Digi International Inc.

Good day and thank you for standing by. Welcome to the Fiscal Q3 2026 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 11 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 first speaker today, Jamie Loch, 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 Konezny, 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. and thanks everyone for joining our call today. We are so excited to share an update on our progress and what we expect in the current quarter. But before we go into that, let me just remind everybody DIGI's core value proposition. We really drive ROI by establishing remote presence, whether through an industrial router connected to remote oil well, whether it's an open gear console server and a data center, smart sense, in a pharmacy, food, or hospital application, dentists through point of sale systems, or infrastructure management and manufacturing. We are enabling our customers to gain great efficiency by connecting to not just the Digi devices, but the assets that we're helping them monitor. We can help them adjust to technical regulatory changes. We can update software to comply with security protocols. We can adapt to business opportunities and challenges. We can increase asset uptime. We can reduce the number of field calls that need to be made. All of those bring tremendous value to organization on top of learning more about how your asset is performing in the field and driving that learning into the next generation of your solution. We pull our customers annually, and we ask them, what are the attributes that you're looking for in your IoT solution? And to no surprise, reliability is The number one priority for our customers, and it's been so for a number of years. We rank well both in their mind and versus our competition. We've got over 40 years of experience, and it makes sense. If you're monitoring a remote device, you need that remote management system to perform all the time and for a long period of time. What's increasingly become a priority is security. With news that seems to come every day and accelerating on security breaches, whether it be the water management system in Minnesota, whether it be AI models escaping their labs, keeping your IoT system secure is of utmost performance. These systems have to scale both in numbers and across geographies, and they've got to be easy to use. We are involved in business and mission critical applications, that combination of attributes. is what Digi really excels at, and we can provide the complete solution. We're providing the edge device, we're providing connectivity if the customer needs it, software services, and we're now adding on top of that our newest attribute, which is AI. We recently introduced a new tool called DANI, Digi Artificial Network Intelligence, that allows you to talk to your Digi equipment and the things it's connected to in natural language. No more standard reports, no more configuring dashboards. You just ask our system and the things it's attached to, how is my network performing today? Are there any software updates to be made available? And you can even, over time, ask our system to perform those actions. There will always be a human at the wheel, but we can make managing your system much easier with the advent of AI. Those results are showing up. this quarter and next quarter. I'm going to pass it to Jamie to review some of the highlights.

Good afternoon, everyone. Unfortunately, our video is down, so we'll speak to the results a little bit. We are very proud of our accomplishments this quarter as a company, which is really a reflection of the delivery that we've provided for our customers in that partnership and helping them enable to better meet their critical objectives. For the quarter, we're reporting record results $139 million of revenue, which is up 29% year-over-year, 64.8% gross margins, $33 million in cash flow from operations, which is also up 38% year-over-year. From a non-GAAP perspective, our annual recurring revenue number has reached the record $191 million. Our adjusted EBITDA margins have reached a record of 29.1% with an adjusted EBITDA of $40 million. Not only is that cash flow a really great metric, but if you look at it from an annualized basis, right now we have generated cash flow from operations in excess of our year-to-date adjusted EBITDA number. And you can see through that 29.1% adjusted EBITDA margin, we continue to see operational leverage as a company. We committed early on that we were going to see ARR and profits growing faster than revenue, and that continues to be the trend that you see here, with our ARR and our adjusted EBITDA growing faster than our revenue number is. on a revenue number that is actually very strong. That relates then as we roll forward into Q4. We are increasing our guidance for Q4 and subsequently our full year guidance. For FQ4, we are expecting our revenues to be between 138 and $142 million. We are expecting our adjusted EBITDA to be between 40 and $40.15 million. and we're expecting our adjusted EPS to be between 75 and 78 cents per diluted share on an expected share count of 39.1 million. The effect of Q3 and our Q4 guidance has increased our full year guidance. Right now we are projecting our full year guidance to land between 529 and $533 million, which is up 23.5% year over year. are adjusted EBITDA on an annualized basis of 146 to 147 and a half, which is up 35.5% for the year. Our adjusted EPS between $22.67 to $2.70 per diluted share. And right now we are projecting our ARR to be at least 27% year over year. The guidance is up from our previous guidance and you can see in that guide ARR and profits continue to grow faster than revenue. and that operating leverage down to the bottom line you can see shining through with our profit growth. All of that really continues to lead us towards that March towards 200 that we laid out as our long-term objective. By 2028, we had committed that we wanted to be at $200 million in ARR and $2 million in adjusted EBITDA. With this latest guide, we will see annualized recurring revenues at least at 193. We expect to cross over that bridge shortly. And on a just EBITDA perspective, with a 23% CAGR ending the year right around 147, you can see how we're trending and expecting to deliver on those five-year objectives as we laid out. As I mentioned earlier, we continue to see cash coming in. We are currently converting our cash in excess of 100%, and that really enables the flywheel that we talked about last call, where Digi is able to use that cash, cycle it back down to pay debt, and then start the flywheel over with looking at acquisitions as part of our inorganic strategy.

Yeah, the flywheel really is first developing a healthy list of acquisition opportunities. We've got hundreds of opportunities we're monitoring now with use of AI, it's much easier to monitor the news throughout those opportunities. At any one point in time, we're looking at 10 or 20 and really digging into a few. We then use debts to acquire those companies. and we then focus on integration and that's where really the magic's made is we integrate the companies quickly, we get them on common systems, common practices and really build ARR and profitability and as we generate cash flow from that profitability, we're looking to then reduce leverage and of course put that money back to use. It's a strategy that we feel protects the equity investor because we're using debt, we're not diluting the shareholder and because we generate and many more. So that's the flywheel is acquire, integrate, generate, compound. It's no better example than two recent acquisitions we did. We acquired Jolt Software in fiscal 25. Particle and Fiscal 26. Both those integrations have gone very well, hitting their targets that we had committed to both internally and externally, and putting us in a great position as, Jamie, we've been able to bring that debt, net of cash, down to $81 million.

That's right. $81 million. We're levered well below one at this point, and you can just see that cycling through. It's a great result.

So that said, we will now take any questions that the audience may have.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from Tommy Mall of Stevens. Your line is open.

Good afternoon, and thanks for taking my questions.

Hi, Tommy. Hey, good afternoon, Tommy.

Question for you on the sales funnel and the days to win, which is an important KPI I know you monitor. You've exceeded expectations this quarter and have guided revenues up sequentially. And so I'm just curious what insight you could give us on the sales funnel and how fast deals are converting. Thanks.

Yeah, Tommy, it's a good question. I think there's really two factors that are coming into play on that. The first one is we are seeing an increase or an improvement, I should say, in our days to win metric. Customers are making decisions faster than they have in the past. I still would caution that it's not back to whatever someone would decide is a normalized level. It's not been normal for a long period of time, but we are seeing improvement. We're also seeing certain deals that are entering into the pipeline that have a level of maybe some urgency to them. And so they're cycling through a little bit faster, which I think is having an overall positive impact on our days to win metrics. We are also seeing overall pipeline growth. We continue to see growth in all levels of the pipeline, all the way from stage one through to the final stages. And so it's really a combination of pipeline growth as well as some improvement in those critical measures, as you pointed out.

Yeah, and I think there's a couple of factors driving it. One is, you know, Tommy, you'd pay attention to this pretty closely. You know, PMI has been relatively strong these last few reporting cycles. I think that's a positive. The AI, you know, wave here, which is obviously impacting data center builds, but also then affecting utilities and other indirect areas. And then also I'd say there's a bit of a supply chain challenge going on right now. Memory is getting all the headlines, but that's starting to spread. And so I think customers are picking up on, boy, I better get my order in place to secure my deliveries and timelines. And that supply chain urgency, I think, is starting to show up in our pipeline data.

Follow-up for you on the data center theme. Ron, OpenGear has an existing presence in that vertical. I'm interested in any update you can give us there in general, and then specifically on the hyperscale side. I know that historically you have not sold directly there, but have any of the tectonic plates maybe shifted in your favor? Thanks.

Yeah, OpenGear has been a really great performer. Their performance is, I want to stress, really, really widespread. It's an edge campus as well as data center applications. We've been the solution of choice for a lot of the neoclouds that have been looking to deploy assets and maintain visibility and control. But we've also been knocking on the doors of hyperscalers to see if we can help them. And those are longer sales cycles. They're very hard to predict. There's only a few of them out there. remain optimistic, but certainly don't embed any of those expectations into our forward guidance.

Thank you both. I'll turn it back. Thanks, Tommy.

Thank you. And our next question comes from Timothy Shespa of Piper Sandler. Your line is open.

Hi, guys. This is Tim. I'm for Jim Fish. Here are kind of accelerated nicely quarter over quarter here. I was just hoping you could talk about any areas of strength that you are seeing, anything specific to call out.

Yeah, Tim, good afternoon. Nice for you to be on the call. One thing we saw this quarter is what I would call really balanced contributions with contributions from product and services and solutions. And that's really, you know, what we want to see on the product services side, you're seeing increased volume and with that volume coming with high attach rates. And so that solution attached to existing product is really driving the results there. On the solution side, great contribution from both Ventus and SmartSense. Enterprise deals help really move that needle and that really generates ARR. So we're really happy to see contributions on both of our business segments.

Great. And then just to follow up, you had strong gross product margin this quarter. Anything to talk about there? What's driving the strength and how should we think about this kind of heading into fiscal year 27 and maybe longer term?

Yeah, I think it's a good question. I think still fundamentally we believe that our gross margin base camp is kind of sit in that low to mid 60s range. In any given quarter, you're going to have some variability that's going to come into that driven a lot by product mix. I think we've had another quarter of favorable mix in that direction where if you really look down and many more. We've really felt like the floor of that camp sits in that lower mid-60s, 62, 63. Then there'll just be some variability that will go with that. So I don't think there's anything unusual. I think product mix works out. I think over a longer duration period of time, it's reasonable to continue to expect that 10 to 15 basis points of improvement as ARR continues to go faster than revenue because ARR comes in and provides that positive mix. So longer term, I think you continue to see that 10 to 15 basis points. Shorter term windows, like 90-day windows, you can get some variability that could be in the 200, 300 basis point range.

Yeah, really, Jamie, I think Great, thank you so much. Thanks, Tim. Thank you.

And if you have a question, please press star one one. We have a follow up now from Tommy Mall. Your line is open of Stevens. Tommy, your line is open. Please unmute.

Hello again. Thanks for letting me back. Yeah, no problem. Ron, you mentioned Danny, the AI agent. And, you know, I I notice in the press release there's some good insight in there, including some dollar signs that are helpful for financial analysts like us on the call here. But maybe can you just help us connect some dots on the commercial opportunity here?

Yeah, so Danny's in our Digital Remote Manager platform, which spans across our cellular router lineup. some of our embedded solutions and our industrial infrastructure management team as well. But it's also a template we're going to use across the company. We developed in a very innovative way where there's embedded artificial intelligence in the cloud-based tool. So instead of generating a standardized report or standardized dashboard, you can speak type into your Digital Remote Manager interface natural language questions. And it will come back with any questions you may have, whether it's how to use Digital Remote Manager, the status of my Digi devices, the status of things that they're connected to. And that also has a benefit of our customers bring new employees all the time in to manage their Digi equipment and things they're connected to. and that's a really good way to train somebody on how to use the system versus, oh, consult the help button or user manual or get trained by your predecessor. You can really speak to the system on the information you're looking for and or the actions you want to take. We see really a lot of runway. This is only the first step in this solution. We're embedding in our existing software because we want to encourage adoption and usage over time. There could be a chance to monetize that, but that's not the priority at the moment. Thank you, Ron. That's very helpful. We'll look forward to watching that unfold. Thank you. Thank you. I show no further questions at this time. I'd like to turn it back to Ron Konezny for closing remarks. Say thank you. Apologize for the late delay here. We had some technical problems, but for those that you hung in there, we really appreciate it. We look forward to continuing the success that we've showed year to date. We're committed, as Jamie covered, to our $200 million objectives. We feel confident that we make promises and we keep them. And we look forward to sharing our results a quarter from now.

Say, this is Jamie. I just want to add real quick. We've talked about this. I don't think Ron or I could be more proud of our employees, our teammates, the work that we've put in, in our dedication to really customer outcomes. You can see it in the results that that care, that passion, that consideration for customers really being first. And that's what really leads us to this. We're proud of the team that we're a part of and we expect to be able to continue to do great things for our customers. So thanks everyone. Well said.

This concludes today's conference call. Thank you for participating and you may now disconnect.