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

Good day, and thank you for standing by. Welcome to the Fiscal Q3 2026 Digi International Inc. Earnings Conference Call. [Operator Instructions] 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, Chief Financial Officer. 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. This afternoon, Ron will provide a comment on our performance, and then we'll take your questions. Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements. While we believe the expectations reflected in our forward-looking statements are reasonable, we give no assurance such expectations will be met or that any of our forward-looking statements will prove to be correct. For additional information, please refer to the forward-looking statements section in our earnings release today and the Risk Factors section of our most recent Form 10-K and subsequent reports on file with the SEC. Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures, are included in the earnings release. The earnings release is also furnished as an exhibit to Form 8-K that can be accessed through the SEC Filings sections of our Investor Relations website. Now I'll turn the call over to Ron.

Thank you, Jamie, and thanks, everyone, for joining our call today. We are so excited to share an update on our progress and what we expect in the current quarter. But before we go into that, let me just remind everybody Digi's core value proposition. We really drive ROI by establishing remote presence, whether through an industrial router connected to remote oil well, whether it's an open gear console server in a data center, SmartSense in a pharmacy, food or hospital application, dentist through point-of-sale systems or infrastructure management and manufacturing, we are enabling our customers to gain great efficiency by connecting to not just the Digi devices, but the assets that we're helping them monitor. We can help them adjust to technical regulatory changes. We can update software to comply with security protocols. We can adapt to business opportunities and challenges. We can increase asset uptime. We can reduce the number of field calls that need to be made. All of those bring tremendous value to organization on top of learning more about how your asset is performing in the field and driving that learning into the next generation of your solution. We pull our customers annually and we ask them, "What are the attributes that you're looking for in your IoT solution?" And to no surprise, reliability is the #1 priority for our customers, and it's been so for a number of years. We rank well, both in their mind and versus our competition. We've got over 40 years of experience, and it makes sense. If you're monitoring a remote device, you need that remote management system to perform all the time and for a long period of time. What's increasingly become a priority is security. With news that seems to come every day and accelerating on security breaches, whether it be the water management system in Minnesota, whether it be AI models escaping their labs, keeping your IoT system secure is of utmost importance. These systems have to scale both in numbers and across geographies. and they've got to be easy to use. We are involved in business and mission-critical applications. That combination of attributes is what Digi really excels at, and we can provide the complete solution. We're providing the edge device. We're providing connectivity. If the customer needs it, software services. And we're now adding on top of that, our newest attribute, which is AI. We recently introduced a new tool called DANI, Digi Artificial Network Intelligence that allows you to talk to your Digi equipment and the things that's connected to a natural language. No more standard reports, no more configuring dashboards. You just ask our system and the things that's attached to, "How is my network performing today? Are there any software updates to be made available?" And you can even, over time, ask our system to perform those actions. There will always be a human at the wheel, but we can make managing your system much easier with the advent of AI. Those results are showing up this quarter and next quarter. I'm going to pass it to Jamie to review some of the highlights.

Good afternoon, everyone. Unfortunately, our video is down, so we'll speak to the results a little bit. We are very proud of our accomplishments this quarter as a company, which is really a reflection of the delivery that we've provided for our customers and that partnership and helping them enable to better meet their critical objectives. For the quarter, we're reporting record results, $139 million of revenue, which is up 29% year-over-year, 64.8% gross margins, $33 million in cash flow from operations, which is also up 38% year-over-year. From a non-GAAP perspective, our annual recurring revenue number has reached a record $191 million. Our adjusted EBITDA margins have reached a record of 29.1% with an adjusted EBITDA of $40 million. Not only is that cash flow a really great metric, but if you look at it from an annualized basis, right now, we have generated cash flow from operations in excess of our year-to-date adjusted EBITDA number. And you can see through that 29.1% adjusted EBITDA margin, we continue to see operational leverage as a company. We committed early on that we were going to see ARR and profits growing faster than revenue, and that continues to be the trend that you see here with our ARR and our adjusted EBITDA growing faster than our revenue number is on a revenue number that is actually very strong. That relates then as we roll forward into Q4. We are increasing our guidance for Q4 and subsequently, our full year guidance. For the Q4, we are expecting our revenues to be between $138 million and $142 million. We are expecting our adjusted EBITDA to be between $40 million and $41.5 million. We're expecting our adjusted EPS to be between $0.75 and $0.78 per diluted share on an expected share count of 39.1 million. The effect of Q3 and our Q4 guidance has increased our full year guidance. Right now, we are projecting our full year guidance to land between $529 million and $533 million, which is up 23.5% year-over-year. Our adjusted EBITDA on an annualized basis of $146 million to $147.5 million, which is up 35.5% for the year. Our adjusted EPS between $2.67 to $2.70 per diluted share. And right now, we are projecting our ARR to be at least 27% year-over-year. The guidance is up from our previous guidance, and you can see in that guide, ARR and profits continue to grow faster than revenue and that operating leverage down to the bottom line, you can see shining through with our profit growth. All of that really continues to lead us towards that march towards $200 million that we laid out as our long-term objective. By 2028, we had committed that we wanted to be at $200 million in ARR and $2 million in adjusted EBITDA. With this latest guide, we will see adjusted -- or sorry, annualized recurring revenues, at least at $193 million. We expect to cross over that bridge shortly. And on an adjusted EBITDA perspective, it was a 23% CAGR, ending the year right around $147 million. You can see how we're trending and expecting to deliver on those 5-year objectives as we laid out. As I mentioned earlier, we continue to see cash coming in. We are currently converting our cash in excess of 100%, and that really enables the flywheel that we talked about last call, where Digi is able to use that cash, cycle it back down to pay debt, and then start the flywheel over with looking at acquisitions as part of our inorganic strategy.

Yes. The flywheel really is first developing a healthy list of acquisition opportunities. We've got hundreds of opportunities we're monitoring now with the use of AI, it's much easier to monitor the news throughout those opportunities. At any one point in time, we're looking at 10 or 20 and really digging into a few. We then used debt to acquire those companies, and we then focus on integration. And that's where really the magic is made. As we integrate the companies quickly, we get them on common systems, common practices and really build ARR and profitability. And as we generate cash flow from that profitability, we're looking to then reduce leverage and, of course, put that money back to use. It's a strategy that we feel protects the equity investor because we're using debt. We're not diluting the shareholder. And because we generate strong cash flow, that doesn't sit on our balance sheet. We pay it down. So that provides more opportunity, especially as we increase our profitability, we get expanded dry powder to go after additional opportunities. So that's the flywheel, is acquire, integrate, generate, compound. It's -- no better example than 2 recent acquisitions we did. We acquired Jolt Software in fiscal '25. We -- Particle in fiscal '26. Both those integrations have gone very well, hitting their targets that we have committed to both internally and externally and putting us in a great position as Jamie -- we've been able to bring that debt net of cash down to $81 million.

That's right. $81 million. We're levered well below 1 at this point. And you can just see that cycling through. It's a great result.

With that said, we will now take any questions that the audience may have.

[Operator Instructions] And our first question comes from Tommy Moll of Stephens.

A question for you on the sales funnel and the days to win, which is an important KPI I know you monitor. You exceeded expectations this quarter and have guided revenues up sequentially. And so I'm just curious what insight you could give us on the sales funnel and how fast deals are converting.

Yes, Tommy, it's a good question. I think there's really 2 factors that are coming into play on that. The first one is we are seeing an increase or an improvement, I should say, in our days to win metric. Customers are making decisions faster than they have in the past. I still would caution that it's not back to whatever someone would decide as a normalized level. It's not been normal for a long period of time, but we are seeing improvement. We're also seeing certain deals that are entering into the pipeline that have a level of maybe some urgency to them. And so they're cycling through a little bit faster, which I think is having an overall positive impact on our days to win metrics. We are also seeing overall pipeline growth. We continue to see growth in all levels of the pipeline, all the way from Stage 1 through to the final stages. And so it's really a combination of pipeline growth as well as some improvement in those critical measures, as you pointed out.

And I think there's a couple of factors driving it. One is, Tommy, you pay attention to this pretty closely, PMI has been relatively strong these last few reporting cycles. I think that's a positive. The AI wave here, which is obviously impacting data center builds, but also then affecting utilities and other indirect areas. And then also, I'd say there's a bit of a supply chain challenge going on right now. Memory is getting all the headlines, but that's starting to spread. And so I think customers are picking up on, "Boy, I better get my order in place to secure my deliveries and time lines." And that supply chain urgency, I think, is starting to show up in our pipeline data.

Follow-up for you on the data center theme. Ron, Opengear has an existing presence in that vertical. I'm interested in any update you can give us there in general? And then specifically on the hyperscale side, I know that historically, you have not sold directly there, but have any of the tectonic plates maybe shifted in your favor?

Yes. Yes, Opengear has been a really great performer. Their performance is, I want to stress, really, really widespread. It's an edge campus as well as data center applications. We've been the solution of choice for a lot of the neo clouds that have been looking to deploy assets and maintain visibility and control. But we've also been knocking on the doors of hyperscalers to see if we can help them. And those are longer sales cycles. They're very hard to predict. There's only a few of them out there, remain optimistic, but certainly don't embed any of those expectations into our forward guidance.

And our next question comes from Timothy Shubsda of Piper Sandler.