Q1 2024 Digi International Inc Earnings Call

Good day, and thank you for standing by and welcome to the fiscal Q1 'twenty 'twenty four did your International Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question too.

Ask a question during this session you will need to press star one on your telephone.

Didn't hear an automated message a bias in your hand, it's 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 CFO. Please go ahead.

Thank you and 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 can ask me are president and CEO.

We issued our earnings release after the market closed yesterday.

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 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.

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 we jump into Q&A a few comments.

We have begun our next journey to double AOR and adjusted EBITDA to $200 million in the next five years.

The first quarter and our journey resulted in air are up 13% year over year now exceeding our quarterly revenue for the first time in the company's history.

<unk> demonstrates disease progression from a product.

To a solution provider.

And significantly improves our visibility and profitability.

<unk> was the primary driver helped.

Helping digi started quarterly gross margin record.

We've adopted stronger cost controls, enabling strong profitability in the quarter.

Our efforts to optimize our supply chain brought our inventory levels down.

It helped us generate significant free cash flow.

We expect our debt refinancing will reduce the amount of cash needed to service our debt by at least $4 million this year.

During our first fiscal quarter, we paid off approximately 50 cents a share in debt to reduce our gross debt to approximately $195 million.

<unk> portfolio of industrial Internet of things solutions is broad and deep <unk>.

Enabling us to service the most demanding applications and customers around the world.

We will relentlessly innovate and service our customers in an ever changing security.

Regulatory technology and business environment, helping our customers adapt and succeed.

At this time I'd like to turn the call back to the operator for our questions and answer session. Thank you operator.

And thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

And one moment for your first question.

And our first question comes from Tommy Moll from Stephens, Inc. Your line is now open.

Good morning, and thank you for taking my questions.

Good morning, Jeremy.

I wanted to start on the <unk> trends for solution, so you're up a little bit quarter over quarter up year over year, but in the low to mid singles.

Range on a percentage basis, which is below the long term trend and aspiration. So I wonder if you could just unpack some of the dynamics there and do you have any visibility into thing some of the higher growth rates returning anytime soon thanks.

Yeah. Thanks, Tom a good question we.

We do think solutions has a bright future.

In the recent quarters than dealing with delayed decision, making that we think we're going to be improving here.

In addition to I'd say, some right sizing, especially in the financial services sectors with with ATM networks, but we think the combination of Ventas and smart.

Really over the long term are going to be producing that strong double digit growth.

Thank you Ron as a follow up I wanted to turn to capital structure.

It looks like the cash flow management in Q in the quarter. You just completed was a pretty strong allowed you to pay down some debt.

And then there was also the refinancings. So it's really a two part question as we go forward.

How do you think about the level of debt outstanding as we progressed through the year, how aggressively do you want to continue to pay that down and then just to level set everyone on.

On your run rate interest expense now maybe maybe your best guess on the second fiscal quarter, just give us something to work with given the changes that have gone on there. Thank you.

Tommy I think it's the restructuring of the debt was a great deal for us.

It lowers our interest rate it puts them in a more flexible structure that we can be more aggressive on the paydowns in and not leave ourselves overly exposed from a capital perspective, So I would anticipate similar to Q1 and continued aggressiveness and paying down the debt. It's our primary objective with our working capital allocation.

And so we will continue that on for the foreseeable future.

In terms of interest expense.

I would round about just do the math and say that we could reasonably expect about a $4 million interest bill here at F Q2 based on debt levels.

And where the rate is apps all part of why we would aggressively pay that down to continue to work that down sequentially as we move through the year.

Thank you Jamie I'll turn it back.

Thanks Tommy.

Ann Thank you.

And one moment our next question.

And our next question comes from Scott Searle from Roth and Ken Your line is now open.

Operator: Good day, and thank you for standing by, and welcome to the Fiscal Q1 2024 Digi-International Inc. Earnings Conference. At this time, all participants are in a listen-only mode.

Hey, good morning, Thanks for taking the questions Hey, Ron I am wondering as we look sequentially into the March quarter. It sounds like there is some stabilization in some of the channels and end markets. I was wondering if you could kind of walk through where youre seeing demand strength, where there are still some pockets of inventory. How you are feeling overall about that.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question... To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand... To withdraw your question, please press star 1 1 again.

And also wondering if you're seeing an impact as it relates to some of the China tactile slash Veeva com issues are you seeing some benefits related to demand on that front.

Operator: 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, CFO. Please go ahead.

Hey, good morning, Scott. Thanks for the question one of the things about Disney that I think is.

Our unique attribute is that we're a very broad company, we service a number of companies across different industrial verticals across different geographies in that portfolio really holds up well in good times and bad and so there are certain sectors that are softer.

James J. Loch: 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. Please refer to the earnings release after the market closed yesterday. You may obtain a copy of the press release through the financial releases section of our investor relations website at digi.com.

Residential solar for example is a soft area, but commercial solar solar farms is very strong medical devices remains really consistent strong mass transit is coming back after being.

James J. Loch: 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 uncertainty. These statements reflect our expectations about future operating and financial performance and speak only as of today. We undertake no obligation to update publicly or revise these forward-looking statements. Although we believe the expectations reflected in our forward-looking statements are reasonable, we give no assurance that such expectations will be met or that any of our forward-looking statements will prove to be correct.

Really shattered during during Covid. So we think that portfolio really holds up well for Digi and oftentimes stated, we don't necessarily run as fast as the cheaters, but were much slower than the turtles.

Now on your second question.

We haven't seen a dramatic impact on say quite tail on <unk> com and that the.

The concern around Chinese sourced cellular radios, there certainly are pockets of them and obviously those the competitors to those companies are are advocating for their case to be made I do think it's good for us to add choice.

James J. Loch: For additional information, please refer to the forward-looking statement section in our earnings release and the risk factor section of our most recent Form 10-K and subsequent reports on file with the SBA. 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, is included in the earnings release.

Both from western suppliers, and some suppliers audi's, but but it hasn't been a dramatic impact on the business as of yet.

Great.

As a follow up on one of my multi part questions but in.

In the quarter, our Iot solutions had a tremendous step up in terms of gross margins I'm wondering if you could dive into that a little bit is that sustainable it sounds like a lot more.

James J. Loch: The earnings release is also furnished as an exhibit to Form 8K that can be accessed through the SEC filing section of our Investor Relations website. Now, we'll turn the call over to Ron. Thank you, Jamie. Good morning, everyone.

Improved profitability on the smartphone front im assuming theres less hardware in there.

As part of that vintage was down in the quarter I'm wondering what you could see from a visibility standpoint of the recovery kind of what are the headwinds specifically on that front and then on the other side of the table with products.

Ronald E. Konezny: Before we jump into Q&A, a few comments. We have begun our next journey to double ARR and adjust EBITDA to $200 million in the next five years. The first quarter in our journey resulted in ARR of 13% year-over-year, now exceeding our quarterly revenue for the first time in the company's history. ARR demonstrates Digi's progressions from a product... to a solution provider and significantly improves our visibility and profitability. AR was the primary driver helping Digi set a quarterly gross margin record. We've adopted stronger cost controls, enabling strong profitability in the quarter. Our efforts to optimize our supply chain brought our inventory levels down and helped us generate significant free cash. We expect our debt refinancing will reduce the amount of cash needed to service our debt by at least $4 million this year.

Console server I think you'd called out last quarter as being a little bit saw some inventory in the channel I am wondering if that is starting to rectify itself. When we start to see recovery of growth there and on the cellular products firm. Thanks, Yes, yes. Thanks. Thanks for the question Scott, Yes, I think you're picking up on a couple of really important trends one is smart.

<unk> gross margins and the solutions gross margins, we do think that Thats sustainable it's showing the power of an IRR model as a reminder, our solutions group as subscription Ali. We also are seeing some opportunities in smart <unk> moved to more of what we call an asset model or an opex model, where there isn't as much.

Product or onetime revenue because that revenue is is baked into a multiyear contract for some customers. That's our preferred way of doing business. We don't force that model, but we do embrace it for those customers.

Operator: During our first fiscal quarter, we paid off approximately $0.50 a share in debt to reduce our gross debt to approximately $195 million. Digi's portfolio of industrial Internet of Things solutions is broad and deep, enabling us to service the most demanding applications and customers around the world. We will relentlessly innovate and serve our customers in an ever-changing security, regulatory, technology, and business environment, helping our customers adapt and succeed. At this time, I'd like to turn the call back to the operator for our questions and answer session. Thank you, operator. And thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.

That want to pursue more of an opex model.

The ventas.

Situation as I mentioned in an earlier question, we did see some pressure in 2023 from a particular financial services. We all know about the regional bank crisis that did have an impact on some ATM networks. We think really that is behind us and so as we look forward, we think that business has stabilized and now ready ready to grow.

The last question on console server and open gear I want to highlight that.

Team does an amazing job with their channel and so open gear and console server really does a nice job, making sure. The channel does not have too much inventory and that has never really been a challenge for us we highlighted a few major customers that had slowed their deployments.

And deferred some of their shipments to future quarters and these are a couple of larger customers. We didn't see a huge impact from those customers in the December quarter, We do expect as the years go on I'm sorry, as the quarters go on squeezing me up that they will start to return based upon the communications, we've had with them and so that will contribute positively.

Operator: Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question comes from Tommy Moe from Stephens, Inc. Your line is now open. Good morning, and thank you for taking my question. Good morning, Tommy.

<unk> did did grow quarter over quarter, even though were still down year over year, but it was it was down almost really exclusive on the back of what if we get the label as our strategic customers.

Ronald E. Konezny: I wanted to start on the ARR trends for solutions. So you're up a little bit, quarter over quarter, up year over year, but in the low to mid-singles range on a percentage basis, which is below the long-term trend and aspiration. So I wonder if you could just unpack some of the dynamics there. And do you have any visibility into seeing some of the higher growth rates returning anytime soon? Thanks. Yeah, thanks, Tom. A good question,

Great. Thanks, I'll get back in the queue.

And thank you.

And one moment our next question.

And our next question comes from Mike Walkley from Canaccord Genuity. Your line is now open.

Ronald E. Konezny: We do think solutions have a bright future. In recent quarters, we've been dealing with delayed decision-making that we think we're going to be improving here, in addition to, I'd say, some right-sizing, especially in the financial services sectors with ATM networks. But we think the combination of Ventus and SmartSense is really, over the long term, going to be producing that strong double-digit growth. Thank you, Ron.

Alright, Thanks for taking my question nice to see the guidance kept for the year.

Especially with Qualcomm, highlighting kind of excess inventory theyre seeing the industrial Iot channel.

Yes, Jamie and speaking to that inventory.

Yes.

Can it down on your balance sheet, but yes.

How much do you think still tied up in working capital in terms of excess inventory as you improve your cash flow.

Versus where you think your inventory will be maybe exiting this year.

James J. Loch: As a follow-up, I wanted to turn to capital structure. It looks like the cash flow management in Q and the quarter you just completed was pretty strong, which allowed you to pay down some debt. And then there was also the refinancing.

Yes, Mike.

Thanks for the question I do think there is still a dollars that are tied up in their namely.

Part of the investment that we talked about last year that we made was our ability to procure components were.

James J. Loch: So it's really a two-part question as we go forward. How do you think about the level of debt outstanding as we've progressed through the year? How aggressively do you want to continue to pay that down? And then, just to level set everyone on your run rate interest expense now, maybe your best guess for the second fiscal quarter, just give us something to work with, given the changes that have gone on there. Thank you.

Where we're seeing shortages and so really where a lot of that inventory relief will come from us as those components work themselves into finished goods. So.

I think it'll be kind of a.

A slower.

Run off because those those components are obviously part of finished goods in.

It will take us.

I would say reasonably the year to be able to work through those I think we saw a good step down here in the first quarter.

James J. Loch: Yeah, Tommy, I think the restructuring of the debt was a great deal for us. It lowers our interest rate. It puts it in a more flexible structure that we can be more aggressive on the paydowns and not leave ourselves overly exposed from a capital perspective. So, similar to FQ1, I would anticipate continued aggressiveness and paying down the debt. It's our primary objective with our working capital allocation, and so we will continue that for the foreseeable future. In terms of interest expense, I would roughly just do the math and say that we could reasonably expect about a $4 million interest bill here on FQ2 based on debt levels and where the rate is at. All part of why we would aggressively pay that down to continue to work that down sequentially as we move through the year. Thank you, Jamie. I'll turn it back.

Youll, probably get something Thats less of a straight line and you could see a quarter, where maybe it flattens out a little bit and then you take another stab or maybe it's a couple of steps and then it flattens out a little bit and continues to step but.

But the real movement will come on that component side of it I would say that thats something that we would look out over the next four quarters is continuing to work itself through.

And to be even more specific we've got in excess of $30 million of components in that.

It's much higher than traditionally we have we have maybe five.

Worst case $10 million to point these be last time buys soap. So there is $20 million to $25 million worth of inventory that we have in normal times, we should not have a whole, but those will be worked off over overtime. So theres a bit of an inventory dividend that we certainly expect to benefit from over there.

Operator: Thanks, Tommy, and thank you. And one moment for our next question. And our next question comes from Scott Searle from Roth M K M. Your line is now open. Hey, good morning.

Following quarters.

Great that's helpful and Ron maybe just.

Follow up question you had been successful.

A lot of acquisitions to build out.

<unk> solutions from a product point product company as you highlighted in your script, but.

Ronald E. Konezny: Thanks for taking the questions. Hey, Ron, I'm wondering, you know, as we look sequentially into the March quarter, it sounds like there's some stabilization in some of the channels and end markets. I was wondering if you could kind of walk through where you're seeing demand strength, where there are still some pockets of inventory, how you're feeling overall about that, and also wondering if you're seeing an impact as it relates to some of the China QECTL slash FIBOCOM issues. Are you seeing some benefits related to demand? Hey, good morning, Scott.

It seems like the capital structure now your focus on paying down that debt, but when you did restructure the debt. There is an option maybe to take on more debt given your strong adjusted EBIT.

Generation. So what's your view may be in this market in terms of acquisitions, and if youre still acquisitive, whereas some of the areas you might be focused on to drive long term value for digi shareholders. Yes. Thanks for the question that the Iot market is just mass industrial Iot is massive.

Tunnel.

Ronald E. Konezny: Thanks for the question. One of the things about Digi that I think is a unique attribute is that we're a very broad company. We service a number of companies across different industrial verticals, across different geographies, and that portfolio really holds up well in good times and bad. And so there are certain sectors that are softer. Residential solar, for example, is a soft area, but commercial solar, and solar farms, are very strong.

Fragmentation opportunities and we think digital will continue to be a leader in both organically growing but also complemented that with select inorganic opportunities. So we are still very active we maintained.

A really strong funnel of opportunities out there and but we're also very patient as well I can say, we have certainly I think been more disciplines here as interest rates have risen and we've been working to pay down our debt.

Ronald E. Konezny: Medical devices remain really consistent and strong. Mass transit is coming back after being really shattered during COVID. So we think that portfolio really holds up well for Digi, and we've often stated, you know, we don't necessarily run as fast as the cheetahs, but we're much slower than the turtles. Now, on your second question, we haven't seen a dramatic impact on, say, Coectel and Feeblecom and the concern around Chinese-sourced cellular radios. There certainly are pockets of them, and obviously the competitors to those companies are advocating for their case to be made. I do think it's good for us to have choice, both from Western suppliers and some suppliers out east, but it hasn't had a dramatic impact on the business as yet.

We really needed to bias, our capital structure, and especially in 'twenty, two and 'twenty three towards inventory to service our customers that as you can see from this recent quarter and some of our comments that Jamie and I had.

We've really not needed to have that type of posture with inventory now we can move more strongly into paying down debt, giving us more capacity for for the right opportunity. So we are working as hard as ever on sourcing and developing.

Potential acquisition targets, but I'd say again, we're still I think pretty disciplined on making sure. It's the right opportunity. It's got the right value proposition and Digi can help.

Succeed, but also improve our model in particular, we look at companies that have a significant amount of annualized recurring revenue they're growing.

Ronald E. Konezny: Great. And as a follow-up, one of my multi-part questions, but, you know, in the quarter, IoT solutions had a tremendous step up in terms of gross margins. I'm wondering if you could dive into that a little bit. Is that sustainable? It sounds like a lot more improved profitability on the smart sense front, but I'm assuming there's less hardware in there. As part of that, Ventus was down in the quarter. I'm wondering what you could see from a visibility standpoint of the recovery, kind of what are the headwinds specifically on that front?

That.

That are profitable and we have a right to partner with them.

Great. Thanks for taking my questions are first language.

And thank you.

And one moment our next question.

And our next question comes from harsh Kumar from Piper Sandler Your line is now open.

Yeah, Hey, guys solid solid guide all things considered given the state of the economy and Ron to that end you.

Ronald E. Konezny: And then on the other side of the table with products, you know, the console server, I think you had called out last quarter as being a little bit soft, some inventory in the channel. I'm wondering if that is starting to rectify itself when we start to see a recovery of growth there and on the cellular product. Yeah, yeah. Thanks.

You maintained your full year guide as Mike pointed out.

I look at your quarterly numbers, you sort of started high about a year or so ago, and then youre maintaining your guide would suggest youre expecting a pickup in the back half of the year.

Ronald E. Konezny: Thanks for the question, Scott. Yeah, I think you're picking up on a couple of really important trends. One is SmartSense's gross margins and the solution's gross margins.

So with that <unk> can I ask Stephanie as June that the inventory correction that everybody was worried about particularly you yourself in your business is that correction coming to an end and can be safely assume that we're close to the bottom of it.

Ronald E. Konezny: We do think that that's sustainable. It's showing the power of an ARR model for, as a reminder, our solutions group is subscription only. We also are seeing some opportunities in SmartSense to move to more of what we call an asset model or an operational expense model where there isn't as much product or one-time revenue because that revenue is baked into a multi-year contract. And for some customers, that's a preferred way of doing business. We don't force that model, but we do embrace it for those customers that want to pursue more of an op-ex model. The Ventus situation, as I mentioned in an earlier question, we did see some pressure in 2023 from particular financial services. We all know about the regional bank crisis that did have an impact on some ATM networks.

Yes, I think without a doubt our annual guide assumes really sequential improvement in our performance over the fiscal year I think it's a combination of all.

I think customers digesting and normalizing their demand and inventory levels. I think it's also in part driven by our previous comments, we made around our open gear teammates that we the strategics coming back.

In the second half of our fiscal year <unk>.

We see also I think some of the comments from our solutions.

Teammates that really are starting to now.

In a much better position to grow they've got some of the screening that their customers day behind them. So I think that combination of things has us.

Ronald E. Konezny: We think really that is behind us. And so, as we look forward, we think Ventus is stabilized and now ready to grow. The last question on console server and OpenGear, I want to highlight that the team does an amazing job with their channel. And so, OpenGear and console server really do a nice job making sure the channel does not have too much inventory, and that has never really been a challenge for us. We highlighted a few major customers that had slowed their deployments and deferred some of their shipments to future quarters. These are a couple of larger customers. We didn't see, you know, a huge impact from those customers in the December quarter.

Feeling confident about our about our annual guidance.

Great.

I think you were making a push or did you were making a push to incorporate software and to hardware sales and I've seen a lot of other companies that make heartbreak do that at very profitable margins.

I was just curious if you could give us an update on how that's going I certainly think that's the right way for you guys to grow but I'd be curious on how things are going.

Yeah. Thanks. Thanks for the question that is the number one priority for this company is to progress from being more of a product oriented company to a solution oriented company, we're going to leverage our <unk>.

Ronald E. Konezny: We do expect as the years go on, I'm sorry, as the quarters go on, excuse me, that they will start to return based upon the communications we've had with them. And so that will contribute positively. Open Gear did grow quarter over quarter, even though it was still down year over year, but it was down almost exclusively on the back of what we would label as our strategic. Great, thanks.

Rich and long history in providing outstanding edge devices, but increasingly we're going to differentiate and satisfy our customers with software both quite frankly on the device, but also.

In the cloud and remote deployments so that those those.

Those things are going to be magazines that are going to last and we're seeing customers and quite frankly internally responds.

Operator: I'll get back to you, and thank you. And one moment for our next question. And our next question comes from Mike Walkley from Canaccord Genuity. Your line is now open.

I was that brief story I was at CES This year and had an opportunity with one of our larger prospects and for the first time in my nine year career. They asked me what the software subscription program was for the products, which almost brought me to tears, but I think what's happening with that.

James J. Loch: All right. Thanks for taking the question. Nice to see the guidance kept for the year, especially with Qualcomm highlighting the kind of excess inventory they're seeing in the industrial IoT channel. I guess, you know, Jamie, speaking to that inventory, you're working it down on your balance sheet. How much do you think is still tied up in working capital in terms of excess inventory as you improve your cash flow versus where you think your inventory will be maybe exiting this year? Yeah, Mike, thanks for the question.

The constant changes in security regulation technology business opportunities and challenges. It is no longer set it and forget it you'd have to actively manage.

Your remote Iot solution and the things that it's connected to and I think the market is really.

Coming and embracing that concept.

Context and providers that can help them on that journey.

Good stuff guys I'll get back in queue, congratulations on maintaining for the guidance it seems like things like hitting the bottom.

James J. Loch: I do think there's still dollars that are tied up in there, namely, part of the investment that we talked about last year that we made was our ability to procure components where we were seeing shortages. And so really where a lot of that inventory relief will come from is as those components work themselves into finished goods. So, you know, I think it'll be kind of a slower runoff because those components are obviously part of finished goods, and you know, it'll take us, I would say, reasonably the year to be able to work through those. I think we saw a good step down here in the first quarter.

And thank you.

And one moment our next question.

And our next question comes from Anthony Stoss from Craig Hallum. Your line is now open.

Good morning, guys nice execution.

Ron for you I'm, just curious if youre seeing any pricing pressures above what you would normally expect in any of your business segments, I'm curious, which is better which is worse and then maybe for for Jamie can you give us a view do you expect gross margins to be stable for the rest of the fiscal year.

Ronald E. Konezny: You know, you'll probably get something that's less of a straight line, and you could see a quarter where maybe it flattens out a little bit and then you take another step, or maybe it's a couple of steps and then it flattens out a little bit and continues the step, but, You know, the real movement will come on that component side, and I would say that that's something that we should look at over Yeah, to be even more specific, you know, we've got in excess of $30 million in components, and that's much higher than we traditionally have. We have, you know, maybe five, worst-case scenario $10 million components. These will be my last time buys.

Hey, Toni good morning, we're not seeing really the price pressures I would say price increases.

Certainly moderated from open area, where it's really tough to get inventory.

Frankly, we see more more conversations around terms and price people are looking to.

To have more discussions on msas and things like that but price I would say have gone to the base necessarily.

Price increases, but not necessarily price decreases EBIT.

Yes, Tony I think on the gross margin side.

Ronald E. Konezny: So there's, you know, $20 to $25 million worth of inventory that we, in normal times, should not have or hold. Those will be worked off over time. So there's a bit of an inventory dividend that we certainly expect to benefit from over the following quarters. Great, that's helpful. And Ron, maybe just a follow-up question.

We certainly think that the gross margins will be stable in fact that I think.

We're running on multi quarters now kind of that 10, 15 20 basis point improvement sequentially.

And I think we'll continue to see gross margins stay at or even continue to click up by basis points here for the remainder of the dynamic there Tony is really <unk> and we've been very prominent that <unk> will grow faster than our topline we'd like to leave with <unk> as the first metric because it is so.

Ronald E. Konezny: You've been successful in, you know, integrating a lot of acquisitions to build out digital solutions from a product point product company, as you highlighted in your script, but, It seems like the capital structure now is focused on paying down that debt, but we did restructure the debt. There is an option, maybe, to take on more debt given your strong adjusted EBITDA generation. So what's your view maybe in this market in terms of acquisitions, and if you're still acquisitive, what are some of the areas you might be focused on to drive longer-term value for digital shareholders? Yeah. Thanks for the question. The IOT market is just a mass; industrial IOT is massive.

Indicative of our journey to be a solutions provider. It has higher gross margins than our product gross margins and it really.

With good operational discipline leads to higher both gross and EBIT margins and so that's been our mantra, we're not going to be perfect, but thats the trend and I think to Jamie's point, we've exhibited that especially in the recent quarters.

Got it one quick follow up a couple of quarters ago, Ron Youre talking about deals taking longer to close is that now.

Generally behind us or still kind of with us.

Ronald E. Konezny: There's a ton of..., fragmentation opportunities, and we think Digi will continue to be a leader in both organically growing and complementing that with select inorganic opportunities. So we are still very active; we maintain a really strong funnel of opportunities out there, but we're also very patient as well. I can say, you know, we have certainly, I think, been more disciplined here as interest rates have risen and we've been looking to pay down our debt, and we really needed to bias our capital structure, and especially in 22 and 23, towards inventory to service our customers. That, as you can see from this recent quarter and some of our comments that Jamie and I had, we really did not need to have that type of posture with inventory.

I would say, it's improved a little bit.

But I wouldn't say, it's back to the way things used to be I think people are still pretty exacting and youre seeing this from a lot of companies that are.

We rewarded for for cost control, whether that's in the form of personnel or other expenses. So we have to I would say we have to work harder to earn the business.

<unk> is there, but you do have to put more time youre going to have to be working more as a team as well.

Getting help from from.

From your teammates in finance and legal to make sure those large opportunities to make it through the final stages, but I do think we will return to I think a more assertive posture right now I'd say.

They'll say, it's taken a bit longer than traditionally for opportunities to close.

Very good guys. Thank you.

Ronald E. Konezny: Now we can move more strongly into paying down debt, giving us more capacity for the right opportunity. So, we are working as hard as ever on sourcing and developing potential acquisition targets, but I'd say, again, we're still, I think, pretty disciplined on making sure it's the right opportunity, it's got the right value proposition, and DIGI, you know, can help DIGI succeed but also improve our model. In particular, we look at companies that have a significant amount of annualized recurring revenue that are growing, that are profitable, and we have a right to partner with them. Thanks for taking my questions off the platform. And one moment for our next question. And our next question comes from Harsh Kumar from Piper Sandler. Your line is now open.

And thank you.

And I am showing no further questions I would now like to turn the call back over to Ron <unk> for closing remarks.

We appreciate everyone joining earnings our earnings call today and for your continued support of <unk>.

Huge.

And heartfelt thank you to our customers distributors suppliers and of course to the Digi team have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Ronald E. Konezny: Yeah, hey, guys, solid, solid guide, all things considered given the state of the economy. And Ron, to that end, you maintained your four-year guide, as Mike pointed out. If I look at your quarterly numbers, you sort of started high about a year or so ago, and then you're maintaining your guide, which suggests you're expecting a pickup in the back half of the year. So with that in mind, can I safely assume that the inventory correction that everybody was worried about, particularly you, yourself, and your business, is that correction coming to an end? And can we safely assume that we're close to the bottom of it?

Ronald E. Konezny: I think, without a doubt, our annual guide assumes sequential improvement in our performance over the fiscal year. I think it's a combination of... I think customers are digesting and normalizing their demand and inventory levels. I think it's also, in part, harsh, driven by our previous comments we've made around our Open Gear teammates that see the strategies coming back in the second half of our fiscal year. We also, I think, some of the comments from our Solutions teammates that really are starting to be in a much better position to grow. They've got some of the trimming that their customers did behind them. So I think that combination of things has us feeling confident about our annual guidance. Good. And then I think you were making a push, or Digi was making a push, to incorporate software into hardware sales. And I've seen a lot of other companies that make hardware do that at very profitable margins. I was just curious if you could give us an update on how that's going. I certainly think that's the right way for you guys to go, but I would be curious about how things are going. Yeah, thanks.

Ronald E. Konezny: Thanks for the question. That is, you know, the number one priority for this company is to progress from being more of a product-oriented company to a solution-oriented company. We're going to leverage our, rich in a long history and providing outstanding edge devices. But increasingly, we're going to differentiate and satisfy our customers with software, both, quite frankly, on the device but also in the cloud and remote deployments. So those, those, those themes are going to be mega themes that are going to last. And we're seeing customers and, quite frankly, internally respond. I was that brief story.

Ronald E. Konezny: I was at CES this year and had an opportunity with one of our larger prospects. And for the first time in my nine-year career, they asked me what the software subscription program was for the product, which almost brought me to tears. But I think what's happening is that the constant changes in security, regulation, technology, business opportunities, and challenges mean that it is no longer set it and forget it; you have to actively manage it, your remote IoT solution, and the things that it's connected to. And I think the market is really coming to terms with embracing that context and providers that can help them on that journey. Good stuff, guys. I'll get back to you.

Operator: Congratulations on maintaining for the guide and seems like it seems like hitting the bottom, and thank you. M1 moment for our next question. And our next question comes from Anthony Stoss on behalf of Craig Hallam. Your line is now open. What a guy's nice execution. Ron, for you, I'm just curious if you're seeing any pricing pressures above what you would normally expect in any of your business segments. I'm curious which is better and which is worse.

Ronald E. Konezny: And then maybe for Jamie, can you give us your view? Do you expect gross margins to be stable for the rest of the fiscal year? Hey, Tony, good morning.

Ronald E. Konezny: We're not really seeing price pressures; I would say price increases have certainly moderated from the COVID area where it was really tough to get inventory. Quite frankly, we see more conversations around terms than price. People are looking to have more discussions on MSAs and things like that.

Ronald E. Konezny: But price, I would say gone are the days of necessarily, you know, rapid price increases but not necessarily price decreases either. Yeah, and Tony, I think on the gross margin side, we certainly think that gross margins will be stable. In fact, I think we're running on multi-quarters now of kind of 10, 15, 20 basis point improvements sequentially, and I think we'll continue to see gross margins stay at or even continue to click up by basis points here for the remainder of the year. Yeah, and the dynamic there, Tony, is really ARR, and we've been very clear that ARR will grow faster than our top line. We'd like to leave with ARR as the first metric because it's so... indicative of our journey to be a solutions provider. It has higher gross margins than our product gross margins, and it really, with good operational discipline, leads to higher both gross and even margins, and so that's been our mantra. We're not going to be perfect, but that's the trend, and I think, to Jamie's point, we've exhibited that, especially in the recent quarters.

Ronald E. Konezny: One quick follow-up. A couple quarters ago, Ron, you talked about deals taking longer to close. Is that now generally behind us, or still kind of with us? I would say it's improved a little bit, but I wouldn't say it's back to the way things used to be.

Ronald E. Konezny: I think people are still pretty demanding, and you're seeing this from a lot of companies that are pretty rewarded for cost control, whether that's in the form of personnel or other expenses. So I'd say we have to work harder to earn the business. The business is there, but you do have to put in more time. You're going to have to work more as a team as well, getting help from your teammates in finance and legal to make sure those large opportunities make it through the final stages. But I do think we will return to, I think, a more assertive posture. Right now, though, I'd still say it's taking a little bit longer than traditionally for opportunities to close.

Ronald E. Konezny: Very good, guys. Thank you, and thank you. And I am showing no further questions.

Ronald E. Konezny: I would now like to turn the call back over to Ron Konezny for closing remarks. We appreciate everyone joining us for earnings, our earnings call today, and for your continued support. A huge, heartfelt thank you to our customers, distributors, suppliers, and, of course, to the Digi team. Have a great day. This concludes today's conference call. Thank you for participating. Thank you for watching!