Digi International Q1 2025 Earnings Report

Digi International EPS Results

• Actual EPS: $0.43
• Consensus EPS: $0.50
• Beat/Miss: Missed by -$0.07
• One Year Ago EPS: N/A

Digi International Revenue Results

• Actual Revenue: $103.87 million
• Expected Revenue: $104.08 million
• Beat/Miss: Missed by -$213.00 thousand
• YoY Revenue Growth: N/A

Digi International Announcement Details

• Quarter: Q1 2025
• Date: 2/5/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, February 5, 2025
• 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 Q1 2025 Earnings Call Transcript

Key Takeaways

• Achieved record ARR of $120 million, up 11% year-over-year and $4 million sequentially, now representing 28% of quarterly revenues and underscoring the shift to recurring revenue.
• Generated $30 million in cash from operations, reduced inventory and lowered total debt below $100 million for the first time since Q4 ’21, with plans to retire all debt by end of calendar 2025.
• Q2 gross margins are expected to normalize after an unusually favorable product mix in Q1, resulting in slightly lower adjusted EBITDA at the midpoint.
• Management remains confident in achieving fiscal ’25 targets of doubling ARR and adjusted EBITDA to $200 million each, backed by market tailwinds in data centers, utilities and industrial IoT.
• Attach rates on key products have exceeded 50% and are trending higher, reflecting progress in converting one-time sales into recurring revenue streams.

Presentation

[Operator]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jamie Loch, CFO. Please go ahead.

[Jamie Loch, CFO at Digi International]

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.

[Jamie Loch, CFO at Digi International]

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

[Ron Konezny, CEO at Digi International]

Thank you, Jamie. Good afternoon, everyone. Before we take questions, a few highlights from our 2025 fiscal first quarter. We begin the second year of our five-year journey to double ARR and adjusted EBITDA at $200 million each, and we remain as confident as ever we will achieve these targets. In our first fiscal quarter, ARR reached another record at $120 million, an increase of 11% over last year and $4 million higher than last quarter. Strong performance in both of our reporting segments drove this performance. ARR now represents a record 28% of our quarterly revenues. ARR is the top strategic priority to benefit our customers, distributors, employees, and shareholders. As an industrial IoT solution provider, Digi solves some of the toughest and most valuable remote connectivity challenges. Our customers rely on our best-in-class software and service, complementing our reliable, secure, award-winning edge intelligence.

[Ron Konezny, CEO at Digi International]

Digi solutions produce a compelling ROI and faster outcomes for our customers. As ARR grows, it will have an increasing impact on our profitability, enabling our second long-term objective. We continue to enhance Digi's balance sheet with total outstanding debt below $100 million for the first time since our fiscal fourth quarter of 2021. We generated $30 million in cash from operations in the quarter and further reduced our inventory balances. We expect strong free cash flow generation this year, with all debt expected to be retired by the end of calendar 2025. As our balance sheet improves, we are even better positioned to pursue solution-oriented acquisitions of scale. In a rapidly evolving geopolitical environment that has a myriad of outcomes for global businesses, we remain steadfast in putting our customers' best interests first, just as we did while navigating the supply chain challenges coming out of the COVID pandemic.

[Ron Konezny, CEO at Digi International]

Despite the speed of change and the fluidity of tariff policies, Digi is confident in our ability to leverage our geographically diverse manufacturers. In 2025, we celebrate our 40-year history of resilience, innovation, and adaptation, and we rely on this to deliver for our customers for decades to come. Operator, I will now hand the call back for Q&A.

[Operator]

As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tommy Moll from Stephens.

[Thomas Allen Moll, Analyst at Stephens]

Good afternoon, and thanks for taking my questions.

[Ron Konezny, CEO at Digi International]

Hey, Tommy.

[Thomas Allen Moll, Analyst at Stephens]

I have a couple of items on the products and services trends here. I guess if we look at the reported revenue, there was the hit from the $4.7 million decline in the one-timers, and then conversely, if you look at the ARR, I mean, we were up 17% year over year, so maybe if you could just give a little bit of context on the drivers there for each, and in particular on the ARR side, what that could look like going forward. Thank you.

[Ron Konezny, CEO at Digi International]

Yeah, Tommy, it's Jamie. One of the things that we've talked about in the past as we make this transition is that you will see where we would have a transfer of one-time revenue into recurring revenue. And I think you're seeing an example of that now. It's not massive swings, but it's enough that it is noticeable. And when you consider that that ARR is over a one-year period versus a three-year period, you can kind of see that it probably is an indicator of how units actually went out the door. And so this is a theme that I think will be pretty consistent over a period of time where you'll have some periods where ARR growth will be higher and that one-time revenue could vary a little bit to the plus or to the minus.

[Ron Konezny, CEO at Digi International]

But this for sure is part of the path that we've laid out as really focusing on our ARR growth.

[Thomas Allen Moll, Analyst at Stephens]

Second question from me on your guidance for the second fiscal quarter. It looks like revenue is projected to be flattish quarter over quarter. On the EBITDA line, just in dollar terms, at the midpoint, we're slightly down. So I'm just curious if there's something on the margin side in Q2 that is worth calling out there.

[Ron Konezny, CEO at Digi International]

Yeah, Tommy, it's Jamie again. I think if you look at the performance in Q1, you would have seen a significant sequential change in gross margins. And while part of that change is attributable to the changing mix between ARR and one-time, we also had some very favorable product mix that took place this quarter in one-time revenue. And I would say that you can see that it really has moved to a level that's probably above new plateaus that we had set are probably considered reasonable. And so we had some favorable mix in Q1 that we are likely not going to see repeat to that scale in Q2. And so that's probably the biggest driver that's taking place, all-around mix on the one-time revenue. But still, for sure, you'll continue to see the mix that's been attributable to ARR growth.

[Ron Konezny, CEO at Digi International]

And at a Digi-wide level, gross margins at 60% or better will continue to be the theme. But this one spikes up a little bit higher than what we've seen in the past.

[Thomas Allen Moll, Analyst at Stephens]

Thanks, Jamie. I'll turn it back.

[Ron Konezny, CEO at Digi International]

Thanks, Tommy.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Jim Fish from Piper Sandler.

[Jim Fish, Analyst at Piper Sandler]

Hey, guys. Thanks for the time here. Maybe, Ron, for you just to start, and you alluded to this a little bit in your prepared remarks. Can you elaborate a little bit more as to how you guys are thinking about the tariff impact potential given your supply chain does stretch across North America here? And do you think we could see a pull-in of demand for more of the CapEx or one-time upfront side of the business as a result of sort of the threat of what we could see as increased prices?

[Ron Konezny, CEO at Digi International]

Yeah, Jim, it's a good question. Over 70% of our revenues are coming out of North America. The U.S., in particular, is a dominant part of that. We have emphasized with our customers we're going to put their interests first. We have a geographically diverse set of manufacturing partners, including with presence in the U.S. We don't move our product lines haphazardly. We're very deliberate about it. We have not been communicating to our customers that, "Hey, get it now or you're going to face some kind of price increase." We're taking that longer view of that relationship and that solution as well, way more valuable than any kind of near-term tariff implication. Combine that with a very fluid policy. I think there's generally a lot of uncertainty out there.

[Jim Fish, Analyst at Piper Sandler]

Got it. And then, look, we've got IT budgets potentially increasing, discussions around data center refreshes. How should we be thinking of these tailwinds for you guys over the next year or two relative to some of the other dynamics around other use cases like ATMs, point of sale, sensors, gaming, and whatnot?

[Ron Konezny, CEO at Digi International]

Yeah, I think there could be a favorable backdrop there, Jim. I think there's a lot of continued interest in infrastructure investing. And of course, as you know, a lot of emphasis on trying to have foreign companies and local companies invest in the U.S. And that all creates opportunity. We saw PMI crack 50 for the first time in some time here. That's a positive indication. The industrial economy has been weak for some time. And so there is the real potential for the hard goods part of our economy to have an uplift here. And those Western companies are increasingly favoring Western providers to help them with their technology and IoT solutions. So there could be a real favorable backdrop.

[Jim Fish, Analyst at Piper Sandler]

Thanks, guys.

[Operator]

Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our next question comes from the line of Josh Nichols from B. Riley.

[Josh Nichols, Analyst at B. Riley]

Yeah, thanks for taking my question. And great to see the healthy gross margins and the record ARR. Previously, sometimes on the calls, you give a little bit more context. I'm just kind of curious about what you're seeing in terms of customer ordering patterns and then any particular end markets where you're seeing particular strength or weakness overall today.

[Ron Konezny, CEO at Digi International]

Yeah, so I think the ordering patterns have stabilized, maybe modestly improved. I wouldn't say dramatically improved, but you do sense increased confidence in the marketplace. We watch closely some of our key suppliers, NXP and Silicon Labs and others, and they're still citing some industrial and automotive weaknesses, and we'll also look at communications equipment comps, and Juniper had a print yesterday that was relatively favorable, so there could be some continued momentum there to climb out of extended sales cycles, shorter order volumes and amounts that could help us. In terms of verticals, as you've heard a lot of times, I know it's a little bit beige, but in terms of the answer, we are very diverse, so at any point in time, we have sectors that are doing well and sectors that maybe aren't as favorable. We continue to see good demand on data centers.

[Ron Konezny, CEO at Digi International]

That's a key market for Opengear. But we're also seeing really good demand in medical devices. We're seeing good demand in connectivity solutions for remote machines, which helps Ventus and cellular. Utilities are a strong segment, both renewable utilities as well as more traditional fossil fuels, and so that's been a good segment as they've been looking to modernize their infrastructure.

[Josh Nichols, Analyst at B. Riley]

Thanks, and then just one follow-up from me. I'm kind of curious. You've been seeing good ARR growth across both the segments now. Any context? I'm just curious what you're looking for in terms of attach rates, where they are today for what used to be one-time revenue, and if you were to kind of compare that and how that's changed over the last year or two overall.

[Ron Konezny, CEO at Digi International]

Yeah, I mean, we're seeing a nice uptick after a lot of years of hard work, both on the, I think, the customer and product-facing side and, quite frankly, as much on the back office side. We're starting to see the beginnings of the strategy playing out. We're having over 50% attach rates on our key products, where we're trending towards much higher than that in certain segments within our cellular router group, for example. So we're very optimistic that we're going to see a continued increase in attach rates. We have a new leader in Opengear. There's a set of solution packages that are being worked on inside of that business that we think that will increase the take rates there as well of solutions. So we're very optimistic we can continue this momentum.

[Josh Nichols, Analyst at B. Riley]

Appreciate it. Thanks, guys.

[Ron Konezny, CEO at Digi International]

Thanks.

[Operator]

Thank you. At this time, I would now like to turn the conference back over to Ron Konezny for closing remarks.

[Ron Konezny, CEO at Digi International]

We plan on attending Roth's 37th Annual Conference for Growth Companies in Dana Point, California on March 17th. We appreciate you joining Digi's earnings call and for your continued support. Thank you to our customers, distributors, suppliers, and to our exceptional Digi team. Have a great day.

[Operator]

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

Participants

Executives

• Jamie Loch, CFO
• Ron Konezny, CEO

Analysts

• Thomas Allen Moll, Analyst at Stephens
• Jim Fish, Analyst at Piper Sandler
• Josh Nichols, Analyst at B. Riley