Good day, and thank you for standing by. Welcome to the Fiscal Q4 2025 Digi International Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jamie Loch, CFO. Please go ahead.

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 Inc. Joining me on today's call is Ronald E. 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 Releases section of our Investor Relations 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. We believe the expectations reflected in our forward-looking statements are reasonable, but 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 reports on file with the SEC. Finally, certain of 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 8-Ks that can be accessed through the SEC filings sections of our Investor Relations website. Now I'll turn the call over to Ron.

Thank you, Jamie. Afternoon, everyone. Before we take questions, I'd like to reflect on our fiscal 2025 performance and share our outlook for fiscal 2026. Digi delivered a strong finish to the year with record quarterly revenue of $114 million, up 9% year over year, cementing our return to top-line growth. We reported a record $152 million ARR with the inclusion of Jolt software acquired in August, which represents a 31% year-over-year increase. This marks our fourth consecutive quarter of double-digit ARR growth. ARR now represents approximately 35% of total revenue, underscoring our continued transition from transactional sales to multiyear solution subscriptions. For the full fiscal year, we generated $430 million in revenue, up 1% year over year, and $108 million in adjusted EBITDA, an 11% increase year over year. Incredible collaboration between our product lines and supply chain teams drove inventory down, helping our cash conversion to deliver $105 million in free cash flow for a yield of 8%. We paid off all the debt from the Ventas acquisition as promised. Lastly, the integration of SmartSense and Jolt is being embraced by the marketplace with our first cross-selling opportunities unfolding. We have a clear vision of the combined platform, and we have integrated the teams. Digi's broad industrial Internet of Things offerings from embedded solutions to edge solutions to turnkey vertical offerings appeal to a wide variety of industries and applications. This diversity fuels our resilience, durability, and relevance. Digi's unique position in the market allows us to participate in emerging and evolving technology trends such as artificial intelligence, edge computing, and industrial automation. We see a broad-based opportunity in connecting hundreds of billions of devices to the Internet. Our AI journey began with an internal focus, and we have seen meaningful productivity gains across the company. We are…

Thank you. To withdraw your question, please press 11 again. And our first question comes from Thomas Allen Moll of Stephens. Your line is open.

Good afternoon and thanks for taking my questions. Thanks, Tommy. Ron, I wanted to start on the P&S recurring revenue trends, strong growth again this quarter, whether you're looking quarter over quarter, year over year. What can you share about the field-level execution here? Any tweaks you've made in the go-to-market strategy? What's driving some of the success? And if you keep this up, how much of that segment in particular is up for grabs to sell on a recurring basis?

Tom, a good question. As you know, we've talked about it for several periods here about wanting to sell solutions and having 100% attached. We really are getting closer to that goal. And so you're seeing that progress, and it's a testament to our teams and also our channel partners that have embraced this as well. And it's not all about just the upfront sale. It's delivering on that promise and, of course, contract extensions, renewals, and cotermination, those kinds of things. But it's been great to see the progress, and you're seeing that attach rate really increase. And we expect that to continue in FY '26. I'm gonna ask a multipart question here. On your revenue guidance, just to address some issues that I think will come up in the coming quarters. So to the extent you can answer these, please do. So a few things jump out on the trend for recurring revenue; it sits below what your reported revenue is expected to be. What's driving the spread there between those two? And then separately, how much are you assuming for Jolt? Just so we could have more of an organic view if we want to strip that out? And how much are you assuming for data centers? Is that a theme worth exploring here as a key growth driver? I'll let you answer whatever you can there. Thank you.

Yeah, yeah. So, I mean, we were very deliberate in the guidance. We're taking two successful teams, SmartSense and Jolt, and we've combined them. We've got some synergies we've captured. So I think we've been just deliberate in incorporating that into our guidance. There's incredible growth opportunities, but there's also obviously some integration we're working through with the teams, with the solutions, with the customer base as well. Jolt just tended, Tommy, to sell a little bottoms up to smaller customers. We're reaching into the enterprise. We've tended, with SmartSense, to be the opposite, selling enterprise. And so we're really moving towards enterprise sales and away from the very, very small customers. And so that's really incorporated in that ARR guidance that you see in fiscal 2026. Regarding revenue, you know, we're seeing really strong contributions from a wide variety of verticals. Data center is certainly one of those. And that's really lifting that one-time revenue, which helps that, incorporated with Jolt too. As you recall from our acquisition, we indicated Jolt contributed over $20 million annualized recurring revenue, so you can kind of add that into the organic growth rates or that's embedded in '26, which, of course, the ARR has incorporated the revenue. We had about a half a quarter that we were able to enjoy in fiscal 2025. Thank you for all that, Ron. I'll turn it back.

Thank you. And our next question comes from Scott Wallace Searle of Roth Capital. Your line is open.

Hey, good afternoon. Thanks for taking the questions and a really nice job on the quarter, guys. Thanks, Scott. Scott. Scott. Jamie, maybe first, just to calibrate in the September quarter, I'm wondering if you could just break out Jolt so we have an idea of the organic uplift in the quarter. It seems like things accelerated towards the end of the quarter. And maybe bolting on to that, I think in some of our last conversations, over the past couple of quarters, sales cycles had been getting extended, and it seemed like that was kind of starting to go in the other direction. I'm wondering if you could comment in terms of the general pace of business right now and maybe by vertical how you're seeing that demand and those decisions getting made now? Is there an acceleration? And maybe as well, if you could address sort of government headwinds on that front as well.

Yeah. Thanks, Scott. I think relative to the first question on the Jolt side, back to Ron's sort of comment on it. At the time of the acquisition, we had indicated Jolt had done over $20 million of ARR. The Jolt deal was closed midway through August, so you could sort of envision based on that ARR with a month and a half what the revenue contribution would have been like based on what we had disclosed at the time of acquisition. So that would kind of give you a guide there in terms of how that impacted both Q4 as well as what the impact would be on '26 going back to that press release. I would say in terms of more broader macro kind of conditions, I do think that we're seeing certain verticals are maybe accelerating some of their decision-making. I think others are still taking their time. I think the current shutdown of the government adds to just uncertainty. I would say we're less impacted by, say, pure government shutdown and more just by the continued uncertainty that it drives out the marketplace. And so I think, you know, again, you kind of we've seen over the last several years we're bouncing from issue to issue, whether that's from COVID into supply chain challenges into macro headwinds, into tariff questions, and now into the shutdown. And so that uncertainty, I think, causes delays. I don't think it's as much because of specific end users or, say, programs that we're working with with government entities as much as it just kind of drags it out. Undoubtedly, though, there are certain verticals where you can see a lot of movement and decision-making having to ramp up in order for those customers to be able to meet their critical objectives. So I would say on the whole, things are accelerating. But for sure, the current geopolitical conditions are creating some uncertainty that keeps things a little bit suppressed in terms of normalcy.

Gotcha. And, Ron, maybe if I could, comments in terms of processing at the edge, and I think tiny language models, I wonder if you could expand on that in terms of what you're seeing from a customer input, desire, I guess, and design activity. You know, where you guys are going on that front, what kind of opportunities that represents, and maybe kind of couple that with some thoughts on M&A. You folded in Jolt in the last quarter. But it sounds like you guys have got some more debt capacity now. In effect, to go out and start to be a little bit more aggressive. I wonder if you could give us your latest thoughts on that front.

Yeah. On the first one, and I'll provide some context to my comments that, you know, I think AI in the industrial IoT world will be a very long fuse. It will have different durations depending upon industries because the very first part of AI is you've got to get your data collected and normalized and ready to be used by AI. So whether you're a manufacturer of generators, elevators, solar farms, you know, all those different industries and all the different market participants have their own journeys they're going on to get their data ready to be leveraged by AI. But to give you a sort of a crude example, today, most IoT applications there's a device at the edge that's interfacing with some piece of equipment. It's typically talking to the computer board inside that device. It's gathering information. It's then transmitting that data to a customer or an application that then is using that data to make some kind of decision. Do I change configuration? Do I update software? Worst case, do I send a person out there to provide some kind of fix in the field, which is sort of the worst case. Right? If you think about fast forwarding to a day where these edge devices are AI-enabled, the tiny language model you're attached to an elevator, that's all you care about is elevators. Right? In fact, you only care about your provider's elevators. And that dataset is very small, a lot of that decision that is waiting to be transmitted to a centralized decision maker could be made at the edge. So those decisions could be made much more autonomously with changing configurations, potentially implementing or even requesting a software update to deal with an issue without any human interaction. That edge device could…

Hey. One last one if I could. You know, in terms of the long-term guidance for ARR and adjusted EBITDA margins, you're well on the path from an ARR perspective, particularly with Jolt now folded in. But I think just from a numerical perspective, adjusted EBITDA was probably trailing that goal and a little more work to be done. But it sounds like you guys are still very comfortable with those fiscal 2028 timeline to double the adjusted EBITDA. I'm wondering if you could just provide some expanded thoughts on what gives you the comfort there, if you're seeing some other synergies, just a general operating leverage now you're expecting to get going forward. Thanks.

Yeah. Yeah. The ARR, you know, that's an easy one, I think, to envision. Starting fiscal 2026 with $152 million, literally, percent growth annually gets us to our goal by the '28. So that's not much of a stretch, I think, for Digi to accomplish. Adjusted EBITDA, clearly a bigger goal. We've guided 15 to 20. You know, we're gonna need 20% plus growth rates in 2027-2028 to hit that number. So there's more work to be done on there. But I will say as we start growing the top line in addition to ARR, and our margins, as you know, and you've seen our margins gradually improve, you can really start to visualize those productivity enhancements we talked about earlier really allow us to get more scale and more leverage out of that growth that we start to bring into the company. So we're still optimistic on our $200 million goals by the '28.

Great. Thanks so much. Great job on the quarter.

Thank you. And our next question comes from James Fish of Piper Sandler. Your line is open.

Hi. This is Caden on for Fish. Just wondering what kind of tailwinds are you guys seeing on the AI side with some of your larger customers? And then any way to parse out what's going into an AI data center or use case? Thank you.

Yeah. Good question. The data center has been the most applicable to our OpenGear console server business. We provide a pretty key piece of technology to allow an IT professional to access the equipment that is inside of that data center and to be able to use command line or other interfaces to change configurations, update software, to orchestrate that equipment without being there physically. And we do so with smart broadband connections so that you don't have to use the network to troubleshoot the network. That's really where we're seeing the most presence within our product line and data centers. And, you know, I think we're all talking about how big, how long will the AI investment last. And we're hopeful for longer and larger for OpenGear's sake. But it's unclear because there's a lot of work. You heard here at some of the major providers over the last week and a half talk about power being a critical issue or access to additional data center space. Not as much on access to NVIDIA technology. But there'll be some pacing to this. And then there's the broader question of are we over-investing in AI, and will there be a correction? Which I think none of us quite know. But in the meantime, OpenGear really is the primary beneficiary within our product lines of the data center expansion. I think to a lesser extent, we get beneficiary impacts in our cellular router and SmartSense solution businesses because utilities are spending a lot of money on their infrastructure, and that's a big vertical for our cellular router product line.

Thanks. And then just my last one. Is Europe still a wildcard at this point? And if so, what do you need to work through there?

I'm sorry. Can you repeat that question, please?

Yep. Is Europe still a wildcard at this point? And if so, what do you need to work through there?

Europe. Yeah. Europe, you know, both say most of our revenue is still North American centric. We're 70% plus North America. Let's say, you know, 15% to 20% Europe, and the rest is other geographies. You know, Europe is a country by country opportunity, and we have product lines that play better in certain countries than others. So we still think Europe will be a meaningful contributor. North America will probably grow faster.

Thank you.

And our next question comes from Josh Nichols of B. Riley. Your line is open.

Yeah. Thanks. Great to see just another sequential quarter of pretty significant margin improvement. I know you have a half-quarter benefit from Jolt, but when looking at the revenue and then the sharper increase that you're expecting in EBITDA guidance in fiscal year 2026, is the expectation that you're going to continue to see some potential improvement on the gross margin line from the quarter you just did for a little bit of context?

Yeah. Josh, it's Jamie. I think we moved our segment of reporting of profitability to op income coming out of the Jolt acquisition. So if we rewind the tapes, we said as ARR continues to expand, we've seen historically that there's that pretty consistent movement in gross margins in that 10 to 20 basis points sequentially. And I would say the story continues to hold the same. Right? ARR will continue to grow. As that continues to grow and adds into the mix, you'll continue to see similar type expansion. So I don't think there's anything really there. We don't guide to gross margins per se. So I really wouldn't be able to get more specific than that, but I would say history suggests based on the guidance that we've provided, we would see a similar pattern.

Thanks. So then looking here, you've talked a lot about previously how these attach rates have kind of been trending up. That seems to be evident in the results. Any update on what you're seeing today in terms of attach rates or where you think that could be going over the next couple of years as you get to those, like, fiscal year 2028 targets for top line and EBITDA?

Yeah, Josh. It's a great question. In certain product lines, we're at 100%. In certain product lines, we're kind of in that 50% to 75% range, but we do expect it to go 100%. There are some products, especially in our embedded division, where we don't have those levels of attach rates. They're sold to engineers that are designing our products into a broader solution. But for most of our devices, we do expect to reach 100% by the end of our fiscal 2028 period.

Great. And then last question for me, I think it was touched on earlier, but just to drill down a little bit further. Is there any context you can provide in terms of, like, you know, in terms of sales revenue? How much of that is actually going into data center if you try to break that out? I know OpenGear has been one of the beneficiaries, with all the increased spend in data centers. But I'm just kind of curious if you could give us a little bit more color on that.

Yeah. I mean, it's a positive, but we're incredibly diverse. While data center is a meaningful contributor, it's not like a dominant theme across the company's business. We do a lot of work in utilities, medical devices, SmartSense does work in health care and food. So it's an important vertical for us, but I wouldn't say any more important than those other verticals as well. But it is certainly one that OpenGear's business is about half data center, half edge.

Got it. Thanks for the detail there. Appreciate it, and have a good one. Good catching up.

Thank you. And our next question comes from Anthony Stoss of Craig Hallum. Your line is open.

Good afternoon, Ron and Jamie. I want to offer my congrats on the really strong quarter and really good guide for fiscal 2026. Ron, I'd love to hear your view, kind of rank order maybe some of your product segments, cellular routers, OpenGear, etcetera, IoT solutions. What you think might be kind of the fastest growing segment within each for 2026? Then I had a follow-up.

Yeah. The fastest growing doesn't always equal the biggest. So we expect growth across all of our product lines, which is really good. I think actually our cellular router division will probably grow the fastest of those on a percentage basis. And then our infrastructure management is our smallest product line. It's mainly legacy products with a couple of new ones. So that's typically the smallest of the four product groupings that we have inside of IoT product services.

Got it. And is it fair to say that your, in addition to the tariffs gonna be behind, that your customers are growing more confident even on the macro? Hence, that's why things are really starting to pick up for you guys.

I think so. I think there's a combination of a little bit more certainty. There still is, you know, less certainty than probably everybody would like, but you've got the Fed that's helping out on that side. You've got certain verticals that are really investing, utilities, data centers, medical devices. We still see a tremendous opportunity in point of sale, digital signage. There certainly are some verticals that have gotten softer. Residential solar is a really good example of that. So the beauty is the diversification of Digi. We can kind of pivot towards those areas where there's a little bit more strength in demand and deemphasize those where there's maybe some softness.

Got it. Great job, guys. Really appreciate it.

Thanks, Tony.

Thank you. And as a reminder, if you have a question, please press 11. One moment. And our next question comes from Greg Messinas of Kingswood Capital Partners. Your line is open.

Yes, thank you. Can you reiterate whatever guidance you gave on the accretion of the acquisition of Jolt back in August? And how have you progressed towards those goals? Have you run ahead of them? Or what? Thanks.

Yeah. Thanks. It's a good question. At the time that we did the acquisition, we indicated really two things. We had said that Jolt was coming in with over $20 million of ARR, you can envision how the revenue was gonna fold in. We had a month and a half remaining in Q4, so we adjusted our revenue guidance to account for that incremental revenue coming from that ARR. We'd also indicated that by the end of calendar 2026, we would be at an $11 million run rate EBITDA through the acquisition. And that was gonna be through a combination of the profit that was coming in as well as synergies both top and bottom line. I would say to date, the teams have executed well, being into the acquisition now for a couple of months. We've got unified sales organizations. We've got, frankly, unified organizations across the board. As we've wrapped up our fiscal year-end, we've had an opportunity to integrate Jolt in with a year-end process that's a little bit different than theirs. So I would say thus far, we're tracking well. Both in terms of how we are focused on our integration with our people as well as being able to obtain both top and bottom line synergies that we have laid out that we would be achieving by the time we ended calendar '26. I would say to Ron's point, we're already seeing movement in our opportunity pipeline on cross-selling opportunities and where the combination is really making sense for our customers. So I think we've done a nice job. Our teams have done a nice job of coming together as one group. Jolt was a very successful company, and it's great having them be a part of Digi, and it's great seeing the enthusiasm and excitement throughout Digi on bringing these two companies together. I feel like we're executing well towards the objectives we laid out.

Thank you for that.

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Ronald E. Konezny for closing remarks.

Thank you, everyone, for joining us this afternoon on the earnings call for Digi. As a reminder, we're going to be at the Stephens Investment Conference in Nashville next week. Thank you to the Digi team, and happy fortieth birthday, Digi International Inc.

And this concludes today's conference call. Thank you for participating, and you may now disconnect.