Digi International Q3 2024 Earnings Report

Digi International EPS Results

• Actual EPS: $0.50
• Consensus EPS: $0.49
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.44

Digi International Revenue Results

• Actual Revenue: $105.20 million
• Expected Revenue: $105.60 million
• Beat/Miss: Missed by -$400.00 thousand
• YoY Revenue Growth: -6.30%

Digi International Announcement Details

• Quarter: Q3 2024
• Date: 8/7/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, August 7, 2024
• Conference Call Time: 5:00PM ET

Digi International (NASDAQ:DGII) is a provider of Internet of Things (IoT) connectivity products and services designed to link devices to networks and applications securely. The company develops a broad range of networking hardware, including cellular and Ethernet routers, gateways, embedded modules and adaptors, as well as accessories and antennas. Digi’s solutions enable businesses to deploy remote monitoring, control and automation systems across diverse industries such as transportation, utilities, healthcare, retail and industrial manufacturing.

In addition to its physical devices, Digi offers cloud-based management software and professional services that simplify device configuration, monitoring and over-the-air updates. Its Digi Remote Manager platform provides a unified interface for provisioning, managing and troubleshooting distributed equipment from a central dashboard. The company also delivers custom engineering services and support to help customers design and integrate connectivity solutions that meet specific regulatory or environmental requirements.

Founded in 1985 and headquartered in Minnetonka, Minnesota, Digi International serves customers around the world through regional offices, channel partners and system integrators in North America, Europe, Asia Pacific and Latin America. The company’s leadership team is committed to advancing IoT innovation under CEO Ron Konezny, who brought extensive experience in technology and enterprise software to the role in early 2021. With a focus on security, reliability and ease of deployment, Digi aims to accelerate digital transformation initiatives for organizations of all sizes.

Digi International Q3 2024 Earnings Call Transcript

Key Takeaways

• Digi delivered a record $113 million in annualized recurring revenue (ARR) in Q3, up 9% year-over-year, with SmartSense driving new customer wins and expansions across logistics, healthcare and food service.
• ARR now accounts for 27% of quarterly revenues and, with high retention rates, contributed to record gross margins and adjusted EBITDA margins for the period.
• The company generated nearly $25 million of cash, reduced inventory by $5 million and paid down $20 million of debt—nearly $200 million in under three years—to lower quarterly interest payments by 43%.
• Digi remains “on the offense” with an acquisition strategy focused on industrial IoT companies that deliver strong profitability and ARR growth potential, while maintaining discipline on valuation and deal size.
• Management expects to hit fiscal 2024 revenue and profitability targets, exceed ARR guidance and capitalize on potential stimulative monetary policies with its secure, reliable and easy-to-manage IoT solutions.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Q3 2024 Digi International Inc. Earnings Conference Call. At this time, all participants are in 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 one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one 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, CFO. Please go ahead.

[Jamie Loch, CFO at Digi International Inc.]

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.

[Jamie Loch, CFO at Digi International Inc.]

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.

[Jamie Loch, CFO at Digi International Inc.]

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 8-K that can be accessed through the SEC Filings sections of our investor relations website. Now, I'll turn the call over to Ron.

[Ron Konezny, President & CEO at Digi International Inc.]

Thank you, Jamie. Good afternoon, everyone. Before we take questions, a few highlights. Digi's diverse and resilient portfolio of ROI-driven industrial IoT solutions drove a record $113 million in annualized recurring revenue, or ARR, as of the end of the third fiscal quarter, up 9% year-over-year. SmartSense led the way, adding new customers and expanding business with existing customers in logistics, healthcare, and food service industries. Our increased attach rates in IoT products and services contributed as well. ARR now represents a record 27% of our quarterly revenues.

[Ron Konezny, President & CEO at Digi International Inc.]

With high retention metrics, ARR drives increased visibility to performance in future periods. In addition, ARR drove record gross margins and record adjusted EBITDA margins in the third fiscal quarter. Digi strengthened its foundation with a significantly improved balance sheet. Our disciplined operating model kept expenses in line and reduced our inventory position by $5 million. As a result, we generated nearly $25 million in cash during the period and paid down $20 million in debt. In less than three years, we have paid down nearly $200 million in debt.

[Ron Konezny, President & CEO at Digi International Inc.]

This has reduced our quarterly interest payment to $3.5 million this fiscal quarter, 43% lower than last year at this time. We expect continued debt payments, which expands our capacity for potential acquisitions in the future. Our acquisition strategy remains focused on growing industrial IoT companies that generate meaningful profitability as well as strong ARR potential. We expect to hit last quarter's projection for fiscal 2024 revenues and profitability, while exceeding our ARR expectations. With potentially stimulative monetary policies on the way, Digi will remain on the offense to capitalize on future opportunities.

[Ron Konezny, President & CEO at Digi International Inc.]

As our world increases in complexity, Digi is uniquely positioned to provide secure, reliable, and easy-to-manage solutions, combined with responsive, expert service and support. Operator, passing it to you for questions.

[Operator]

Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tommy Moll of Stephens Inc. The floor is yours.

[Tommy Moll, Md & Senior Equity Research Analyst at Stephens Inc.]

Good afternoon, and thanks for taking my questions.

[Ron Konezny, President & CEO at Digi International Inc.]

Good afternoon, Tommy.

[Tommy Moll, Md & Senior Equity Research Analyst at Stephens Inc.]

Ron, on solutions ARR this quarter, it was up $3 million sequentially, which I think is the biggest quarter-over-quarter step-up in some time. In recent quarters, we've heard you talk about elongated sales cycles there, but obviously you closed some pretty big deals this quarter. So I'm just curious what context you can give. Is this reenergized trend a durable one, do you think? Was there some favorable timing going on? Just what's the state of the, excuse me, state of the environment there?

[Ron Konezny, President & CEO at Digi International Inc.]

Yeah, it's a really good question. We, we have been dependent on SmartSense to have more explosive ARR growth, and as you highlighted, we've been mentioning the long, elongated sales cycles. Fortunately, some of those came to conclusion after extensive testing and, and ROI validation. You know, we do think the sales cycles have stabilized, not necessarily improved, but we do have a number of things in the pipeline that, that could come to realization in future periods.

[Tommy Moll, Md & Senior Equity Research Analyst at Stephens Inc.]

Okay. Ron, you touched on some of this in the prepared, but I just wanted to circle back on cash flow generation and capital allocation. On the cash flow generation, there's been significant year-to-date, partly aided by inventory. And so I'm just curious, how much more work do you think you have to do there on the inventory front? And then as you think to deploying the cash, the first call on it this year has been delevering, which is clearly important, but acquisitions are too. So just give us a current state of play on the priority and likelihood of any acquisitions near term.

[Ron Konezny, President & CEO at Digi International Inc.]

Yeah, the first question's, you know, we do think we'll see improvements in our inventory position in future periods that will start to moderate over time. So we'll have, if you will, less of an inventory dividend on the cash side, but there's still enough there that we'll still see some tailwinds from, you know, getting that inventory position down. We remain on the offense, acquisition-wise. We're very active out there. We have been disciplined, I think a combination of finding the right target, but also making sure that, you know, that we've got the right capital position. You know, acquisitions are a very, very difficult thing to predict in terms of timing, but we do remain very active and on the offense.

[Tommy Moll, Md & Senior Equity Research Analyst at Stephens Inc.]

Thanks, Ron. I'll turn it back.

[Operator]

Thank you for your question. Our next question comes from the line of Jim Fish from Piper Sandler. The floor is yours.

[James Fish, Md & Senior Research Analyst at Piper Sandler]

Hey, guys, you know, great to, great to join here, and appreciate the time. You guys mentioned, software attach rates were pretty good. I guess, how should we think about the attach of software, at this point? And do you guys expect, as we think about fiscal 25, any changes coming to either the sales team or a way to incentivize customers to, you know, further adopt the software modules?

[Ron Konezny, President & CEO at Digi International Inc.]

Jim, it's a really good question. We've seen incremental improvements in attach rates, so we are pleased with the progress there. We do think there's more room to go. We've got some initiatives underway, some good planning we've been doing and some work on the back end of our systems to improve those even further, and we expect that it can contribute to 25 ARR growth as well.

[James Fish, Md & Senior Research Analyst at Piper Sandler]

Got it. And then, Ron, you decided to partner with Atsign here this past week. Can you just walk us through the rationale to partner here rather than build or buy? I guess, why not... And really the crux of my question is, why not move more into sort of that IoT security space, just given that, networking overlay that you guys have already? Thanks.

[Ron Konezny, President & CEO at Digi International Inc.]

Yeah, it's a really good question. We'd like to think of it as not an either/or, but an and. So we've got an incredible amount of security designed into our products and we've got other initiatives underway. There are certain customers and opportunities that like certain technology, and it's not limited to security. It can be communication protocols like Ignition or Sparkplug. So we'd like to do both, where we've got the security designed into our solutions, but then there's add-ons that we can bring on, either for an industry or a particular customer.

[Operator]

Thank you for your question. Again, as a reminder, to ask a question, please press star one one on your telephone. One moment, please. Our next question comes from the line of Scott Searle from Roth Capital. The line is yours.

[Scott Searle, Md & Senior Research Analyst at Roth MKM]

Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter. Hey, Ron and Jamie, maybe just to start, could you give us some sequential indications in terms of how Opengear performed in the quarter, how Ventus is looking? There had been some slowdown, I think, in adoption in the channel on that front. And then how you're thinking about those business segments as we look into the September quarter. What should we be thinking about, that sequential progression, up or down for some of those businesses? And then I had a couple of follow-ups.

[Ron Konezny, President & CEO at Digi International Inc.]

Yeah, if you recall, at the beginning of this fiscal year, you know, we had cited some softness on the strategic side, and we thought that would come back, and we have seen that. We've seen some nice improvement, mainly driven by the strategics being more assertive and a steadier regional and channel business that has remained in place. The Ventus business, we're really excited about some new design wins and some new customers, new logos we've brought on the business, in addition to retention. If you recall, last year, we had a little bit of a step back and some soft churn in our ATM business with the regional bank crisis, and that, of course, has been put behind us.

[Ron Konezny, President & CEO at Digi International Inc.]

As we look forward, you know, we're looking for growth really from all of our, all of our product lines and offerings as we look into 2025. We're optimistic about, some, some opportunities. We've brought in, a couple of new leaders as we've had some retirements and, and other things. We've got some exciting leadership, that's joined both Opengear as well as our cellular and, and Ventus groups. We're, we're really optimistic about 2025.

[Scott Searle, Md & Senior Research Analyst at Roth MKM]

... and Ron, you know, kind of just looking at the macro environment, could you give us a little bit more of an update from an inventory perspective? Are there still pockets of inventory sitting out there? You've talked, you know, recently about, you know, delayed decisions. Is that starting to compress now? Are people feeling better about the economy for your product lines? What are you seeing right now?

[Ron Konezny, President & CEO at Digi International Inc.]

Yeah. So, Scott, if you recall, we really have never had any excess inventory out in the channel. We've had a few customers that have had inventory they're working through, but not your traditional, you know, stocking and POS type of inventory. So we think we've done a really nice job there, and these few customers that are working through their inventory are more isolated. But we think we've had a healthier channel there. The second part of your question, we think things have, if you will, stabilized. They're they haven't regressed further in terms of sales cycles and order sizes, but not yet, I don't think yet we can call that the improvement in those.

[Ron Konezny, President & CEO at Digi International Inc.]

I think there's the potential for it with, you know, the Fed potentially lowering interest rates in September, and obviously, we've got an election cycle underway. And so I think there's still a little bit of deliberation and caution as we head into those periods. But I guess the good news is we don't see it, you know, decelerating or decaying any further. We see it more stabilizing.

[Scott Searle, Md & Senior Research Analyst at Roth MKM]

Great. Helpful. And if I could, just on the gateway front, I know you're kind of managing some of that transition to more of a Ventus model. I'm wondering if you could give us some color in terms of how that progression is going. How should we think about how hardware grows on that front, versus starting to contribute to more on the ARR front? And then maybe just the back end of that, as you're starting to think about going on the offensive from an M&A perspective, I'm wondering what you're seeing and how you're thinking about the valuation environment. Thanks.

[Ron Konezny, President & CEO at Digi International Inc.]

Yeah. You know, a big part of our story is, you know, we lead with ARR. We think that's both providing more value to the customer, but it also, you know, ends up in stronger relationships and more predictable outcomes. And we think the cellular and Ventus combination is gonna be a big part of that. You could potentially see top line, you know, be impacted in terms of growth rates by a stronger ARR growth rates, but that's gonna be a central part of our strategy. I'm sorry, Scott, what was the second part of your question?

[Scott Searle, Md & Senior Research Analyst at Roth MKM]

Just the valuation environment. Yeah, you know, what you're kind of seeing out there now as you start to think about going on the M&A offensive again. Thanks.

[Ron Konezny, President & CEO at Digi International Inc.]

Yeah. You know, we've seen a pretty healthy flow of opportunities. We've seen a lot of things that we would be maybe more active in the past, but due to size, we're really cautious. We're looking for fewer, larger acquisitions that can have a more material impact on our business and our outcomes. That we've seen actually some of the properties that we think and assets that are probably best suited are pausing. They're waiting things out for better conditions. I think those interest rates where they are, the financial buyers are not quite as strong. We've seen a lot of financial buyers be focusing on their portfolio companies, helping them improve, adding some tuck-ins, to prepare for better conditions.

[Ron Konezny, President & CEO at Digi International Inc.]

So, it's a real mixed market out there, with maybe each end of the barbell having different dynamics. I think smaller companies wanting to exit, larger companies waiting for better conditions.

[Scott Searle, Md & Senior Research Analyst at Roth MKM]

Thank you. Nice job.

[Ron Konezny, President & CEO at Digi International Inc.]

Thank you.

[Operator]

Thank you for your question. Again, as a reminder, please press star one one on your telephone to ask a question. At this time, I'm showing no further questions, and I would now like to hand it back to Ron Konezny, our CEO, for closing remarks.

[Ron Konezny, President & CEO at Digi International Inc.]

Thank you. We plan to attend Piper Sandler’s Growth Frontiers conference in Nashville on September tenth. We appreciate you joining Digi’s earnings call and for your continued support. Thank you to our customers, distributors, suppliers, and our exceptional Digi team. Have a great day.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Participants

Executives

• Jamie Loch, CFO
• Ron Konezny, President & CEO

Analysts

• James Fish, Md & Senior Research Analyst at Piper Sandler
• Scott Searle, Md & Senior Research Analyst at Roth MKM
• Tommy Moll, Md & Senior Equity Research Analyst at Stephens Inc.