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Digi International Reports Second Fiscal Quarter 2009 Results

Announces Business Restructuring to Increase Focus on Wireless Solutions and Improve Profitability

Meets Street consensus of $0.03 per share profitability

(Minneapolis, MN, April 23, 2009) - Digi International® Inc. (NASDAQ: DGII, www.digi.com) reported revenue of $40.1 million for the second fiscal quarter of 2009, compared with $43.1 million for the second fiscal quarter of 2008, a decrease of $3.0 million, or 6.9%. Digi reported net income for the twenty-fifth consecutive quarter, and met both revenue and earnings per share guidance for the second quarter of fiscal 2009.

Below is a table setting forth certain GAAP and Non-GAAP results:

"Digi has continued to invest aggressively in technology and innovation through this downturn," said Joseph Dunsmore, Digi's CEO. "During the quarter we announced the rollout of the most strategic initiative since I've been at Digi. The iDigi Energy solution bundle is our first in what will become a series of iDigi solution bundles that make wireless M2M fast, easy, and inexpensive."

Business Results for the Three and Six Months Ended March 31, 2009

Revenue from embedded products in the second fiscal quarter of 2009 was $17.4 million compared to $21.7 million in the second fiscal quarter of 2008, a decrease of $4.3 million, or 20.0%. Revenue from non-embedded products was $22.7 million in the second fiscal quarter of 2009 compared to $21.4 million in the second fiscal quarter of 2008, an increase of $1.3 million, or 6.4%. Revenue from embedded products includes $1.2 million of Spectrum revenue in the second fiscal quarter of 2009. Revenue from non-embedded products includes Sarian-branded revenue of $5.0 million for the second fiscal quarter of 2009. Sarian Systems, Ltd. and Spectrum Design Solutions, Inc. were acquired in April 2008 and July 2008, respectively. The strengthening of the U.S. dollar compared to the Euro and UK pound sterling had an unfavorable impact on revenue of $2.7 million in the second fiscal quarter of 2009 compared to the second fiscal quarter of 2008.

Revenue by geographic region is shown below:

Gross profit was $19.2 million in the second fiscal quarter of 2009 compared to $23.2 million in the same period in the prior year. The gross margin was 47.8% in the second fiscal quarter of 2009 compared to 53.8% in the second fiscal quarter of 2008. The gross margin was lower in the second fiscal quarter of 2009 than in the comparable period a year ago due to unfavorable product mix within primarily the non-embedded products, including sales of Sarian non-embedded products which provide lower gross profit margins. The strengthening of the U.S. dollar compared to the Euro and UK pound sterling had an unfavorable impact on gross margin of approximately 1.1% in the second quarter of fiscal 2009 compared to the comparable year ago quarter.

Total operating expenses in the second fiscal quarter of 2009 were $18.6 million, or 46.3% of revenue, compared to $19.5 million, or 45.3% of revenue, in the second fiscal quarter of 2008. The decrease in operating expenses in the second fiscal quarter of 2009 compared to the same quarter in the prior year is primarily due to the elimination of all incentive compensation previously accrued for fiscal 2009, since this program was eliminated for the entire fiscal year. Effective cost management offset the incremental ongoing operating expenses for Sarian and Spectrum.

Total other income, net decreased by $0.6 million in the second fiscal quarter of 2009 compared to the same quarter in the prior year primarily due to lower interest yields on cash equivalents and marketable securities.

Reported net income was $0.7 million in the second fiscal quarter of 2009, or $0.03 per diluted share, compared to $3.1 million, or $0.12 per diluted share, in the second fiscal quarter of 2008. Non-GAAP net income and net income per diluted share for the second fiscal quarter of 2009 were also $0.7 million, or $0.03 per diluted share, as detailed later in this earnings release.

For the six months ended March 31, 2009, Digi reported revenue of $81.4 million compared to revenue of $87.6 million for the six months ended March 31, 2008, a decrease of $6.2 million, or 7.1%. Revenue from embedded products for the first six months of fiscal 2009 was $35.4 million compared to $42.4 million in the first six months of fiscal 2008, a decrease of $7.0 million, or 16.6%. Revenue from non-embedded products was $46.0 million in the first six months of fiscal 2009 compared to $45.2 million in the first six months of fiscal 2008, an increase of $0.8 million, or 1.9%. Revenue from embedded products includes $2.2 million of Spectrum revenue in the first six months of fiscal 2009. Revenue from non-embedded products includes Sarian-branded revenue of $8.1 million for the first six months of fiscal 2009. The strengthening of the U.S. dollar compared to the Euro and UK pound sterling had an unfavorable impact on revenue of $4.1 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008.

For the six months ended March 31, 2009, Digi reported net income of $1.7 million, or $0.07 per diluted share, compared to net income for the six months ended March 31, 2008 of $6.8 million, or $0.26 per diluted share. Net income benefited by $0.4 million, or $0.02 per diluted share, during the first six months of fiscal 2009 as a result of a retroactive benefit from the extension of the research and development credit and the reversal of tax reserves due to the resolution of a state tax matter.

Digi's cash and cash equivalents and marketable securities balance, including long-term marketable securities, was $63.6 million at March 31, 2009, a decrease of $6.6 million from December 31, 2008. Digi re-purchased 834,190 shares of stock in the second quarter of fiscal 2009 for $6.1 million. Please refer to the Condensed Consolidated Statements of Cash Flows which is included in this earnings release for additional cash flow details. At March 31, 2009, Digi's current ratio was 6.4 to 1 compared to 6.7 to 1 at December 31, 2008.

Business Restructuring to Increase Focus on Wireless and iDigi Solutions and Improve Profitability

With the increasing importance of wireless and the introduction of the iDigi brand, Digi today announced a restructuring of its operations. This restructuring will increase the focus of Digi's business to wireless and from individual hardware products to solutions that include hardware, software, and services, in addition to improving profitability. To aggressively focus on these strategic business initiatives, Digi is shifting more resources to wireless and solutions initiatives, closing an engineering location in Long Beach, California, and relocating and consolidating the manufacturing function located in Davis, California to Digi's corporate headquarters located in Minneapolis, Minnesota. The restructuring will result in a workforce reduction of 87 positions, or 13% of Digi's total workforce.

Digi expects to record a pre-tax charge of $2.0 million during the third fiscal quarter of 2009 related to the restructuring of its operations. The restructuring charge is expected to reduce earnings per diluted share in the third quarter of fiscal 2009 by approximately $0.05. Digi expects quarterly pre-tax savings as a result of these initiatives of approximately $0.7 million and $1.0 million in the third and fourth quarters of fiscal 2009, respectively. Digi anticipates quarterly pre-tax expense savings of approximately $1.4 million in fiscal year 2010 as a result of these initiatives.

Second Fiscal Quarter 2009 Business Highlights:

  • In spite of the challenging economy, Digi's wireless revenue grew over 49% from the second fiscal quarter of 2008. With wireless revenue now reaching 35% of revenue, Digi's wireless initiatives continue to build momentum.
  • Digi introduced iDigi Energy, a wireless M2M solution bundle optimized for energy services providers. The energy solution bundle includes the hardware, hosted software and services necessary to accelerate Smart Energy deployments. iDigi Energy lowers the barriers for companies to build robust, next generation information services by removing the complexities of remote device communication.
  • Further expanding upon the new iDigi platform, the company introduced three new iDigi development kits that make it fast, easy and inexpensive to develop wireless applications.
  • Digi announced a green design contest to promote the development of sustainable applications. Contestants use one of three new iDigi wireless development kits to create environmentally beneficial designs.
  • Digi partnered with Itron to develop smart grid applications, further expanding upon Digi's comprehensive family of Drop-in Networking connectivity solutions. The partnership enables utilities to remotely monitor and control distribution automation (DA) devices utilizing OpenWay, an advanced metering infrastructure (AMI) network by Itron.

Reconciliation Table:

Fiscal 2009 Guidance
Digi expects revenue for the third fiscal quarter of 2009 in a range of $42 million to $48 million, and net income per diluted share in a range of $0.01 to $0.06. Non-GAAP net income per diluted share, excluding the impact of the restructuring charge, is projected to be in a range of $0.06 to $0.11. Digi projects annual revenue in a range of $165 million to $175 million. Digi projects annual GAAP net income per diluted share to be in a range of $0.11 to $0.22. Annual non-GAAP net income per diluted share, excluding the impact of the restructuring charge and the reversal of tax reserves and other discrete tax benefits, is projected to be in a range of $0.16 to $0.26.

Second Fiscal Quarter 2009 Conference Call Details
Digi invites all those interested in hearing management's discussion of its quarter, on Thursday, April 23, 2009 after market close at 5:00 p.m. ET (4:00 p.m. CT), to join the call by dialing (866) 831-6270 and entering passcode 96534234. International participants may access the call by dialing (617) 213-8858 and entering passcode 96534234. A replay will be available two hours after the completion of the call, and for one week following the call, by dialing (888) 286-8010 for domestic participants or (617) 801-6888 for international participants and entering access code 82982516 when prompted. Participants may also access a live webcast of the conference call through the investor relations section of Digi's website, www.digi.com.

About Digi International
Digi International, based in Minneapolis, is the leader in device networking for business. Digi develops reliable products and technologies that enable companies to connect and securely manage local or remote electronic devices over the network or via the web.

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, continued or increasing weakness in North America and in other regions due to changes in economic conditions, the current uncertainty in global economic conditions which could negatively affect product demand, the recent financial crises affecting the banking system and financial markets which could negatively impact the financial solvency of the company's customers and suppliers, the extreme volatility in fixed income, credit and equity markets which could result in actual amounts realized on the company's debt securities or other investments that differ significantly from current market values, the ability to achieve the anticipated benefits and synergies associated with acquisitions, the estimated expenses and risks associated with restructuring of the company's operations, and the 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 report on Form 10-K for the year ended September 30, 2008 and its quarterly reports on Form 10-Q, 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.

This release includes historical and projected non-GAAP net income and net income per diluted share data.

Digi understands that there are material limitations on the use of non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures, such as net income, for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that were actually recognized by the company. These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Digi believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Digi's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Digi's results of operations in conjunction with the corresponding GAAP measures.

Digi believes that providing historical and projected net income and net income per diluted share exclusive of the impact of projected restructuring charges and reversals of tax reserves and discrete tax benefits permits investors to compare results with prior periods that did not include these items. Digi uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of the comparative operating performance of the company. In addition, shareholders in the company have expressed an interest in seeing financial performance measures exclusive of the impact of decisions relating to taxes and other discrete items, such as the projected restructuring charge, which while important, are not central to the core operations of Digi's business.

Digi International Inc.
Condensed Consolidated Statement of Operations

Digi International Inc.
Condensed Consolidated Balance Sheet

Digi International Inc.
Condensed Consolidated Statement of Cash Flows

Investor Contacts:
S. (Kris) Krishnan
Digi International
952-912-3125
Email: S. (Kris) Krishnan

Tom Caden
Dian Griesel Inc.
212-825-3210
Email: Tom Caden

For more information, visit Digi's Web site at www.digi.com, or call 877-912-3444 (U.S.) or 952-912-3444 (International).

All brand names and product names are trademarks or registered trademarks of their respective companies.

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