Q4 2023 Digi International Inc Earnings Call
Okay.
Good day and welcome to the Digi International fiscal fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question you will need to press star one one on your telephone you will then hear an automated message advising your hand, just raised to withdraw your question. Please press star. One again, 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 Chief Financial Officer. Please go ahead.
Yeah.
Thank you good day, everyone. It's great to talk to you again and thank you for joining us today to discuss the earnings results of Digi International.
<unk> me on today's call is Ron <unk>, our president and CEO.
We issued our earnings release before the market opened this morning, you may obtain a copy of the press release through the financial releases section of our Investor Relations website at <unk> Dot com.
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.
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.
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 section of our Investor Relations website.
Now I will turn the call over to Ron.
Thank you Jamie good morning, everyone before I jump into Q&A, a few comments.
What an incredible year for Digi, we connected millions of industrial things to the Internet.
Unlocking savings improving customer service and reducing our customers' carbon footprint with fewer truck rolls and higher uptime.
Throughout a turbulent fiscal 'twenty three we set new records for adjusted.
Adjusted EBITDA and revenues.
Paid down $36 million in debt and.
And improved our gross and adjusted EBITDA margins.
We are proud to have essentially achieved our three $100 million goals.
And now we begin our next journey to double.
<unk> and adjusted EBITDA to $200 million in the next five years.
Although it would be off to a modest start in our fiscal 2004 period.
We believe the dip is contained to a subset of long term customers that need time to deploy their inventory.
We expect to grow <unk> and adjusted EBITDA faster than the top line continuing the improvement of our model.
There are billions of industrial things that need to be connected and digi is excited to play a leading role by providing secure resilience and easy to manage solutions.
At this time I'd like to turn the call back to the operator for a question and answer session. Thank you operator.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Moment for our first question.
Our first question comes from Tommy Moll with Stephens. Your line is open.
Good morning, and thanks for taking my questions.
Good morning, Tony.
Ron you referenced the dip in terms of revenue as largely relating to a subset of customers and their extended deployment Timeframes I think that maybe the same point you referenced about console servers in the earnings release.
But could you just give us any more context on what you are saying there.
Yes, there are some I think you've seen this with other companies.
In the data center space and in some industrial sectors as analogies, but there there.
There are some of our customers that have taken inventory, it's taken them a little bit longer than the original projections to deploy that inventory.
Quite often a collection of products that need to be put together not just AG equipment, but other vendors like Cisco et cetera, and so getting all that organized deployed matching that with demand profiles will take a little bit longer than they originally projected.
And is that.
Do you think Ron a function of us.
Slowing in that underlying demand or is it more a function of logistics and just having to stage the timing of deployment deployment.
So a bit of both I think that the long term trends are there is more and more work moves to the cloud. So we're confident in that long term trend I think there's more of an aberration, where probably growth rates were a little bit higher than expected and also the logistics of putting things together.
In some cases leadership literally deployed around the world.
Morning, all that can take some some planning.
Okay. That's helpful. Thank you. The other question I had was on your guidance for the year flat revenue overall.
So at the segment level or are we expecting something similar for both or one's up one's down.
And then on the EBITDA line.
Youre showing progression on flat revenues. So there must be some driver for that margin expansion. If you could highlight that as well it would be helpful. Yeah, I think really it's similar story across the segments.
In terms of our expectations and we do expect <unk> to grow faster and that's one of the really important contributing factors to <unk> mission as a whole which is to increase the amount of <unk> and an absolute basis and as a percentage of our overall revenue and where we see that really slowed down as to the gross <unk>.
In line and if we're good operators like we anticipate being to your adjusted EBITDA line. Our recurring revenue is generally at much higher margins than the consolidated gross revenue or gross margin level.
So that's the dynamic you're seeing play out.
That's helpful. Thank you and I'll turn it back.
One moment for our next question.
Our next question comes from Mike Walkley with Canaccord Genuity. Your line is open.
Okay.
Great. Thanks, and congrats on the strong fiscal 'twenty three I guess, Brian just.
Little more on the flattish revenue growth for fiscal 'twenty four.
With increase they are.
How much of an impact might there be to to the hardware sales from maybe bundling.
The lower hardware revenue upfront, that's built into that guidance that's driving that.
And higher margin longer term, yes.
Mike Thats, a real important dynamic.
As you and many of our investors know that is a key theme of ours is to become more of a solution provider and move away from onetime sales and so we're seeing bolt on solutions and to some extent product and services, we're moving away from a one time sale too.
To a service and that revenue is lower upfront, but of course, it helps <unk> and provides increased visibility and overall better economics for the customer and for Digi. So youre seeing that certainly in the solutions segment, where were seeing fewer and fewer customers that want to a onetime for deployment rather than wrapping all of those services into a into a single.
Our monthly expenditure and we're also seeing to some extent with our product services group, especially with cellular and Ventas working increasingly close closer together, we may lead with a cellular router solution, but overtime it transitions to more of a vendor solution.
Got it Thats helpful.
For my follow up question.
Jamie it's supply and demand more in balance now or there is still high.
To get components and then as we think about maybe your cash flow in fiscal 'twenty four.
How much inventory and working capital improved to drive incremental cash flow off the offer guaranteed escape.
Mike.
You know the challenges in the.
In the supply chain better than anybody.
I think we're seeing some improvement I think there still is a handful.
Where we are were tested but largely I think we've navigated through that either through.
The supply chain easing or through some of the strategic buys that we made that really put us in a position to meet our customer demand.
Agree with your assessment I would expect as the year progresses that we will not see some of the demands through the supply chain and that should free us up from a working capital perspective.
Both to realize the benefits in working capital on the investments that were made in <unk> three as well as.
Maybe not meeting to see the builds that we saw to that degree.
<unk>, So I would expect cash conversion on that adjusted EBITDA line to improve from where it was in 'twenty three.
And probably could predict that that would equate into more aggressive debt pay down in 'twenty four.
Great that's helpful I'll pass the line.
Thanks, Mike.
One moment for our next question.
Our next question comes from Scott Searle with Roth and Ken Your line is open.
Hey, good morning, Thanks for taking my questions.
Ron maybe you could just quickly follow up on Mike's question again as Youre looking at the traditional onetime sale the hard way harder.
Hardware gateway market transitioning more to event just like model could you give us some metrics around what youre seeing in terms of.
That preexisting piece wanting to move towards the recurring model from.
What's historically been the onetime hardware sale model, John kind of give us a little bit of a.
Assessment in terms of how much of that is impacting the flattish sales for fiscal 'twenty four.
So one metric as an example, if you look at within our solutions segment, you look at the revenue that's a subscription nature.
Versus the total revenue in fiscal 'twenty two.
Around 79% fiscal 'twenty three it was eight.
82%. That's an example of moving more towards recurring and away from the onetime sales that's been predominantly driven by smart sense.
<unk>.
As a comparison within product and services.
We saw a significant increase in the recurring in fiscal 'twenty three.
I think it was close to 50% increase in the recurring and that's a combination of having greater attach rates with our solutions, but also to some extent moving towards.
Towards towards a more of a subscription and solution sale versus the traditional one time.
It does take a lot of work on change management, both internally and with our channel partners to execute.
But we're really excited to see that progress.
22 over 23.
Ron maybe to just follow up on that so what is what's the expectation in terms of the conversion of that hardware based at one time sale to a recurring mix as we look out in fiscal 'twenty four in fiscal 'twenty five.
When your gradual process initially, but it sounds like it started to accelerate which is a good thing longer term, yes, Scott is a really good question.
It's about specifics, but I think it's going to be a gradual thing we've got to be very careful change management. We've got a lot of long term customers, we need to work closely with as we move to this model and some of them have been budgeting for years with Capex right. So we show up and say, we want to deliver opex, we need to be patient as they incorporate that into their budgets.
Forward. So to your question I think it's more of a slow motion.
Event than say, a big Bang, where we force customers to move over that is may be inappropriate for them from a timing perspective.
Got you and as a follow up.
Just looking out into the December quarter and for the guidance for fiscal 'twenty four Im wondering if you could kind of tick through some of the different product lines in terms of where youre seeing some weakness in the broad based expectations for fiscal 'twenty four you commented already.
The out of band in open gear in data center, but I'm wondering if you could kind of highlight some of the other areas of where you are seeing relative strength and how the channel is performing right now thanks.
Scott. Good question, we really think it's primarily isolated to that subset of customers within console server.
<unk>.
If they were ordering product.
As they have done previously.
So that alone really does explain a lot of the difference as I mentioned earlier, we do expect them to digest and get back on track with the traditional ordering patterns, but it will take a quarter or two for that to normalize and that's really what's baked into that assumption as we see that recovery throughout 'twenty four.
Great. Thank you.
One moment our next question.
Our next question comes from Robert <unk> with Piper Sandler Your line is open.
Hey, guys. Thank you for taking the question Robert on for harsh Kumar here.
More of a strategic question.
How are you guys balancing the.
The weakness.
In the near term coming from your large customers that you had mentioned as well as the inventory buildups can you compare that versus maybe how youre thinking about further penetration of your products and potentially other geographies or within the markets that you guys playing already thank.
Thank you.
Yes. Thanks for the question Robert what we've got this this near term we are absolutely confident in the long term growth rates of our end markets and up Digi. We think we're outperforming the market when we look at other public companies as well as private companies that we think are down significantly double digits. So we think we're doing better than most.
And we don't want to let up the gas pedal on the investments whether they be.
Capital or labor resources. So we're in a very offensive posture, because we think the long term trend is there even if we've got a short term dip.
There are just so many opportunities to connect remote assets to connect people to their remote assets and the ROI is compelling they are less compelling in good times and even in times of more stressed macroeconomic <unk>.
In terms like we essentially have today.
Awesome and as my follow up just on.
That hardware to software transition.
How are you.
Hardware legacy hardware customers.
Responding maybe.
The large customer specifically on.
<unk>.
If you put the software in front of them and maybe they only want to stick with the hardware are you keeping that business or without getting too specific.
How are you reacting to that situation.
Yes, it's a good question, Robert we're very very sensitive to existing relationships they've relied on us for in some cases decades.
And we want to sell them to value want to convince them. We don't want to threaten them. We don't want to hold them hostage. If you will to new models. So we want to work over time to understand what opportunities there are to transition them to solutions and earn that business rather than forcing it starting with new opportunities. It's a much different story new opportunities we're much more.
Convicted and courageous on positioning ourselves as a solution party provider, which both quite frankly allows us to avoid opportunities that don't have a good mass as well as our <unk> those that do have a good match in this.
As many of you know we're not alone in this journey and there are other companies that are going down there. So it is hardly an unfamiliar story, but the key for us is translating our solution strength and matching that very closely what the customers need.
Thanks, guys.
One moment for our next question.
Our next question comes from Anthony Stoss with Craig Hallum. Your line is open.
Morning, guys.
Ron can you maybe address any changes that you've seen.
As of yet on timing of recurring revenue customers and maybe Jamie any thoughts on Opex for 2024 on a quarterly basis.
Hey, good morning, Tony.
Yes, we're excited to grow faster than the top line. So we think overall, it's a real compelling message and we're seeing a lot of our customers quite frankly focused on their internal expertise and decide to to trust us with the solution rather than management internally. So we feel thats a if you will in many trends under this <unk>.
<unk> industrial Iot, where customers, having more success getting there faster by trusting companies like did you with the entire solution that trying to manage the bits and pieces themselves. So we feel really emboldened on this journey and first and foremost it's in the customer's best interest and of course, secondly that we deliver incredible impeccable solution.
That are performing at a higher level and what could they could do on their own it and so I think that's just a really good favorable backdrop and trend for this position.
Solutions, and then having that translate of course for us for IRR, Jamie I'll, let you comment on the Opex side, Yes, Tony I think from an Opex perspective.
If you have to look over a little bit of a trend rate in Q4 is typically youll get some.
Counting treatments that ends up flowing through that line.
Through several lines that can create kind of a weird results. If you just look at that Standalone, but if you look at it over a four quarter period, you'll see that it's trending it's.
It's there's nothing while thats really happening we continue to be open to the right investments for the business whether that would be okay.
Capital or operating expense investments.
But I would project.
We watched this transition take place from one time more into recurring that.
We would manage our bottom line.
Appropriately part of why we say that we see <unk> and profits growing faster than revenue will be monitoring that pretty closely.
Very good thanks, guys.
Sure.
One moment for our next question.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced our next question comes from Greg Mcginniss with West Park Capital. Your line is open.
Yes. Thank you.
Can you guys give a little bit of color on your <unk>.
Current sales model in terms of direct versus third party distribution distributors.
Hey, good morning, Greg and our solutions segment, we are primarily a direct distributors were selling directly to the end user.
And making sure that the customers are aware of the solution how to deploy it how to get the ROI and product and services.
It's primarily an indirect where most of our opportunities are going with them through a channel partner.
Right and how has that ratio trended recently and how do you expect it to grow moving forward. Thanks.
It really is trending similar to what's done in the past and we expect that to continue one of the opportunities certainly is on the channel side to bring them into some of our solutions and have them are taken and embraced the solutions element, which we're seeing really good results because again with select other companies as well so, but we think that the trend is likely to.
Continue that were through channel partners on the <unk> side and direct on the solution side.
Great. Thank you.
Thank you that concludes the question and answer session. At this time I would like to turn the call back to Ron <unk> for closing remarks.
Thank you everyone for joining <unk> earnings call and for your continued support.
For investors, we will be attending Stephens annual investment conference November 14th in Nashville.
Have a great day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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Good day and welcome to the Digi International fiscal fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your telephone you will then hear an automated message advising your hand.
Just raised to withdraw your question. Please press star one again, 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 Chief Financial Officer. Please go ahead.
Okay.
Thank you good day, everyone. It's great to talk to you again and thank you for joining us today to discuss the earnings results of Digi International joining me on today's call is Ron <unk>, our president and CEO.
We issued our earnings release before the market opened this morning, you may obtain a copy of the press release through the financial releases section of our Investor Relations website at <unk> Dot com.
This morning, 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.
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 section of our Investor Relations website.
Now I will turn the call over to Ron.
Thank you Jamie good morning, everyone before I jump into Q&A, a few comments.
What an incredible year for Digi, we connected millions of industrial things to the Internet unlocking savings improving customer service and reducing our customers' carbon footprint with fewer truck rolls and higher uptime.
Throughout a turbulent fiscal 'twenty three we set new records for adjusted.
Adjusted EBITDA and revenues.
We paid down $36 million in debt and improved our gross and adjusted EBITDA margins.
We are proud to have essentially achieved our three $100 million goals.
And now we begin our next journey to double.
<unk> and adjusted EBITDA to $200 million in the next five years.
Although it will be off to a modest start in our fiscal 2004 period.
We believe the dip is contained to a subset of long term customers that need time to deploy their inventory.
We expect to grow <unk> and adjusted EBITDA faster than the top line continuing the improvement of our model.
There are billions of industrial things that need to be connected and digi is excited to play a leading role by providing secure resilience and easy to manage solutions.
At this time I'd like to turn the call back to the operator for a question and answer session. Thank you operator.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced so withdraw. Your question. Please press star one again, one moment for our first question.
Our first question comes from Tommy Moll with Stephens. Your line is open.
Good morning, and thanks for taking my questions.
Good morning, Tony.
Ron you referenced.
Dip in terms of revenue as largely relating to a subset of customers and their extended deployment Timeframes I think that may be the same point you referenced about console servers in the earnings release.
But could you just give us any more context on what you're saying there.
Yes, there are some I think you've seen this with other companies.
The data center space and in some industrial sectors as analogies, but there there.
There are some of our customers that have taken inventory, it's taken them a little bit longer than the original projections to deploy that inventory.
Quite often a collection of products that need to be deployed together not just AG equipment, but other vendors like Cisco et cetera, and so getting all that organized deployed matching that with demand profiles will take a little bit longer than they originally projected.
And is that.
Do you think Ron a function of.
Slowing in that underlying demand or is it more a function of logistics and just having to stage the timing of deployment deployment, yes, Tim I think it's a bit of both I think that the long term trends are there is more and more work moves to the cloud. So we're confident in that long term trend I think there's more of an aberration, where probably growth rates were a little bit.
Higher than expected and also the logistics of putting things together.
In some cases leadership literally deployed around the world.
Morning, all that can take some some planning.
Okay. That's helpful. Thank you. The other question I had was on your guidance for the year flat revenue overall.
So at the segment level or are we expecting something similar for both or ones up one's down.
And then on the EBITDA line.
Youre showing progression on flat revenues. So there must be some driver for that margin expansion. If you could highlight that as well it would be helpful. Yeah, I think really it's similar story across the segments.
In terms of our expectations and we do expect <unk> to grow faster and that's one of the really important contributing factors to <unk> mission as a whole which is to increase the amount of <unk> and an absolute basis and as a percentage of our overall revenue and where we see that really slowdown is to the gross <unk>.
In line and if we're good operators like we anticipate being <unk>. Our recurring revenue is generally at much higher margins than the consolidated gross revenue or gross margin level.
So thats the dynamic you're seeing play out.
That's helpful. Thank you and I'll turn it back.
One moment for our next question.
Our next question comes from Mike Walkley with Canaccord Genuity. Your line is open.
Great. Thanks, and congrats on the strong fiscal 'twenty three.
I guess, Brian just.
Little more on the flattish revenue growth for fiscal 'twenty four.
With increased <unk>.
How much of an impact might there be to to the hardware sales from maybe bundling.
A little lower hardware revenue upfront, that's built into that guidance that's driving that.
And higher margin longer term, yes.
Yeah, Mike Thats, a really important dynamic.
As you and many of our investors know that is a key theme of ours is to become more of a solution provider and move away from onetime sales and so we're seeing bolt on solutions and to some extent product and services, we're moving away from a one time sale too.
To a service and that revenue is lower upfront, but of course, it helps and provides increased visibility and overall better economics for the customer and for Digi. So youre seeing that certainly in the solutions segment, where were seeing fewer and fewer customers that want to a onetime for deployment rather than wrapping all of those services into a into a single.
Uh huh.
Our monthly expenditure and we're also seeing to some extent with our product services group, especially with cellular and Ventas working increasingly close closer together, we may lead with a cellular router solution, but overtime it transitions to more of a vendor solution.
Got it Thats helpful.
I guess for my follow up question, Jamie a supply and demand more in balance now or there is still high.
To get components and then as we think about maybe your cash flow in fiscal 'twenty four.
Inventory and working capital improved to drive some incremental cash flow off the offer guaranteed escape.
Mike.
Yes.
You know the challenges in the.
In the supply chain better than anybody and I do think we're seeing some improvement I think there still is a handful.
Where we are were tested but largely I think we've navigated through that either through.
The supply chain easing or through some of the strategic buys that we made that really put us in a position to meet our customer demand.
<unk> with your assessment I would expect as the year progresses that we will not see some of the demands through the supply chain and that should free us up from a working capital perspective.
To realize the benefits in working capital on the investments that were made in <unk> three as well as well maybe not meeting to see the builds that we saw to that degree in 'twenty four and so I would expect cash conversion on that adjusted EBITDA line to improve from where it was in 'twenty three.
And probably could predict that that would equate into more aggressive debt pay down in 'twenty four.
Alright, Thats helpful ill pass the line.
Thanks, Mike.
One moment for our next question.
Our next question comes from Scott Searle with Roth and Ken Your line is open.
Hey, good morning, Thanks for taking my questions.
Ron maybe you could just quickly follow up on Mike's question again as Youre looking at the traditional one.
Onetime sale of the hard way.
<unk> gateway market transitioning more to event just like model could you give us some metrics around what youre seeing in terms of.
That preexisting dis wanting to move towards the recurring model from.
What has historically been the onetime hardware sale model, John kind of give us a little bit of.
An assessment in terms of how much of that is impacting the flattish sales for fiscal 'twenty four.
Yes.
One metric as an example, if you look at within our solutions segment you look at the revenue that's that's over subscription nature.
Versus the total revenue in fiscal 'twenty two it was around 79% fiscal 'twenty three it was eight.
82%. That's an example of moving more towards recurring and away from the onetime sales that's been predominantly driven by smart sense.
<unk>.
As a comparison within products and services we.
We saw a significant increase in the recurring in fiscal 'twenty three.
I think it was close to 50% increase in the recurring and that's a combination of having greater attach rates with our solutions, but also to some extent moving towards <unk>.
Towards towards a more of a subscription and solution sale versus the traditional one time.
It does take a lot of work on change management, both internally and with our channel partners to execute.
But we're really excited to see that progress.
22 over 23.
Ron maybe to just follow up on that so what is what's the expectation in terms of the conversion of that.
Hardware based at one time sale to a recurring mix as we look out in fiscal 'twenty four in fiscal 'twenty five.
Got it.
When your gradual process initially, but it sounds like it started to accelerate which is a good thing longer term, yes, Scott is a really good question.
There hasnt provide specifics, but I think it's going to be a gradual thing we've got to be very careful change management. We've got a lot of long term customers, we need to work closely with as we move to this model and some of them have been budgeting for years with Capex right. So we show up and say, we want to deliver opex, we need to be patient as they incorporate that into their budget.
Moving forward so to your question I think it's more of a slow motion.
Event than say, a big Bang, where we force customers to move over that is may be inappropriate for them from a timing perspective.
Got you and as a follow up.
Just looking out into the December quarter and for the guidance for fiscal 'twenty four Im wondering if you could kind of tick through some of the different product lines in terms of where youre seeing some weakness in the broad based expectations for fiscal 'twenty. Four you commented already on the out of band and open gear in data center, but I'm wondering if you could kind of highlight some of the other areas of <unk>.
You are seeing relative strength and how the channel is performing right now thanks.
Scott. Good question, we really think it's primarily isolated to that subset of customers within console server.
If they were ordering product.
As they have done previously we'd be seeing growth in the period year over year.
So that alone really does explain a lot of the difference as I mentioned earlier, we do expect them to digest and get back on track with the traditional ordering patterns, but it will take a quarter or two for that to normalize and that's really what's baked into that assumption as we see that recovery throughout 'twenty four.
Great. Thank you.
One moment our next question.
Our next question comes from Robert <unk> with Piper Sandler Your line is open.
Hey, guys. Thank you for taking the question Robert on for harsh Kumar here.
More of a strategic question.
How are you guys balancing the.
The weakness.
In the near term coming from your large customers that you had mentioned as well as the inventory buildups can you compare that versus maybe how youre thinking about further penetration of your products and potentially other geographies or within the markets that you guys playing already thank.
Thank you.
Yes. Thanks for the question Robert what we've got this this near term we are absolutely confident in the long term growth rates of our end markets and of Digi. We think we're outperforming the market when we look at other public companies as well as private companies that we think are down significantly double digits. So we think we're doing better than most.
And we don't want to let up the gas pedal on the investments whether they be.
Capital or labor resources. So we're in a very offensive posture, because we think the long term trend is there even if we've got a short term dip.
There are just so many opportunities to connect remote assets to connect people to their remote assets and the ROI is compelling <unk>.
Telling in good times and even in times of more stress macroeconomic.
Concerns like we essentially have today.
Awesome and as my follow up just on that.
That hardware to software transition.
How are you.
Hardware legacy hardware customers.
Responding maybe.
The large customer specifically on.
If you put the software in front of them and maybe they only want to stick with the hardware are you keeping that business or without getting too specific.
How are you reacting to that situation.
It's a good question, Robert we're very very sensitive to existing relationships they've relied on us for in some cases decades.
And we want to sell them the value want to convince them. We don't want to threaten them. We don't want to hold them hostage. If you will to new models. So we want to work over time to understand what opportunities there are to transition them to solutions and earn that business rather than forcing it starting with new opportunities. It's a much different story new opportunities we're much more.
And Victor and courageous on positioning ourselves as solution party provider, which both quite frankly allows us to avoid opportunities that don't have a good mass as well as our senior nurse those that do have a good match and.
As many of you know we're not alone in this journey and there are other companies that are going down there. So it is hardly an unfamiliar story, but the key for us is translating our solution strength and matching that very closely what the customers need.
Thanks, guys.
One moment for our next question. Our next question comes from Anthony Stoss with Craig Hallum. Your line is open.
Morning, guys.
Ron can you maybe address any changes that you've seen.
As of yet on trimming of recurring revenue customers and maybe Jamie any thoughts on Opex kind of for 2024 on a quarterly basis.
Hey, good morning, Tony.
Yes, we're excited to grow faster than the top line. So we think overall, it's a real compelling message and we're seeing a lot of our customers quite frankly focused on their internal expertise and decide to to trust us with the solution rather than management internally. So we feel that if you.
We'll have many trends under this megatrend of industrial Iot, where customers were having more success getting there faster by trusting companies like these U with the entire solution than trying to manage the bits and pieces themselves. So we feel really emboldened on this journey and feel it first and foremost it's in the customer's best interests and of course, secondly that we deliver.
Incredible a packable solutions that are performing at a higher level and what could they could do on their own and so I think that's just a really good favorable backdrop and trend for this position.
Solutions, and then having that translate of course for us for.
Jamie I'll, let you comment on the Opex side, Yes, Tony I think from an Opex perspective.
If you you have to look over a little bit of a trend rate in Q4 as is typical youll get some.
Accounting treatments that ends up flowing through that line.
Through several lines that can create kind of a weird results. If you just look at that Standalone, but if you look at it over a four quarter period.
You'll see that it's trending it's it's there is nothing while thats really happening we continue to be open to the right investments for the business whether that would be.
Capital or operating expense investments.
But I would project as we watched this transition take place from onetime more recurring that we.
Appropriately part of why we say that we see <unk> and profits growing faster than revenue, we'll be monitoring that pretty closely.
Very good thanks, guys.
Okay.
One moment for our next question.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced our next question comes from Greg CNS with West Park Capital. Your line is open.
Yes. Thank you.
Can you guys give a little bit of color on your <unk>.
Current sales model in terms of direct versus third party distribution distributors.
Yeah.
Hey, good morning, Greg and our solutions segment, we are primarily a direct distributors were selling directly to the end user.
And making sure that the customers are aware of the solution how to deploy it how to get the ROI and product and services.
It's primarily an indirect where most of our opportunities are going with them through a channel partner.
Right and how has that ratio trended recently and how do you expect it to go moving forward. Thanks.
Yes, it really is trending similar to what's done in the past and we expect that to continue.
The opportunity is certainly is on the channel side to bring them into some of our solutions and have them are taken and embraced the solutions element, which we're seeing really good results because again with select other companies as well so but we think that trend is likely to continue that were through channel partners on the service side and direct on the solution side.
Great. Thank you.
Thank you that concludes the question and answer session. At this time I would like to turn the call back to Ron <unk> for closing remarks.
Thank you everyone for joining <unk> earnings call and for your continued support.
For investors, we will be attending Stephens annual investment conference November 14th in Nashville.
Have a great day.
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