Digi International Inc. Price & Performance (DGII)

Thank you. Good day, everyone. It's great to talk to you again, and thanks for joining us today to 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 release 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. 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 Statements in our earnings release today and the Risk Factors section of our most recent Form 10 and subsequent reports on file with the SEC.

Finally, certain of the financial information disclosed on this call and includes non GAAP measures. The information required to be disclosed about these measures including reconciliations to the most comparable GAAP measures, 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 filings sections of our Investor Relations website. Now, I'll turn the call over to Ron. Thank you, Jamie. 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 Both of our reporting segments contributed to ARR growth in the quarter. 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.

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 9%. We now expect to be net cash positive by the 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. 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. Operator, I will now hand the call back to you for Q and A. Thank you.

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

Hey, good afternoon, Tommy. Ron, my first question is on the recurring revenue trends in 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. Yeah, thanks Tommy. The two big levers that were 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 a 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 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? 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 they're they are reacting to this model in a real positive way They realize it helps them build a recurring revenue business. [indiscernible] 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.

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 Revvers have a little bit weaker in the APAC region and you can probably understand why. So there's a little bit of that dynamic going on as well. But I think the inventory situation is resolving itself. You'll see in our numbers that inventory has come down quite a bit. We're getting back to normalized levels. And that's a real positive sign. Thank you, Ron. I appreciate the time. I will turn it back.

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.

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

Great. Just another quick one. Any update on the software attach rates? Yeah, we're seeing, you know, the 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% across the portfolio, less the OEM solutions business, of course. But there's still room to improve. Gotcha. Thanks.

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

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, are things starting to lag a little bit more? What are you seeing in terms of your supply chain? Interestingly, your inventories, you guys have working them down for a while, where 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 give us some thoughts in terms of how you're approaching the current environment. Yeah, Scott, good questions. We monitor our opportunities very closely. 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. [indiscernible] so we think that's steady so far. 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 our opportunities The inventory, you know, we've think during COVID we've 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. And we're in a good shape from the diversity and optimization of our Bolt suppliers and the location. So we've got some flexibility to move products around to try to to minimize tariff impacts. We're probably less subject to stockpiling that you might see at other companies and more willing to see how this evolves and then react accordingly. Gotcha, very helpful. And Ron, maybe just a 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? Yeah, our outlook really incorporates the current state of tariffs. So we feel like we've we've got a good handle on things and let's kind of this discussion, assume a 10% tariff rate is the most common tariff rate.

We know China is higher and and some other things like things that comply with US 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 gonna require a little bit more agility About 70% of our business is in North America, so 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 and some of these may be more tariff situations where you might have reciprocal put in place, we're going have to move feet to juggle some things a bit. Gotcha. Very helpful. And lastly, if I could just on the solutions front, you continue to see some pretty good demand there and growing your ARR.

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. Yeah, we're really pleased with the additions we've had, both in Ventus and SmartSense. They have been off 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 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. Hey, Ron, just to follow-up on that last point, right, in terms of extending your existing router gateway business into the Ventus model, are we in terms of that timeline now?

How long before we get through a majority of that conversion or attach process? Thanks. 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, you know, they know when that model applies and quite frankly, when, you know, it's a more traditional model. So, it's not a light switch, it's more like a dimmer switch that happens over time. So, expect it really to be a multi quarter evolution. Great, thanks so much. Nice job on the quarter. Thank you, Scott.

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.

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

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