When the Covid-19 pandemic hit Bali, the role of digital technology became important for organizations in dealing with consumer movements and the flow of goods. Through digital transformation, SME managers can provide a mechanism for SME innovation and performance. Using the theoretical resource-based view (RBV) framework, this study examines the mediating effect of digital innovation in the relationship between digital transformation and firm performance. Empirical data collected from 400 SME actors across the province of Bali reveals that digital transformation positively affects digital innovation and SME performance. Furthermore, our findings show that digital innovation positively affects SME performance and subsequently partially mediates the relationship of digital transformation to SME performance.