Hopkins' Digi International continues to outperform

Digi International is making more global connections every day.

The Hopkins-based company designs and produces software connecting millions of pieces of equipment to the internet for its swelling ranks of customers. Think wind turbines, solar arrays, factory machines, agricultural equipment and swimming pool controls.

Investors also increasingly are connecting with Digi, which also has proved to be one of Minnesota's best stocks to own in 2022, as it has for the past five years.

"Digi gives machines a voice," said Ron Konezny, the company's CEO for eight years, on Monday. "They tell us how they feel and why. And that allows us to keep things maintained and operating."

That's a change from the "Call us if there's a problem" model.

"Now we can prevent them from having to call us," Konezny said.

Digi last week reported unexpectedly good fiscal third-quarter results and a bright outlook that pushed its stock price into record territory. Digi, which has been a public company for 33 years, set new quarterly records for revenue and operating profits, before one-time charges.

Konezny's key to profitable growth is accelerating "annualized recurring revenue." That's high-margin, predictable software-based revenue that tends to "stick" year after year.

Recurring revenue was up 157% this year from the first three quarters of 2021, closing on $100 million for the fiscal year. It has risen to about 25% of Digi's total revenue. It's also revenue that "provides strengthened visibility" to future performance.

Digi is benefiting, after years of investment, from Konezny's long-term push into customer-customized, subscription-based software services. Team Konezny sacrificed faster growth in the early years of the Digi turnaround as they envisioned what was needed for the best long-term results.

The shareholder benefits have arrived. Shares hit a record price of $34.11 on Friday, with a 39% return so far in a rough year for technology stocks. The stock was down a bit by Tuesday's close, at $32.81.

Digi shares are up a whopping 256% over the past five years.

By comparison, the Piper Sandler/Star Tribune index of Minnesota's 50 largest public companies shows a 31% return since August 2017. Digi also bests the Russell 2000 index of small-capitalization stocks, which is up 45% since 2017.

Digi's gross profit margins and operating earnings have trended upward for several years as revenue rose from thousands of customers, including Otis Elevator, Medtronic, Pentair, Ecolab and New York City. It uses Digi devices and software to run street lights based on traffic patterns and intelligence.

Piper Sandler analyst Harsh Kumar last week revised his projections upward to fiscal 2022 earnings of $1.63 a share on revenue of $382.6 million.

Kumar raised his 12-month target price to $45. The several-analyst consensus target price is around $41.

Digi's double-digit growth is slowed only by supply-chain shortages that Konezny said will suppress revenue by $30 million in the fourth quarter.

"We don't have enough parts from suppliers to manufacture products for our customers," Konezny said.

Digi has phased out manufacturing in China, placing orders for its devices with contract manufacturers partners in Mexico, Thailand and South Korea. But the company still is dealing with shortages caused by an accelerated kickstart to the economy after COVID-19 shutdowns. China, which has had bigger slowdowns than many countries, also still supplies a disproportionate number of the semiconductor chips used by all manufacturers.

"Industrial 'Internet of Things' is the right industry, and Digi is in strong businesses such as renewable energy, 'smart cities' and smart agriculture," said Wendy Lee, equity research analyst at St. Paul's Mairs & Power, which has invested in Digi for four years.

"Ron has made the right investments and executed on them," she said. "They have a record [$250 million-plus] backlog of orders right now with customers they can count on. Digi's only challenge right now is supply. They are unable to get all the semiconductors that power the sensors and other equipment they make.''

That bottleneck should be relieved somewhat as Asian supply-chain issues improve and developing North American production of semi-conductor chips increases.

Konezny has been a successful acquirer-integrator of several niche players. Digi, albeit not a huge player, is getting notice for performance. Its market value is approaching $1.2 billion.

"I get calls all the time from private equity firms and other prospective acquirers," he said. "I've got to run the business. I'm busy. The board can deal with that."

Staff writer Patrick Kennedy contributed to this story.