00:05 Good day and thank you for standing by. Welcome to Digi International's First Quarter -- First Fiscal Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] 00:30 I would like to hand the conference over to your host today, Jamie Loch, Chief Financial Officer. Please go ahead.

00:44 [Technical Difficulty] fiscal 2022 first quarter results of Digi International. Joining me on today's call is Ron Konezny, our President and CEO. Ron will provide his thoughts on our business and I will follow with the highlights of our financial performance. Following our prepared remarks, we'll take your questions. We issued our earnings release shortly after the market closed today, you may obtain a copy through the Financial Releases section of our Investor Relations website at digi.com. 01:10 Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements. While we believe the expectations reflected in our forward-looking statements are reasonable, we give no assurance such expectations will be met or that any of our forward-looking statements will prove to be correct. 01:41 For additional information, please refer to the forward-looking statements section in our earnings release today and the Risk Factors sections of our 2021 Form 10-K and subsequent reports on file with the SEC. Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures are included in the earnings release. The earnings release is also an exhibit to a Form 8-K that can be accessed through the SEC filings section of our Investor Relations website. 02:14 Now, I'll turn the call over to Ron.

02:17 Thank you, Jamie and welcome to Digi International's 2022 first fiscal quarter earnings call. Digi's mission is to transform our customers' business by connecting their people and machines. Our industrial IoT solutions are used in business and mission-critical applications that are secure, scale and numbers and across geographies, reliable and easy to implement and manage. 02:42 Paired with our expert support and backed by a vibrant growing profitable company with decades of experience, Digi helps tens of thousands of customers around the world. We are committed to ever increasing value by pairing software and services with our award-winning products. 02:59 We have gotten off to a fast start in our commitment to set another record year. With the acquisition of Ventus on November 1st, we are reporting two months of their results in combination with SmartSense within the IoT solutions business segment. We set several new records including over $84 million in quarterly revenue, up 15% from last year; $17 million in quarterly adjusted EBITDA, up 31% from last year; over 20% adjusted EBITDA margins, up 240 basis points from last year; over 270,000 subscribers powered over $88 million in annualized recurring revenues, up 170% from last year. 03:41 In addition, strong bookings added to our $0.25 billion backlog. Digi is benefiting from continued acceleration of digital transformation throughout the industrial economy. We believe this trend will be sustained for the foreseeable future and that Digi can play an increasing role in our customers' success. 04:03 The continued pandemic and its impact on our supply chain remains our biggest challenge. Customer demand continues to outstrip our ability to access components and provide product to satisfy our order book. We expect these conditions to persist through the first half of 2022 with a potential for improvement thereafter. 04:23 We are…

08:35 Thanks, Ron and good afternoon, everyone. Today, I'll start with key financial highlights that contributed to the results of our record first fiscal quarter. Our new model has pushed our ARR to over $88 million, which is up 170% over prior year. Sites in our solutions segment grew 271,000 sites with the addition of Ventus. We delivered $84.3 million in revenue, which is up 15% from prior year, delivered adjusted EBITDA of over 20%. We paid $50 million of debt principal from debt incurred through the acquisition of Ventus and finished the quarter with over $47 million in cash. 09:12 Our $84.3 million in revenue in the first fiscal quarter represents 15% year-over-year growth, gross margins were 56.8% and led to an adjusted EBITDA of $17.0 million or 20.1% of revenue. Gross margins, excluding amortization were 58.5% for the quarter. On a per diluted share basis with the diluted share count of $35.8 million, our GAAP EPS was $0.03 and our non-GAAP EPS for the quarter was $0.36. 09:45 Revenue, adjusted EBITDA and adjusted EPS, all beat analysts’ consensus estimates for the quarter, with adjusted EBITDA and adjusted EPS exceeding the high end of the ranges we provided in our guidance last call. 09:59 Some other financial highlights. As we communicated in our last earnings call, we retired and replaced our extending credit facility in conjunction with the Ventus acquisition. Details of our new $350 million term loan B credit agreement were disclosed in a Form 8-K on December 23, 2021. 10:19 During the quarter, as I mentioned, we made a $50 million payment against our new credit facility, which places our debt position at the end of F Q1 at $300 million. These figures do not consider the treatment of leases, which based on the accounting standards will…

16:18 Thank you. [Operator Instructions] And our first question comes from the line of Mike Walkley with Canaccord Genuity. Your line is open. Please go ahead.

16:36 Hey, guys. Good afternoon. This is Daniel on for Mike. Thanks for taking my question. So congrats on the great quarter. Could you just give us a sense of approximately, how much the Ventus contribution was within the $75 million IoT solutions ARR number?

16:56 Yeah. Hey, Dan. Thanks for hopping on the call here. We are – due to SEC business segment reporting, we don't break out those results separately, but they do include two months of their effort. And if you can kind of go back to what we've declared on June of the Ventus ARR and then look at of course the SmartSense September quarter AAR to kind of get a feeling for where we started the quarter at. But we can't share that information with the segment reporting.

17:28 Okay. Great. Thanks for the details. And just a follow-up if I could. I guess given the higher margin Ventus contribution to your gross margins. How should we think about IoT Solutions margins moving forward, to expected to I guess stay along the lines of the 65.9% you just reported depending on mix?

17:52 Yeah. This is Jamie. I think the answer to that is yes, right. We've talked in the past that, we see recurring margins on the ARR is typically higher than the one-time margins and that mix skews to be in the Solutions segment, a much higher percentage of the total revenue you're right, you would see that margin rate, and I think you could reasonably expect that to ride its way through as the recurring portion of the revenue is a higher percentage of the total inside of solutions.

18:23 Great. Thank you very much.

18:24 Yeah. Thank you.

18:28 Thank you. And our next question comes from the line of Harsh Kumar with Piper Sandler. Your line is open. Please go ahead.

18:34 Yeah. Hey, guys. First of all, tremendous results and congratulations on being able to complete Ventus guys. I had a handful of questions, maybe Jamie, I'll hit you first. So strong, strong gross margins up into the 58.5% and 59% range versus the mid '50s and the low '50s you started the last year at. Is this the new base for us that we should think about? And maybe you could help us understand as you move forward through the year supply chain challenges sort of like go away or get better in the second half. How should we think of this gross margin number?

19:17 Yeah. Hi, Harsh. Thanks for the comments and I appreciate the question and glad you're on today. I do think this really is a representation of the new model. I think what we talked about Ventus and what Ventus brings financially. It really brings a lot of recurring revenue with characteristics that are very similar in our SmartSense business, why that solutions add on really makes a lot of sense. And so you're seeing the impact of -- as an overall company and an ARR number of $88 million, you can see as a percentage of our revenue, the impact that's having on the model. So I really do think that is reflective in this quarter and I think it's reasonable that you would see that high '50s between kind of where we're at now that would ride its way through given that mix and that significant changes happened in financial model that, that will carry so forward.

20:17 Okay. And Jamie, if I can put you on a little bit of a spot maybe comment on our supply chain challenges improve. Would that be a benefit to you as well from the sustainable business (ph)?

20:28 Yeah. It's a really good question I feel. It's hard to predict that, but there's really two or three factors that are kind of impacting that at a margin rate. You've got the ongoing fleet challenges where freight rates are rising, you're seeing a lot of surcharges that are being added in by the carriers. And that's causing some challenges you are seeing some pricing change in components. And it's hard to know logic would follow that has that loosens up some of those prices coming back down, which should provide for some gross margin upside. 21:05 When that actually takes place, it's hard to know if that's going to take place hand in hand with when the supply chain loosens up or if one is going to lag versus the other. So I would say right now that and as we commented on what we believe that the supply chain will loosen up in the second half of the year. I'm trying to plan in that the pricing isn't going to really resolve itself till fiscal ‘23.

21:28 Okay. Fair enough. I know it's a tough question to answer, qualitative sort of question but if I can ask a question Ron on the backlog. So you guys talked about a 250 I think $0.25 billion backlog, if I heard that correctly Ron? Could you maybe talk about where that's concentrated is that, or how that splits, what are the areas that are like abnormally good for you relative to others and maybe some other areas that are not so good. Just any kind of color you have would be appreciate it.

22:07 Yeah, absolutely. The backlog is across the business. It's probably most pronounced in our embedded product line, OEM Solutions, because you've got our solutions being designed in with our customers engineers who -- all of our customer segments they appreciate the supply chain challenges. It also shows as you how it is limiting our full potential in the near term. We've talked in the past about not be able to ship all of our orders due to supply chain challenges. So that backlog is both showing that bookings are cynically higher than our revenues in the same period and shows you that we're able to deliver all the products we'd like to, but that backlog is concentrated in near quarters but it goes all the way out to FY ’23 for us.

22:52 Wow, great. And then my last question, I'll get back in line was in the past Ron, you have, I think chosen to take the pricing head from inflation, supply and some of these sort of factors outside your control, but then I think last quarter I got the sense that maybe you're leaning towards passing at least some of those costs order to the customers. I'm curious, if you're seeing any friction from the customer, any resistance from the customers in taking those costs and what is the bias right now? Is it to pass these costs, because these are not fairly coming to you or is it due to take them internally?

23:32 Yeah. It's a really good question and something we talk about quite a bit and we really attack the challenge on a per product line basis, because we have to be relevant with our customers and our competitors in the marketplace for the most parts, we have been implementing single-digit price increases and have been very careful as to when we do it and how often doing which we provide. So we've been very deliberate about trying to keep our prices both competitive, but also when possible, sharing those costs increases with our customers. For the most part the market has been very receptive as you can tell by that backlog and my comments on bookings that hasn't slowed our business down to date.

24:17 Hey, guys. Congratulations on the new model. Congratulations on Ventus and I'll get back in line.

24:24 Hey. Thanks, Harsh.

24:26 Thank you. [Operator Instructions] And I'm showing no further questions and I would like to turn the conference back over to Ron for any further remarks.

24:46 Thank you. A sincere thank you to our shareholders, research and banking communities and all of you that experienced our earnings calls. Rob Bennett joined Digi recently to lead our Investor Relations efforts. Rob and I plan to attend in person the 34th Annual Roth Conference in Southern California on March 13th and 14th. We look forward to our next earnings call.

25:10 This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.