Digi International Q2 2025 Earnings Report

Digi International EPS Results

• Actual EPS: $0.51
• Consensus EPS: $0.49
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $0.49

Digi International Revenue Results

• Actual Revenue: $104.50 million
• Expected Revenue: $104.08 million
• Beat/Miss: Beat by +$419.00 thousand
• YoY Revenue Growth: -3.00%

Digi International Announcement Details

• Quarter: Q2 2025
• Date: 5/7/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, May 7, 2025
• Conference Call Time: 5:00PM ET

Digi International (NASDAQ:DGII) provides business and mission-critical Internet of Things (IoT) products, services, and solutions in the United States, Europe, the Middle East, Africa, and internationally. The company operates in two segments, IoT Products & Services, and IoT Solutions. It offers cellular routers for mission-critical wireless connectivity; cellular modules to embed cellular communications abilities into the products to deploy and manage intelligent and secure cellular connected products; console servers to provide secure and remote access to network equipment in data centers and at edge locations; and radio frequency products, including embedded wireless modules, off-the-shelf gateways, modems, and adapters under the Digi XBee brand. The company provides embedded system products under the Digi Connect, ConnectCore, and Rabbit brands; and infrastructure management products, comprising of serial servers, which offers serial port-to-Ethernet integration of devices into wired Ethernet networks; and universal serial bus solutions. In addition, it offers Digi Remote Manager and Lighthouse, a recurring revenue cloud-based service that provides a secure environment for customers to manage their connected device deployment and network devices; SmartSense by Digi for monitoring wirelessly the temperature of food and other perishable or sensitive goods, monitor facilities or pharmacies by tracking the completion of operating tasks by employees, as well as quality control and incident management for food service, healthcare, and transportation/logistics industries; and Ventus which provides MNaaS solutions. Further, the company provides professional services, such as site planning, implementation management, application development, and customer training; data plan subscriptions; and enhanced technical support services, as well as Digi Wireless Design Services. Digi International Inc. was incorporated in 1985 and is headquartered in Hopkins, Minnesota.

Digi International Q2 2025 Earnings Call Transcript

Key Takeaways

• Record ARR: ARR grew 12% year-over-year to a record $123 million, now representing 29% of annualized quarterly revenues and driving improved profitability through a scalable solution-oriented business model.
• Strong cash generation: Free cash flow of $26 million enabled a $25 million debt paydown, reducing net debt to $45 million, normalizing inventory levels, and attaining a 9% free cash flow yield, with net cash positivity now targeted by fiscal year-end.
• Recurring revenue acceleration: P&S recurring revenue was up over 20% as customers increasingly adopt software/service attachments and the Ventus subscription model via channel partners.
• Tariff and supply chain management: Guidance assumes current tariff rates and leverages USMCA-compliant production along with a diversified, optimized supply chain to mitigate margin impact amid macro uncertainty, while noting some softness in APAC markets.
• Subscription transition: Extending the Ventus zero-down subscription approach to cellular routers is underway, evolving over multiple quarters to expand ARR and offset soft churn in larger customers’ deployments.

Presentation

[Operator]

Please be advised that today's conference is being recorded.

[Operator]

I would now like to hand the conference over to your speaker, Chief Financial Officer, Jamie Locke. Please go ahead.

[Jamie Loch, EVP, CFO & Treasurer 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.

[Jamie Loch, EVP, CFO & Treasurer at Digi International]

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, EVP, CFO & Treasurer 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 Factors section of our most recent Form 10 ks 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 eight ks 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, President, Chief Executive Officer at Digi International]

Thank you, Jamie. Good afternoon, everyone. Before we take questions, a few highlights from our second fiscal quarter of twenty twenty five. Digi's solution oriented approach to the industrial IoT market continues to shine, with ARR growing 12% year over year to a record 123,000,000 in the quarter. Both of our reporting segments contributed to ARR growth in the quarter.

[Ron Konezny, President, Chief Executive Officer at Digi International]

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 revenue. Free cash flow generation of $26,000,000 in the quarter allowed us to reduce our net debt to $45,000,000 after paying down $25,000,000 of debt during the quarter.

[Ron Konezny, President, Chief Executive Officer at Digi International]

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 nine percent. 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 twenty twenty five year assumes the current tariff rates and does not contemplate a drop off in what we have seen to date as steady demand.

[Ron Konezny, President, Chief Executive Officer at Digi International]

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.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Operator, I will now hand the call back to you for Q and A.

[Operator]

Thank you. And our first question will come from the line of Tommy Moll with Stephens. Your line is open.

[Tommy Moll, Managing Director at Stephens Inc]

Afternoon, and thanks for taking my questions.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Hey, good afternoon, Tommy.

[Tommy Moll, Managing Director at Stephens Inc]

Ron, my first question is on the recurring revenue trends in P and S, up over 20% in the quarter. You've been accelerating there for some time now, but I feel like we need to ask again, what are some of the operational levers you're unlocking or you're using to unlock some of that growth? Thank you.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Yeah, thanks, Tommy. The two big levers that we're really emphasizing is one is certainly providing a solution and attaching software and services to that product to provide a more complete solution. And those attach rates continue to improve. And we are when the opportunity presents itself, providing a Ventus type model to customers where it's zero down x bucks a year or a month instead of a one time upfront to better match their ROI. So the combination of those two things are really helping ARR improve.

[Tommy Moll, Managing Director at Stephens Inc]

And is some of this, do you feel like just the channel becoming more accustomed to driving higher attach rates or is it not as much a channel dynamic and maybe something else?

[Ron Konezny, President, Chief Executive Officer at Digi International]

No, we're very channel centric in products and services. In solutions, we're more direct, so we absolutely want to partner and go with and through our channel. And so, are reacting to this model in a real positive way. They realize it helps them build a recurring revenue business.

[Tommy Moll, Managing Director at Stephens Inc]

Yep. Shifting gears to some of the one time sales in the same segment, it sounds like you've got some customers continuing to bleed their own inventories lower. I'm just curious what anecdotes or visibility you can share as to how much longer that might persist.

[Ron Konezny, President, Chief Executive Officer at Digi International]

It's a good question. I think it's becoming both a smaller set of customers, but also less inventory for them to worry about. I'd say the other factor, Tommy, is if you look at and you'll see this eventually in the queue, you'll see the split. You know, Revver has been a little bit weaker in the APAC region and you could probably understand why. So, there's a little bit of that dynamic going on as well.

[Ron Konezny, President, Chief Executive Officer at Digi International]

But I think the inventory situation is resolving itself. You'll see in our numbers that inventory has come down quite a bit and we're getting back to normalized levels. And that's a real positive sign.

[Tommy Moll, Managing Director at Stephens Inc]

Thank you, Ron. I appreciate the time. I'll turn it back.

[Operator]

Thank you. One moment for our next question. And that will come from the line of James Fish with Piper Sandler. Your line is open.

[Analyst]

Hi. This is Kaden on for Jim. Just a quick one on macro volatility. How has this changed your customers' willingness to spend across your product portfolio? Thanks.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Yeah, it's a good question. You know, to date, we see steady demand. Certainly, we acknowledge there's some fluidity out there. I'd say the exception is in the APAC region, if you look at our sales op statistics, our pipeline, days to close, average oversize, those have stayed pretty stable. Again, it's up there's a lot of change out there potentially.

[Ron Konezny, President, Chief Executive Officer at Digi International]

So we have to be prepared, but for now, it's holding firm.

[Analyst]

Great. And just another quick one. Any update on the software attach rates?

[Ron Konezny, President, Chief Executive Officer at Digi International]

Yeah, we're seeing, you know, a very good improvement. I'd say it's more of an evolution than a revolution. We've been getting higher and higher take rates across the portfolio. We're still, I'd say, under 50%, you know, across the portfolio less the OEM solutions business, of course. So, there's still room to improve.

[Analyst]

Got you. Thanks.

[Operator]

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Ron Kanesny for any closing remarks. Actually, we do have a question that just came in.

[Operator]

And that will come from the line of Scott Searle with Roth Capital. Your line is open.

[Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC]

Hey, good afternoon. Thanks for taking the questions. Hey, I apologize, Ron. I got on a couple of minutes late. But just wondering if you could give us a quick view in terms of timelines to close deals now or things starting to lag a little bit more.

[Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC]

What are you seeing in terms of your supply chain? And interestingly, your inventories, you guys have been working them down for a while, or most companies have been padding their balance sheet with inventory ahead of tariffs. You guys continue to be pretty efficient on that front. So I'm wondering if you could give us some thoughts in terms of how you're approaching the current environment.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Yeah, Scott, good questions. We monitor our opportunities very closely. You know, we saw coming out of the COVID period, sales cycles lengthening, order sizes coming down, and it's really stabilized. So, we haven't seen a deterioration with the only exception of the APAC region. So we think that's steady so far.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Again, I think there's a lot of waiting on what's gonna happen with tariffs on a more permanent basis. But for now, we're holding firm on our opportunities. The inventory, you know, we've I think during COVID, we probably accumulated more inventory than many other peers and made sure that both the channel and customers didn't have too much that they couldn't digest. And so, we've been able to slowly burn down that inventory, took a nice step here. We do think inventory has a chance to go up slightly in some future periods because we're at relative normalization now.

[Ron Konezny, President, Chief Executive Officer at Digi International]

And we're in a good shape from the diversity and optimization of our both suppliers and the locations. So we've got some flexibility to move products around to try to minimize tariff impacts. So we're probably less subject to, you know, stockpiling that you might see at other companies and more willing to see how this evolves and then react accordingly.

[Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC]

Gotcha. Very helpful. And Ron, maybe just to follow-up on that. I'm not sure if you're willing to share, but in terms of looking at tariff exposures, in terms of where they stand today, what's the range of outcomes in terms of gross margin impact as you look at the potential landscape, particularly as we get into the September?

[Ron Konezny, President, Chief Executive Officer at Digi International]

Yeah, our outlook really incorporates the current state of tariffs. So we feel like we've got a good handle on things and let's kind of, you know, for this discussion assume a 10% tariff rate is the most common tariff rate. We know China is higher and some other things like things that comply with USMCA are lower. But we think we've got a good handle on that. I think the range of outcomes that become a little more interesting is if there's portions of the world that start enacting more reciprocal tariffs, that that is going to require a little bit more agility.

[Ron Konezny, President, Chief Executive Officer at Digi International]

About 70% of our business is in North America. So, to the extent that we're importing things for our US and North American customers, that can require we do have quite a bit of product and facility that complies with USMCA, so as long as that stays in place, that's a good tool for us to leverage. So, we think we're in good shape. The way things stand right now, I think we're all having a tough time predicting what might happen, But we do have some options in some of these maybe more extreme tariff situations where you might have reciprocal put in place. We're gonna have to move our feet to juggle some things a bit.

[Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC]

Gotcha. Very helpful. Lastly, if

[Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC]

I could, just on the solutions front, you continue to see some pretty good demand there and growing your ARR. I'm wondering if you could go one layer down and give us a little bit of color in terms of Ventas, both higher end solutions versus lower end. Is there any difference in terms of how things are performing there? And I think SmartSense was going through a little bit of a refresh or upgrade cycle in terms of expanded capabilities. How is that being received in the marketplace right now? Thanks.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Yeah, we're really pleased with the additions we've had, both in Ventus and SmartSense. They have been offset to a lesser degree by what we would describe as some soft churn, where we have a larger customer that maybe closes a smaller percentage of their locations. We still retain the customer, but we have fewer locations.

[Ron Konezny, President, Chief Executive Officer at Digi International]

But they're being more than offset with growth. And we're really extending the Ventus model really into our cellular router business. And that has a tendency to tamp down top line revenue, but of course contribute to ARR. So, we're excited about that initiative and really extending that core capability and business model into the channel.

[Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC]

Hey, Ron, just to follow-up on that last point, right, in terms of, extending your existing router gateway business into the Ventus model, where are we in terms of that timeline now? How long before we get through a majority of that conversion or attach process? Thanks.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Yeah, think it'll be more of an evolution than a revolution. We work really closely with the channel. We're signing up our initial launch channel partners and getting them educated on the model and making sure that they know when that model applies, and quite frankly, when it's a more traditional model. So, it's not a light switch. It's more like a dimmer switch that happens over time.

[Ron Konezny, President, Chief Executive Officer at Digi International]

So, I expect it really to be a multi quarter evolution.

[Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC]

Great, thanks so much. Nice job on the quarter.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Thank you, Scott.

[Operator]

Thank you. I'm showing no questions at this time. So again, I'll turn the call back over to Mr. Ron Kanesny for any closing remarks.

[Ron Konezny, President, Chief Executive Officer at Digi International]

Thank you. We appreciate you joining Digi's earnings call and for your continued support. A huge thank you to our customers, distributors, suppliers, to our exceptional Digi team. Have a great day.

[Operator]

This concludes today's program. Thank you all for participating. You may now disconnect.

Participants

Executives

• Jamie Loch, EVP, CFO & Treasurer
• Ron Konezny, President, Chief Executive Officer

Analysts

• Tommy Moll, Managing Director at Stephens Inc
• Analyst
• Scott Searle, Managing Director, Senior Research Analyst at Roth Capital Partners, LLC