DIGI INTERNATIONAL INC Q2 FY2025 earnings call

• ARR grew 12% YOY to $123 million, with both segments contributing. • ARR now 29% of annualized quarterly revenues. • Free cash flow was $26 million, net debt reduced to $45 million after paying down $25 million. • Improved inventory position approaching historical norms. • Expects to be net cash positive by end of fiscal year. • Diversified and optimized supply chain across geographies and suppliers. • Diligent with operating expense investments.

Digi's ARR grew 12% year-over-year to a record $123 million in the second fiscal quarter of 2025. Both reporting segments contributed to ARR growth. ARR now represents a record 29% of the company's annualized quarterly revenues.

• Assumes current tariff rates for the balance of fiscal 2025. • Will adjust accordingly to the fluid macro environment. • Expects to be net cash positive by end of fiscal year, a one-quarter improvement from initial goal.

• Macro environment fluidity. • Potential impact of tariffs on gross margin. • Inventory fluctuations in some future periods if not managed properly.

Q: Ron, my first question is on the recurring revenue trends in P&S, up over 20% in the quarter. What are some of the operational levers you're unlocking or using to unlock some of that growth?

A: The two big levers are providing a solution with attached software and services to improve attach rates, and using models like Ventus-type where it's zero down x months a year to better match ROI.

Q: How has macro volatility changed your customers' willingness to spend across your product portfolio?

A: To date, steady demand with exception in APAC region. Pipeline, days to close, average oversight have stayed pretty stable.

Q: Any update on the software attach rates?

A: Seeing very good improvement, still under 50% across portfolio less OEM solutions business.

Q: Are things starting to lag a little bit more in terms of timelines to close deals? What are you seeing in terms of your supply chain?

A: Monitored opportunities closely, sales cycles stabilized except APAC. Inventory burned down, think inventory may go up slightly in future periods as at normalization, with flexibility to move products to minimize tariff impacts.

Q: What's the range of outcomes in terms of gross margin impact as you look at the potential landscape, particularly as we get into the September quarter?

A: Outlook incorporates current tariffs, assume 10% tariff rate is common, 70% of business in North America, have product and facility compliant with USMCA, will adjust agility if more receivable tariffs.