Q3 2024 Digi International Inc Earnings Call

August 7, 2024

Operator: Good day, and thank you for standing by. Welcome to the Q3 2024 Digi International Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-one-one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star-one-one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jamie Loch, CFO. Please go ahead.

Operator: Good day, and thank you for standing by. Welcome to the Q3 2024 Digi International Inc. Earnings conference call. At this time, all participants are in listening-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press Star 11 on your telephone. You will then hear an automated message advising your hand is raised. To draw your question, please press star 11 again. Please be advised that today's conference is being recorded.

Good day, and thank you for standing by. Welcome to the Q3 2024 Digi International Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

Jamie Loch: Thank you. Good day, everyone.

Operator: Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jamie Loch, CFO. Please go ahead.

Jamie Loch: 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 is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jamie Loch, CFO . Please go ahead.

Operator: I would now like to hand the conference over to your first speaker today.

James Loch: Jamie Loch, CFO, please go ahead. 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.

Jamie Loch: 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. We issued our earnings release after the market closed today. You may obtain a copy of the press release through the financial releases section of our investor relations website at digi.com. This afternoon, Ron will provide a comment on our performance, and then we'll take your questions.

Jamie 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 .

James Loch: Joining me on today's call is Ron Konezny, our President and CEO. We issued our earnings release after the market closed today. You may obtain a copy of the press release through the financial releases section of our Investor Relations website at digi.com. This afternoon, Ron will provide a comment in our performance, and then we'll take your questions.

Jamie Loch: We issued our earnings release after the market closed today. You may obtain a copy of the press release through the financial releases section of our investor relations website at digi.com.

We issued our earnings release after the market closed today. You may obtain a copy of the press release through the financial releases section of our investor relations website at digi.com.

Jamie Loch: This afternoon, Ron will provide a comment on our performance, and then we'll take your questions. While 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. For additional information, please refer to the forward-looking statement section in our earnings release today and the risk factor section of our most recent Form 10-K and subsequent reports on file with the SEC.

James Loch: 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 that such expectations will be met or that any of our forward-looking statements will prove to be correct.

Jamie Loch: 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. 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 that such expectations will be met or that any of our forward-looking statements will prove to be correct.

Speaker Change: This afternoon, Ron will provide a comment on our performance, and then we'll take your questions.

Speaker Change: Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties.

Ron: 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.

Jamie Loch: 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.

James Loch: Traditional information, please refer to the forward-looking statement section in our earnings release today and the risk factor section of our most recent Form 10-K and subsequent reports on file with the SEC.

Jamie Loch: For additional information, please refer to the forward-looking statement section in our earnings release today and the risk factor 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, is included in the earnings release. The earnings release is also furnished as an exhibit to Form 8K, which can be accessed through the SEC filing sections of our Investor Relations website. Now, I'll turn the call over to Ron.

Ron: For additional information, please refer to the Forward-Looking Statements section in our earnings release today and the Risk Factor section of our most recent Form 10-K and subsequent reports on file with the SEC.

James Loch: Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures, are included in the earnings release. The earnings release is also furnished as an exhibit to Form 8-K that can be accessed through the SEC filing sections of our investor relations website.

Ron: finally certain 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 earnings release

Ron: The earnings release is also furnished as an exhibit to Form 8K that can be accessed through the SEC filing sections of our Investor Relations website. Now I'll turn the call over to Ron.

Ronald Konezny: Now I'll turn the call over to Ron. Thank you, Jamie. Good afternoon, everyone.

Ron Konezny: Thank you, Jamie. Good afternoon, everyone.

Ronald Konezny: Before take questions, a few highlights. JG's diverse and resilient portfolio of ROI-driven industrial IoT solutions drove a record 113 million in annualized recurring revenue, or ARR, as of the end of the third fiscal quarter, up 9% year-of-year. SmartSense led the way, adding new customers and expanding business with existing customers in logistics, healthcare, and food service industries. Our increased attach rates in IoT products and services contributed as well. ARR now represents a record 27% of our quarterly revenues. With high retention metrics, ARR drives increased visibility to performance and future periods. In addition, ARR drove record gross margins and record adjusted even margins in the third fiscal quarter.

Ron: Thank you, Jamie. Good afternoon, everyone. Before we take questions, a few highlights.

Ron Konezny: Before we take questions, a few highlights. JGI's diverse and resilient portfolio of ROI-driven industrial IoT solutions drove a record $113 million in Annualized Recurring Revenue, or ARR, as of the end of the third fiscal quarter, up 9% year-over-year. SmartSense led the way, adding new customers and expanding business with existing customers in the logistics, healthcare, and food service industries.

Speaker Change: JG's diverse and resilient portfolio of ROI-driven industrial IoT solutions drove a record $113 million in annualized recurring revenue, or ARR, as of the end of the third fiscal quarter, up 9% year-over-year.

Jamie Loch: Smart Sense led the way, adding new customers and expanding business with existing customers and in the logistics, healthcare, and food service industries, with high retention metrics. ARR drives increased visibility. In addition, ARR drove record gross margins. Additionally, our disciplined operating model kept expenses in line and reduced our inventory position by $5 million. We generated nearly $25 million in cash during the period and paid down $20 million in debt. With potentially stimulative monetary policies on the way, Digi will remain on the offensive to capitalize on future opportunities.

Speaker Change: SmartSense led the way adding new customers and expanding business with existing customers in logistics, health care, and food service industries.

Ron Konezny: Our increased attach rates in IoT products and services contributed as well. ARR now represents a record 27% of our quarterly revenue, with high retention metrics. ARR drives increased visibility into performance in future periods. In addition, ARR drove record gross margins and record-adjusted even margins in the third fiscal quarter.

Ron: Our increased attach rates in IoT products and services contributed as well.

Ron: ARR now represents a record 27% of our quarterly revenues.

Ron: With high retention metrics, ARR drives increased visibility to performance in future periods.

Ron: In addition, ARR drove record gross margins,

Ronald Konezny: Did you strengthen its foundation with a significantly improved balance? Our discipline, operating model, kept expenses in line and reduced our inventory position by $5 million. As a result, we generated nearly 25 million in cash during the period and paid down 20 million in debt. In less than three years, we have paid down nearly $200 million in debt. This has reduced our quarterly entertainment to 3.5 million this fiscal quarter, 43% lower.

Ron: and record-adjusted even margins in the third fiscal quarter.

Ron Konezny: Digi strengthened its foundation with a significantly improved balance. Our disciplined operating model kept expenses in line and reduced our inventory position by $5 million. As a result... We generated nearly $25 million in cash during the period and paid down $20 million in debt in less than three years. We have paid down nearly $200 million in debt. This has reduced our quarterly interest payment to $3.5 million this fiscal quarter, 43% lower than last year.

Ron: Digi strengthened its foundation with a significantly improved balance sheet.

Ron: Our disciplined operating model kept expenses in line and reduced our inventory position by $5 million.

Ron: As a result,

Ron: We generated nearly $25 million in cash during the period and paid down $20 million in debt.

Ron: in less than three years.

Ron: We have paid down nearly $200 million in debt.

Ron: This has reduced our quarterly interest payment to $3.5 million this fiscal quarter, 43% lower than last year at this time.

Ronald Konezny: And last year, at this time, we expect continued debt payments, which expands our capacity for potential acquisitions in the future. Our acquisition strategy remains focused on growing industrial IoT companies that generate meaningful profitability, as well as strong ARR potential. We expect to hit last quarter's projection for fiscal 2024 revenues and profitability, while exceeding our ARR expectations. With potentially stimulative monetary policies on the way, Digi will remain on the offense to capitalize on future opportunities.

Ron Konezny: We expect continued debt payments, which expands our capacity for potential acquisitions in the future. Our acquisition strategy remains focused on growing. Industrial IoT companies that generate meaningful profitability as well as strong ARR potential. We expect to hit last quarter's projection for fiscal 2024 revenues and profitability while exceeding our ARR expectations. With potentially stimulative monetary policies on the way, Digi will remain on the offense to capitalize on future opportunities. As our world increases in complexity, Digi is uniquely positioned to provide secure, reliable, and easy to manage solutions combined with responsive expert service and support. Operator, I'm passing it to you for questions.

Ron: We expect continued debt payments.

Ron: which expands our capacity for potential acquisitions in the future.

Ron: our acquisition strategy remains focused on growing industrialiot companies that generate meaningful profitability as well as strong airar potential

Ron: we expect to hit last quarter's projection for fiscal two thousand and twenty-four revenues and profitability while exceeding our ar expectations

Ron: With potentially stimulative monetary policies on the way, Digi will remain on the offense to capitalize on future opportunities.

Ronald Konezny: As our world increases in complexity, Digi is uniquely positioned to provide secure, reliable, and easy-to-manage solutions combined with responsive, expert service and support.

Ron: As our world increases in complexity, Digi is uniquely positioned to provide secure, reliable, and easy-to-manage solutions combined with responsive expert service and support.

Operator: Operator, passing it to you for questions. 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 11 on your telephone. And wait for your name to be announced. To draw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Operator: Operator, passing it to you for questions.

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 select your question. Please press star one one again. Please stand by while we compile the Q&A. Now, our first question.

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 on your telephone and wait for your name to be announced to draw your question. Please press star one one again. Please stand by while we compile the Q&A. Our first question comes from the line of Tommy Moll of Stevens Inc. The floor is yours.

Ron: to

Ron: ple

Speaker Change: 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 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.

Thomas Moll: Our first question comes from the line of Tommy Mall of Steven Zink; the floor is yours. Good afternoon, and thanks for taking my questions.

Speaker Change: Our first question...

Speaker Change: comes from the line of tommy mall of stevens e the flow as yours

Unnamed Analyst: Good afternoon, and thanks for taking my question. Good afternoon, Tommy.

Tommy Moll: Good afternoon, and thanks for taking my question. Good afternoon, Tommy.

Ronald Konezny: Good afternoon, Tommy. Ron, on solutions ARR this quarter, it was up $3 million sequentially, which I think is the biggest quarter-over-quarter step up in some time. In recent quarters, we've already talked about elongated sales cycles there, but obviously you close some pretty big deals this quarter.

Speaker Change: Good afternoon and thanks for taking my questions.

Unnamed Analyst: Ron, on solutions ARR this quarter, it was up $3 million sequentially, which I think is the biggest quarter-over-quarter step up in some time. In recent quarters, we've heard you talk about elongated sales cycles there, but obviously, you closed some pretty big deals this quarter. So I'm just curious what context you can give. Is this re-energized trend a durable one, do you think? Was there some favorable timing going on? Just what was the state of the environment there? Yeah, it's a really good question.

Ron Konezny: Ron, on solutions ARR this quarter, it was up $3 million sequentially, which I think is the biggest quarter-over-quarter step up in some time. In recent quarters, we've heard you talk about elongated sales cycles there, but obviously, you closed some pretty big deals this quarter. So I'm just curious what context you can give. Is this re-energized trend a durable one, do you think? Was there some favorable timing going on? Just what was the state of the environment there? Yeah, it's a really good question.

Speaker Change: yes afternoon tomy

Speaker Change: Ron, on Solutions ARR this quarter, it was up $3 million sequentially, which I think is the biggest quarter-over-quarter step-up in some time.

Speaker Change: In recent quarters, we've heard you talk about elongated sales cycles there, but obviously you closed some pretty big deals this quarter. So I'm just curious what context you can give. Is this re-energized trend a durable one, do you think? Was there some favorable timing going on? Just what's the state of the...

Ronald Konezny: Some just curious what context you can give. Is this reenergized trend a durable one, do you think? Was there some favorable timing going on? Just what's the state of the, excuse me, state the environment there?

Ron Konezny: Yeah, it's a really good question. We have been dependent on SmartSense for more explosive ARR growth, and as you highlighted, we've been mentioning the elongated sales cycles. Fortunately, some of those came to conclusion after extensive testing and ROI validation. We do think the sales cycles have stabilized, not necessarily improved, but we do have a number of things in the pipeline that could come to realization in future periods.

Ronald Konezny: Yeah, it's a really good question. We have been dependent on Smart Sense to have more explosive ARR growth. And, as you highlighted, we've been mentioning the long, elongated sales cycles. Fortunately, some of those came to conclusion after extensive testing and ROI validation. We do think the sales cycles have stabilized, not necessarily improved, but we do have a number of things in the pipeline that could come to realization in future periods.

Speaker Change: Excuse me, stay in the environment there.

Speaker Change: Yeah, it's a really good question. We have been dependent on SmartSense to have more explosive...

Speaker Change: ARR growth, and as you highlighted, we've been mentioning the elongated sales cycles. Fortunately, some of those came to conclusion after

Speaker Change: extensive testing and ROI validation. You know, we do think the sales cycles have stabilized, not necessarily improved, but we do have a number of things in the pipeline that could come to realization in future periods.

Thomas Moll: Ron, you touched on some of this in the prepared, but I just wanted to circle back on cash flow generation and capital allocation. On the cash flow generation, there's been significant year to date, partly aided by inventory. And so I'm just curious how much more work do you think you have to do there on the inventory front, and then as you think to deploying the cash? The first column on it this year has been delivering, which is clearly important, but acquisitions are too.

Unnamed Analyst: Ron, you touched on some of this in the prepared remarks, but I just wanted to circle back on cash flow generation and capital allocation. On cash flow generation, there's been significant year-to-date growth, partly aided by inventory. The first call on it this

Ron Konezny: Ron, you touched on some of this in the prepared remarks, but I just wanted to circle back on cash flow generation and capital allocation. On cash flow generation, there's been significant year-to-date growth, partly aided by inventory. And so I'm just curious, how much more work do you think you have to do there on the inventory front? And then when do you think about deploying the cache? Um, the first call on it this year has been delevering, which is clearly important, but acquisitions are too. So just give us a current state of play on the priority and likelihood of any acquisitions in the near term.

Speaker Change: Okay.

Speaker Change: Ron, you touched on some of this in the prepared, but I just wanted to circle back on cash flow generation and capital allocation. On the cash flow generation, there's been significant year-to-date, partly aided by inventory.

Speaker Change: and so i'm just curious how much more work do you think you have to do there on the inventory front and then as you think to deploying the cash

Speaker Change: The first call on it this year has been delevering, which is clearly important, but acquisitions are too. So just give us a current state of play on the priority and likelihood of any acquisitions near term.

Ronald Konezny: So just give us a current state of play on the priority and likelihood of any acquisitions in your term. Yeah, the first questions we do think we'll see improvements in our inventory position and future periods that will start to moderate over time. So we'll have, if you will, less of an inventory dividend on the cash side, but there's still enough there that we'll still see some tailwinds from getting that inventory position down. We remain on the offense acquisition-wise. We're very active out there. We have been disciplined. I think a combination of finding the right target, but also making sure that we've got the right capital position.

Operator: Yeah, the first question, you know, we do think we'll see... James Walkley, Gregory Mesniaeff, Robert Aguanno, Digi International Inc. James Walkley, Gregory Mesniaeff, Robert Aguanno, Digi International Inc. Thanks Ron, I'll turn it back.

Operator: Michael Nichols, Gregory Mesniaeff, and Robert Aguanno, Digi International Inc.

Speaker Change: Yeah, the first question is, you know, we do think we'll see...

Speaker Change: improvements in our inventory position in future periods that will start to moderate over time, so we'll have, if you will, less of an inventory dividend on the cash side, but there's still...

Speaker Change: enough there that willll steal still 'll see some tailwinds from getting the inventory position down

Speaker Change: we remain on the offense acquisition wli we're very active out there we have been disciplined i think a combination of finding the right target but also making sure that know that we've got the right the right to capital position

Thomas Moll: You know, acquisitions are a very, very difficult thing to predict in terms of timing, but we do remain very active and on the offense.

Speaker Change: You know, acquisitions are a very, very difficult thing to predict in terms of timing, but we do remain very active and on the offense.

Thomas Moll: Thanks, Ron. I'll turn it back.

Operator: Thanks Ron, I'll turn it back.

Jim Fish: Thank you for your question. Our next question comes from the line of Jim Fish from Piper Sandler; the floor is yours.

Speaker Change: Thanks, Ron. I'll turn it back.

Jim Fish: This question comes from the line of Jim Fish from Piper Stanley. The floor is yours.

Speaker Change: Thank you for your questions.

Speaker Change: Our next question comes from the line of Jim Fish from Piper Sandler. The floor is yours.

Jim Fish: Hey guys, you know, great to, great to join here and appreciate the time. You guys mentioned software attachments were pretty good. I guess how should we think about the attach of software at this point, and do you guys expect, as we think about fiscal 25, any changes coming to either the sales team or a way to incentivize customers to further adopt the software modules.

Jim Fish: Hey guys, you know, great to great to join here. You guys mentioned software attach rates were pretty good. I guess how should we think about the attach rate of software at this point, and do you guys expect, as we think about Fiscal 25, any changes coming to either the sales team or a way to incentivize customers to further adopt the software modules? and Jimit.

Unnamed Analyst: You guys mentioned software attach rates were pretty good; I guess how should we think about the attach rate of software at this point, and do you guys expect, as we think about Fiscal 25, any changes coming to either the sales team or a way to incentivize customers to further adopt the software modules? Yeah, Jim, it's...

Jim Fish: hey guys you know brit to crick to join here and appreciate the time

Jim Fish: You guys mentioned software attach rates were pretty good. I guess how should we think about the attach of software at this point and do you guys expect as we think about

Unnamed Analyst: fiscal 25, any changes coming to either the sales team or a way to incentivize customers to, you know, further adopt the software modules.

Ron Konezny: Jim, it's a really good question. We've seen incremental improvements in attach rates, so we are pleased with the progress there. But we do think there's more room to go. We've got some initiatives underway, some good planning we've been doing, and some work on the back end of our systems to improve those even further. And we expect that it can contribute to 25 ARR growth as well.

Ronald Konezny: Jim, it's a really good question. We've seen incremental improvements in attach rates. So we are pleased with the progress there. We do think there's more room to go. We've got some initiatives underway. Some good planning. We've been doing some work on the back end of our systems to improve those even further. And we expect that it can contribute to 25 air are broke as well.

Ronald Konezny: So we are pleased with the progress there. We do think there is more room to go. We've got some initiatives underway, some good planning we've been doing, and some work on the back end of our systems to improve those even further. And we expect that it can contribute to 25 ARR growth as well.

Speaker Change: Jim, it's a really good question. We've seen incremental improvements in attach rates.

So we are pleased with the progress there. We do think there is more room to go. We've got some initiatives underway, some good planning we've been doing, and some work on the back end of our systems to improve those even further. And we expect that it can contribute to 25 ARR growth as well.

Ron Konezny: Got it. And then, Ron, you decided to partner with AppSign here this past week. Can you just walk us through the rationale to partner here rather than build or buy? I guess, why not? And really, the crux of my question is, why not move more into sort of that IoT security space, just given that networking overlay that you guys have already? Thanks. Yeah, it's a really good question. We'd like to think of it as not an either or but an

Jim Fish: Ron, do you decided to partner with app sign here this past week? Can you just walk us through the rationale to partner here rather than build or buy? I guess, why not?

Ron: Got it. And then, Ron, you decided to partner with AppSign here this past week. Can you just walk us through the rationale?

Ronald Konezny: And really the crux of my question is why not move more into sort of that IoT security space just given that networking overlay that you guys have already. Thanks.

Speaker Change: to partner here rather than build or buy. I guess why not, and really the crux of my question is why not move more into sort of that IOT security space just given that networking overlay that you guys have already. Thanks.

Ronald Konezny: Yeah, it's a really good question.

Ron Konezny: So we've got an incredible amount of security designed into our products, and we've got other initiatives underway. There are certain customers and opportunities that are more comfortable with certain technologies, and it's not limited to security. It can be communication protocols like ignition or spark plug. So we like to do both, where we've got the security design in our solutions, but then there are add-ons that we can bring in either for an industry or a particular customer.

Ron Konezny: Yeah, it's a really good question. We'd like to think of it as not an either-or choice but an and.

Ronald Konezny: Yeah, it's a really good question. We'd like to think of it as not an either or but an

Ronald Konezny: We'd like to think it is not a either orbit, and so we've got an incredible amount of security designed into our products and. And we've got other initiatives underway. There are certain customers and opportunities that like certain technology, and it's not limited to security. It can be communication protocols like ignition or spark plug. So we like to do both where we've got security designed into our solutions, but then there's add on that we can bring on either for industry or particular customer.

Speaker Change: Yeah, it's a really good question. We'd like to think of it as not an either-or, but an and. So we've got an incredible amount of security designed into our products and

Ronald Konezny: and we've got other initiatives underway. There are certain customers and opportunities that like certain technologies, and it's not limited to security. It can be communication protocols like ignition or spark plug. So we like to do both, where we've got the security design in our solutions, but then there are add-ons that we can bring on either for an industry or a particular customer.

Ronald Konezny: and

Ronald Konezny: and we've got other

Ronald Konezny: initiatives underway. There are certain customers and opportunities that like certain technology and it's not limited to security. It can be communication protocols like ignition or spark plug.

Ronald Konezny: so we'd like to do both where we've got the security designing or solutions but then there's add-on that we can bring on either fore an industry or a particular customer

Ronald Konezny: Thank you for watching!

Ronald Konezny: Thank you for your question.

Operator: Again, as a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from the line of Scott Searle from Ruth Capital. The line is yours.

Operator: Again, as a reminder to ask a question, please press star 11 on your telephone. Come on. please.

Speaker Change: Thank you for your question. Again, as a reminder, to ask a question, please press star 1 1 on your telephone.

Scott Searle: Our next question comes from the line of Scott Searle from Ruth Capital; the line is yours. Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter.

Operator: Our next question comes from the line of Scott Searle from Ruth Capital. The line is yours.

Speaker Change: One moment, please.

Speaker Change: Our next question comes from the line of Scott Searle from Ruth Capital. The line is yours.

Scott Searle: Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter. Hey, Ron and Jamie, maybe just to start, could you give us some sequential indications in terms of how Open Gear performed in the quarter?

Scott Searle: Hey, Ronnie, Jamie, maybe just a start. Could you give us some sequential indications in terms of how Open Gear performed in the quarter, and how Ventus is looking. There had been some slowdown, I think, an adoption in the channel on that front.

Scott Searle: Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter.

Speaker Change: Thank you.

Scott Searle: Ron and Jamie, maybe just to start, could you give us some sequential indications in terms of how Open Gear performed in the quarter, how Ventus is looking, there had been some slowdown I think in adoption in the channel on that front, and then how you're thinking about those

Scott Searle: And then how you're thinking about those business segments as we look into the September quarter, what you would be thinking about that sequential progression up or down for some of those businesses that had a couple of fireworks.

Speaker Change: Those business segments as we look into the September quarter, what you would be thinking about that sequential progression, up or down for some of those businesses, and I had a couple of follow-ups.

Ron Konezny: Yeah, if you recall, at the beginning of this fiscal year, we had cited some softness on the strategic side, and we thought they would come back, and we have seen that we've seen some nice, The Ventus business, we're really excited about some new design wins and some new customers, new logos we've brought to the business in addition to retention. If you recall last year, we had a little bit of a step back and some soft turns in our ATM business due to the regional bank crisis, and that, of course, has been put behind us.

Ronald Konezny: Yeah, if you recall at the beginning of this fiscal year, we had cited some softness on the strategic side, and we thought they would come back, and we have seen that we've seen some nice, The Ventus business, we're really excited about some new design wins and some new customers, new logos we've brought to the business in addition to retention. If you recall last year, we had a little bit of a step back and some soft turns in our ATM business due to the regional bank crisis. And that, of course, is... has been put behind us.

Ronald Konezny: Yeah, if you recall, at the beginning of this fiscal year, you know, we had cited some softness on the strategic side and we thought they would come back. And we have seen that. We've seen some nice improvement, mainly driven by the strategic being more assertive and a steadier regional and channel business that has remained in place. The Ventus business, we're really excited about some new design wins and some new customers, new logos we brought out of the business. In addition to retention, if you recall last year, we had a little bit of a step back and some soft turn in our ATM business with the regional bank crisis.

Ronald Konezny: Yeah, if you recall, at the beginning of this fiscal year, you know, we had cited some

Ronald Konezny: some softness on the strategic side and we thought that would come back and and we have seen that we've seen some nice

Speaker Change: improvement mainly driven by the strategics being more asssorttive than in a steadier regional and pend ent channel business

Ronald Konezny: The Ventus business, we're really excited about some new design wins and some new customers, new logos we've brought on the business in addition to retention. If you recall last year, we had a little bit of a step back and some

Ronald Konezny: And that, of course, has been put behind us. And as we look forward, you know, we're looking for growth really from all of our product lines and offerings as we look into 25. We're optimistic about some opportunities.

Ronald Konezny: some soft churn in our ATM business with the regional bank crisis, and that of course is...

Ron Konezny: And as we look forward, we're looking for growth in all of our product lines and offerings as we look into 25. We're optimistic about some opportunities. We brought in a couple of new leaders as we've had some retirements and other things. We've got some exciting leadership that's joined both OpenGear as well as our Cellular and Ventus groups. So we're really optimistic about 25.

Ronald Konezny: And as we look forward, we're looking for growth in all of our product lines and offerings as we look into 25. We're optimistic about some opportunities. We brought in a couple of new leaders as we've had some retirements and other things. We've got some exciting leadership that's joined both OpenGear as well as our Cellular and Ventus groups. So we're really optimistic about 25.

Ronald Konezny: has been put behind us. And as we look forward, we're looking for growth really from all of our product lines and offerings as we look into 25. We're optimistic about.

Ronald Konezny: We brought in a couple of new leaders as we've got some retirements and other things. We've got some exciting leadership that's joined both Open Gear as well as our Cellular and Ventus group.

Ronald Konezny: some opportunities. We've brought in a couple of new leaders as we've had some retirements and other things. We've got some exciting leadership that's joined both Open Gear as well as our Cellular and Ventus groups, so we're really optimistic about 25.

Ronald Konezny: So, we're really optimistic about 25.

Ron Konezny: and Ron. You know, kind of just looking at the macro environment, could you give us a little bit more of an update from an inventory perspective? Are there still pockets of inventory sitting out there? You've talked recently about, you know, delayed decisions. Is that starting to compress now? Are people feeling better about the economy for your product lines? What are you seeing right now?

Scott Searle: And Ron, you know, kind of just looking at the macro environment, could you give us a little bit more of an update from an inventory perspective? Are there still pockets of inventory sitting out there? You've talked, you know, recently about, you know, delayed decisions. Is that starting to compress now, or are people feeling better about the economy for your product lines? What do you see in right now? Yeah, so Scott, if you recall, we really have never had any excess inventory out in the channel. We've had a few customers that have had inventory they're working through, but not your traditional, you know, stocking and POS type of inventory.

Scott Searle: You know, kind of just looking at the macro environment, could you give us a little bit more of an update from an inventory perspective? Are there still pockets of inventory sitting out there? You've talked recently about, you know, delayed decisions. Is that starting to compress now? Are people feeling better about the economy for your product lines? What are you seeing right now?

Scott Searle: what

Speaker Change: and en runon

Scott Searle: You know, kind of just looking at the macro environment. Could you give us a little bit more of an update from an inventory perspective? Are there still pockets of inventory sitting out there? You've talked, you know, recently about, you know, delayed decisions. Is that starting to compress now? Are people feeling better about the economy for your product lines? What are you seeing right now?

Ronald Konezny: Yeah, Scott, if you recall, we really have never had any excess inventory out in the channel. We've had a few customers that have had inventory they're working through, but not your traditional, you know, stocking and POS type of inventory. So we think we've done a really nice job there, and these few customers that are working through their inventory are more isolated. But we think we've had a healthier channel there.

Ron Konezny: Yeah, Scott, if you recall, we really have never had any excess inventory out in the channel. We've had a few customers that have had inventory they're working through, but not your traditional, you know, stocking and POS type of inventory. So we think we've done a really nice job there, and these few customers that are working through their inventory are more isolated. But we think we've had a healthier channel there.

Ronald Konezny: Yeah, so Scott if you recall we really have never had any excess inventory out in the channel We've had a few customers that have had

Ronald Konezny: inventory they're working through, but not your traditional, you know, stocking and POS type of inventory. So we think we've done a really nice job there.

Ronald Konezny: So, we think we've done a really nice job there, and these few customers that are working through their inventory are more isolated, but we think we've had a healthier channel there. The second part of your question, we think things of, if you will, stabilized; they haven't regressed further in terms of sales cycles and order sizes, but not yet, I don't think yet we can call that the improvement in those. I think there's the potential for it with, you know, the Fed potentially lowering interest rates in September, and obviously we've got an election cycle underway. And so I think there's still a little bit of deliberation and caution as we head into those periods. But I guess the good news is we don't see it, you know, decelerating or decaying any further; we see it more stabilizing.

Ronald Konezny: On the second part of your question, we think things have, if you will, stabilized. They haven't regressed further in terms of sales cycles and order sizes, but not yet. I don't think yet we can call that an improvement. I think there's the potential for it with the Fed potentially lowering interest rates in September, and obviously, we've got an election cycle underway, and so I think there's still a little bit of deliberation and caution as we head into those periods, but I guess the good news is we don't see it decelerating or decaying any further. We see it as more stabilizing.

Ron Konezny: On the second part of your question, we think things have, if you will, stabilized. They haven't regressed further in terms of sales cycles and order sizes, but not yet. I don't think yet we can call that an improvement. I think there's the potential for it with the Fed potentially lowering interest rates in September, and obviously, we've got an election cycle underway, and so I think there's still a little bit of deliberation and caution as we head into those periods, but I guess the good news is we don't see it decelerating or decaying any further. We see it as more stabilizing.

Ronald Konezny: These few customers that are working through their inventory are more isolated, but we think we've had a healthier channel there. The second part of your question, we think things have, if you will, stabilized. They haven't

Scott Searle: Great Helpful.

Ronald Konezny: Regressed further in terms of sales cycles and order sizes, but not yet. I don't think yet. We can call that the improvement

Ronald Konezny: in those. I think there's the potential for it with...

Ronald Konezny: You know, the Fed potentially lowering interest rates in September , and obviously we've got an election cycle underway, and so I think there's still a little bit of deliberation and caution as we head into those periods, but I guess the good news is we don't see it, you know, decelerating or decaying any further. We see it more stabilizing.

Scott Searle: And if I could, just on the gateway front, I know you're kind of managing some of that transition to more of a ventus model. I'm wondering if you could give us some color in terms of how that progression is going. How should we think about how hardware grows on that front versus starting to contribute to more on the ARR front? And then maybe just the back end of that, as you're starting to think about going on the offensive from an M&A perspective, I'm wondering what you're seeing and how you're thinking about the valuation environment. Thanks.

Scott Searle: Very helpful.

Scott Searle: And if I could just on the gateway front, I know you're, you're kind of managing some of that transition to more of a Ventus model. I'm wondering if you could give us some color in terms of how that progression is going. How should we think about how hardware grows on that front versus starting to contribute to more on the ARR front?

Speaker Change: Great. Helpful. And if I could, just on the gateway front, I know you're kind of managing some of that transition to more of a ventus model. I'm wondering if you could...

Speaker Change: Give us some color in terms of how that progression is going, how should we think about...

Speaker Change: how hardware grows on that front versus starting to contribute to more on the ARR front. And then maybe just the back end of that, as you're starting to think about going on the offensive from an M&A perspective, I'm wondering what you're seeing and how you're thinking about the valuation environment. Thanks.

Ronald Konezny: And then maybe just at the back end of that, as you're starting to think about going on the offensive from an M&A perspective, I'm wondering what you're seeing and how you're thinking about the valuation environment. Thanks. Yeah, you know, a big part of our story is, you know, we leave with ARR. We think that's both providing more value to the customer, but it also, you know, has been stronger relationships. and more predictable outcomes. And we think the cellular and Ventus combination is going to be a big part of that. You could potentially see top line, you know, be impacted in terms of growth rates by a stronger air or growth rates, but that's going to be a central part of our strategy.

Ronald Konezny: Yeah, you know, a big part of our story is that we lead with ARR. We think that's both providing more value to the customer, but it also, you know, ends up in stronger relationships. Scott Searle, Cole Couzens, Gregory Mesniaeff, Robert Aguanno, Digi International Inc.

Ron Konezny: Yeah, you know, a big part of our story is that we leave with ARR. We think that's both providing more value to the customer, but it also, you know, ends up in stronger relationships and more predictable outcomes. And we think the cellular and ventus combination is going to be a big part of that. You could potentially see top line, you know, be impacted in terms of growth rates by a stronger ARR growth rate, but that's going to be a central part of our strategy. I'm sorry, Scott. What was the second part of your question?

Ronald Konezny: Yeah, you know a big part of our story is, you know, we lead with ARR. We think that's both providing more value to the customer, but it also, you know, ends up in stronger relationships and

Ronald Konezny: and more predictable outcomes. And we think the cellular and ventus combination is going to be a big part of that. You could potentially see top line be impacted in terms of growth rates by a stronger ARR growth rates, but that's going to be a central part of our strategy.

Scott Searle: I'm sorry, Scott, what was the second part of your question? Just the devaluation environment. Yeah, you know, what you're kind of seeing out there now, as you start to think about going on the M&A offensive again.

Scott Searle: Just the evaluation environment. Yeah, you know what you're kind of seeing out there now as you start to think about going on the M&A offensive again. Thanks. Yeah, we've...

Ronald Konezny: I'm sorry Scott, what was the second part of your question?

Speaker Change: butjust the down should ' it you youknowwhatyou're kind of see out there nowas you start to think about going on the mna offens again yeah you know we've seen a pret healthy flow of opportunities

Ronald Konezny: Thanks. Yeah, you know, we've seen a pretty healthy flow of opportunities. We've seen a lot of things that we would be maybe more active in the past, but due to size, we're really cautious. We were looking for fewer, larger acquisitions that can have a more material impact on our business and our outcomes. That we've seen actually some of the properties that we think in assets that are probably best suited are pausing. They're waiting things out for better conditions. I think it was an interest rates where they are that the financial buyers are not quite as strong.

Ron Konezny: Yeah, we've seen a pretty healthy flow of opportunities. We've seen a lot of things that we would have been maybe more active in the past, but due to size, we're really cautious. We're looking for fewer larger acquisitions that can have a more material impact on our business and our outcomes.

Ronald Konezny: Yeah, we've seen a pretty healthy flow of opportunities. We've seen a lot of things that we would have been maybe more active in the past, but due to size, we're really cautious. We're looking for fewer larger acquisitions that can have a more material impact on our business and our outcomes.

Ronald Konezny: We've seen a lot of things that we would be maybe more active in the past, but due to size, we're really cautious. We're looking for fewer, larger acquisitions that can have a more material impact on our business and our outcomes.

Ronald Konezny: We've seen actually some of the properties that we think and assets that are probably best suited are pausing. They're waiting things out for better conditions. I think because of interest rates where they are, the financial buyers are not quite as strong. We've seen a lot of financial buyers focusing on their portfolio companies, helping them improve, and adding some tuck-ins to prepare for better conditions. So it's a real mixed market out there with maybe each end of the barbell having different dynamics. I think smaller companies are wanting to exit, and larger companies are waiting for better conditions.

Ron Konezny: We've seen actually some of the properties that we think and assets that are probably best suited are pausing. They're waiting things out for better conditions. I think because of interest rates where they are, the financial buyers are not quite as strong. We've seen a lot of financial buyers focusing on their portfolio companies, helping them improve, and adding some tuck-ins to prepare for better conditions. So it's a real mixed market out there with maybe each end of the barbell having different dynamics. I think smaller companies are wanting to exit, and larger companies are waiting for better conditions.

Ronald Konezny: that we've seen actually some of the properties that we think in assets that are probably best suited are pausing, they're waiting things out for better conditions.

Ronald Konezny: We've seen a lot of financial buyers be focusing on their portfolio companies, helping them improve, adding some tokens to prepare for better conditions. So it's a real mixed market out there, with maybe each end of the barbell having different dynamics. I think smaller companies wanting to exit larger companies, waiting for better conditions.

Ronald Konezny: I think interest rates where they are, the financial buyers are not quite as strong. We've seen a lot of financial buyers be focusing on their portfolio companies, helping them improve, adding some tuck-ins to prepare for better conditions.

Ronald Konezny: So it's a real mixed market out there with maybe each end of the barbell having different dynamics. I think smaller companies wanting to exit, larger companies waiting for better conditions.

Scott Searle: Thank you. Nice job.

Operator: Thank you. Thank you for your question. Again, as a reminder, please press star 11 on your telephone to ask a question.

Operator: Thank you. Nice job. Thank you for your question. Again, as a reminder, please press star one one.

Operator: Thank you for your question. Again, as a reminder, please press star one one on your telephone to ask a question. At this time, I'm not taking any further questions, and I would now like to hand it back to Ron Konezny, the CEO, for closing remarks.

Operator: Thank you. Nice job. Thank you for your question. Again, as a reminder, please press star one one.

Ron Konezny: Thank you. Nice job. Thank you.

Operator: Thank you for your question. Again, as a reminder, please press star 1 1 on your telephone to ask a question.

Operator: At this time, I'm showing no further questions.

Ronald Konezny: And I would now like to hand it back to Ron Cohen's CEO for closing remarks. Thank you.

Operator: At this time, I'm showing no further questions, and I would now like to hand it back to Ron Konezny, a CEO , for closing remarks.

Ronald Konezny: Thank you. We plan to attend Piper Sandler's Growth Frontiers Conference in Nashville on September 10th.

Ronald Konezny: We plan to attend Piper Standards Growth Frontiers Conference in Nashville on September 10th. We appreciate you joining Diggy earnings call and for your continued support. Thank you to our customers, distributors, suppliers, and our exceptional Diggy team.

Speaker Change: Thank you. We plan to attend Piper Sandler's Growth Frontiers Conference in Nashville on September 10th.

Ron Konezny: Thank you. We plan to attend Piper Sandler's Growth Frontiers Conference in Nashville on September 10th. We appreciate you joining Digi's earnings call and for your continued support. Thank you to our customers, distributors, suppliers, and our exceptional Digi team. Have a great day.

Ron Konezny: We appreciate you joining Digi's Earnings Call and for your continued support. Thank you to our customers, distributors, suppliers, and our exceptional Digi team. Have a great day.

Operator: Have a great day. Thank you for your participation in today's conference.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Operator: This does conclude the program.

Operator: You may now disconnect.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Operator: Good day, and thank you for standing by.

Operator: Welcome to the Q3 2024 Digi International Inc, earnings conference call. At this time, all participants are in listening only mode.

Operator: After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To draw your question, please press star 11 again. Please be advised that today's conference is being recorded.

Operator: I would now like to hand the conference over to your first speaker today.

Jamie Loch: Jamie Loch, CFO, please go ahead. 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. We issued our earnings release after the market closed today. You may obtain a copy of the press release through the financial releases section of our investor relations website at digi.com.

Jamie Loch: This afternoon, Ron will provide a comment in 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 that such expectations will be met or that any of our forward-looking statements will prove to be correct.

Jamie Loch: Traditional information, please refer to the forward-looking statement section in our earnings release today and the risk factor section of our most recent form 10K and subsequent reports on file with the SEC. Finally, certain of the financial information disclosed on this call includes non-gap measures. The information required to be disclosed about these measures, including reconciliations to the most comparable gap measures are included in the earnings release. The earnings release is also furnished as an exhibit to form 8K that can be accessed through the SEC filing sections of our investor relations website.

Ron Konezny: Now I'll turn the call over to Ron. Thank you, Jamie.

Ron Konezny: Good afternoon, everyone. Before take questions, a few highlights. JG's diverse and resilient portfolio of ROI-driven industrial IoT solutions drove a record 113 million in annualized recurring revenue or ARR as of the end of the third fiscal quarter up 9% year-of-year. SmartSense led the way adding new customers and expanding business with existing customers and logistics, healthcare, and food service industries. Our increased attach rates in IoT product and services contributed as well. ARR now represents a record 27% of our quarterly revenues.

Ron Konezny: With high retention metrics, ARR drives increased visibility to performance and future periods. In addition, ARR drove record gross margins and record adjusted even margins in the third fiscal quarter. Did you strengthen its foundation with a significantly improved balance? Our discipline, operating model, kept expenses in line and reduced our inventory position by $5 million. As a result, we generated nearly 25 million in cash during the period and paid down 20 million in debt.

Ron Konezny: In less than three years, we have paid down nearly $200 million in debt. This has reduced our quarterly entertainment to 3.5 million this fiscal quarter, 43% lower. And last year, at this time, we expect continued debt payments, which expands our capacity for potential acquisitions in the future. Our acquisition strategy remains focused on growing industrial IoT companies that generate meaningful profitability, as well as strong ARR potential. We expect to hit last quarter's projection for fiscal 2024 revenues and profitability, while exceeding our ARR expectations.

Ron Konezny: With potentially stimulative monetary policies on the way, Digi will remain on the offense to capitalize on future opportunities. As our world increases in complexity, Digi is uniquely positioned to provide secure, reliable, and easy-to-manage solutions combined with responsive, expert service and support.

Operator: Operator, passing it to you for questions.

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 11 on your telephone. And wait for your name to be announced. To draw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Tommy Mall: Our first question comes from the line of Tommy Mall of Steven Zink, the floor is yours. Good afternoon, and thanks for taking my questions. Good afternoon, Tommy. Ron, on solutions ARR this quarter, it was up $3 million sequentially, which I think is the biggest quarter of a quarter step up in some time. In recent quarters, we've already talked about elongated sales cycles there, but obviously you close some pretty big deals this quarter.

Tommy Mall: Some just curious what context you can give. Is this reenergized trend a durable one, do you think? Was there some favorable timing going on? Just what's the state of the, excuse me, state the environment there? Yeah, it's a really good question. We have been dependent on smart sense to have more explosive ARR growth. And as you highlighted, we've been mentioning the long elongated sales cycles. Fortunately, some of those came to conclusion after extensive testing and ROI validation. We do think the sales cycles have stabilized, not necessarily improved, but we do have a number of things in the pipeline that could come to realization and future periods.

Ron Konezny: Ron, you touched on some of this in the prepared, but I just wanted to circle back on cash flow generation and capital allocation. On the cash flow generation, there's been significant year to date, partly aided by inventory. And so I'm just curious how much more work do you think you have to do there on the inventory front and then as you think to deploying the cash?

Ron Konezny: The first column on it this year has been delivering, which is clearly important, but acquisitions are too. So just give us a current state of play on the priority and likelihood of any acquisitions in your term. Yeah, the first questions we do think we'll see improvements in our inventory position and future periods that will start to moderate over time. So we'll have, if you will, less of an inventory dividend on the cash side, but there's still enough there that we'll still see some tailwinds from getting that inventory position down.

Ron Konezny: We remain on the offense acquisition wise. We're very active out there. We have been disciplined. I think a combination of finding the right target, but also making sure that we've got the right capital position. You know, acquisitions are very, very difficult thing to to predict in terms of timing, but we do remain very active and on the offense. Thanks, Ron. I'll turn it back. Thank you for your question.

Jim Fish: Our next question comes from the line of Jim Fish from Piper Sandler, the floor is yours. Hey guys, you know, great to, great to join here and appreciate the time. You guys mentioned software attachments were pretty good.

Ron Konezny: I guess how should we think about the attach of software at this point and do you guys expect as we think about fiscal 25 any changes coming to either the sales team or a way to incentivize customers to further adopt the software modules. Jim, it's a really good question. We've seen incremental improvements in attach rates. So we are pleased with the progress there. We do think there's more room to go. We've got some initiatives underway. Some good planning. We've been doing and some work on the back end of our systems to to improve those even further. And we expect that it can contribute to 25 air are broke as well.

Ron Konezny: Ron, do you decided to partner with app sign here this past week? Can you just walk us through the rationale to partner here rather than build or buy? I guess why not? And really the crux of my question is why not move more into sort of that IoT security space just given that networking overlay that you guys have already. Thanks. Yeah, it's a really good question. We'd like to think it is not a either orbit and so we've got a incredible amount of security designed into our products and.

Ron Konezny: And we've got other initiatives underway. There are certain customers and and opportunities that like certain technology and it's not limited to security. It can be communication protocols like ignition or spark plug. So we like to do both where we've got security designed into our solutions, but then there's add on that we can bring on either for industry or particular customer. Thank you for your question. Again as a reminder to ask a question please press star 11 on your telephone.

Operator: Come on, please.

Scott Searle: Our next question comes from the line of Scott Searle from Ruth Capital, the line of yours. Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter. Hey, Ronnie, Jamie, maybe just a start. Could you give us some sequential indications in terms of how Open Gear performed in the quarter, how Ventus is looking. There had been some slowdown, I think, an adoption in the channel on that front. And then how you're thinking about those business segments as we look into the September quarter, what you would be thinking about that sequential progression up or down for some of those businesses that had a couple of fireworks.

Scott Searle: Yeah, if you recall, at the beginning of this fiscal year, you know, we had cited some softness on the strategic side and we thought they would come back. And we have seen that. We've seen some nice improvement mainly driven by the strategic being more assertive and a steadier regional and and channel business that has remained in place. The Ventus business, we're really excited about some new design wins and some new customers, new logos we brought out of the business.

Scott Searle: In addition to retention, if you recall last year, we had a little bit of a step back and some soft turn in our ATM business with the regional bank crisis. And that, of course, has been put behind us. And as we look forward, you know, we're looking for growth really from all of our product lines and offerings as we look into 25. We're optimistic about some some opportunities. We brought in a couple of new leaders as we've got some retirements and other things. We've got some exciting leadership that's joined both Open Gear as well as our cellular and Ventus group.

Ron Konezny: So, we're really optimistic about 25.

Ron Konezny: And Ron, you know, kind of just looking at the macro environment, could you give us a little bit more of an update from an inventory perspective? Are there still pockets of inventory sitting out there? You've talked, you know, recently about, you know, delayed decisions. Is that starting to compress now or people feeling better about the economy for your product lines? What do you see in right now? Yeah, so Scott, if you recall, we really have never had any excess inventory out in the channel.

Ron Konezny: We've had a few customers that have had inventory they're working through, but not your traditional, you know, stocking and POS type of inventory. So, we think we've done a really nice job there and these few customers that are working through their inventory are more isolated, but we think we've had a healthier channel there. The second part of your question, we think things of, if you will, stabilized, they haven't regressed further in terms of sales cycles and order sizes, but not yet, I don't think yet we can call that the improvement in those.

Ron Konezny: I think there's the potential for it with, you know, the Fed potentially lowering interest rates in September and obviously we've got an election cycle underway, and so I think there's still a little bit of deliberation and caution as we head into those periods, but I guess the good news is we don't see it, you know, decelerating or decaying any further we see it more stabilizing.

Scott Searle: Very helpful.

Ron Konezny: And then maybe just at the back end of that, as you're starting to think about going on the offensive from an M&A perspective, I'm wondering what you're seeing and how you're thinking about the valuation environment. Thanks. Yeah, you know, a big part of our story is, you know, we leave with ARR, we think that's both providing more value to the customer, but it also, you know, has been stronger relationships, and more predictable outcomes.

Ron Konezny: And we think the cellular and ventus combination is going to be a big part of that. You could potentially see top line, you know, be impacted in terms of growth rates by a stronger air or growth rates, but that's going to be a central part of our strategy.

Ron Konezny: I'm sorry Scott, what was the second part of your question? Just the devaluation environment. Yeah, you know, what you're kind of seeing out there now, as you start to think about going on the M&A offensive again. Thanks. Yeah, you know, we've seen a pretty healthy flow of opportunities. We've seen a lot of things that we would be maybe more active in the past, but due to size, we're really cautious. We were looking for fewer larger acquisitions that can have a more material impact on our business and our outcomes.

Ron Konezny: That we've seen actually some of the properties that we think in assets that are probably best suited are pausing. They're waiting things out for better conditions. I think it was an interest rates where they are that the financial buyers are not quite as strong. We've seen a lot of financial buyers be focusing on their portfolio companies, helping them improve adding some tokens to prepare for better conditions. So it's a real mixed market out there with maybe each end of the barbell having different dynamics.

Operator: I think smaller companies wanting to exit larger companies waiting for better conditions. Thank you. Nice job. Thank you. Thank you for your question. Again, as a reminder, please press star 11 on your telephone to ask a question.

Operator: At this time, I'm showing no further questions.

Ron Konezny: And I would now like to hand it back to Ron Cohen's CEO for closing remarks. Thank you. We plan to attend Piper standards growth frontiers conference in Nashville on September 10th.

Ron Konezny: We appreciate you joining Diggy earnings call and for your continued support. Thank you to our customers, distributors, suppliers, and our exceptional Diggy team. Have a great day. Thank you for your participation in today's conference.

Operator: This does conclude the program. You may now disconnect.

Q3 2024 Digi International Inc Earnings Call

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