Digi International Reports Third Fiscal Quarter 2002 Results

7/18/2002 - Digi International® Inc. (Nasdaq: DGII), the leader in Connectware, today announced third fiscal quarter 2002 revenue of $26.1 million, compared to $25.2 million in the prior quarter and $31.1 million in the third quarter of fiscal 2001. Digi reported a net loss of $0.6 million for the quarter, or $0.03 per diluted share, compared to a net loss of $7.3 million, or $0.39 per diluted share, in the prior quarter, and net income of $0.4 million, or $0.02 per diluted share, during the third fiscal quarter of 2001.

On a pro forma basis, the company reported net income per diluted share of $0.02, excluding amortization of intangible assets (net of taxes), one-time acquisition and divestiture-related charges (net of taxes), and a gain resulting from the forgiveness of a European investment grant, compared to net income per diluted share on a comparable pro forma basis of $0.04 in the prior quarter and net income per diluted share on a comparable pro forma basis of $0.09 during the third fiscal quarter of 2001.

Revenue from Digi Connectware products and NetSilicon Connectware products contributed $20.0 million and $6.1 million, respectively, in the third fiscal quarter 2002. Revenue from products addressing growth markets totaled $8.1 million during the quarter, or 31% of total revenue, compared to $8.9 million, or 35 % of total revenue, in the second fiscal quarter of 2002.

Among the quarter's highlights, Digi introduced new server-management features for its PortServer CM line of console management products that dramatically improve server uptime and IT department efficiency. The company also secured significant contracts and design wins with customers in several of its targeted vertical markets which include point-of-sale, industrial automation, hospitality, finance and medical industries addressing applications for auto-parts retailing, semiconductor testing, office-automation product manufacturing and ATM deployment.

"We were pleased with our top-line performance for the quarter, which was within the range of our revenue guidance and up modestly on a sequential basis over our second fiscal quarter results," said Joe Dunsmore, Digi's chairman, president and CEO. "However, as noted below, we have recognized the need to bring the cost structure of NetSilicon in line with market conditions and the current outlook for NetSilicon's business. As a result, management has begun to work on a restructuring plan to accomplish these goals."

Accordingly, Digi's board of directors has authorized management to develop plans to restructure NetSilicon, subject to final board approval. The process of developing the plan is expected to be completed within 30 days. While the details of the restructuring are undetermined at this time, the effect is expected to be material.

Gross margin for the second quarter of fiscal 2002 was 57.0%, compared to 52.3% during the prior quarter. Excluding the NetSilicon business and acquisition related costs, gross margin for the third fiscal quarter of 2002 was 58.4%. The increase in gross margin in the third fiscal quarter of 2002 is primarily a result of higher gross margins from NetSilicon products and the sale of MiLAN whose products generated lower margins, in addition to improvements in manufacturing efficiencies.

Operating expenses, excluding amortization, one-time acquisition and divestiture-related expenses, restructuring charges, and a gain resulting from the forgiveness of a European investment grant, were $15.4 million, compared to $15.1 million in the prior quarter and compared to $14.7 million in the third fiscal quarter of 2001. Excluding the NetSilicon business, operating expenses, excluding amortization and the gain resulting from the forgiveness of a European investment grant, were $10.2 million for the third fiscal quarter of 2002 compared to $10.1 million in the prior quarter.

Incremental operating expenses for NetSilicon, excluding amortization and one-time acquisition-related expenses, were $5.3 million for the current quarter. Digi continues the process of integrating NetSilicon into the Digi business and aligning costs with Digi's desired business model. This process will continue throughout the fourth quarter and into the first quarter of fiscal 2003.

Digi's cash and marketable securities balance at the end of the quarter was $57.6 million, an increase of $4.7 million from the end of the second fiscal quarter. Days sales outstanding (DSO) were 32 during the third fiscal quarter of 2002, down 11 days from the prior quarter. Digi's tangible book value per share was $3.67, and book value per share was $7.01.

Revenue and Earnings Guidance:
The company expects fiscal fourth quarter 2002 revenue of between $25.5 million and $26.5 million and a pro forma loss per diluted share of $0.02 to $0.04, excluding amortization of intangible assets (net of taxes) and acquisition -related expenses (net of taxes). For the year, the company expects revenue from between $101 million and $103 million and pro forma earnings per diluted share of $0.05 to $0.07. The growth products component will be in the range of $33.0 to $34.0 million.

SFAS 142 Adoption Relative to NetSilicon Assets
Effective October 1, 2002, the company must adopt Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS 142 provides a new methodology for evaluating goodwill impairment. While we have not yet performed the necessary calculations, we anticipate that the methodology prescribed by SFAS 142 for evaluating and measuring the impairment of goodwill will result in a goodwill impairment charge for NetSilicon, and the amount of such charge may be material. Once determined, any charge will be reported as a change in accounting principle in the first quarter of fiscal 2003. We will be required by SFAS No. 142 to assess, on at least an annual basis, whether our goodwill carrying value is impaired. In the event that the fair value of our business declines in the future, we may incur additional charges for impairment.

Conference Call Notice
Digi invites all those interested in hearing management's discussion of the quarter to attend our third fiscal quarter conference call either by phone or on the Web. Participants can access the call directly at 4:00 p.m. Central Time on Wednesday, July 17, 2002, by dialing 800-348-6433. A replay will be available for one week following the call by dialing 800-633-8284 and entering the code 20737995. Participants may also access a live web cast of the conference call through the investor relations section of Digi's web site, www.digi.com

About Digi International
Digi International, based in Minneapolis, is the leader in Connectware wired and wireless, hardware and software connectivity solutions. Digi markets its products through a global network of distributors and resellers, systems integrators and original equipment manufacturers (OEMs).

For more information, visit Digi's Web site at www.digi.com, or call 800-344-4273 (U.S.) or 952-912-3444 (International). All brand names and product names are trademarks or registered trademarks of their respective companies.

Digi, Digi International and the Digi logo are trademarks or registered trademarks of Digi International Inc. in the United States and other countries. All other brand names and product names are trademarks or registered trademarks of their respective companies.

Forward-looking statements
This press release contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which generally can be identified by the use of forward-looking terminology such as "anticipate," "believe," target," "estimate," "may," "will," "expect," "plan," "project," "should," or "continue" or the negative thereof or other variations thereon or similar terminology. Such statements are based on information available to management as of the time of such statements and relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market and statements regarding the Company's mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, including risks related to the highly competitive market in which the Company operates; rapid changes in technologies that may displace products sold by the Company, declining prices of networking products, the Company's reliance on distributors, delays in the Company's product development efforts, uncertainty in consumer acceptance of the Company's products, and changes in the Company's level of revenue or profitability. These and other risks, uncertainties and assumptions identified from time to time in the Company's filings with the Securities and Exchange Commission, including without limitation, its annual reports on Form 10-K, its quarterly reports on Form 10-Q and its definitive Joint Proxy Statement/Prospectus filed on January 10, 2002, could cause the Company's future results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Many of such factors are beyond the Company's ability to control or predict. These forward-looking statements speak only as of the date for which they are made. The Company disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Digi International Contacts:
S. (Kris) Krishnan, Digi International Inc.
(952) 912-3125 or s_krishnan@digi.com

Tony Carideo, Padilla Speer Beardsley Inc.
(612) 455-1720 or tcarideo@psbpr.com

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