Digi International Inc.

Good day and welcome to the Digi International Inc. Second Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Chief Financial Officer, Jamie Locke. 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 highlights from our second fiscal quarter of 2025. DIGI's solution-oriented approach to the industrial IoT market continues to shine, with ARR growing 12% year-over-year to a record $123 million in the quarter. Both of our reporting segments contributed to ARR growth in the quarter. Our solution focus enables customers to get quick ROI from remote monitoring, machine uptime, and integration and analytics. ARR now represents a record 29% of our annualized quarterly revenues. Expanding ARR and favorable product mix helps improve our profitability. Our business model is demonstrating its scalability as ARR and profits grow faster than our top-line revenues. Free cash flow generation of $26 million in the quarter allowed us to reduce our net debt to $45 million after paying down $25 million of debt during the quarter. In addition, we improved our inventory position significantly, and we are approaching historical norms. Given our modest capital expenditures, less than 1% of total revenue, our current free cash flow yield sits at 9%. We now expect to be net cash positive by the end of our fiscal year, a one-quarter improvement from our initial goal at the end of the calendar year. As our balance sheet improves, we are even better positioned to pursue solution-oriented acquisitions of scale. Our outlook for the balance of our fiscal 2025 year assumes the current tariff rates and does not contemplate a drop-off in what we have seen to date as steady demand. We acknowledge the macro environment is fluid. However, DIGI has a robust history of adaptability and resiliency, and we will adjust accordingly. Over the last several years, we have diversified and optimized our supply chain across geographies and suppliers. We plan to be diligent with our operating expense investments. As always, we remain steadfast in putting our customers' interests first. just as we navigated the supply chain challenges coming out of the COVID pandemic. Operator, I will now hand the call back to you for Q&A.