Earnings call transcript: Digi International Q3 2025 sees earnings beat and stock uptick

Digi International Inc. (DGII) reported stronger-than-expected earnings for its fiscal third quarter of 2025, with earnings per share (EPS) of $0.53, surpassing the forecasted $0.47. Revenue also exceeded expectations, coming in at $108 million compared to the anticipated $106.17 million. Following the earnings announcement, Digi’s stock rose by 1.24% in after-hours trading, closing at $31.95. With a market capitalization of $1.18 billion, InvestingPro analysis indicates the stock is currently trading near its Fair Value, supported by strong financial health metrics and a "GOOD" overall rating.

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Key Takeaways

• Digi International reported a 12.77% EPS surprise, outperforming analyst expectations.
• Revenue growth returned, driven by strong performance in the Annual Recurring Revenue (ARR) segment.
• The company achieved record adjusted EBITDA margins of 25.6%.
• Debt reduction efforts continue, with $30 million retired, aiming for a net cash positive position by the end of fiscal 2025.
• Stock price increased by 1.24% following the earnings announcement.

Company Performance

Digi International demonstrated robust performance in the third quarter, with a significant focus on expanding its IoT solutions. The company has successfully returned to year-over-year revenue growth, marking a positive turnaround. The ARR, which now accounts for 30% of the trailing twelve-month revenues, saw double-digit growth for the third consecutive quarter. This growth trajectory aligns with the company’s strategic focus on recurring revenue models.

Financial Highlights

• Revenue: $108 million, up from the forecasted $106.17 million.
• Earnings per share: $0.53, surpassing the forecast of $0.47.
• Adjusted EBITDA margin reached a record 25.6%.
• Net debt reduced to $20 million, with a target to become net cash positive by fiscal year-end.

Earnings vs. Forecast

Digi International’s actual EPS of $0.53 exceeded the forecasted $0.47, resulting in a 12.77% earnings surprise. Revenue also surpassed expectations by 1.72%, amounting to $108 million against the forecast of $106.17 million. This performance marks a significant improvement over previous quarters, reflecting the company’s strong operational execution and strategic focus on high-growth areas.

Market Reaction

Following the earnings release, Digi’s stock experienced a 1.24% increase in after-hours trading, closing at $31.95. This movement places the stock within its 52-week range, which spans from a low of $22.39 to a high of $37.07. The stock has delivered impressive returns, gaining 37.7% over the past year and 5.7% year-to-date, demonstrating strong momentum despite market volatility. The positive market reaction indicates investor confidence in the company’s growth trajectory and strategic initiatives.

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Outlook & Guidance

Looking forward, Digi International anticipates that its ARR and profit growth will continue to outpace revenue growth as the business model scales. The company remains committed to strategic acquisitions that enhance its growth profile and expects to further optimize its operations through AI-driven productivity improvements. Analysts maintain a bullish outlook, with three analysts recently revising their earnings estimates upward, and the consensus target price suggesting potential upside from current levels.

Executive Commentary

CEO Ron Konezny highlighted the company’s focus on scaling its recurring revenue model, stating, "We expect ARR and profitability to increasingly outpace revenue growth as our model scales." He also emphasized the importance of strategic flexibility, noting, "If I could, I’d sell all of our solutions as recurring."

Risks and Challenges

• Supply Chain Management: Despite a diversified global supply chain, potential disruptions could impact operations.
• Market Conditions: The weaker performance in the APAC region and the uncertain European market pose challenges.
• Tariff Impacts: Ongoing tariff challenges require careful navigation to maintain competitive positioning.
• Renewable Market Weakness: Current softness in the renewable market could affect future growth opportunities.

Q&A

During the earnings call, analysts inquired about the potential impacts of tariffs and the company’s mitigation strategies. Discussions also covered the M&A environment and the company’s approach to strategic acquisitions. Analysts were interested in understanding how Digi plans to leverage its recurring revenue model to drive future growth.

This comprehensive performance and strategic focus position Digi International well for continued success, as evidenced by the positive market reaction and strong financial results.

Full transcript - Digi International Inc (DGII) Q3 2025:

Conference Operator: Thank you for standing by, and welcome to DG International Inc. Q3 twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. Thank you.

I would now like to turn the conference over to Jamie Locke, CFO. Please go ahead.

Jamie Locke, CFO, Digi International: 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 Release 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 ks and subsequent reports on file with the SEC. Finally,

Jamie Locke, CFO, Digi International: certain of

Jamie Locke, CFO, Digi International: 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 eight ks that can be accessed through the SEC Filings sections of our Investor Relations website. Now, I’ll turn the call over to Ron.

Ron Konezny, President and CEO, Digi International: Thank you, Jamie. Good afternoon, everyone. Before we open the line for questions, I’d like to share a few highlights from our third fiscal quarter. Digi delivered a strong quarter returning to year over year revenue growth. Annual recurring revenue grew double digits year over year for the third consecutive quarter.

ARR now represents a new record of approximately 30% of our trailing twelve months revenues. Importantly, both of our reporting segments contributed to this growth. Our tailored IoT solutions make it simpler and faster for customers to deploy intelligent and cloud connected edge solutions. Our solutions enable remote monitoring, improve machine uptime, and deliver actionable analytics, which produce rapid ROI for our customers. This value proposition is resonating across industries and applications.

Profitability improved, driven by ARR and favorable product mix, partially offset by increased freight and duties costs. Adjusted EBITDA margins hit a record 25.6%. We expect ARR and profit growth to increasingly outpace revenue growth as our model scales. Free cash flow generation is a hallmark of our fiscal twenty twenty five performance. Our results were driven by disciplined operations, increased productivity from our AI initiatives, and continued inventory optimization.

After retiring $30,000,000 in debt this quarter, we now stand at $20,000,000 in net debt and remain on track to be net cash positive by the end of our fiscal twenty twenty five. Our CapEx light model delivers a 9% free cash flow yield, underscoring the efficiency of our business. Strategic acquisitions remain a top priority. We continue to evaluate opportunities that align with our ARR, growth and scale objectives. Looking ahead to the final quarter of our fiscal twenty twenty five, our outlook assumes a dynamic macro environment.

Digi’s forty year legacy demonstrates our ability to adapt and to thrive. Our diversified global supply chain positions us to respond quickly when needed, while maintaining a long term focus on our customers’ success. I’ll now turn the call back to the operator for Q and A.

Conference Operator: Thank you. And our first question comes from the line of Tommy Moll with Stephens. Your line is open.

Tommy Moll, Analyst, Stephens: Good afternoon, and thanks for taking my questions.

Ron Konezny, President and CEO, Digi International: Good afternoon, Tommy.

Tommy Moll, Analyst, Stephens: Ron, on products and services ARR, another big step higher this quarter. So I wanted to get an update from you there. A couple aspects I had in mind and then anything else you want to offer. But maybe an update on how you’re managing these attach rates through your channel. I know there’s a decision you have to make about how quickly you to move there.

And then another one that came to mind was if you can give any color on which product categories you’re having the most success with or the most challenges with, frankly, that would be interesting as well. Thank you.

Ron Konezny, President and CEO, Digi International: Yeah, good questions, Tommy. We’re really seeing some increase on take rates. We’ve increasingly moved towards having almost all new business now being attached in the IT area. So IT would include our cellular routers, our OpenGear console servers and our infrastructure management devices. They’re all now seeing really much higher levels of attach and that’s helping drive that recurring revenue.

We saw really good contributions across the board. We did have some product mix with some products with improved margins having a little bit higher weight than others. But we did see some broad based contribution, which is always good to see that you got a diverse set of contributors.

Tommy Moll, Analyst, Stephens: Ron, on the guidance for fourth quarter, looks like sales flat sequentially, EBITDA dollars a touch lower sequentially. What do you want to call out? Maybe there was some goodness that hit the P and L in the most recent quarter that we shouldn’t expect to recur. Anything you can do to bridge us from one to the other would be helpful.

Ron Konezny, President and CEO, Digi International: Yeah, Tommy, we had a similar profile to last quarter. And so we’re always a little bit cautious on the mix side. And so the mix driving gross margin is the thing that would really impact that adjusted EBITDA number. I would point out, although it appears to be relatively flat quarter over quarter, it still would mark another year over year return to growth, which we’re pretty excited about. But that profit assumption will be driven mainly by gross margin rather than say OpEx.

Tommy Moll, Analyst, Stephens: That’s helpful. Thank you. And I’ll turn it back.

Conference Operator: Next question comes from the line of Matthew Moss with B. Riley Securities. Your line is open.

Matthew Moss, Analyst, B. Riley Securities: Hi. This is Matthew on for Josh Nichols. Thanks for taking my questions. I guess just first off, I mean, in terms of demand outside of APAC and and setting tariff returns aside, are you seeing customers move from wait and see mode to pulling the trigger more on larger projects?

Ron Konezny, President and CEO, Digi International: You know what, we’re optimistic that between US financial policy, the One Beautiful Bill Act, as well as now tariffs becoming more certain, whether you like them or not, I think that’s going to open up some improved decision making. We hadn’t seen as much of that in FQ3, but I think we are starting to see that here in this particular period. And so we’re optimistic that increased certainty will help drive more effective and timely decision making by our customers.

Matthew Moss, Analyst, B. Riley Securities: Helpful. Thank you. And if I remember correctly, think OpenGear is benefiting from AI infrastructure build out. Can you kind of size that opportunity as hyperscalers kind of move from planning to deploying a little bit more?

Ron Konezny, President and CEO, Digi International: Yeah, as a reminder, OpenGear really services both data center applications as well as edge. We saw a slight improvement increase in data center business this fiscal year and that continued in FQ3. But it’s still around a fiftyfifty split between those applications. The data centers that we’re doing business with are both AI and non AI. And increasingly, actually, one of the bigger trends is hybrid deployments where a customer wants to have some of their compute in the cloud but they also want to have some compute locally.

And that’s becoming more important as customers look to protect their data as they’re leveraging AI models. So that’s been a real growth area for that hybrid data center environment.

Matthew Moss, Analyst, B. Riley Securities: Got it. And I guess just on inventory, it looks like it’s basically normalized to historical levels. Should we expect customer reordering to accelerate in fiscal ’twenty six?

Ron Konezny, President and CEO, Digi International: Yeah, that’s a good point on inventory. We feel like we’re getting really to that optimized level. In fact, if anything, we want to make sure we have enough of the right product. We’re seeing some positive signs from the channel as well that their velocity is improving. It’s hard to say how much that will continue in FY twenty six, but we are seeing some improvement there.

Matthew Moss, Analyst, B. Riley Securities: Got it. Thank you. That was all for me.

Ron Konezny, President and CEO, Digi International: Thank you, Matthew.

Conference Operator: Next question comes from the line of James Fish with Piper Sandler. Your line is open.

James Fish, Analyst, Piper Sandler: Hi. This is Caden on for Fish. My first question, what was the linearity of the quarter like? What did you guys see through July? Was there any impact from tariffsmacro volatility?

Jamie Locke, CFO, Digi International: I think the, again, had favorable mix that navigated its way through. I think the, I don’t know that there was really anything unusual about the way the linearity came into the quarter. And frankly, there’s not anything unusual about the way the demand is shaping up either. There is some tariff impact. This is Jamie by the way.

There’s been some tariff impact, but we’ve really been navigating through that either through some accelerated buys that we had as well as leveraging our lower tariff regions for manufacturing. So we’ve had some tariff impact. Again, that’s been a very volatile situation with some of the more recent information that’s come out. We’re analyzing how we think that’s going to play into Q4. But as it relates to FQ3, there wasn’t anything unique really about linearity.

James Fish, Analyst, Piper Sandler: Gotcha, thanks. And then just how are you guys feeling about the and A environment? Like what are the opportunity shaping out there?

Ron Konezny, President and CEO, Digi International: Yeah, it’s still a robust environment out there. We’ve got a real healthy pipeline. It’s always an arm wrestle of valuations for the right opportunities. And we continue to emphasize opportunities that have really strong ARR, good growth profiles. We have a right to own them clearly and we want them to be profitable as well.

But it’s a healthy market out there. So, feel like we’ve got a good pipeline.

James Fish, Analyst, Piper Sandler: Got you. Thank you.

Conference Operator: Next question comes from the line of Scott Searle with ROTH Capital. Your line is open.

James Fish, Analyst, Piper Sandler: Hey, good afternoon.

Scott Searle, Analyst, ROTH Capital: Thanks for taking the questions. Hey, Ron, was hoping you could provide a little bit of color maybe geographically and by some of the vertical end markets. I know you had a big win with, I think it was NYC DOT. But where is the activity? Where are you seeing the demand and the pull through in the pipeline building right now?

Ron Konezny, President and CEO, Digi International: Yes, it’s a really good question. One of the hallmarks of Digi is we have tremendous diversity across different industries. And that diversity has really helped us through good times and challenging ones. For example, right now, as you can imagine that renewable market isn’t as strong as it had been traditionally. And so we’re not seeing maybe as much demand there as we’ve had in previous periods.

But we’ve seen really good demand in the utility segment and water. Mass transit has come back as well as we talked about earlier. It’s been good business in both the edge as well as in data center environments and AI has been a nice boost there as well. So, those positives right now are outweighing the challenges. And North America I think is gaining more prominence as compared to the other geos.

APAC in particular I think has been softer for us than maybe we would have liked, but more than offset by some strength in North America. Europe is going to be a bit of a wildcard here as they’re working through a lot of things on that side and we remain optimistic. But there may be some bumps along the way in Europe.

Scott Searle, Analyst, ROTH Capital: Got you. You already addressed the channel issue. It sounds like things are starting to normalize here. But from a costing component standpoint, I’m wondering if you could give us some updated thoughts in terms of the competitive landscape with China based vendors that’s creating opportunities for you. It sounds like you guys have been able to manage your cost structure or your BOM pretty well from that standpoint.

And it sounds like if anything just tariff certainty is going to drive decision making, whereas we’ve been a little bit more of a holding pattern.

Ron Konezny, President and CEO, Digi International: Yes, Scott, you nailed it. I think as things become clear, even if you don’t like them, it enables you to make really effective decision making. We’re very, very fortunate to put in the work prior to have a diversified supply chain. So we’ve got some flexibility. Of course, you can’t just turn on a dime, but we’re trying to take advantage of those areas where the transit routes are very favorable, whether it’s Mexico into North America or Asia into Europe.

And so we’ve got some flexibility there. And we’re going to take advantage of that. We have really moved all of our manufacturing out of China so we don’t have the exposure to what we think has been more of a longer term risk there. And there could be some opportunities as we run into some competitors that maybe don’t have as flexible a supply chain. There is a tremendous amount of tariff engineering going out there where transformation is occurring, there’s competitors considering opening facilities in North America.

But there could be a short term opportunity for us.

Scott Searle, Analyst, ROTH Capital: Got you. And lastly, if I could, just in terms of the near term visibility, I’m wondering if there’s number that’s required to hit maybe the middle of the range. And Jamie, just in terms of capital allocation, you guys obviously been doing a great job on the free cash flow generation front and paying down the debt. As you basically get a net cash position, where does the buyback stand in terms of the level of priorities versus keeping a little bit more in the kitty for M and A? Thanks.

Jamie Locke, CFO, Digi International: Yeah, Scott, good to hear from you. I think the priority continues to be M and A and I would say we would prioritize it that way. We’ve been pretty clear as that being part of our strategy and I would largely look for any deployment to go that route versus say a buyback. We are focused on finding the right acquisitions And so we would deploy our capital with priority there.

Jamie Locke, CFO, Digi International: Thanks. Nice job on the quarter.

Ron Konezny, President and CEO, Digi International: Thanks Scott.

Conference Operator: Another question from Tommy Moll with Stephens. Your line is open.

Tommy Moll, Analyst, Stephens: One final one for me today. Ron, on the 2025 outlook, you’ve got revenues flat year over year, recurring revenues up double digits. And I think I heard you say in your prepared comments that you continue to expect that the recurring fees would grow faster. I’m just looking at the consensus for 2026, well aware you’re not prepared to guide today. But the consensus does assume, call it a mid single digit growth rate on that reported line.

And so I just wanted to give you the opportunity to make any comment about the interplay there where potentially the more success you have on recurring revenue, there can be some optical headwinds there on the reported revenue. Anything you could do to frame how you’re thinking about next year would be helpful. Thank you.

Ron Konezny, President and CEO, Digi International: Yes. In my prepared remarks, I talked about how we expect ARR and profitability to outpace our top line growth and we think that will persist beyond FY 2025. We haven’t characterized the percentages. And when there’s opportunities for us to service a customer with more of a solution that is over a multi year period, we’re going to take that every time. And that will dampen our one time revenue, but it’s got a higher IRR and it’s a better opportunity for both customer and for Digi.

We continue to see those opportunities and we’re going to take advantage of those. And that’s one of the big reasons that ARR is going to outpace revenue for the future. That ARR also contains a higher gross margin than what our one time revenue and that’s what’s going to help drive improved margins that we’ve seen and drive down to the bottom line, which will lift that adjusted EBITDA. And we’re seeing really a version of that happening as 2025 period unwound. We’re seeing double digit growth on ARR that’s contributing to the gross margin.

And now you’re seeing us in the last two quarters lift our profit expectations. So we expect that model to continue. If I could, I’d sell all of our solutions. Are recurring. We’re at a record 30%.

We do have customers and products that are appropriate for that, but we’re going to keep emphasizing that because we think it’s in the customers’ best interest. It really matches investment with return. It’s very cash flow friendly for our customers as well. And it’s just easy. It makes it a lot easier.

It holds Digi to a higher level of responsibility than providing a product and having break fix support. You get a real engagement at that ROI level, then you’re just a component of broader solution. So it’s part of the color behind that real strong belief that the ARR profit will outpace top line.

Tommy Moll, Analyst, Stephens: Thank you, Ron. I appreciate it. We’ll turn it back.

Ron Konezny, President and CEO, Digi International: Thank you, Tom.

Conference Operator: Seeing no further questions, that concludes our Q and A session. I’d like to turn the call back over to Ron Konesni, CEO, for closing remarks.

Ron Konezny, President and CEO, Digi International: Thank you. We look forward to participating in the Piper Sandler Annual Growth Frontiers Conference in mid September in Nashville. Please seek out your Piper representative for a meeting at that event. And thank you for joining Digi’s earnings call today. We appreciate the continued support of our customers, distributors, suppliers, and our exceptional Digi team.

Have a great day.

Conference Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.

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