating segments which are also reportable segments under ASC 280: (i) IoT P&S; and (ii) IoT Solutions. Each operating segment is led by a Segment Leader who reports directly to our CEO. The CODM views the Company and allocated resources and makes financing decisions at the IoT P&S and IoT Solutions level. Within each of the two segments, there are identified product lines that each have a product leader who reports directly to the respective Segment Leader. The following organizational structure took effect during the third quarter of fiscal 2024:
IoT P&S
Our IoT P&S segment offers products and services that help original equipment manufacturers ("OEMs"), enterprise and government customers create and deploy, secure IoT connectivity solutions. From embedded and wireless modules to console servers as well as enterprise and industrial routers, we provide a wide variety of communication sub-assemblies and finished products to meet our customers' IoT communication requirements. In addition, this segment provides our customers with a device management platform to enable customers to capture and manage data from devices connected to networks. IoT P&S consists of the following product lines:
•Cellular Routers are fully enclosed devices that rest outside the machine for which they provide connectivity. The machines for which they provide connectivity interface with the router via a cable – i.e., they are plugged into the router. As their name implies, the routers provide communication via cellular protocols for the machine 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 offers connect sensors, cellular enabled devices that are battery operated, as well as other types of console server applications. These products are offered for edge computing 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 cable – i.e., they are plugged into the device.
•OEM solutions are smaller form factor module products that the customer purchases to embed into their own device to enable computer and/or connectivity. These modules utilize either cellular or another wireless communication protocol (e.g., ZigBee, Bluetooth, LoRa, WiFi) based on the end user’s needs and preferences.
IoT Solutions
Our IoT Solutions segment consists of Ventus’s Managed Network-as-a-Service (“MNaaS”) business acquired in the first quarter of fiscal 2022 and our SmartSense by Digi (“SmartSense”) business. Ventus is a leader in MNaaS solutions that simplify the complexity of enterprise-wide area network (“WAN”) connectivity for customers. The Ventus portfolio includes cellular wireless and fixed line WAN solutions for connectivity applications in banking, healthcare, retail, gaming, hospitality and other sectors. SmartSense offers wireless temperature and other condition-based monitoring services as well as employee task management services. These solutions are focused on the following vertical markets: food service, healthcare (primarily pharmacies and hospitals) and supply chain.
Determination of Operating Segments:
Accounting Guidance Considerations – ASC 280, Segment Reporting:
Digi uses the guidance in ASC 280, Segment Reporting, in identifying our operating segments. ASC 280-10-50-1 specifies that an operating segment is a component of a public entity if it has all the following characteristics:
a.It engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity);
b.Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and
c.Its discrete financial information is available.
If more than one operating segment is identified through applying the above guidance, then further analysis is completed to determine whether the segments can be aggregated (280-10-50-11) and whether the segments meet specified quantitative thresholds (280-10-50-12) that would make them a reportable segment.
Digi Analysis
1.Engagement in Business Activities
Each of Digi’s six product lines engages in business activities from which they can derive revenue and incur expenses. As such, all product lines meet this criterion. Management noted that while each product line can generate revenue independently, there are also shared headquarters and other functional costs that are not directly attributable to a specific product line and certain of those costs are not allocated to product lines. The unallocated cost centers do not engage in business activities as they support our segments and do not engage in any activities to generate revenue. As each of the product lines engage in business activities, each product line meets this criterion. However, note that nothing beyond Annualized Recurring Revenue (“ARR”)1 and revenue are provided to the CODM and all cost information at a product line level is only provided and reviewed by Segment Leaders.
2.The Chief Operating Decision Maker (“CODM”) Reviews Operating Results
Identification of the CODM and Segment Leadership
Ron Konezny, our CEO, is the Company’s CODM. While the Executive Leadership Team, defined as all individuals who report directly to the CODM (“ELT”), meets monthly as noted in 2(a and b) below and each member provides input to the ELT as it relates to their areas of responsibility, the final authority to make resource allocation decisions and assessing performance resides with our CODM.
We believe additional insight into the level at which our CODM reviews operating results to allocate resources and assess performance is evidenced by a variety of sources, including:
•information provided to and reviewed by our CODM (the “CODM package”);
•our organizational structure, including meetings between our CODM and the rest of the ELT;
•the level at which budgets are prepared and reviewed;
•the basis on which compensation is determined; and
•information provided to the board of directors.
No single factor is determinative in Digi’s analysis. Rather, we consider the totality of the information and carefully consider whether any of it may be inconsistent with the information used to identify our operating segments.
The CODM makes the key operating decisions for Digi, including decisions relating to significant contracts, market and product changes, capital expenditure deployment, marketing
1 Annualized Recurring Revenue is the annualized monthly value of all billable subscription contracts, measured at the end of any fiscal period. This is a key business metric used by the Company and is not a number directly from the financial statements of Digi. The metric is only related to revenue expected to reoccur in the future and has no cost elements included in the metric.
strategies, hiring and firing of key personnel and approving operating budgets. We assessed each of these factors prior to reaching a conclusion of reportable segments.
a.Information Provided to and Reviewed by our CODM
The operating results regularly reviewed by our CODM take various forms. The financial results are regularly reviewed by the CODM through monthly business review (“MBR”) meetings with the ELT, among them the segment leaders (identified as Steve Ericson, Segment Leader of IoT P&S, and Tony Puopolo, Segment Leader of IoT Solutions). The CODM package is provided to the CODM by the Director of FP&A for review at the MBR meeting. The MBRs are led by the CFO with the two Segment Leaders providing additional commentary when needed over their respective Segment financials. This presentation details financial performance for the month for the operating segments through gross profit, key operational activities for the period and a reforecast for the remainder of the quarter. The focus of the CODM package and review by the CODM is centered around ARR and revenue.
The following information is reviewed and discussed at a Digi-only level, as part of the CODM package:
-Sales Operations data including, but not limited to
oPipeline data for new Annual Recurring Revenue for the current quarter plus the future three quarters
oPipeline data for new hardware transactions
oWeekly pipeline creation and weekly bookings
-Overall channel inventory
-Current quarter P&L forecast (including months of the quarter that are in actuals) down through Adjusted EBITDA
-Cash and working capital metrics
-Overall talent metrics, including adds, departures, time to fill and turnover data
D