Digi International Reports Fiscal First Quarter 2005 Revenue Growth of

Digi International Reports Fiscal First Quarter 2005 Revenue Growth of 12.0% over First Quarter 2004

    Business Editors

    MINNEAPOLIS--(BUSINESS WIRE)--Jan. 13, 2005--

First Quarter 2005 Net Income up 79.8% over First Quarter 2004, Earnings Per Share at High End of Guidance
    Digi International(R) Inc. (NASDAQ: DGII) today reported revenue of $29.5 million for the first fiscal quarter of 2005, compared to $26.3 million in the first fiscal quarter of 2004. Revenue for the quarter represented an increase of 12.0% over the first quarter of the prior fiscal year and was at the high end of management's previously announced guidance of $28.5 - $29.5 million.
    Device Networking Solutions products, which include NetSilicon and the device server product lines, contributed $10.1 million in revenue in the first quarter of fiscal 2005 compared to $8.8 million in the first fiscal quarter of 2004 or an increase of 15.5%. Revenue from Connectivity Solutions products was $19.4 million in the first fiscal quarter of 2005, an increase of 10.3% over $17.5 million in the comparable period in 2004.
    Digi reported net income of $3.0 million for the first fiscal quarter of 2005, or $0.13 per diluted share, compared to net income of $1.6 million, or $0.08 per diluted share during the first fiscal quarter of 2004. Earnings per diluted share for the first fiscal quarter of 2005 was at the upper end of management's guidance of $0.11 - $0.13.
    The gross profit margin in the fiscal first quarter of 2005 was 62.1% compared to 61.2% in the first fiscal quarter of 2004, primarily due to customer and product mix.
    Total operating expenses in the first fiscal quarter of 2005 were $14.2 million or 48.2% of net sales, compared to $13.8 million, or 52.6% of net sales, in the first fiscal quarter of 2004. The increase in operating expenses is primarily attributable to increased variable selling and other variable operating expenses directly related to the increase in revenue.
    Operating income in the first fiscal quarter of 2005 was $4.1 million, compared to $2.3 million in the first fiscal quarter of 2004, an increase of 80%.
    Digi's cash and cash equivalents and marketable securities balance at the end of the quarter was $83.0 million, an increase of $1.3 million from the end of the prior quarter. Days sales outstanding (DSO) was at 32 days for the fiscal first quarter of 2005, compared to 33 days for the previous quarter. Digi's cash per share at December 31, 2004, defined as cash and cash equivalents and marketable securities divided by shares outstanding of 22,343,695, was $3.71. Tangible book value per share at December 31, 2004, defined as stockholders' equity less net identifiable intangible assets and goodwill divided by shares outstanding of 22,343,695, was $5.25.
    "Digi is off to a good start in 2005. We continue to innovate and expand our product pipeline in order to leverage the Digi brand and deliver on our promise of making device networking easy for our customers. With this goal in mind, we are excited that Microsoft has recognized Digi and selected our console servers to meet their current needs," said Joe Dunsmore, Chairman, President and CEO of Digi.

    Highlights of the quarter

--	Standard & Poor's made semi-annual changes to its various indices including the S&P SmallCap 600/Barra Value index where Digi was re-classified from a value company to a growth company. A stock's categorization as either "growth" or "value" is determined by its book-to-price ratio.
--	Microsoft Corp. selected the Digi CM console server, with patented RealPort software, to provide remote out-of-band access via serial port to the servers that power Microsoft's recently introduced MSN Search engine.
--	Digi introduced an enhanced Digi One IAP industrial device server, the industry's first truly interoperable device server featuring industrial protocol bridging. Protocol bridging is a unique Digi technology that enables industrial Ethernet and serial protocols to transparently intercommunicate.
--	Digi added four new products to its USB Plus Series of powered USB connectivity solutions. The USB Plus Series is the most extensive line of powered USB connectivity solutions available and is designed to simplify retail operations by allowing powered USB peripheral devices to be used with a standard, low-cost PC.

    Second Quarter and Fiscal 2005 Guidance

    Digi expects second quarter 2005 revenue to be in the range of $29.0 million to $30.0 million and anticipates earnings per diluted share to be in the range of $0.12 to $0.14. For the full fiscal year 2005, Digi continues to forecast an increase in revenue over fiscal year 2004 revenue in excess of 10%.
    As a result of a settlement with the Internal Revenue Service on an audit of prior fiscal years, subject to final approval by the Joint Committee of Taxation, Digi anticipates that 2005 earnings per share may include a reversal of approximately $5.5 million of previously established income tax reserves, equating to approximately $0.24 per diluted share positive impact. Excluding this possible one-time tax item described above, Digi expects earnings per diluted share for fiscal 2005 to increase in excess of 33% compared to fiscal 2004. Digi's guidance for the second fiscal quarter and full fiscal year of 2005 do not give effect to this possible reversal because the timing and amount of the reversal are uncertain.

Digi International Inc. Condensed Consolidated Statement of Operations (In thousands, except per share amounts) (Unaudited)

Three months ended ------------------- December December 31, 2004 31, 2003 --------- --------- Net sales $29,470 $26,307 Cost of sales 11,159 10,203 --------- --------- Gross profit 18,311 16,104

Operating expenses: Sales and marketing 6,443 6,076 Research and development 4,252 4,511 General and administrative 2,190 1,940 Intangibles amortization 1,325 1,298 --------- --------- Total operating expenses 14,210 13,825

Operating income 4,101 2,279 Other income, net 190 74 --------- --------- Income before income taxes 4,291 2,353 Income tax provision 1,330 706 --------- ---------

Net income $ 2,961 $ 1,647 ========= =========

Net income per common share, basic and diluted $ 0.13 $ 0.08 ========= =========

Weighted average common shares, basic 22,082 20,498 ========= =========

Weighted average common shares, diluted 23,309 21,276 ========= =========

Digi International Inc. Condensed Consolidated Balance Sheets (In thousands)

December September 31, 2004 30, 2004 ---------- ---------- ASSETS (unaudited)

Current assets: Cash and cash equivalents $ 12,400 $ 19,528 Marketable securities 68,556 59,639 Accounts receivable, net 12,019 10,555 Inventories, net 12,566 11,231 Other 5,328 4,315 ----------- --------- Total current assets 110,869 105,268

Marketable securities, long-term 2,000 2,500 Property, equipment and improvements, net 18,800 18,634 Identifiable intangible assets and goodwill, net 18,859 20,233 Net deferred tax assets 3,403 3,013 Other 730 817 ----------- ---------

Total assets $154,661 $150,465 =========== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities: Accounts payable $ 5,489 $ 4,945 Accrued expenses 6,710 9,126 Income taxes payable 6,138 9,107 ----------- --------- Total current liabilities 18,337 23,178

Net deferred tax liabilities 83 208 ----------- ---------

Total liabilities 18,420 23,386

Total stockholders' equity 136,241 127,079 ----------- ---------

Total liabilities and stockholders' equity $154,661 $150,465 =========== =========

Digi International Inc. Condensed Consolidated Statement of Cash Flows For the three months ended December 31, 2004 and 2003 (in thousands) (Unaudited)

Three months ended -------------------- December December 31, 2004 31, 2003 -------- -------- Operating activities: Net income $ 2,961 $ 1,647 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation of property, equipment and improvements 566 657 Amortization of identifiable intangible assets and other assets 1,572 1,550 Tax benefit related to the exercise of stock options 1,509 534 Other (185) 83 Changes in operating assets and liabilities: Accounts receivable (1,029) 1,004 Inventories (1,341) (788) Other assets (1,045) (996) Accounts payable and accrued expenses (2,275) (1,108) Income taxes payable (2,978) 601 Other (515) (430) -------- -------- Total adjustments (5,721) 1,107 -------- --------

Net cash (used in) provided by operating activities (2,760) 2,754 -------- --------

Investing activities: (Purchase) sale of held-to-maturity marketable securities, net (8,417) 3,895 Contingent purchase price payments related to business acquisitions - (1,962) Purchase of property, equipment, improvements and certain other intangible assets (196) (371) -------- --------

Net cash (used in) provided by investing activities (8,613) 1,562 -------- --------

Financing activities: Proceeds from stock option plan transactions 3,561 1,858 Proceeds from employee stock purchase plan transactions 179 335 -------- --------

Net cash provided by financing activities 3,740 2,193 -------- -------- Effect of exchange rate changes on cash and cash equivalents 505 467 -------- -------- Net (decrease) increase in cash and cash equivalents (7,128) 6,976 Cash and cash equivalents, beginning of period 19,528 17,228 -------- -------- Cash and cash equivalents, end of period $12,400 $24,204 ======== ========

    First Quarter Fiscal 2005 Conference Call Details

    Digi invites all those interested in hearing management's discussion of the quarter to attend our first fiscal quarter 2005 conference call, scheduled for Thursday, January 13, 2005, at 4:00 p.m. CT, either by phone or on the Web. Participants can access the call directly at 1-800-621-5170. International participants may access the call by dialing 212-346-0300. A replay will be available for one week following the call by dialing 1-800-633-8284 for domestic participants or 402-977-9140 for international participants and entering access code 21219668 when prompted. 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 and makes device networking easy by developing products and technologies that are cost effective and easy to use. 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).
    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 owners.

    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 report on Form 10-K for the year ended September 30, 2004 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.

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CONTACT: Digi International S. (Kris) Krishnan, 952-912-3125 s_krishnan@digi.com or The Investor Relations Group, New York Investors: Kathryn McNeil/John Nesbett, 212-825-3210

KEYWORD: MINNESOTA INDUSTRY KEYWORD: HARDWARE COMPUTERS/ELECTRONICS TELECOMMUNICATIONS SOFTWARE EARNINGS CONFERENCE CALLS SOURCE: Digi International

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