DIGI INTERNATIONAL INC Q4 FY2024 earnings call

• Digi is committed to being a leader in the industrial Internet-of-Things market, with a solution provider approach reducing risk and accelerating time to value.
• ARR reached a record $116 million in fiscal 2024, growing 9% year-over-year and representing over 27% of total revenue.
• Achieved 60% gross margins for the first time, driven by the solution strategy.
• Flat operating expenses year-over-year led to a record adjusted EBITDA margin.
• Inventory reduced as supply chain normalized, and debt facility restructured to reduce interest payments, resulting in net debt to adjusted EBITDA less than 1.
• Launched Digi 360 and achieved SOC 2 Type II compliance.

ARR grew 9% year-over-year to reach a record $116 million, representing more than 27% of total revenue. ARR growth was seen in both the products and services business segment, as well as the solutions business segment. ARR increased through onboarding new customers and solutions, retaining and extending existing customers, and the launch of Digi 360 with SOC 2 Type II compliance.

• Expect continued ARR growth in fiscal 2025 from both business segments, with onetime revenues tempering due to more solution packages.
• Expect flat revenue in fiscal 2025 due to retiring legacy product lines like Rabbit.
• Expect flat adjusted EBITDA in fiscal 2025, with plans to be net debt free by the end of calendar 2025.
• Continuing to explore potential acquisitions that benefit customers and align with ARR and profitable growth goals.
• Remain confident in reaching five-year targets of $200 million in ARR and $200 million in adjusted EBITDA.

• Supply chain normalization issues with some components becoming difficult to source.
• Macroeconomic uncertainties including PMI contraction in the industrial economy, but strength in AI, data centers, utilities, and renewables.
• Nationalism and talks of increased tariffs, though Digi has diversified its supply chain.
• Interest rate impacts on M&A decisions, with rates only recently starting to come down.

Q: Ron, you mentioned the dynamic between reported revenue and recurring revenue. How does that play into the fiscal 2025 outlook, including discontinuing old product lines?

A: It's a combination of discontinuing old product lines where components are hard to source and moving towards recurring revenue. The supply chain for some components is difficult, and there's a tradeoff with moving to recurring revenue.

Q: You mentioned being net debt free by the end of calendar 2025. Does that imply a certain pace of cash flow generation?

A: Expect another inventory dividend in FY’25 like in 2024, interest payments are lower and will continue to decrease as debt is paid down, so cash inches closer to EBITDA.

Q: As we think about ARR growth in fiscal 2025, what segments or solutions will drive it?

A: Expect contributions from both business segments as in 2024, with ARR growth not overly dependent on one product line, vertical, or customer.

Q: Thoughts on the M&A landscape and potential acquisitions in 2025?

A: M&A landscape improved modestly in 2024, with interest rates recently coming down potentially leading to increased M&A in 2025. Banks are optimistic about M&A acceleration going into 2025.

Q: Thoughts on gross margins moving higher in 2025 given ARR growth?

A: ARR is accretive to gross margin, and with ARR becoming a bigger component of the mix, gross margins above 60% can be sustained.

Q: Thoughts on fiscal first quarter revenue dip and ordering trends?

A: Last quarter is often softer due to channel-centric nature with less inventory as they enter the end of their fiscal year.

Q: Thoughts on tariffs and manufacturing diversification?

A: Diversified supply chain out of China, with exposure to China in single digits, moved manufacturing to Southeast Asia and US, positioned to adapt to different tariff scenarios