Digi International, slowly transforming business model, increased share value 25% in 2021

Digi International has slowly transformed under CEO Ron Konezny into a company that not only makes internet of things devices for companies but also the software to manage the systems in factories, agriculture and telecommunications.

The result has been markedly improved operating and stock-price performance in recent years.

"We needed to transform into a company that embraces its hardware experience but adds more value through software, helping customers," said Konezny, who has led the 36-year-old company since 2015. "And we enjoy more recurring revenue. We want to be known as a service provider that also [is] an equipment manufacturer. That's the transformation."

Digi's software sales and services, which makes up about 25% of the business, is the fastest growing segment.

The evolution was slow and painful and included layoffs in in Konezny's early years. But investors have warmed to the still-evolving story.

Hopkins-based Digi also benefited from the remote work boom and demand for increased internet connectivity of the last couple years. Its shares have increased in value by about 25% in 2021, ending the year at $24.57. The stock price was around $7 per share when Konezny took over the struggling company in 2015.

Digi, with a market value approaching $900 million, has grown profitably thanks to organic growth as well as acquisitions. The consensus stock price of several stock analysts is $30 per share within 12 months, based on recent results and developments.

In the recently concluded fiscal 2021, Digi's adjusted earnings per share increased 10% to $1.08 per share, while operating earnings increased 20% to $48.3 million. Revenue grew 10.5% to $308.6 million.

Konezny noted strong revenue growth, despite "unprecedented supply chain challenges" that have plagued American manufacturers as the economy accelerated in 2021.

Still, the company is treated more like a manufacturer than a go-go tech stock where revenue is sometimes valued more than profitability. Konezny has been able to grow Digi in a measured way; with earnings that generally grow faster than revenue.

In November, Digi bought Connecticut-based Ventus Holdings, a "managed network-as-a-service (MNaaS) solutions provider.'' The $350 million transaction, financed largely with debt, is Digi's largest in its 36-year history.

"The addition of Ventus to the Digi family further accelerates our transformation to software, services and subscription offerings … to over 250,000 sites," Konezny said at the time.

The deal was hailed by Wall Street.

"Digi continues to execute well in the current environment, with supply constraints hindering strong demand," analyst Harsh Kumar of Piper Sandler wrote in a recent investors note. "In addition, the company is driving strong [adjusted rate-of-return] growth in both of its [hardware and software] businesses, and we expect the 'ARR' growth to exceed revenue growth and drive margin expansion (as most of it is software-related) over the long term."

Kumar, who has a 12-month target price of $33, recently projected Digi will post improved earnings per share of $1.49 on revenue of $335.5 million in fiscal 2022.

Ventus broadens Hopkins-based Digi's subscription-based technologies and services that connect people and Internet-enabled machines.

"We prefer you buy a subscription over just a device, and Ventus only lets you buy a device if you have the service," Konezny said. "They service it. They have a model of zero down and 'X dollars' a month. Whether an electric vehicle charger or a parking garage meter. The idea is: 'You do what you are good at. I'll keep [the technology] running. Cellular is the best way to [deliver the service].'"

Konezny said the deal also will accelerate Digi's movement to a product-plus-software-subscription base for its entire business. That doesn't include the 25% of Digi's business that makes and sells products that are embedded in another manufacturer's technology product.

Hitting the analysts' consensus target next year of $30 per share would catapult Digi to a market value of over $1 billion, a long-term goal of Konezny.

Konezny, 53, earned about $1.5 million in cash-stock compensation in fiscal 2020, according to an SEC filing. The only stock he has sold over the years was enough to pay the taxes on the gains he made on option shares he has acquired over time at their historic-issue prices.

Digi's employment has grown from 525 to 670 over the last five years. All of them are shareholders, Konezny said, including up to 100 shares given to every employee and a discounted-stock purchase plan.