DIGI INTERNATIONAL INC Q3 FY2025 earnings call

• Digi delivered strong Q3 with year-over-year revenue growth. ARR grew double digits for the third consecutive quarter.
• Profitability improved driven by ARR and favorable product mix, with adjusted EBITDA margins hitting a record 25.6%, partially offset by increased freight and duties costs.
• Free cash flow generation was a hallmark of fiscal 2025 performance, driven by disciplined operations, AI initiatives, and inventory optimization. Net debt reduced to $20 million this quarter, on track to be net cash positive by end of fiscal 2025.
• Strategic acquisitions remain a top priority, with evaluation of opportunities aligning with ARR, growth, and scale objectives.
• Diversified global supply chain positions Digi to adapt and thrive in a dynamic macro environment.

Both reporting segments contributed to growth. Annual recurring revenue (ARR) now represents a new record of approximately 30% of the trailing 12-month revenues. Tailored IoT solutions made it simpler and faster for customers to deploy intelligent and cloud connected Edge solutions, contributing to the growth.

• Outlook for Q4 assumes a dynamic macro environment, with sales flat sequentially and EBITDA dollars a touch lower sequentially. Profit assumption driven mainly by gross margin rather than OpEx.
• Expect ARR and profitability to increasingly outpace revenue growth as the model scales.
• M&A remains a top priority for capital allocation, with focus on finding the right acquisitions.

• Dynamic macro environment poses uncertainties.
• Tariff uncertainties and volatility can impact decision-making and operations.
• Europe presents a wildcard as it works through various issues, potentially causing bumps.
• Competitive landscape with China-based vendors and tariff engineering by competitors could pose challenges.

Q: On products and services ARR, update on attach rates through the channel and product categories with most success/challenges?

A: Increasing take rates, almost all new business now attached in IT area (cellular routers, Opengear console servers, infrastructure management devices) with broad-based contribution.

Q: Are customers moving from wait-and-see mode to pulling the trigger more on larger projects?

A: Optimistic that increased certainty from U.S. financial policy and tariff clarity will help drive more effective decision-making by customers.

Q: Size of Opengear opportunity with AI infrastructure build-out?

A: Opengear services data center and Edge, slight improvement in data center business, 50-50 split, hybrid deployments in data centers due to AI and data protection being growth areas.

Q: Inventory normalized, should customer reordering accelerate in fiscal '26?

A: Inventory optimized, seeing positive signs from channel with improved velocity, though hard to say how much it continues in FY '26.

Q: Linearity of Q3 and tariff impact?

A: Favorable mix navigated through, some tariff impact managed via accelerated buys and lower tariff regions, analyzing impact on Q4.

Q: M&A environment and opportunities?

A: Robust M&A environment with healthy pipeline, emphasizing opportunities with strong ARR, good growth profiles, and profitability.

Q: Geographical and vertical end market activity?

A: Renewable market softer, good demand in utility water, mass transit, Edge, data center, AI; North America gaining prominence, APAC softer, Europe wildcard.

Q: Near-term visibility and capital allocation re buyback vs M&A?

A: Priority is M&A, will deploy capital for acquisitions rather than buybacks.

Q: Interplay of recurring revenue growth and reported revenue optical headwinds?

A: ARR and profitability expected to outpace top line, as more solution-based business over multiyear periods dampen onetime revenue but have higher IRR, higher gross margin, and better for customer and Digi.