Q1 2025 Digi International Inc Earnings Call

Depressed star one one on your telephone you will then hear an automated message advising your hand is rage to withdraw your question. Please press star one one again please.

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.

Operator: 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: 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.

Operator: Joining me on today's call is Ron Konezny, our president and CEO.

Jamie Loch: Joining me on today's call is Ron can ask me are president and CEO.

Operator: 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: 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 Dot com.

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

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

Operator: 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.

Jamie Loch: So all 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.

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.

Operator: 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.

Jamie Loch: Additional information please refer to the forward looking statements section in our earnings release today and the risk factors section of our most recent Form 10-K and subsequent reports on file with the SEC.

Operator: 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 8K that can be accessed through the SEC filing sections of our Investor Relations website.

Jamie Loch: Finally, certain of the financial information disclosed on this call includes non-GAAP measures.

Jamie Loch: Information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures are included in the earnings release.

Jamie Loch: The earnings release is also furnished as an exhibit to form 8-K that can be accessed through the SEC filings sections of our Investor Relations website, now I'll turn the call over to Ron.

Operator: Now I'll turn the call over to Ron.

Ron Konezny: Thank you, Jamie.

Ron Konezny: Good afternoon, everyone. Before we take questions, a few highlights from our 2025 fiscal first quarter. We begin the second year of our five-year journey to double ARR and adjust it even to $200 million each. and remain as confident as ever, we will achieve these targets. In the first fiscal quarter, ARR reached another record at $120 million, an increase of 11% over last year and $4 million higher than last quarter. strong performance in both of our reporting segments drove this. ARR now represents a record 28% of our quarterly revenue. AR is the top strategic priority to benefit our customers.

Ron Can: Thank you Jerry good afternoon, everyone.

Ron Can: Before taking questions a few highlights from our 2025 fiscal first quarter.

Ron Can: Again, the second year of our five year journey to double AOR and adjusted EBITDA of $200 million each.

Ron Can: We remain as confident as ever we will achieve these targets.

Ron Can: And our first fiscal quarter <unk> reached another record at 120 million.

Ron Can: An increase of 11%.

Ron Can: Over last year and $4 million higher than last quarter.

Ron Can: Strong performance in both of our reporting segments drove this performance.

Ron Can: <unk> now represents a record 28%.

Ron Can: Our quarterly revenues.

Ron Can: E R.

Ron Can: Top strategic priority to benefit our customers district.

Ron Konezny: distributors. employees, and shareholders. As an industrial IoT solution provider, Digi solves some of the toughest and most valuable remote connectivity challenges. Our customers rely on our best-in-class software and service, complementing our reliable, secure, award-winning edge intelligence. Digi solutions produce a compelling ROI and faster outcomes for our customers. As ARR grows, it will have an increasing impact on our profitability, enabling our second long-term We continue to enhance Digi's balance. The total outstanding debt below $100 million for the first time since our fiscal fourth quarter of 2021. We generated $30 million in cash from operations in the quarter and further reduced our inventory balance.

Ron Can: Distributors.

Ron Can: Poised and shareholders.

Ron Can: As an industrial Iot social provider that you saw some of the toughest and most valuable remote connectivity challenges.

Ron Can: Our customers rely on our best in class software and service complementing a reliable secure award winning edge intelligence.

Ron Can: Did your solutions produced a compelling ROI and faster outcomes for our customers.

Ron Can: As <unk> grows.

Ron Can: It will have an increasing impact on our profitability.

Ron Can: Enabling our second long term objectives.

Ron Can: We continue to have the <unk> balance sheet with.

Ron Can: Total outstanding debt below 100 million for the first time since our fiscal fourth quarter of 2021.

Ron Can: We generated 39 in cash from operations in the quarter.

Ron Can: Further reduced our inventory balances.

Ron Konezny: We expect strong free cash flow generation this year, with all debt expected to be retired by the end of calendar 2025. As our balance sheet improves, we are in an even better position to pursue Solution-Oriented Acquisitions of Scale. in a rapidly. In an evolving geopolitical environment that has a myriad of outcomes for global businesses, we remain steadfast in putting our customers' best interests first. just as we did while navigating the supply chain challenges coming out of the COVID pandemic. Despite the speed of change and the fluidity of tariff policies, Digi is confident in our ability to leverage our geographically diverse manufacturers.

Ron Can: We expect strong free cash flow.

Ron Can: Free cash flow generation this year.

Ron Can: With all that expected to be retired by the end of calendar 2025.

Ron Can: As our balance sheet improves we're even better positioned to pursue.

Ron Can: Solution oriented acquisitions of scale.

Ron Can: In a rapidly.

Ron Can: Evolving geopolitical environment that has a myriad of outcomes for global businesses, we remain steadfast in putting our customers best interest first.

Just as we did while navigating the supply chain challenges coming out of the Covid pandemic.

Ron Can: Despite the speed of change and the fluidity of tariff policies. It just confident in our ability to leverage our geographically diverse manufacturers.

Ron Konezny: In 2025, we celebrate our 40-year history of resilience, innovation, and adaption. who rely on this to deliver for our customers for decades.

Ron Can: In 2025, we celebrate our 40 year history.

Ron Can: Resilience innovation and adoption.

Ron Can: And we rely on us to deliver for our customers for decades to come.

Operator: Operator, I will now hand the call back for Q&A. As a reminder, to ask a question, please 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.

Speaker Change: Operator, I will now hand, the call back to Q&A.

Speaker Change: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced so I wanted to draw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.

Tommy Moll: Our first question comes from the line of Tommy Moll from Stevens. Good afternoon and thanks for taking my questions. have a couple items on the products and services trends here. I guess if we look at the reported revenue, there was a the hit from the $4.7 million decline in the one timers. And then conversely, if you look at the ARR, I mean, we were up 17% year over year. So maybe if you could just give a little bit of context on the drivers there for each and in particular on the ARR side. what that could look like going forward.

Tommy Moll: Our first question comes from the line of Tommy Moll from Stephens.

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

Speaker Change: Hey, Tommy.

Speaker Change: Have a couple items on the products and services trends here.

Speaker Change: I guess, if we look at the reported revenue there was the hit from the $4 $7 million decline in the one timers.

Speaker Change: And then Conversely, if you look at the <unk>.

Speaker Change: I mean, we were up 17% year over year. So maybe if you could just give a little bit of context on the drivers there for each and in particular on the <unk> side.

Speaker Change: What that could look like going forward.

Operator: Thank you.

Jamie: Yeah, Tommy, it's Jamie. One of the things that we've talked about in the past as we make this transition is that you will see where we would have a transfer of one-time revenue into recurring revenue. And I think you're seeing an example of that now. It's not massive swings, but it's enough that it is noticeable. And when you consider that that ARR is over a one-year period versus a three-year period. You can kind of see that it probably is an indicator of how units actually went out the door. And so, this is a theme that I think will be pretty consistent over a period of time, where you'll have some periods where ARR growth will be higher, and that one-time revenue could vary a little bit to the plus or to the minus.

Speaker Change: Thank you.

Speaker Change: Yeah Tammi its Jamie one of the things that we've talked about in the past as we make this transition is that you will see.

Speaker Change: Where we would have a transfer of onetime revenue into recurring revenue and I think youre seeing an example of that now.

Speaker Change: It's not massive swings, but it's enough that it is noticeable in and when you consider that that <unk> has over a one year period versus a three year period.

Speaker Change: You can kind of see that it probably is an indicator of how units actually went out the door and so this is a team that I think will be.

Speaker Change: Pretty consistent over a period of time, where you'll have some periods, where <unk> growth will be higher than that one time revenue could vary a little bit to that.

Jamie: But this for sure is part of the path that we've laid out as really focusing on our ARR growth.

Speaker Change: Or to the minus.

Speaker Change: But this for sure as part of the path.

Speaker Change: That we've laid out is is really focusing on our <unk> growth.

Tommy Moll: Second question from me on your guidance for the second fiscal quarter. It looks like revenue is projected to be flattish quarter over quarter on the EBITDA line, just in dollar terms. at the midpoint we're slightly down, so I'm just curious if there's something on the margin side in Q2 that is worth calling out there.

Speaker Change: Yeah.

Speaker Change: Second question from me on your guidance for the second fiscal quarter.

Speaker Change: It looks like revenue is projected to be flattish quarter over quarter on the EBITDA line just in dollar terms.

Speaker Change: At the midpoint, we're slightly down.

Tommy Moll: So I'm just curious if theres something on the margin side in Q2 that is worth calling out there yeah Tommy.

Jamie: Yeah, Tommy, it's it's Jamie again. I think if you look at the performance in Q1 you would have seen significant sequential change in gross margins, and while part of that change is attributable to the changing mix between ARR and one-time, we also had some very favorable product mix that took place this quarter in one-time revenue, and I would say that you can see that it really has moved to a level that's probably above new plateaus that we had said are probably considered reasonable, and so we had some favorable mix in Q1 that we are likely not going to repeat to that scale in Q2, and so that's probably the biggest driver that's taking place all around mix on the one-time revenue.

Jamie Loch: Jamie again, I think if you look at the performance in Q1, you would have seen a <unk>.

Jamie Loch: Significant sequential change in gross margins.

Jamie Loch: And while part of that change is attributable to the changing our mix between <unk> and one time. We also had some very favorable product mix that took place this quarter and onetime revenue.

Jamie Loch: And I would say that you can see that it really has moved to a level that's probably above new play chose that we had set are probably considered reasonable and so we had some favorable mix in Q1.

Jamie Loch: That we are likely not going to repeat to that scale in Q2, and so that's probably the biggest driver thats taking place all around mix on the onetime revenue, but still.

Jamie: But still, for sure seeing, you know, you'll continue to see the mix that's been attributable to ARR growth, and you know, at a Digi-wide level, gross margins at 60% or better will continue to be the theme, but this one spikes up a little bit higher than what we've seen in the past.

Jamie Loch: For sure seeing.

Jamie Loch: Youll continue to see that mix, that's been attributable to our growth and.

Jamie Loch: Digi wide level gross margins at 60% or better will continue to be the theme, but this one spikes up a little bit higher than what we've seen in the past.

Tommy Moll: Thanks, Jamie. I'll turn it back.

Operator: Thanks, Thomas. Thank you.

Jamie Loch: Thanks, Jamie I'll turn it back thanks Tommy.

Speaker Change: Thank you one moment for our next question.

Jim Fish: Our next question comes from the line of Jim Fish from Piper Sandler. Hey, guys. Thanks for the time here. Maybe, Ron, for you, just to start, and you alluded to this a little bit in your prepared remarks. Can you elaborate a little bit more as to how you guys are thinking about the tariff impact potential, given, you know, your supply chain does stretch across North America here? And do you think we could see a pull-in of demand for more of the CapEx or one-time upfront side of the business as a result of sort of the threat of what we could see as increased prices?

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

Speaker Change: Hey, guys. Thanks for the time here.

Speaker Change: Maybe Brian for you just to start.

Speaker Change: You alluded to this a little bit in your prepared remarks can you elaborate a little bit Morris. How are you guys are thinking about.

Speaker Change: The tariff impact potential given.

Speaker Change: Our supply chain does stretch across North America.

Speaker Change: And do you think we could see a pull in of demand for more of that.

Speaker Change: Capex are one to one time upfront side of the business as a result of sort of a threat.

Speaker Change: What we see is increased prices.

Ron Konezny: Yeah, Joe, it's a good question. You know, over 70% of our revenues are coming out of North America. The US in particular is a dominant part of that.

Speaker Change: Joe It's a good question and over 70% of our revenues are coming out of North America. The U S. In particular is a dominant part of that.

Ron Konezny: We have emphasized with our customers, we're going to put their interests first. We have a geographically diverse set of manufacturing partners, including with presence in the US. We don't move our product lines haphazardly, we're very deliberate about it. We have not been communicating to our customers that, hey, get it now or you're going to face some kind of price increase. We're taking that longer view of that relationship and that solution as well, way more valuable than any kind of near-term tariff implication.

Speaker Change: We have emphasized with our customers we're going to put their just first we have a geographically diverse set of manufacturing partners, including with presence in the U S. We don't move our product lines.

Speaker Change: Haphazardly, we're very deliberate about it.

Speaker Change: We have not been.

Speaker Change: Communicating to our customers that hey, get it now or youre going to face some kind of price increase we're taking that longer view that relationship and that solution as well way more valuable than any kind of near term.

Ron Konezny: Combine that with a very fluid policy, I think there's generally a lot of uncertainty out Got it.

Speaker Change: Tariff implication combine that with a very fluid policy I think there's.

Speaker Change: Generally a lot of uncertainty out there.

Jim Fish: And then, look, we've got IT budgets potentially increasing, discussions around, you know, data center refreshes, how should we be thinking of these tailwinds for you guys over the next year or two, relative to some of the other dynamics around other use cases, like, you know, ATMs, point of sale, sensors, gaming, and whatnot.

Speaker Change: Got it.

Speaker Change: Look we've got IP budgets potentially increasing discussions around data center refreshes, how should we be thinking of beef tailwind for you guys over the next year or two relative to some of the other dynamics.

Speaker Change: Around to other use cases like.

Speaker Change: Atms point of sale centers gaming and whatnot.

Ron Konezny: Yeah, I think there could be a favorable backdrop there, Jim. I think there's a lot of continued interest in infrastructure investing and And of course, as you know, a lot of emphasis on trying to have foreign companies and local companies invest in the U.S., and that all creates opportunity. We saw PMI crack 50 for the first time in some time here. That's a positive indication.

Speaker Change: I think there could be a favorable backdrop, there Jim I think theres a lot of continued interest in infrastructure investing in.

And of course as you know a lot of emphasis on trying to have foreign companies and local company to invest in the U S and not all creates opportunity. We saw PMI correct 50 for the first time in some time here, that's a positive indication the industrial economy has been weak.

Ron Konezny: The industrial economy has been weak for some time, and so there is the real potential for the hard goods part of our economy to have an uplift here. And those Western companies are increasingly favoring Western providers to help them with their technology and IoT solutions. So there could be a real favorable backdrop.

Speaker Change: For some time and so there is a real potential for the hard goods part of our economy to have an uplift here and those western companies are increasingly favoring western providers to help them with their technology and Iot solutions. So there could be a real favorable backdrop.

Speaker Change: Okay.

Speaker Change: Thanks, guys.

Operator: Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.

Speaker Change: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced toward the draw. Your question. Please press star one one again.

Josh Nichols: Our next question comes from the line of Josh Nichols from B Riley. Yeah, thanks for taking my question. And great to see the healthy gross margins and the record ARR.

Speaker Change: Our next question comes from the line of Josh Nichols from B Riley.

Josh Nichols: Yes, Thanks for taking my question and great to see.

Speaker Change: Healthy gross margins in the record.

Josh Nichols: Previously, sometimes on the call, as you give a little bit more context, I'm just kind of curious about what you're seeing in terms of customer ordering patterns, and then any particular end markets where you're seeing particular strength or weakness overall today. Yeah, so I think the ordering patterns have stabilized, maybe modestly improved. I wouldn't say dramatically improved, but you do sense increased confidence in the marketplace. We watch closely some of our key suppliers, NXP and Silicon Labs and others, and they're still citing some industrial and automotive weaknesses, and we'll also look at communications equipment comps, and Juniper had a print yesterday that was relatively favorable.

Speaker Change: Previously sometimes on the call is to give them a little bit more context, I'm just kind of curious about what youre seeing in terms of <unk>.

Speaker Change: Customer ordering patterns, and then any particular end markets, where you're seeing particular strength or weakness overall today.

Speaker Change: Yes, so the ordering patterns have stabilized maybe modestly improved I wouldn't say dramatically improved but you do have increased confidence in the marketplace.

Speaker Change: <unk> closely some of our key suppliers, NXP and Silicon labs, and others. They are still citing some industrial and automotive weaknesses.

Speaker Change: We'll also look at communications equipment Thompson Juniper had a print late yesterday that is relatively favorable.

Ron Konezny: So there could be some continued momentum there to climb out of extended sales cycles, shorter order volumes and amounts that could help us.

Speaker Change: So there could be some continued momentum there to climb out of extended sales cycles shorter order.

Speaker Change: Volumes in amounts that could help us.

Ron Konezny: In terms of verticals, as you've heard a lot of times, I know it's a little bit beige, but in terms of the answer, we are very diverse. So at any point in time, we have sectors that are doing well and sectors that maybe aren't as favorable. We continue to see good demand out of data centers. That's a key market for OpenGear, but we're also seeing really good demand in medical devices. We're seeing good demand in connectivity solutions for remote machines, which helps dentists and cellular. Utilities are a strong segment, both renewable utilities as well as more traditional fossil fuels.

Speaker Change: In terms of verticals as you have heard a lot of times I know, it's a little bit.

Speaker Change: But in terms of the answer we are very diverse so at any point in time, we are sectors that are doing well and sectors that maybe aren't as favorable we continue to see good demand out of data centers, that's a key market for over a year.

Speaker Change: But we're also seeing really good demand in medical devices, we're seeing good demand in and connectivity solutions for remote machines, which helps ventas and cellular utilities are a strong segment, both renewable utilities as well as more traditional.

Ron Konezny: So that's been a good segment as they've been looking to modernize their infrastructure.

Speaker Change: Fossil fuels. So that's been a good segment as they have been looking to modernize their infrastructure.

Josh Nichols: Thanks, and then just one follow-up from me. I'm kind of curious, just you've been seeing good ARR growth across both the segments now. Any context?

Speaker Change: Thanks, and then just one follow up for me I'm kind of curious just been seen good growth across both the segments now.

Ron Konezny: I'm just curious what you're looking for in terms of attach rates, where they are today for what used to be one-time revenue, and if you were to kind of compare that and how that's changed over the last year or two overall. Yeah, I mean, we're seeing a nice uptick after a lot of years of hard work, both on the, I think, the customer and product facing side, and quite frankly, as much on the back office side. We're starting to see the beginnings of the strategy playing out. We're having over 50% attach rates on our key products.

Any context I'm just curious what you are looking for in terms of attach rates, where they are today for what used to be one time revenue and if you were to kind of compare that and how that's changed over the last year or two overall, yes.

Speaker Change: Yes, I mean, we're seeing a nice uptick after a lot of years of hard work bolt ons, I think the customer and product facing side and quite frankly as much on the back office side, we're starting to see the beginnings of the strategy playing out where having over 50% attach rates on our key products what were trending towards much higher than that and certain segment.

Ron Konezny: We're trending towards much higher than that in certain segments, so within our cellular router group, for example. So, we're very optimistic that we're going to see a continued increase in attach rates.

Speaker Change: So within our cellular router groups. For example, so we're very optimistic that we're going to see a continued increase in attach rates. We have a new leader in open gear. There is a set of solution packages that are being worked on inside of that.

Ron Konezny: We have a new leader in OpenGear. There's a set of solution packages that are being worked on inside of that business that we think that will increase the take rates there as well of solutions. So, we're very optimistic we can continue this momentum.

Speaker Change: <unk> that.

Speaker Change: We think that will increase the take rates there as well our solutions. So we're very optimistic we can continue this momentum.

Josh Nichols: I appreciate it. Thanks, guys.

Speaker Change: I appreciate it thanks guys.

Ron Konezny: At this time, I would now like to turn the conference back over to Ron Konezny for closing remarks. We plan on attending Ross' 37th annual... Conference for Growth Companies in Dana Point, California on March 17.

Speaker Change: Yes.

Speaker Change: Thank you at this time I would now like to turn the conference back over to Ron <unk> for closing remarks.

Speaker Change: We plan on attending Roth.

Speaker Change: <unk> 37th annual.

Speaker Change: Conference for growth companies in Dana point, California on March 17.

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

Speaker Change: We appreciate you joining digi is earning call and for your continued support thank you to our customers distributors suppliers into our exceptional digi team have a great day.

Operator: Have a great day.

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

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

Speaker Change: Okay.

Speaker Change: [music].