Digi International Inc. (NASDAQ:DGII) Q4 2023 Earnings Call Transcript

Digi International Inc. (NASDAQ:DGII) Q4 2023 Earnings Call Transcript November 9, 2023

Digi International Inc. beats earnings expectations. Reported EPS is $0.52, expectations were $0.48.

Operator: Good day. And welcome to the Digi International Fiscal Fourth Quarter 2023 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, Chief Financial Officer. Please go ahead.

Jamie Loch: Thank you. Good day, everyone. It’s great to talk to you again and thank you 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 open this morning. You may obtain a copy of the press release through the Financial Releases section of our Investor Relations website at digi.com. This morning, Ron will provide comments on our performance and then we will 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 of the financial information disclosed in this call includes non-GAAP measures. 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-K that can be accessed through the SEC Filings section of our Investor Relations website. Now, I will turn the call over to Ron.

Ron Konezny: Thank you, Jamie. Good morning, everyone. Before we jump into Q&A, a few comments. What an incredible year for Digi. We connected millions of industrial things to the Internet, unlocking savings, improving customer service and reducing our customer’s carbon footprint with fewer truck rolls and higher uptime. Throughout a turbulent fiscal 2023, we set new records for our ARR, adjusted EBITDA and revenues. We paid down $36 million in debt and improved our gross and adjusted EBITDA margins. We are proud to have essentially achieved our three $100 million goals, and now we begin our next journey to double ARR and adjusted EBITDA to $200 million in the next five years. Although we will be off to a modest start in our fiscal 2024 period, we believe the dip is contained to a subset of long-term customers that need time to deploy their inventory.

We expect to grow ARR and adjusted EBITDA faster than the topline, continuing the improvement of our model. There are billions of industrial things that need to be connected and Digi is excited to play a leading role by providing secure, resilient and easy-to-manage solutions. At this time, I’d like to turn the call back to the Operator for questions-and-answers session. Thank you, Operator.

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment for our first question. Our first question comes from Tommy Moll with Stephens. Your line is open.

Tommy Moll: Good morning and thanks for taking my questions.

Ron Konezny: Good morning, Tommy.

Tommy Moll: Ron, you referenced the dip in terms of revenue as largely relating to a subset of customers and their extended deployment timeframes. I think that maybe the same point you referenced about console servers in the earnings release. But could you just give us any more context on what you are seeing there?

Ron Konezny: Yeah. There is some — I think you have seen this with other companies in the datacenter space and in some industrial sectors as analogies. But there are some of our customers that have taken inventory. It’s taken them a little bit longer than the original projections to deploy that inventory. There is quite often a collection of products that need to be put together, not just Digi equipment but other vendors like Cisco, et cetera. And so getting all that organized, deployed, matching that with demand profiles has taken a little bit longer than they originally projected.

Tommy Moll: And is that — do you think, Ron, a function of a slowing in that underlying demand or is it more a function of logistics and just having to stage the timing of deployments?

Ron Konezny: Yeah. I think it’s a little bit of both. I think the long-term trends are there as more and more work moves to the cloud. So we are confident in that long-term trend. I think there’s more of an aberration, where probably, growth rates were a little bit higher than expected and also the logistics of putting things together. In some cases, these are literally deployed around the world…

Tommy Moll: Yeah.

Ron Konezny: … supporting all that can take some planning.

Tommy Moll: Okay. That’s helpful. Thank you. The other question I had was on your guidance for the year, flat revenue, overall. So at the segment level, are we expecting something similar for both or one is up, one is down? And then, on the EBITDA line, you are showing progression on flat revenues, so there must be some driver for that margin expansion. If you could highlight that as well, it would be helpful.

Ron Konezny: Yeah. I think really it’s similar story across the segments in terms of our expectations and we do expect ARR to grow faster and that’s one of the really important contributing factors to Digi’s mission as a whole, which is to increase the amount of ARR on an absolute basis and then as a percentage of our overall revenue. And where we see that really flow down is to the gross margin line, and if we are good operators like we anticipate being to adjusted EBITDA line. Our recurring revenue is generally at much higher margins than the consolidated gross revenue — our gross margin level and so that’s the dynamic you are seeing play out.

Tommy Moll: That’s helpful. Thank you. I will turn it back.

Operator: One moment for our next question. Our next question comes from Mike Walkley with Canaccord Genuity. Your line is open.

Mike Walkley: Great. Thanks and congrats on the strong fiscal 2023. I guess, Ron, just a little more on the flattish revenue growth for fiscal 2024. With increased ARR, how much of an impact might there be to the hardware sales for maybe bundling, so you get a little lower hardware revenue upfront that’s built into that guidance that’s driving the ARR and higher margin longer term?

Ron Konezny: Yeah. Mike, that’s a really important dynamic and I think as you and many of our investors know, that’s a key theme of ours is to become more of a solution provider and move away from one-time sales. And so we are seeing both in solutions, and to some extent, product and services. We are moving away from a one-time sale to a service and that revenue is lower upfront, but of course, it helps ARR and provides increased visibility and overall better economics for the customer and for Digi. So you are seeing that certainly in the Solutions segment, where we are seeing fewer and fewer customers that want to pay one-time for deployment rather than wrapping all of those services into a single monthly expenditure. And we are also seeing to some extent within our Products and Services group.