Digi International Inc. (DGII) Earnings

Management highlights

- Core Value Proposition & Competitive Strengths: Digi delivers ROI for customers by enabling remote connectivity and management of business and mission-critical assets across industries including energy, healthcare, data centers, retail, and manufacturing. Key customer priorities are reliability (Digi’s longstanding strength built on 40+ years of experience) and increasingly, security, where Digi’s end-to-end solutions meet growing market demand. Digi excels at delivering scalable, secure, easy-to-use complete solutions combining edge devices, optional connectivity, and software services. - New AI Product Development: Digi launched DANI (Digi Artificial Network Intelligence), a new natural language AI tool integrated into its Digital Remote Manager platform that allows users to query network performance, check software update status, and eventually execute management actions without customized reports or dashboards. DANI is currently being rolled out across Digi’s product lines as a feature to drive adoption, with monetization not an immediate priority. - Acquisition Flywheel Strategy: Digi runs a repeatable inorganic growth flywheel: monitor hundreds of potential acquisition targets, use debt to fund acquisitions to avoid shareholder dilution, quickly integrate targets onto common systems, grow ARR and profitability, generate operating cash flow to pay down debt, then recycle capital for new acquisitions. Recent acquisitions Jolt Software (Fiscal 25) and Particle (Fiscal 26) are progressing well, meeting pre-close integration and performance targets. Net debt after these acquisitions is $81 million, with leverage well below 1x, demonstrating successful execution of the flywheel strategy. - Q3 2026 Financial Highlights: Digi reported record Q3 results: total revenue of $139 million, up 29% year-over-year; gross margin of 64.8%; operating cash flow of $33 million, up 38% year-over-year. Non-GAAP metrics include a record ARR of $191 million, a record adjusted EBITDA margin of 29.1% ($40 million adjusted EBITDA). ARR and adjusted EBITDA grew faster than revenue, continuing the trend of operational leverage the company committed to previously. Annualized operating cash flow conversion exceeds 100% of year-to-date adjusted EBITDA.

Guidance

- The company upwardly revised guidance for Fiscal Q4 2026 and full year Fiscal 2026. For Q4, management expects revenue of $138 million to $142 million, adjusted EBITDA of $40 million to $40.15 million, and adjusted diluted EPS of $0.75 to $0.78. - Full year Fiscal 2026 guidance is updated to total revenue of $529 million to $533 million (representing 23.5% year-over-year growth), adjusted EBITDA of $146 million to $147.5 million (35.5% year-over-year growth), and adjusted diluted EPS of $2.67 to $2.70. Full year ARR is projected to grow at least 27% year-over-year, and will reach at least $193 million annualized. - The company reaffirmed its 5-year long-term objective to reach $200 million in ARR by 2028. With 2026 year-end ARR on track to near this target, management expects to cross the $200 million ARR threshold well ahead of the original 2028 timeline. Adjusted EBITDA is tracking to a 23% CAGR towards long-term targets.

Segment performance

Digi International does not break out formal financial results for individual product segments in this call. Leadership notes that balanced contributions from both product and services/solutions segments drove Q3 results, with strong volume growth for products and high solution attach rates to existing product sales. Ventus and SmartSense specifically delivered strong contributions to the solutions segment, driving annual recurring revenue (ARR) growth. The OpenGear product line delivered widespread strong performance across edge campus and data center end applications.

Risks & headwinds

- Forward-looking statements included in this call are inherently subject to significant risks and uncertainties, and there is no assurance that stated expectations will be met. Management undertakes no obligation to update forward-looking statements after the date of the call. - Supply chain constraints, most notably in memory components, are spreading and creating market uncertainty. While this has driven near-term urgency for customer orders, it remains an ongoing industry challenge. - Hyperscale data center opportunities remain in very early stages, have very long sales cycles, and are not included in current forward guidance, with no guarantee of future meaningful revenue from this segment. - While days to win have improved from recent levels, they have not returned to pre-existing normalized levels, and sales conversion timing remains variable.

Analyst Q&A

• Q: An analyst asks about trends in the sales funnel and days to win, given stronger than expected Q3 results and upward guidance revisions. /

  A: Management reports that days to win has improved, as customers are making purchase decisions faster than in recent periods, though it has not returned to pre-slowing norms. There is broad growth across all stages of the sales pipeline, and some deals have unusual urgency that speeds up conversion. Contributing factors include strong recent PMI manufacturing data, AI-driven growth in end markets like data centers that indirectly boost Digi demand, and supply chain concerns that lead customers to place orders earlier to secure deliveries. (301 characters)

• Q: An analyst asks for an update on OpenGear's performance in the data center vertical, specifically whether Digi has made inroads into the hyperscale segment where it did not previously sell directly. /

  A: Management states OpenGear has delivered widespread strong performance across edge campus and data center applications, and is the preferred solution for many neocloud deployments. Digi continues to pursue hyperscale clients, but these have very long sales cycles with unpredictable outcomes. Management remains optimistic but does not include any hyperscale revenue in current guidance. (287 characters)

• Q: An analyst asks what is driving the strong Q3 product gross margin, and what the long-term margin outlook is heading into Fiscal 27. /

  A: Management says the baseline long-term gross margin range is low to mid 60s, with 62-63% as a stable floor. Q3's stronger 64.8% margin came from favorable product mix, which is the main driver of quarterly variability. Longer term, Digi expects 10-15 basis points of annual margin improvement as faster growing ARR drives continued positive mix shift, with quarterly results expected to vary by 200-300 basis points around the baseline. (318 characters)

• Q: An analyst asks for clarification on the commercial opportunity for the new DANI AI tool. /

  A: Management explains DANI is integrated into Digi's Digital Remote Manager platform across its router, embedded, and infrastructure product lines, and will be rolled out to all Digi offerings. The tool allows natural language queries about device status and network performance, and also acts as a built-in training tool for new customer staff. Digi is prioritizing adoption over near-term monetization, but sees long-term runway for the feature and potential future monetization opportunities. (322 characters)