Digi International Q2 Earnings Call Highlights

Key Points

• Digi delivered a record fiscal Q2 with $131 million in revenue (+25% YoY), a 64% gross margin (all-time high), record operating cash flow of $41 million, ARR $184 million (+50% YoY) and $34 million of adjusted EBITDA (26.3% margin).
• Management says the company remains on track toward its longer-term targets — guidance implies roughly 25% ARR growth to about $190 million by year-end, and the $200 million ARR and $200 million adjusted EBITDA goals are considered “within reach,” though adjusted EBITDA still needs additional progress.
• Operationally, Digi sees “accelerating” customer behavior across AI data centers, utilities, medical and transit, with Jolt integrated well and Particle (about $20 million of recurring revenue) contributing roughly $4 million this quarter; channel inventory is low but supply-chain availability is being managed.

Digi International NASDAQ: DGII reported record results for its fiscal second quarter of 2026, driven by strong revenue growth, expanding margins, and continued gains in annualized recurring revenue (ARR), as management highlighted improving customer engagement in several industrial markets.

Record quarter highlighted by revenue growth, margin expansion, and cash generation

Chief Financial Officer Jamie Loch said the company delivered “records all over the place” in the quarter, including revenue of $131 million, up 25% year-over-year and a quarterly record. Gross margin reached 64%, up 190 basis points from the prior year and an all-time high for Digi.

Loch attributed the gross margin performance to a combination of factors, including the growing contribution from ARR, favorable mix within product lines, and pricing dynamics. He noted that current memory-related pricing pressure was being “somewhat offset by other positive pricing impacts” within cost of goods sold, leaving memory as more of a basis-point-level headwind rather than a major drag in the quarter.

The company also posted record cash flow from operations of $41 million, up 58% year-over-year. On a non-GAAP basis, Digi reported:

• $184 million in ARR, up 50% year-over-year
• $34 million of adjusted EBITDA, a quarterly record
• Adjusted EBITDA margin of 26.3%, another quarterly record

Loch emphasized that a growing recurring revenue base is supporting “more reliable, predictable results,” helping Digi “set records quarter over quarter.”

Progress toward “$200 million ARR and $200 million adjusted EBITDA” goals

Management also discussed progress against longer-term financial objectives the company outlined at the beginning of fiscal 2024: reaching $200 million in ARR and $200 million in adjusted EBITDA.

Loch said Digi’s ARR trajectory has been strong, citing a 28% compound annual growth rate over the last two years. Based on the company’s guidance calling for 25% ARR growth for the year, Digi projects it will finish the year at about $190 million in ARR.

Adjusted EBITDA growth has also been strong, which Loch characterized as a 17% CAGR. However, he acknowledged the company still has “a little bit of work to do” to reach the $200 million adjusted EBITDA objective. He added that as revenue and ARR expand, the company expects leverage to drive profit growth faster than revenue and believes the goal remains “within our reach.”

Chief Executive Officer Ron Konezny underscored the central role recurring revenue plays in Digi’s strategy, calling ARR “the most important measure in this company” and a sign that Digi is “selling solutions” and delivering ongoing value through “an actively managed system.”

Market conditions, vertical momentum, and “accelerating” customer behavior

During Q&A, analyst Tommy Moll of Stephens asked Konezny to elaborate on management’s description of “accelerating” customer behavior. Konezny pointed to strong execution and improved market conditions in several end markets, including AI data centers, utilities, medical, and mass transit. He also cited improving industrial conditions, noting that a purchasing managers’ index (PMI) above 50 in recent months is “certainly helpful” given Digi’s industrial exposure.

Loch added that Digi tracks “days to win” metrics across its product lines and is seeing those timelines shorten in certain areas—still not back to pre-COVID levels, but improving enough to support the view that activity is accelerating.

Moll also questioned an apparent mismatch implied by guidance, with sequential revenue rising from the third to the fourth quarter but adjusted EBITDA potentially declining. Loch said the dynamic was not necessarily “intended,” and pointed to items that are “more annualized” in Q4, potential mix effects in the pipeline that could move gross margin “a point or two,” and a degree of caution related to uncertainty in the memory market.

Acquisition integration: Jolt and Particle updates

Analyst Timothy Shubsda of Piper Sandler asked about the integration of Digi’s Jolt and Particle acquisitions. Konezny said the Jolt acquisition, completed in August of the prior year, has integrated well. He cited solutions ARR improvement as a “direct” result of Jolt and SmartSense collaboration, and said the cultures, teams, and processes are integrated, while technology integration is “well underway.”

Particle, acquired in January, is at an earlier stage, but Konezny said Digi is “equally thrilled” and sees opportunities to sell Digi legacy products alongside the Particle cloud offering, as well as bring Particle’s solution into Digi customer opportunities. He added that Digi is working toward a common CRM and ERP environment by the end of the fiscal year.

In response to analyst Scott Searle of ROTH Capital Partners on Particle’s quarterly contribution, Konezny said Particle is “about $20 million of recurring revenue,” representing the majority of its revenue. He said Digi owned Particle for roughly two-thirds of the quarter and that the acquisition contributed “basically around $4 million or so” in fiscal Q2.

Supply chain, channel inventory, and ARR demand by segment

On channel conditions, Loch said inventory is “in the zone,” but still at “the low end of the range,” while Konezny said distributors are being more incremental and generally less willing to take large inventory positions without customer purchase orders.

Konezny described the supply chain environment as still volatile, citing higher energy prices affecting freight and elevated costs for newer memory types. However, he said Digi’s supply chain team is securing availability and allocations, and that Digi is not “upsetting customers with availability and lead times.” He added that recent U.S. regulations affecting consumer routers have not yet meaningfully impacted industrial applications where Digi competes.

Regarding federal spending, Konezny said Digi is “not hugely exposed” to the federal market compared with companies more dependent on defense or other agency demand.

On ARR demand trends, Konezny said SmartSense remains focused primarily on food applications and healthcare, and that Jolt has added capabilities such as labeling services, calendar services, and inventory management that strengthen Digi’s food service offering. He also noted the company signed a large opportunity in the prior quarter that combined Jolt capabilities with SmartSense’s enterprise selling and contracting. In Ventus, he said Digi has seen significant success in financial services, including point-of-sale applications such as lottery gaming, and is pursuing opportunities in areas like digital signage and unmanned kiosks.

Looking at gross margin longer term, Loch reiterated that one-time revenue mix can introduce variability quarter to quarter, but he views “low to mid-60s%” as a reasonable base range. Over a longer horizon, he expects continued basis-point improvement as ARR grows as a percentage of revenue, suggesting that 15 to 25 basis points of improvement per quarter is a reasonable long-term rule of thumb, acknowledging variability in individual quarters.

Konezny closed the call by thanking stakeholders and emphasizing the company’s team-driven execution, calling the quarter’s results part of building “something very special.”

About Digi International NASDAQ: DGII

Digi International Inc 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.

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