Digi International Posts Record Quarter, Guides Fiscal 2027 Up Double Digits

Digi International (NASDAQ:DGII) grew revenue 24% for its full fiscal year and posted record quarterly revenue, annual recurring revenue and adjusted EBITDA in the fiscal fourth quarter, executives said on the company's earnings call. The boardroom mood, one infers, was tolerable.

President and CEO Ron Konezny said results exceeded the company's guidance "almost across the board." Chief Financial Officer Jamie Loch broke the fourth-quarter revenue growth into roughly $16 million from one-time revenue and $13 million from recurring revenue. Both engines, in short, fired.

What drove the fourth quarter?

The IoT products and services segment delivered nearly 30% year-over-year revenue growth, with operating margin up 320 basis points (one hundredth of a percentage point each). Annual recurring revenue, or ARR, doubled in the segment, helped by the acquisition of Particle as well as organic growth, Loch said.

The solutions segment performed almost as briskly. Revenue rose 20%, operating margin improved by nearly 600 basis points, and ARR increased 11%.

Cost discipline held. Operating expenses consumed 47% of revenue in the quarter, down from 51% a year earlier; for the full year, the ratio fell to 49% from 50%. Full-year gross margin improved from the prior year, though fourth-quarter gross margin declined. Loch said the company remains comfortable with gross margins in the low- to mid-60% range.

Cash generation followed suit. Digi generated $42 million in cash during the quarter and $153 million for the year, Loch said. Gross debt stood at $69 million, with net debt of approximately $39 million. A modest balance sheet, by most standards.

What does fiscal 2027 guidance promise?

Digi projected fiscal 2027 revenue growth of 10% to 15%, ARR growth of at least 15% and profit growth of 12.5% to 17.5%. The outlook includes the pending acquisition of sensor maker Disruptive Technologies and assumes the deal closes on Nov. 30.

The fiscal first quarter looks livelier still: revenue growth of 14% to 18%, adjusted EBITDA growth of 25% to 30%, and adjusted net income per diluted share growth of 27% to 34%. The per-share forecast includes anticipated interest expense of $0.02 to $0.04 per diluted share.

Asked why first-quarter adjusted EBITDA dollars were guided lower sequentially, Loch cited margins expected closer to the middle of the company's range plus seasonally timed expenses. Konezny added that channel partners typically tighten inventory before their own fiscal year-end, slowing the start for the IoT products and services segment. A calendar quirk, not a demand signal, per management.

Loch said Digi expects to reach its $200 million ARR goal in fiscal 2027 — a year ahead of the target set at the end of 2023. The company still expects to meet a separate goal of $200 million in adjusted EBITDA by the end of fiscal 2028.

What does the Disruptive Technologies deal bring?

Digi agreed to purchase Disruptive Technologies for $130 million in cash, funded through its credit facility. The transaction awaits regulatory approval, which Konezny said the company expects to receive this month. Digi expects the acquisition to generate $9 million in incremental adjusted EBITDA in fiscal 2028.

Strategically, the deal extends Digi's SmartSense business into Europe and adds sensor capabilities for markets including building automation and occupancy monitoring. Disruptive Technologies has deployed more than 250,000 sensors, most of them in Europe, Konezny said.

Digi plans to shift the acquired business toward a subscription model rather than relying primarily on one-time sensor sales. Konezny described fiscal 2027 as a transition year and said the shift would be gradual, requiring coordination with customers and channel partners alike. Recurring revenue, it turns out, remains the preferred religion.

How serious are the supply constraints?

The build-out of AI data centers has put pressure on memory and other components, Konezny said. Digi faces both higher costs and allocation challenges, and has selectively implemented modest price increases on some products.

The company is extending demand planning from a typical six months to nine months and, in some cases, 12 months. Despite the constraints, Konezny said Digi had not seen significant customer order pull-ins or delays.

The demand picture appears intact. Konezny said the opportunity pipeline was up by double digits and at its highest level. Loch noted that the time taken to win business continued to improve sequentially and year over year, though it remained above pre-COVID levels. Sales cycles, like traffic, recover slowly.

Digi International provides products and services for connecting, managing and securing IoT devices, including cellular routers and gateways, embedded modules, console servers and related software. Its customers span transportation, energy, healthcare, industrial automation and retail markets worldwide.