Digi International Q3 2025 Earnings Call Transcript

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Provided by Quartr
August 6, 2025

Key Takeaways

  • Positive Sentiment: Annual Recurring Revenue grew double digits year-over-year for the third consecutive quarter and now represents a record ~30% of trailing twelve-month revenues.
  • Positive Sentiment: Adjusted EBITDA margins hit a record 25.6%, and free cash flow enabled a $30 million debt retirement, leaving net debt at $20 million with a path to net cash positive by year-end.
  • Positive Sentiment: The company expects ARR and profitability to outpace revenue growth as its subscription-based model scales and yields higher gross margins than one-time sales.
  • Positive Sentiment: A CapEx-light model delivering a 9% free cash flow yield underscores the efficiency of operations and supports disciplined capital allocation.
  • Neutral Sentiment: Strategic acquisitions remain a top priority as Digi evaluates opportunities that align with its ARR, growth, and scale objectives.
AI Generated. May Contain Errors.
Earnings Conference Call
Digi International Q3 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 2

Thank you for standing by and welcome to Digi International Inc.'s Q3 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Thank you. I would now like to turn the conference over to Jamie Loch, CFO. Please go ahead.

Speaker 1

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 Inc. 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.

Speaker 1

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-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.

Operator

Thank you, Jamie. Good afternoon, everyone. Before we open the line for questions, I'd like to share a few highlights from our third fiscal quarter. Digi delivered a strong quarter returning to year-over-year revenue growth. Annual recurring revenue grew double digits year over year for the third consecutive quarter. ARR now represents a new record of approximately 30% of our trailing 12-month revenues. Importantly, both of our reporting segments contributed to this growth. Our tailored IoT solutions make it simpler and faster for customers to deploy intelligent and cloud-connected edge solutions. Our solutions enable remote monitoring, improve machine uptime, and deliver actionable analytics, which produce rapid ROI for our customers. This value proposition is resonating across industries and applications. Profitability improved, driven by ARR and favorable product mix, partially offset by increased freight and duties costs. Adjusted EBITDA margins hit a record 25.6%.

Operator

We expect ARR and profit growth to increasingly outpace revenue growth as our model scales. Free cash flow generation is a hallmark of our fiscal 2025 performance. Our results were driven by disciplined operations, increased productivity from our AI-driven productivity gains, and continued inventory optimization. After retiring $30 million in debt this quarter, we now stand at $20 million in net debt and remain on track to be net cash positive by the end of our fiscal 2025. Our CapEx-light model delivers a 9% free cash flow yield, underscoring the efficiency of our business. Strategic acquisitions remain a top priority. We continue to evaluate opportunities that align with our ARR, growth, and scale objectives. Looking ahead to the final quarter of our fiscal 2025, our outlook assumes a dynamic macro environment. Digi's 40-year legacy demonstrates our ability to adapt and to thrive.

Operator

Our diversified global supply chain positions us to respond quickly when needed, while maintaining a long-term focus on our customers' success. I'll now turn the call back to the operator for Q&A.

Speaker 2

Thank you. As a reminder, to ask a question, you will need to press star then the number one on your telephone keypad. To withdraw your question, press star one again. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Tommy Moe with Defense. Your line is open.

Speaker 2

Good afternoon, and thanks for taking my questions.

Operator

Good afternoon, Tommy.

Operator

Ron, on products and services, ARR, another big step higher this quarter. I wanted to get an update from you there. A couple of aspects I had in mind and then anything else you want to offer, maybe an update on how you're managing these attach rates through your channel. I know there's a decision you have to make about how quickly you want to move there. Another one that came to mind was if you can give any color on which product categories you're having the most success with or the most challenges with, frankly, that would be interesting as well. Thank you.

Operator

Yeah, good questions, Tommy. We're really seeing some increase on take rates. We've increasingly moved towards having almost all new business now being attached in the IT area. IT would include our cellular routers, our Opengear console servers, and our infrastructure management devices. They're all now seeing really much higher levels of attach, and that's helping drive that recurring revenue. We saw really good contributions across the board. We did have some product mix with some products with improved margins having a little bit higher weight than others. We did see some broad-based contribution, which is always good to see that you got a diverse set of contributors.

Operator

Ron, on the guidance for fourth quarter, it looks like sales flat sequentially, EBITDA dollars a touch lower sequentially. What do you want to call out? Maybe there was some goodness that hit the P&L in the most recent quarter that we shouldn't expect to recur. Anything you can do to bridge us from one to the other would be helpful.

Operator

Yeah, Tommy, we had a similar profile to last quarter. We're always a little bit cautious on the mix side, and the mix driving gross margin is the thing that would really impact that adjusted EBITDA number. I would point out, although it appears to be relatively flat quarter over quarter, it still would mark another year-over-year return to growth, which we're pretty excited about. That profit assumption will be driven mainly by gross margin rather than, say, OpEx.

Operator

That's helpful. Thank you. I'll turn it back.

Speaker 2

Next question comes from the line of Matthew Maus with B. Riley Securities. Your line is open.

Speaker 2

Hi, this is Matthew on for Josh Nichols. Thanks for taking my questions. I guess just first off, in terms of demand outside of APAC and setting tariff returns aside, are you seeing customers move from wait-and-see mode to pulling the trigger more on larger projects?

Operator

We're optimistic that between U.S. financial policy, the One Beautiful Bill Act, as well as now tariffs becoming more certain, whether you like them or not, I think that's going to open up some improved decision-making. We hadn't seen as much of that in FQ3, but I think we are starting to see that here in this particular period. We're optimistic that increased certainty will help drive more effective and timely decision-making by our customers.

Operator

Helpful. Thank you. If I remember correctly, I think Opengear is benefiting from AI infrastructure buildout. Can you kind of size that opportunity as hyperscalers move from planning to deploying a little bit more?

Operator

Yeah, as a reminder, Opengear really services both data center applications as well as edge. We saw a slight improvement increase in data center business this fiscal year, and that continued in FQ3. It's still around a 50/50 split between those applications. The data centers that we're doing business with are both AI and non-AI, and increasingly, actually, one of the bigger trends is hybrid data center deployments where a customer wants to have some of their compute in the cloud, but they also want to have some compute locally. That's becoming more important as customers look to protect their data as they're leveraging AI models. That's been a really growth area for us in that hybrid data center environment.

Operator

Got it. I guess just on inventory, it looks like it's basically normalized to historical levels. Should we expect customer reordering to accelerate in fiscal 2026?

Operator

Yeah, that's a good point on inventory. We feel like we're getting to really to that optimized level. In fact, if anything, we want to make sure we have enough of the right product. We're seeing some positive signs from the channel as well, that their velocity is improving. It's hard to say how much that will continue in FY2026, but we are seeing some improvement there.

Operator

Got it. Thank you. That was all for me.

Operator

Thank you, Matthew.

Speaker 2

Next question comes from the line of James Fish with Piper Sandler & Co. Your line is open.

Speaker 2

Hi, this is Caden on for Fish. My first question, what was the linearity of the quarter like? What did you guys see through July? Was there any impact from tariffs/macro volatility?

Operator

I think we had a favorable mix that navigated its way through. I don't know that there was really anything unusual about the way the linearity came into the quarter. Frankly, there's not anything unusual about the way the demand is shaping up either. There is some tariff impact. This is Jamie, by the way. There's been some tariff impact, but we've really been navigating through that either through some accelerated buys that we had as well as leveraging our lower tariff regions for manufacturing. We've had some tariff impact. That's been a very volatile situation. With some of the more recent information that's come out, we're analyzing how we think that's going to play into Q4. As it relates to FQ3, there wasn't anything unique really about the linearity.

Operator

Gotcha. Thanks. How are you guys feeling about the M&A environment? What are the opportunities shaping out there?

Operator

Yeah, it's still a robust environment out there. We've got a real healthy pipeline. You know, it's always an arm wrestle over evaluations for the right opportunities. We continue to emphasize opportunities that have really strong ARR, good growth profiles. We have a right to own them clearly, and we want them to be profitable as well. It's a healthy market out there, so we feel like we've got a good pipeline.

Operator

Gotcha. Thank you.

Speaker 2

Next question comes from the line of Scott Wallace Searle with ROTH Capital Partners. Your line is open.

Speaker 3

Hey, good afternoon. Thanks for taking the questions. Hey, Ron, I was hoping you could provide a little bit of color maybe geographically and by some of the vertical end markets. I know you had a big win with, I think it was NYC DOT. Where is the activity? Where are you seeing the demand and the pull-through and the pipeline building right now?

Operator

Yeah, it's a really good question. One of the hallmarks of Digi International Inc. is we have tremendous diversity across different industries. That diversity has really helped us through good times and challenging ones. For example, right now, as you can imagine, that renewable market isn't as strong as it had been traditionally. We're not seeing maybe as much demand there as we've had in previous periods. We've seen really good demand in the utility segment and water. Mass transit has come back as well. As we talked about earlier, it's been good business in both the edge as well as in data center environments. AI has been a nice boost there as well. Those positives right now are outweighing the challenges. North America, I think, is gaining more prominence as compared to the other geos.

Operator

APAC in particular, I think, has been softer for us than maybe we would have liked, but more than offset by some strength in North America. Europe is going to be a bit of a wildcard here as they're working through a lot of things on that side. We remain optimistic, but there may be some bumps along the way in Europe.

Speaker 3

Gotcha. You already addressed the channel issue. It sounds like things are starting to normalize there. From a cost and component standpoint, I'm wondering if you could give us some updated thoughts in terms of the competitive landscape with China-based vendors, if that's creating opportunities for you. It sounds like you guys have been able to manage your cost structure or your BOM pretty well from that standpoint. It sounds like, if anything, just tariff certainty is going to drive decision-making, whereas we've been a little bit more of a holding pattern.

Operator

Yeah, Scott, you nailed it. I think as things become clear, even if you don't like them, it enables you to make really effective decision-making. We're really very fortunate to put in the work prior to have a diversified supply chain. We've got some flexibility. Of course, you can't just turn on a dime. We're trying to take advantage of those areas where the transit routes are very favorable, whether it's Mexico into North America or Asia into Europe. We've got some flexibility there, and we're going to take advantage of that. We have really moved all of our manufacturing out of China. We don't have the exposure to what we think has been more of a longer-term risk there. There could be some opportunities as we run into some competitors that maybe don't have as flexible a supply chain.

Operator

There is a tremendous amount of tariff engineering going out there where transformation is occurring. There are competitors considering opening facilities in North America. There could be a short-term opportunity for us.

Speaker 3

Gotcha. Leslie, if I could, just in terms of the near-term visibility, I'm wondering if there's a terms number that's required to hit maybe the middle of the range. Jamie, just in terms of capital allocation, you guys obviously are doing a great job on the free cash flow generation front and paying down the debt. As you basically get to a net cash position, where does the buyback stand in terms of the level of priorities versus keeping a little bit more in the kitty for M&A? Thanks.

Speaker 1

Yeah, Scott, good to hear from you. I think the priority continues to be M&A. I would say we would prioritize it that way. We've been pretty clear as that being part of our strategy. I would largely look for any deployment to go that route versus, say, a buyback. We are focused on finding the right acquisitions, so we would deploy our capital with priority there.

Speaker 3

Great. Thanks. Nice job on the quarter.

Speaker 1

Yeah, thanks, Scott.

Speaker 2

Another question from Thomas Allen Moll with Defense. Your line is open.

Speaker 2

One final one for me today. Ron, on the 2025 outlook, you've got revenue flat year over year, recurring revenue up double digits. I think I heard you in your facility comments. I'm just looking at the consensus for 2026. I'm well aware you're not prepared to guide today. The consensus does assume, call it a mid-single-digit growth rate on that reported line. I just wanted to give you the opportunity to make any comment about the interplay there, where potentially the more success you have on recurring revenue, there can be some optical headwinds there on the reported revenue. Anything you could do to frame how you're thinking about next year would be helpful. Thank you.

Operator

Yeah, you know, in my prepared remarks, I talked about how we expect ARR and profitability to outpace our top-line growth. We think that will persist beyond FY2025. We haven't characterized the percentages. When there's opportunities for us to service a customer with more of a solution that is over a multi-year period, we're going to take that every time. That will dampen our one-time revenue, but it's got a higher IRR and it's a better opportunity for both the customer and for Digi. We continue to see those opportunities and we're going to take advantage of those. That's one of the big reasons that ARR is going to outpace revenue for the future.

Operator

That ARR also contains a higher gross margin than what our one-time revenue does, and that's what's going to help drive improved margins that we've seen and drive down to the bottom line, which will lift that adjusted EBITDA. We're seeing really a version of that happening as the 2025 period unwound. We're seeing double-digit growths on ARR that's contributing to the gross margin. Now you're seeing us in the last two quarters lift our profit expectations. We expect that model to continue. If I could, I'd sell all of our solutions via recurring. We're at a record 30%. We do have customers and products that are appropriate for that, but we're going to keep emphasizing that because we think it's in the customer's best interest. It really matches investment with return. It's very cash flow friendly for our customers as well. It's just easy.

Operator

It makes it a lot easier. It holds Digi to a higher level of responsibility than providing a product and having great fixed support. You get a real engagement at that ROI level, then you're just a component of a broader solution. It's part of the color behind that real strong belief that the ARR profit will outpace top line.

Operator

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

Operator

Thank you, Tommy.

Speaker 2

Seeing no further questions, that concludes our Q&A session. I'd like to turn the call back over to Ron Konezny, CEO, for closing remarks.

Operator

Thank you. We look forward to participating in the Piper Sandler Annual Growth Frontiers Conference in mid-September in Nashville. Please seek out your Piper representative for a meeting at that event. Thank you for joining Digi International Inc.'s earnings call today. We appreciate the continued support of our customers, distributors, suppliers, and our exceptional Digi team. Have a great day.

Speaker 2

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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