Digi International Inc. (NASDAQ:DGII) Q3 2023 Earnings Call Transcript

Digi International Inc. (NASDAQ:DGII) Q3 2023 Earnings Call Transcript August 5, 2023

Operator: Good day and thank you for standing by. Welcome to the Q3 2023 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. [Operator Instructions] 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.

Jamie Loch: 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 before the market opened this morning, and we posted a shareholder letter this morning as well. You may obtain a copy of the press release and shareholder letter through the Financial Releases section of our Investor Relations website at digi.com. This morning, 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-K and subsequent reports on file with the SEC. Finally, certain 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.

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The earnings release is also furnished as an exhibit to Form 8-K that can be accessed through the SEC filings section of our Investor Relations website. Now I’ll turn the call over to Ron.

Ron Konezny: Thank you, Jamie. Good morning, everyone. Before we jump into Q&A, a few comments. We are excited to deliver our 10th consecutive record revenue quarter, which is especially pleasing in this constantly evolving macro environment. We’re thrilled to announce we achieved the second of our three $100 million goal in annualized recurring revenue. We continue to sustain $100 million in quarterly revenue, and we are gaining more confidence in capturing our final goal of $100 million in annualized adjusted EBITDA. Digi provides connectivity and management of the world’s assets, and most assets are not connected today. Digi is well positioned to capture this opportunity with our secure, reliable, scalable and easy to manage solutions. At this time, I’d like to turn the call back to the operator for our questions-and-answer session. Thank you, operator.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Tommy Moll, Stephens Inc.

Tommy Moll: Ron, I’ve got two on ARR. So we’ll start on the P&S side, where there was a big step up, and I know that driving that penetration rate higher has been a priority for some time. So what can you tell us is behind the trend we’ve seen, how much more is to come?

Ron Konezny: Yes, Tom, a really good question. We were obviously very excited to see the improvement both year-over-year and quarter-over-quarter. There’s really two things going on: one is really pleasing in that we have seen year-over-year growth in really all of our product lines. And it’s certainly the result of a lot of work that preceded this in making sure that our employees, our partners and, of course, most importantly, our customers understand the value of a complete solution. And so we’re seeing increased take rates there and also nice renewals. We were benefited as well with one larger Enterprise deal that came to close there that helped really catapult that number. We do have other Enterprise deals we work on. Those are harder to predict, but it was nice to secure that one last quarter.

Tommy Moll: And then, Ron, on the solutions side, you called out, I believe, in the shareholder letter, some of those Enterprise deals have taken longer to close than you originally would have expected. What can you tell us about the trends on that side of the ARR story?

Ron Konezny: Yes, equally good question. We — the good news is the pipeline is increasing, and we aren’t losing deals. We are, to the point in the share letter. It’s taking longer. Customers are being more inspecting and really making sure that the testing process goes well before they roll out. So we’re excited that the pipeline is still there, and we’ve got to work hard to convert that, of course, into ARR.

Operator: Our next question comes from the line of Mike Walkley of Canaccord Genuity.

Mike Walkley: And congrats on the 10th consecutive quarter. Ron or Jamie, just for the September quarter guidance of flat to slightly down sequentially at the midpoint, how much of an impact is that due to the September quarter still be in face with hard-to-get components? And when do you think supply demand might come into balance? You said during fiscal ’24. Is it still multi-quarters or does that start to come into balance as we get to early fiscal ’24?

Ron Konezny: Yes, Mike, really good question. As you know, we’ve been battling supply chain challenges. We have a variety of products with thousands of parts that are needed to put these together into finished goods. Some of those parts are a little bit older in terms of their birth dates and harder to secure. So we’re still facing some supply chain headwinds. Those are improving gradually. We don’t have an exact quarter we can call out, but we’re seeing the trends where we expect fiscal ’24 to see some degree of normalization, but we’re still facing near-term headwinds. And I think as you’ve seen in the last couple of quarters, we like to give guidance with the confidence that we can secure the parts we need. And we’ve been fortunate enough to get some hard work that paid off that has enabled us to go beyond the guidance in the most recent quarters.

But we’re sticking with that philosophy in the September quarter guidance that those we know we can secure, we’re embedding that into our outlook, and there certainly is some opportunity to chase some additional parts as well.

Mike Walkley: That’s helpful. And just a follow-up question for Jamie. Just how should we think about seasonality into the December quarter, you might have better supply, but that tends to be an area where your distribution partners tend to clean up — get their inventory a little bit lower. And then also for Jamie, just as supply and demand come more in balance, where should we think about the right levels of inventory longer term and how that might free up some working capital as you continue to pay down your debt?