Digi International Inc.

Good day, and thank you for standing by. Welcome to Quarter 4, 2024 Digi International Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jamie Locke, Chief Financial Officer. Please go ahead.

Thank you. Good day, everyone. It's great to talk to you again, and thanks for joining us today to discuss the earnings results of Digi International. Joining me on today's call is Ron Konesny, our President and CEO. We issued our earnings release after the market closed today. You may obtain a copy of the press release through the financial releases section of our investor relations website at digi.com. This afternoon, Ron will provide a comment on our performance, and then we'll take your questions. 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. For additional information, please refer to the forward-looking statement section in our earnings release today and the risk factor section of our most recent 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 furnished as an exhibit to Form 8K that can be accessed through the SEC filing sections of our investor relations website. Now, I'll turn the call over to Ron.

Thank you, Jamie. Good afternoon, everyone. Before we take questions, a few comments on last fiscal year while looking forward to fiscal 2025. GIGI is committed to be a leader in the industrial Internet of Things market. We believe a significant share of the market wants a solution provider rather than building a solution to various vendors. Our solution provider approach reduces risk, improves outcomes, allows customers to focus on their core competencies and accelerates time to value. The single metric demonstrating our relative success is annual recurring revenue, or ARR. ARR, consolidated across our product lines, represents our transition from one-time sales to solutions. Increasingly, Digi will forego one-time transactional sales in favor of multi-year solutions agreement. Over time, this dynamic will dampen overall revenue but increase ARR. As ARR grows, our results will become more consistent, provide greater visibility, and improve our model. You can see this in our fiscal 2024 results. ARR grew 9% year-over-year to reach a record $116 million, which now represents more than 27% of our total revenue. ARR grew in both our products and services business segment, where we complement our award-winning products with solution packages. ARR also grew in our solutions business segment, where we offer turnkey solutions combining product, connectivity, service, and software. ARR increased as we both onboarded new customers and solutions while retaining and extending existing customers with increased value added to our offerings, such as our recently launched Digi360 offering and achieving SOC 2 Type 2 compliance. Our strengthening model achieved 60% gross margins for the first time in the company's history, driven by this solution strategy. A disciplined and scalable organization demonstrated flat operating expenses year over year, which resulted in a record-adjusted EBITDA margin. We were able to reduce our inventory throughout the year as supply chain normalized. We restructured our debt facility, which reduced our interest payments. Cash generated from these combined efforts resulted in a net debt-adjusted EBITDA level of less than one. Turn the page to fiscal 2025. We are experiencing both uncertainty as well as reasons to be optimistic. Supply chain and inventory levels have normalized, but COVID-induced scars create caution, resulting in elongated sales cycles and smaller or frequent order patterns. The industrial economy's health, measured in part by PMI, has been in contraction for quarters, but there is strength in AI, data centers, utilities, and renewables. Nationalism persists with talks of increased tariffs, but Digi has diversified its supply chain to help buffer potential changes. With that macroeconomic backdrop, we take a consistent but pragmatic approach to setting expectations for fiscal 2025. We expect continued growth in ARR with contributions from both business segments. As we move to more solution packages, one-time revenue is expected to temper. In addition, we are improving our offering portfolio by retiring legacy product lines that have been in decline, such as Revit. Combined, this results in an expectation of flat revenue, select operating expenses, expense investments required to sustain long-term growth result in flat adjusted EBITDA, and we expect to generate cash and to be net debt free by the end of calendar 2025. We continue to explore potential acquisitions that benefit our customers, and are consistent with our focus on ARR and profitable growth. Macroeconomic improvement throughout the fiscal year could improve our outlook. Lastly, DIGI remains confident in reaching its five-year targets of $200 million in ARR and $200 million in adjusted EBITDA established last year. In October, we celebrated the 35th anniversary of our listing on NASDAQ. Next year, we celebrate our 48th birthday. Digi's story is highlighted by customer focus, resilience, relentless innovation, and continuous improvement. Very few companies that went public in 1989 exist, let alone remain independent. Amation, 3Com, WorldCom, Symantec, and Cambridge Technology Partners were some of the companies that went public in 1989 and are no longer independent. Over the decades, Digi has adapted to change, and that core competence is vital. to success in an ever-changing world. Operator, that concludes my remarks. I would like to open the call to questions.