Digi International Inc. (DGII) Earnings Call Transcript & Summary

Good day. Thank you for standing by. Welcome to the Digi International Jolt Software Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Jamie Loch, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone. It's great to talk to you. Thanks for joining us today to discuss Digi International's acquisition of Jolt. Joining me on today's call is Ron Konezny, our President and CEO. We issued the Jolt acquisition press release after the market closed yesterday. You may obtain a copy of the press release through the Financial Releases section of our Investor Relations website at digi.com. This morning, Ron will provide a few comments on the deal, and then we'll take your questions. Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements. While we believe the expectations reflected in our forward-looking statements are reasonable, we give no assurance such expectations will be met or that any of our forward-looking statements will prove to be correct. For additional information, please refer to the forward-looking statements section in our press release yesterday and the Risk Factors section of our most recent Form 10-K and subsequent reports on file with the SEC. The press release is also furnished as an exhibit to Form 8-K that can be accessed through the SEC Filings section of our Investor Relations website, which will be filed shortly. Now I'll turn the call over to Ron.

Thank you, Jay. Welcome to Digi's investor call focused on the acquisition of Jolt announced yesterday. Jolt is a natural fit to both extend and enhance SmartSense market leadership. Jolt's operational intelligence platform optimizes workflows, adds printing and labeling solutions and labor scheduling capabilities. Based in Lehi, Utah, just outside Salt Lake City, Jolt team will work with SmartSense to bring more comprehensive ROI to our customers. SmartSense and Jolt have very little overlap with existing customers. Jolt leadership in food and beverage will complement SmartSense's leadership in health care. We've known Jolt for nearly 10 years and have followed their progress closely. We share cultural values, including customer focus, positive energy, outcome orientation and caring deeply about each other, our work and the success of our customers. As stated in our press release, Digi paid $145.5 million in cash, net of Jolt's cash and subject to customary adjustments, utilizing our existing line of credit to fund this transaction. Jolt contributes to both of our long-term goals as it generated over $28 million in annualized recurring revenue, or ARR, as of their fiscal 2025 year-end of January 31, 2025. Jolt has been growing ARR at a faster rate than Digi's IoT Solutions business segment. Based on expected synergies, the combined SmartSense and Jolt business plans to achieve $11 million in incremental annualized adjusted EBITDA by the end of calendar 2026. Lastly, Jolt brings approximately $30 million of net operating loss carryforwards for Digi to utilize subject to Section 32 analysis. We are thrilled to welcome Jolt to SmartSense and to the Digi family, and we are confident in our joint success. We will now open the line for questions.

Our first question coming from the line of Jim Fish with Piper Sandler.

On the deal. I guess just wanted to understand Jolt a little bit more. What makes them different? Who are they mainly competing against? And it does seem like there might be some overlap with some of your existing products. Can you just walk through if there is any?

Yes. Jolt really grew up based on the founder, Josh Bird, servicing food and beverage. Josh actually owned a Baskin-Robbins prior to -- and operated prior to starting Jolt software. And his inspiration was really optimizing the workflow for restaurants and franchise owners and operators. And so they've kind of grown up bottoms up, if you will, and have gone slowly into enterprise customers. They've added in condition monitoring through third-party resources. and then added printing labeling and labor and scheduling. So they've been really more focused on that food and beverage segment, where Digi has historically grown up in the condition monitoring area. And so we have our own condition monitoring solution with sensors. And then we've evolved into both enterprise deals, but also into task management. So there's some overlap in task management and condition monitoring. But clearly, Jolt got, I think, a world-class task monitoring task digitization platform. And we've got, we think, a world-class condition monitoring system that will ultimately emerge and prevail. So our existing customer overlap is very, very modest. Jolt would compete against companies like Zenput that's a part of now CrunchTime, which is owned by a PE firm and to another company called Logile. Those are -- these are companies that focus on task management. We compete more against condition monitoring companies like Sensor Scientific and which is now a part of a larger company and other companies like that. So we both compete against generally smaller private companies. So the customer overlap is very modest. And in many cases, our customers are asking for the other company's solutions to complement an existing implementation. So we're excited to really cross-sell against each other's customers and focus our innovation on the things that really we're both founded on and do best.

Got it. And maybe, Jamie, for you, can you just help us where the annualized $11 million in added synergies is coming from? And just a little bit of understanding around the business model. Is it completely 100% subscription? Or is there some hardware product revenue associated here? Just trying to understand essentially like the gross margin kind of level for this part in terms of the IoT Solutions impact?

Yes, Jim, the -- when talking about the synergies on a forward-looking basis, it's a combination of both top line and cost savings synergies. Clearly, we would expect to see more of the synergy come from the top line, but there is some natural overlap on the cost side that we would expect to work its way through the model over that period of time. And so the focus really will be on growth. The focus will be on accelerating that growth, but there will be some overlap on the cost side. And again, calendarize that to a run rate number that would be achieved by the end of '26 because as we talk about really overlapping those sales forces, focusing on the cross-selling nature and bringing these 2 solutions together will really be the focus. From a revenue perspective, there is some onetime revenue, but I would say it's pretty immaterial to the overall outlook of the business. And so the primary focus is going to be on that ARR side, where as we've discussed, their ARR number is growing at a rate faster than what we've seen in our solutions business so far. But the onetime is pretty immaterial in nature.

Our next question coming from the line of Tommy Moll with Stephens Inc.

Ron, just to stick on the $11 million annualized EBITDA that you framed for us. Is it safe to assume that to hit that number, you're embedding a double-digit ARR growth rate. It sounds like that's how fast the business has been growing, but I just want to try to understand the art of the possible here going forward.

Yes, you're absolutely spot on, Tommy. We think the combined company is going to be growing at double digits. That's what Jolt has been able to achieve, and we think the combined business can sustain that.

Okay. And then you've referenced the the overlap or the adjacency in the offering here with SmartSense. So how do you envision integrating the 2 sales organizations and going to market? Or do you run them independently and just have each one cross-sell the other?

No, we're going to be really combining the 2 organizations pretty effectively. And we want to leverage the best of each company's practices. Jolt has done a really, really nice job of that cadence with SMB. And Digi has done a really nice job with the enterprise. What we are probably going to do is have a vertical focus, which SmartSense has had and apply that to the Jolt go-to-market team that's been a little less vertical focused, a little more territory focused. But we think that combined organization is capable of delivering consistent double-digit ARR growth.

Maybe one for Jamie here, just on the updated guidance, Jamie. My assumption would be that the update is purely reflective of the acquired revenue and earnings. But I just want to make sure there's not also some operational update that you're embedding today.

Yes. Tommy, you're right. The update to the guidance is purely based on the addition of Jolt. There is no operational update that we provided to guidance from our earnings call.

Okay. That's what I expected you would say. And so Jamie, as we all look at what those numbers imply for the current run rate of Jolt, it's going to be a little tricky because it's partial quarter, and we don't know the seasonality across the quarters. But is there anything you would go ahead and call out for us now as we all just look at what's implied for what you just acquired?

I think that -- Tommy, I think when you take a look at it, you can really see, again, you're dealing with a partial quarter. The run rate on ARR is in excess of $20 million. You can see the impact that we're seeing coming down at the bottom, and then you can kind of visualize how that impact this quarter has over a period of time to annualize to an $11 million number by the end of calendar '26. So you can kind of visualize from an adjusted EBITDA rate, how that's going to manifest itself through the P&L, if you say, starting with FQ4 for us right now going all the way through to FQ1 of '27, kind of how that would ramp up at a rate perspective. Again, the onetime revenue is pretty immaterial. So you can see from an ARR perspective and then mapping that out, how that probably adds into the forward look.

Okay. Last one for Ron. On Jolt. Is this purely a software offering, Ron? Or is it more like Digi where in the recurring revenue context, it's going to be more a bundle of the hardware, software service altogether?

Yes. As Jamie mentioned, Jolt is really a software company and provides some hardware solutions based on some third-party solutions, combined with a few things have done on their own. They have not traditionally done a lot of what we would call OpEx or asset deals. And that's going to be an element we're going to consider, especially on the printing side, where that's a really key capability some of our customers have been asking for in food and beverage. So that's going to be an element we're going to try to exploit and take advantage of inside the SmartSense business model.

Yes. So would that potentially be what most excites you about how you can accelerate the growth here? Or is it more of the sales organization? It sounds like you may have some tweaks in mind about their go-to-market. If you had to really just isolate one thing that you're most excited to really drive change and accelerate growth around, what would that be?

Yes. I mean, listen, I think we're creating a clear market leader here, well over 200 employees between the 2 businesses. You've got 2 businesses that can really focus on what they're best-in-class at with SmartSense on the health care side with condition monitoring applying to all their customers and Jolt on the food and beverage side with world-class operational intelligence and workflow automation. So that combination is really thrilling. There's opportunities that, quite frankly, both companies we're engaged in separately that combined make us a much more comprehensive solution. A lot of our customers, Tommy, are looking for one provider to be a more comprehensive provider versus bolting together point solutions. And we have an opportunity to really better meet that customer need as a combined force than separate.

Our next question coming from the line of Josh Nichols with B. Riley Securities.

One, just on margin profile, fair to assume since this is largely SaaS business that's comparable. Two, the recurring ARR piece of your business where you're looking at stuff where gross margins are likely 80% plus and significantly higher than your corporate average? And two, any comment you can make just about like the average customer relationship at Jolt in terms of length churn, net retention, overall with how those things are typically trending?

Yes, Josh, it's Jamie. Thanks for the question. I do think the financial profile of Jolt mirrors really the financial profile of our solutions business, both in terms of growth profile, gross margins and adjusted EBITDA margins. I think when you're dealing with a company that's a little bit smaller in scale, I think you could see coming out of the gate, maybe an adjusted EBITDA margin that would be reflective of a company that's got a little bit smaller scale, a little bit higher growth as they're focused on in terms of percent. But I do think the financial profile really mirrors what we've seen here at Digi, both in terms of top line growth as well as gross margin profile. So I think you're spot on, and I think that mirrors up well with us. I do think from a retention perspective, we've not been at the spot where we've really disclosed either gross or net retention. But I would say from an ARR perspective, again, that overall profile really mirrors what Digi has seen in terms of churn over the period of time. With an SMB profile that Jolt has, you can see a little bit smaller, again, soft churn, maybe where you've got a location closure. But from an overall basis, a lot of those metrics really line up well. And to Ron's point, when you're talking about the mirroring of the solutions from a condition monitoring and task management, the financial profiles also line up very well. So there's a lot of similarities there that really line up with the solutions side of the business, a lot of commonality.

Yes. We do think there's some positive synergies on the customer success side. I'd say the SmartSense customer success organization is a little bit more mature than Jolt. So I think there's going to be some added value there to potentially even improve retention further.

And then last question for me, just as a quick follow-up. You mentioned the financial profile is pretty comparable. I think the IoT Solutions business is probably doing 20% or so EBITDA margin on like a segment level. So obviously, already profitable. But in terms of that, do you think that that's comparable to where Jolt is today? And then in addition to that, do you think that there's an additional $11 million of revenue and cost synergies that would bump that up from the $4 million to $6 million EBITDA run rate that it's kind of running at today. Is that correct?

So before Jamie comments, I just wanted to emphasize the very first thing we think about is the acceleration of growth. And as growth accelerates and you gain scale, you get really good efficiencies and you start to really improve the profitability. So the growth is going to be our primary focus. We're certainly going to be efficient along the way, but the key is growing. Jolt has been very, very growth-oriented, smaller company, private funding to emphasize the growth. And as we combine the companies, we want to maintain that growth and then get them to a more mature financial profile as well.

Yes. Josh, this is Jamie. I think that the -- again, when you look at the impact that we've had on guidance and then carry that through to a run rate adjusted EBITDA number of $11 million by the end of calendar '26, I think you can see how as those synergies are obtained, both in terms of the top line synergies as well as any cost synergies that we'd be profiling, that growth is going to provide, let's call it, adjusted EBITDA rate improvement over that period of time. That lines up well again with Digi's model that as we continue to grow, you're seeing a lot of that fall down into the bottom line in terms of rate. I think you would see the same thing here. Jolt immediately gets to take advantage of some of Digi's scale as it navigates through. And so where there will be a little bit of cost synergy, you'll be able to see how that does come down to the bottom line and continue to enhance that adjusted EBITDA rate performance over that period of time. So you'll see that as it kind of scales up. You can see from the adjustment in guidance, that's no change in operational and then carry that forward into the end of calendar '26, where we're projecting a run rate EBITDA performance of 11%, how we see that falling down to the bottom line in terms of that enhanced performance.

Our next question coming from the line of Scott Searle with ROTH Capital Partners.

Congrats on the acquisition. Ron, maybe to start from a combined company standpoint now when you look at the competitive landscape, you ran down the list of competitors. Who has the same sort of comprehensive suite that you'll now have with Jolt? Does this materially change the landscape for you? And second, from a cross-selling opportunity standpoint, when you look at the existing SMB base for Jolt, how much of that is immediately addressable with SmartSense opportunities and vice versa, taking Jolt into your existing SmartSense installed base?

Yes. Good questions. We think, obviously, the combination of Jolt and SmartSense creates an even stronger and more comprehensive leader. I do want to emphasize restaurant technology and health care technology is a very broad area that has a lot of room for growth, both within our capabilities, but outside of them as well. And we don't take that for granted. So we think we've got a great platform. We think there's even opportunities to go further, to be quite honest. And we remain active. But I think this does materially change the landscape. I think where companies may have looked for 2 different providers, they may now look to one. And we may be changing that narrative quite a bit with this combined portfolio of offerings because there's going to be fewer and fewer companies that can provide this comprehensive solution set in both health care as well as food and logistics settings. So we think this is a bit of a game changer. But we also acknowledge that there is even further to go to meet customers' needs that span into inventory and other areas that we don't cover right now.

And maybe just 2 quick follow-ups. Being the cost of capital on the acquisition, I'm just kind of wondering what you guys are paying from an interest rate standpoint. And yes, just start with that.

Yes. Scott, we took advantage of our existing credit facility to be able to execute on that in the 8-K, we'll be releasing that based on the leverage profile that we have, we expect the markup on the borrowing to be at a SOFR rate plus about 250 basis points, 225 on the markup and 25 basis for commitment.

Got you. Helpful. And lastly, Ron, look, not that the ink is drying the deal yet, but in terms of your existing management capacity and debt capacity to pursue other M&A opportunities, are you guys on the sideline for a little bit here as you digest this? Or are you guys still active on that front looking?

No. Yes, good question. We remain active. We -- our leverage position, we feel is both modest, but you can see now between the Opengear and Ventis acquisitions, you can see our both propensity and capability to rapidly delever. And so we remain active, and we continue to look for solutions that can really enhance our customers' ROI and contribute to our long-term goals of both ARR and adjusted EBITDA contributions.

And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Ron Konezny for any closing remarks.

Thanks again for joining this special investor call. We welcome the Jolt team to both SmartSense and Digi. Looking forward to giving you an update on our progress here as we finish our fiscal 2025, and have a great day, everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.