Digi International Inc. Stock

Good day, and thank you for standing by. Welcome to the Fiscal Q3 2026 Digi International Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jamie Loch, Chief Financial Officer. 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. Joining me on today's call is Ron 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 website 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. 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 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-K 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, and thanks, everyone, for joining our call today. We are so excited to share an update on our progress and what we expect in the current quarter. But before we go into that, let me just remind everybody Digi's core value proposition. We really drive ROI by establishing remote presence, whether through an industrial router connected to remote oil well, whether it's an open gear console server in a data center, SmartSense in a pharmacy, food or hospital application, dentist through point-of-sale systems or infrastructure management and manufacturing, we are enabling our customers to gain great efficiency by connecting to not just the Digi devices, but the assets that we're helping them monitor.

We can help them adjust to technical regulatory changes. We can update software to comply with security protocols. We can adapt to business opportunities and challenges. We can increase asset uptime. We can reduce the number of field calls that need to be made.

All of those bring tremendous value to organization on top of learning more about how your asset is performing in the field and driving that learning into the next generation of your solution. We pull our customers annually and we ask them, "What are the attributes that you're looking for in your IoT solution?" And to no surprise, reliability is the #1 priority for our customers, and it's been so for a number of years. We rank well, both in their mind and versus our competition. We've got over 40 years of experience, and it makes sense. If you're monitoring a remote device, you need that remote management system to perform all the time and for a long period of time.

What's increasingly become a priority is security. With news that seems to come every day and accelerating on security breaches, whether it be the water management system in Minnesota, whether it be AI models escaping their labs, keeping your IoT system secure is of utmost importance. These systems have to scale both in numbers and across geographies. and they've got to be easy to use. We are involved in business and mission-critical applications. That combination of attributes is what Digi really excels at, and we can provide the complete solution. We're providing the edge device. We're providing connectivity. If the customer needs it, software services.

And we're now adding on top of that, our newest attribute, which is AI. We recently introduced a new tool called DANI, Digi Artificial Network Intelligence that allows you to talk to your Digi equipment and the things that's connected to a natural language. No more standard reports, no more configuring dashboards. You just ask our system and the things that's attached to, "How is my network performing today? Are there any software updates to be made available?" And you can even, over time, ask our system to perform those actions. There will always be a human at the wheel, but we can make managing your system much easier with the advent of AI. Those results are showing up this quarter and next quarter. I'm going to pass it to Jamie to review some of the highlights.

Good afternoon, everyone. Unfortunately, our video is down, so we'll speak to the results a little bit. We are very proud of our accomplishments this quarter as a company, which is really a reflection of the delivery that we've provided for our customers and that partnership and helping them enable to better meet their critical objectives. For the quarter, we're reporting record results, $139 million of revenue, which is up 29% year-over-year, 64.8% gross margins, $33 million in cash flow from operations, which is also up 38% year-over-year.

From a non-GAAP perspective, our annual recurring revenue number has reached a record $191 million. Our adjusted EBITDA margins have reached a record of 29.1% with an adjusted EBITDA of $40 million. Not only is that cash flow a really great metric, but if you look at it from an annualized basis, right now, we have generated cash flow from operations in excess of our year-to-date adjusted EBITDA number. And you can see through that 29.1% adjusted EBITDA margin, we continue to see operational leverage as a company. We committed early on that we were going to see ARR and profits growing faster than revenue, and that continues to be the trend that you see here with our ARR and our adjusted EBITDA growing faster than our revenue number is on a revenue number that is actually very strong.

That relates then as we roll forward into Q4. We are increasing our guidance for Q4 and subsequently, our full year guidance. For the Q4, we are expecting our revenues to be between $138 million and $142 million. We are expecting our adjusted EBITDA to be between $40 million and $41.5 million. We're expecting our adjusted EPS to be between $0.75 and $0.78 per diluted share on an expected share count of 39.1 million. The effect of Q3 and our Q4 guidance has increased our full year guidance. Right now, we are projecting our full year guidance to land between $529 million and $533 million, which is up 23.5% year-over-year. Our adjusted EBITDA on an annualized basis of $146 million to $147.5 million, which is up 35.5% for the year. Our adjusted EPS between $2.67 to $2.70 per diluted share. And right now, we are projecting our ARR to be at least 27% year-over-year.

The guidance is up from our previous guidance, and you can see in that guide, ARR and profits continue to grow faster than revenue and that operating leverage down to the bottom line, you can see shining through with our profit growth.

All of that really continues to lead us towards that march towards $200 million that we laid out as our long-term objective. By 2028, we had committed that we wanted to be at $200 million in ARR and $2 million in adjusted EBITDA. With this latest guide, we will see adjusted -- or sorry, annualized recurring revenues, at least at $193 million. We expect to cross over that bridge shortly. And on an adjusted EBITDA perspective, it was a 23% CAGR, ending the year right around $147 million. You can see how we're trending and expecting to deliver on those 5-year objectives as we laid out.

As I mentioned earlier, we continue to see cash coming in. We are currently converting our cash in excess of 100%, and that really enables the flywheel that we talked about last call, where Digi is able to use that cash, cycle it back down to pay debt, and then start the flywheel over with looking at acquisitions as part of our inorganic strategy.

Yes. The flywheel really is first developing a healthy list of acquisition opportunities. We've got hundreds of opportunities we're monitoring now with the use of AI, it's much easier to monitor the news throughout those opportunities. At any one point in time, we're looking at 10 or 20 and really digging into a few. We then used debt to acquire those companies, and we then focus on integration. And that's where really the magic is made. As we integrate the companies quickly, we get them on common systems, common practices and really build ARR and profitability. And as we generate cash flow from that profitability, we're looking to then reduce leverage and, of course, put that money back to use.

It's a strategy that we feel protects the equity investor because we're using debt. We're not diluting the shareholder. And because we generate strong cash flow, that doesn't sit on our balance sheet. We pay it down. So that provides more opportunity, especially as we increase our profitability, we get expanded dry powder to go after additional opportunities. So that's the flywheel, is acquire, integrate, generate, compound. It's -- no better example than 2 recent acquisitions we did. We acquired Jolt Software in fiscal '25. We -- Particle in fiscal '26. Both those integrations have gone very well, hitting their targets that we have committed to both internally and externally and putting us in a great position as Jamie -- we've been able to bring that debt net of cash down to $81 million.

That's right. $81 million. We're levered well below 1 at this point. And you can just see that cycling through. It's a great result.

With that said, we will now take any questions that the audience may have.

[Operator Instructions] And our first question comes from Tommy Moll of Stephens.

A question for you on the sales funnel and the days to win, which is an important KPI I know you monitor. You exceeded expectations this quarter and have guided revenues up sequentially. And so I'm just curious what insight you could give us on the sales funnel and how fast deals are converting.

Yes, Tommy, it's a good question. I think there's really 2 factors that are coming into play on that. The first one is we are seeing an increase or an improvement, I should say, in our days to win metric. Customers are making decisions faster than they have in the past. I still would caution that it's not back to whatever someone would decide as a normalized level. It's not been normal for a long period of time, but we are seeing improvement.

We're also seeing certain deals that are entering into the pipeline that have a level of maybe some urgency to them. And so they're cycling through a little bit faster, which I think is having an overall positive impact on our days to win metrics. We are also seeing overall pipeline growth. We continue to see growth in all levels of the pipeline, all the way from Stage 1 through to the final stages. And so it's really a combination of pipeline growth as well as some improvement in those critical measures, as you pointed out.

And I think there's a couple of factors driving it. One is, Tommy, you pay attention to this pretty closely, PMI has been relatively strong these last few reporting cycles. I think that's a positive. The AI wave here, which is obviously impacting data center builds, but also then affecting utilities and other indirect areas. And then also, I'd say there's a bit of a supply chain challenge going on right now. Memory is getting all the headlines, but that's starting to spread. And so I think customers are picking up on, "Boy, I better get my order in place to secure my deliveries and time lines." And that supply chain urgency, I think, is starting to show up in our pipeline data.

Follow-up for you on the data center theme. Ron, Opengear has an existing presence in that vertical. I'm interested in any update you can give us there in general? And then specifically on the hyperscale side, I know that historically, you have not sold directly there, but have any of the tectonic plates maybe shifted in your favor?

Yes. Yes, Opengear has been a really great performer. Their performance is, I want to stress, really, really widespread. It's an edge campus as well as data center applications. We've been the solution of choice for a lot of the neo clouds that have been looking to deploy assets and maintain visibility and control. But we've also been knocking on the doors of hyperscalers to see if we can help them. And those are longer sales cycles. They're very hard to predict. There's only a few of them out there, remain optimistic, but certainly don't embed any of those expectations into our forward guidance.

And our next question comes from Timothy Shubsda of Piper Sandler.

This is Tim on for Jim Fish. ARR kind of accelerated nicely quarter-over-quarter here. I was just hoping you could talk about any areas of strength that you are seeing, anything specific to call out?

One thing we saw this quarter is what I would call really balanced contributions with contributions from product and services and solutions, and that's really what we want to see. On the product and services side, you're seeing increased volume and with that volume coming with high attach rates. And so that solution attached to existing product is really driving the results there. On the solutions side, great contribution from both Ventus and SmartSense. Enterprise deals help really move that needle, and that really generates ARR. So we're really happy to see contributions on both of our business segments.

Great. And then just a follow-up. You had strong gross product margin this quarter. Anything to talk about there? What's driving the strength? And how should we think about this kind of heading into fiscal year '27 and maybe longer term?

Yes, I think it's a good question. I think still, fundamentally, we believe that our gross margin base camp is kind of sit in that low to mid-60s range. In any given quarter, you're going to have some variability that's going to come into that, driven a lot by product mix. I think we've had another quarter of favorable mix in that direction where if you really look down deeper into the business, almost across all product families, you're seeing right now some of the higher-margin products going.

I don't think that, that's necessarily a new base camp that I would say. It's definitely in the range. There will be periods where it will be in that. There were periods where it will be a little bit lower. We really feel like the floor of that camp sits in that lower mid-60s, 62%, 63%. And then there will just be some variability that will go with that. So I don't think there's anything unusual. I think product mix works out. I think over a longer duration period of time, it's reasonable to continue to expect that 10 to 15 basis points of improvement as ARR continues to grow faster than revenue because ARR comes in and provides that positive mix.

So longer term, I think you continue to see that 10 to 15 basis points. Shorter-term windows like 90-day windows, you can get some variability that could be in the 200, 300 basis point range.

Yes. And really, Jamie, I think combining that with good operating discipline because it's showing up at the operating margin line. And we're not perfect, but I think we're doing a good job of maintaining discipline, which is leading to that leverage we talked about, where our profits are growing faster than the top line. And we really want to and expect to continue that kind of performance.

[Operator Instructions] We have a follow-up now from Tommy Moll.

Ron, you mentioned DANI, the AI agent. And I noticed in the press release, there's some good insight in there, including some dollar signs that are helpful for financial analysts like us on the call here. But maybe can you help us connect some dots on the commercial opportunity here?

Yes. So DANI is in our digital wealth manager platform, which spans across our cellular router lineup, some of our embedded solutions and our industrial infrastructure management team as well. But it's also a template we're going to use across the company. We developed in a very innovative way where there's embedded artificial intelligence in the cloud-based tool. So instead of generating a standardized report or standardized dashboard, you can speak, type into your Digi Remote Manager interface, natural language questions. And it will come back with any questions you may have, whether it's how to use Digi Remote Manager, the status of ID devices, the status of things that they're connected to. And that also has a benefit of our customers bring new employees all the time and to manage their Digi equipment and things they're connected to. And that's a really good way to train somebody on how to use the system versus, "Oh, consult the help button or a user manual or get trained by your predecessor," you can really speak to the system on the information you're looking for and/or the actions you want to take.

We see, really, a lot of runway. This is only the first step in this solution. We're embedding in our existing software because we want to encourage adoption and usage. Over time, there could be a chance to monetize that, but that's not the priority at the moment. It's really to help better service our customers, improve their understanding and use of our system, better train and adapt new employees, and ultimately, get more value out of your Digi solution.

I show no further questions at this time. I'd like to turn it back to Ron Konezny for closing remarks.

Thank you. I apologize for the late delay here. We had some technical problems. But for those that you hung in there, we really appreciate it. We look forward to continuing the success that we've showed year-to-date. We're committed, as Jamie covered, to our $200 million objectives. We feel confident that we make promises and we keep them. And we look forward to sharing our results a quarter from now.

Say, this is Jamie. I just want to add real quick. We've talked about this. I don't think Ron or I could be more proud of our employees, our teammates, the work that we've put in, and our dedication to really customer outcomes. You can see it in the results that, that care, that passion, that consideration for customers really being first, and that's what really leads us to this. We're proud of the team that we're a part of, and we expect to be able to continue to do great things for our customers. So thanks, everyone.

Well said.

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

Good day, and welcome to the Biote First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Szymon Serowiecki, Investor Relations. Please go ahead.

Thank you for joining us today. This afternoon, Biote published financial results for the first quarter ended March 31, 2026. This news release is available in the Investor Relations section of the company's website. Hosting today's call are Bret Christensen, Chief Executive Officer; and Bob Peterson, Chief Financial Officer.

Before we get started, I'd like to remind everyone that management will make statements during this call that include forward-looking statements regarding, among other things, the company's financial results, future performance growth opportunities, business outlook, strategic plans and anticipated benefits, goals, future and development, manufacturing and commercialization activities, competitive position, regulatory operations, benefits of its solutions, anticipated impact of macroeconomic Biote's business, results of operations, financial conditions and other matters that do not relate to historical facts.

These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties, some of which are beyond the company's control. Actual results could differ materially from expectations reflected in any forward-looking statements. These statements are subject to risks, uncertainties and assumptions that are based on management's current expectations as of today.

Biote undertakes no obligation to update them in the future. Therefore, these statements should not be relied upon as representing the company's views as of any subsequent date. Discussion of risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and the Investor Relations section of our website as well as risks and other important factors discussed in the earnings release.

Management will also refer to adjusted EBITDA and EBITDA margin are non-GAAP financial measures to provide additional information to investors. Reconciliation of the non-GAAP to GAAP measures is provided in the earnings release with the primary differences being stock-based compensation, fair value adjustment to liabilities and other non-operating expenses. Please refer to our first quarter 2026 earnings release for reconciliation of these non-GAAP measures to the closest comparable GAAP measures.

I'll now turn the call over to Bret Christensen.

Thank you, Szymon, and thank you all for joining us. After my remarks, Bob will review our first quarter financial results. We'll then open the call for your questions.

Over the past 12 months, we have made important progress to advance our strategic priorities. We have strengthened our commercial organization, expanded our sales team and enhanced our capabilities to better support practitioners and their patients.

We have also sharpened our focus on maximizing value from our existing top-tier clinics, which remain important contributors to our long-term financial performance. Through these strategic and operational initiatives, we built a solid foundation that we believe supports sustainable long-term profitable growth.

As previously communicated, in January, Biote voluntarily withdrew certain bio-identical hormone pellet inventory from the market. We initiated this recall out of an abundance of caution. This temporary supply disruption created a headwind to our first quarter performance, resulting in an estimated $1.7 million revenue impact and approximately $1.5 million of incremental costs incurred due to the voluntary recall.

We are addressing the supply challenge as efficiently as possible. To mitigate the impact on our practitioners and their patients, we are increasing inventory levels to ensure continuity of care throughout our network. The recall affected our first quarter results and was a significant distraction to our sales force and their growth objectives as they were forced to service accounts versus focusing on growth.

While the impacts are expected to continue into the second quarter, we believe this is a temporary issue, and it does not affect our long-term strategy or alter the overall demand environment. We continue to see a sizable market opportunity across hormone therapy and therapeutic wellness, and we remain focused on building sustainable revenue growth.

In our last call, I noted that one of our top priorities in 2026 was to expand our sales personnel from over 90 at the end of 2025 to approximately 120 this year. I'm pleased to report that we are substantially complete with this effort with over 25 new sales personnel hired in the first quarter. We've expanded and strengthened our commercial capabilities and are ready for the future.

Despite the distraction caused by the voluntary recall, our commercial team is already beginning to deliver a higher level of service to existing accounts while utilizing our increased sales capacity to grow and scale our practitioner network. In the first quarter, we trained more than 200 new practitioners, representing a 16.5% increase from the first quarter of 2025.

For our top clinics, we have introduced a series of measures aimed at improving retention and supporting stronger lifetime revenue outcomes. We are enhancing our commercial framework to reinforce the value proposition Biote can offer to our leading practitioners. New practitioner training sessions remain at near full capacity, underscoring continued practitioner interest in our bio-identical hormone optimization and healthy aging solution offerings.

Because the number of newly trained practitioners is a leading indicator of future procedures and dietary supplement sales, this high level of engagement further strengthens our belief that we are on the right path to restore revenue growth. As a reminder, once a practitioner is fully trained, it typically takes about six months for that new practitioner to begin to contribute meaningfully to our financial performance.

As we continue to invest in our commercial team, one of our key objectives is to elevate the quality of our sales pipeline. Over the past several months, we have seen clear evidence of progress with higher-value OB/GYN and general practitioners representing a growing share of our pipeline. This reflects a more disciplined qualification process as well as our focus on recruiting practitioners with greater long-term revenue contribution potential.

We believe our efforts to enhance our sales pipeline should translate into more predictable performance as we increasingly support practitioners whose clinical specialties more closely aligned with our suite of product offerings.

In summary, while our first quarter performance fell short of our expectations due to the voluntary product recall, we continued to move forward on key initiatives that support our long-term strategy. I'm confident that our strategic investments and actions are expected to strengthen our capabilities and lay the groundwork for what we anticipate will be a return to growth in the second half of the year.

I'll now turn the call over to Bob to review the first quarter results.

Thank you, Bret, and good afternoon, everyone. Unless otherwise noted, all quarterly financial comparisons in my prepared remarks are made against the first quarter of 2025.

Revenue decreased 8.3% to $44.9 million, with procedure revenue declining 13.2% to $31.3 million, which included a $1.7 million impact related to the voluntary recall of certain hormone pellets shipped by Asteria Health.

Procedure revenue was primarily impacted by the following factors, one, lower procedure volume in existing clinics, which includes the impact of hormone pellet supply constraints related to the recall; and two, slower productivity from new clinics as our sales reps focused on supporting recall impacted clinics.

Dietary supplement revenue grew 19.1% to $11.0 million. The increase was primarily driven by the continued growth of our e-commerce channel. Overall, we continue to forecast our dietary supplement revenue will grow at mid- to high single-digit rate for the 2026 year.

Gross profit margin was 68.9% compared to 74.3%. The decrease was primarily due to $1.1 million of incremental cost related to the recall. In the first quarter, Asteria Health produced approximately 30% of our shipped pellets as compared to over 50% in the fourth quarter of 2025.

As Bret noted, we anticipate fully restoring Asteria Health supply continuity by the end of the second quarter. As a result, we expect our second quarter product mix will continue to include an elevated level of third-party supply, which will impact second quarter gross margin. Our goal remains to meet customer needs through the vertical integration of Asteria Health.

Selling, general and administrative expenses increased 4.1% to $27.8 million. The increase reflected higher legal expense and $0.4 million of SG&A costs associated with the product recall.

Net income was $2.7 million and diluted earnings per share attributed to Biote Corp. shareholders was $0.06. This compares to net income of $15.8 million and diluted earnings per share attributed to Biote Corp. stockholders of $0.37. Net income for the first quarter of 2026 included a gain of $2.1 million due to changes in the fair value of the earn-out liabilities. By comparison, net income for the first quarter of 2025 included a gain of $10.7 million due to changes in the fair value of the earn-out liabilities.

Adjusted EBITDA decreased to $8.7 million with an adjusted EBITDA margin of 19.4% due to lower sales, reduced gross profit and higher operating expenses. Cash flow from operations in the first quarter was $3.9 million. As of March 31, 2026, cash and cash equivalents were $5.3 million as Biote fully repaid the remaining amount due under its share repurchase liabilities in January 2026.

Now turning to our financial outlook for 2026. We maintain our guidance, forecasting 2026 revenue above $190 million and 2026 adjusted EBITDA of greater than $38 million.

With respect to our 2026 revenue outlook, procedure revenue is expected to return to growth in the second half of 2026, unchanged from our prior guidance. Based on current trends, we now expect first half procedure revenue growth to be moderately lower than previously forecast due to the temporary impact of the voluntary product recall and related supply constraints. Dietary supplement revenue is expected to grow at a mid- to high single-digit rate from 2025.

I'll now turn the call back to Bret for his closing comments.

Thanks, Bob. While we continue to address temporary impacts from the recall, we remain focused on the priorities that will strengthen our business for the long term. Our continued investments in commercial talent, technology and practitioner support are creating a stronger platform for future execution. With this foundation in place, I believe Biote is well positioned to better serve our practitioners, improve our financial performance and create value for our shareholders.

Operator, let's now open the call for questions.

[Operator Instructions] The first question today comes from Les Sulewski with Truist Securities.

This is Jeevan on for Les. How did the clinic attrition trend in the first quarter as the recent hires ramp up? And are you seeing some stabilization here if you normalize for the voluntary recall?

Jeevan, this is Bret. Thanks for the question. Attrition for us has stabilized and been stable now for several quarters. It's still a little bit higher than we'd like to see it. And with the disruption that we had in Q1 due to supply constraints from the recall, it's hard to draw any conclusions of really any improvement there yet.

We did see, however, some positive signs in daily volumes prior to the recall, which is where we get the $1.7 million impact of the recall, which we quoted in the earlier comments. So, there was some things to be encouraged by and supply constraints really sort of put a damper on that.

And then as far as the sales force, the sales force expansion, that expansion is new in Q1 going to 120 reps. They were fairly distracted in Q1 with supply constraints, but we have every belief that they're going to start growing the business now as we are just weeks away from completely normalizing inventory levels and getting that team back to growth. So, we should see the impact of that team starting in Q2.

The next question comes from Jeff Van Sinderen with B. Riley Securities.

Just wanted to understand a little bit more about the supply constraints. I guess I'm confused by the recall still having an impact in Q2 and why we would still have supply constraints at this point. I would think that Asteria would recover a little more quickly. Maybe you can just talk a little bit about that.

Yes, Jeff, I'll start with that, and then Bob can add some color to everything that's going on here. So, if you remember, we announced the recall at the end of January and then began notifying our customers that was done out of an abundance of caution for product that was compounded and manufactured prior to October of 2025.

That was just a lot of product that needed to come back and be replaced by Asteria and by some of our third-party customers who are helping with the fulfillment of that product. It just put a lot of strain on Asteria. We've done a tremendous amount to scale production at Asteria, including adding a second shift and asking that team to work very hard to catch up on supply, but it's been an ongoing struggle.

The disruption really comes from two things, having to allocate inventory to our customers, meaning to give them probably less than what they ordered in some cases, that meant rescheduling of patients and just some uncertainty in the field as to what they can do for scheduling patients and making sure they have enough product to perform those procedures. The distraction in the field was we asked them to manage that message and in some cases, manage those orders to help us prioritize who should get inventory and when.

All of that aid to our safety stock at Asteria, and we're in the process of building that back up now. But it's been a process that's been longer than we'd like it to be, and we've had to ask for help from our third-party pharmacy partners to help fulfill those orders. But again, we are probably just weeks away from a more normalized situation. It's better today than it was in February and March as well. I'll say that. Today, a much better situation than it was in the early days of a recall.

Bob, do you have anything to add there?

Yes. Look, I think the -- Jeff, the biggest thing that I would add would be, look, we're maximizing our production to build safety stock. We intentionally slowed some of the pellets that went out from Asteria so that Asteria could potentially build inventory. And as Bret said, one of the biggest steps that we took to potentially build inventory even quicker is the establishment of a second production shift.

So this will enable us to maximize our production and really prepare for the future growth in the future, but at the same time, increase our stock levels. So I think those are probably the two biggest pieces. We intend and will return to expanding four vertical penetration in the remainder of the year once we see a line of sight into that, as Bret said, in the next several weeks once we see that safety stock at a solid level.

Okay. And so I'm just kind of, I guess, thinking this through out loud, but you had a shortfall in Q1. You sort of guided down for Q2 in your language as I took it, but you kept the year guidance unchanged. So I guess I'm wondering what gives you confidence that the second half will be even better than what was previously implied in guidance?

Yes, Jeff. Thanks for the question. So like I said in my comments earlier, we just believe this is a temporary headwind to demand because we had these inventory constraints. What makes us optimistic and confident in the guide that we're still going to return to growth in the second half of this year are a couple of things.

We saw some positive signs, as I said, going into the recall in daily volumes. That's where -- that's how we extrapolated this impact of $1.7 million in revenue on the top line. We believe that's temporary. There's also some -- surely some pent-up demand from these supply shortages that we'll recapture in the coming weeks and months.

And then this team of 120 territory reps that's new really didn't even have a chance to contribute to some of those positive signs that we saw going into the recall. So we're optimistic that, that team is going to do just what we hired them to do. We just go out and grow the business once they're not distracted from these inventory issues.

If you remember, too, I'll say one more thing, we've had full training classes now for going on six months. That's the earliest indication of supply -- I'm sorry, of production in the field returning to growth. So we're optimistic that those 200-plus practitioners that we trained in Q1 are going to start adding meaningfully to growth after they've been onboarded here in the next six months. So there's a lot to be optimistic about once we get through these supply issues. It's why we still are confident in a second half return to growth.

Okay. That's helpful. And then just thinking about some of the doctors who couldn't get the supply that they needed. They were on allocation. In the moment during Q1 and maybe a little bit in Q2, was there anything preventing them from maybe sourcing the pellets elsewhere?

Well, not really, Jeff, but I'll say this, that the entire industry has been stretched for pellet production. And the best partners out there are partners of ours. And so we very quickly reached out to them, ask for their help in supplying product to our customers, which is why you saw the Asteria mix go down in Q1.

That's a temporary drag on gross margin. But those are the most readily available pellets out there. We frankly have strained some of our third-party suppliers because of the demand that we've given them. So there's not a ton of places that physicians can go. It's a very difficult thing to do.

If you remember, 80-plus percent of our patients are women since we're so strong in the OB/GYN space. And the hardest pellets to produce are the estrogen estradiol pellets. They're very manual and can't be produced at scale in the way testosterone pellets can. And so that, for the most part, was the drag on supply and the challenge, but that challenge is shared by a lot of the pharmacies out there.

So, we're in a good spot today, thanks to the help of our third-party pharmacies and the quick work by Asteria to scale production as a second shift, and we think we're in good shape going forward.

[Operator Instructions] The next question comes from George Kelly with ROTH Capital Partners.

First one is just back to the recall. I was curious if you saw much clinic attrition as a result.

George, this is Bret. Thanks for the question. Not really. So, at this point, it would be anecdotal anyway, but we did -- we haven't seen too much clinic attrition. We clearly saw a reduction in volumes of procedures in the field. And so, it remains to be seen if there was any patient attrition, meaning the patient switch modalities, things like that. We think there's pent-up demand that we'll capture in the coming weeks and months. But not meaningfully. We didn't see any uptick in attrition that we could not.

Okay. And then with your current status and your sort of inventory build that your catch-up that you're doing right now, where are you in that process? You mentioned that you feel like you're in a good spot now as there's still a lot of sort of catch-up that needs to happen?

And part two of the question is, what have you seen in April? Can you comment on -- the press release commented that there's continued pressure. So, any kind of detail you can give about procedure volume in April would be helpful.

Yes. Thanks, George. So, we said it would persist into Q2, which where we're at today. But at the same time, we're saying we're weeks away from probably a fully normal situation. So that is tremendous progress. And we intentionally are kind of taking an easy on Asteria to allow them to build through safety stock because we do want to eventually get to another two months or so of safety stock on top of everything they are currently supplying to our customers.

So, we're going to continue to use our third-party partners as much as we can to allow that to happen. And we use them going forward as well. They've just been fantastic in this whole process. So, we had the management team into the corporate office today. And like I can tell you, just anecdotally, if it's not going well, we hear it. And the consensus was things are much, much better today than they were weeks and months ago.

So I think that the team is feeling it. Our customers are certainly feeling it. We're not completely out of the woods only because we're still allocating inventory, meaning we're holding some of our customers to two or three weeks of inventory when they're used to having two-plus months sometimes. That just gives them the confidence to schedule a lot of cases in the future.

So that's the only thing I would say is there's inventory in the field. It's not to the level that some of our customers would like to see it to feel confident, but we'll get there shortly.

And George, to your first part of the question about Asteria, I would just tell you that it does take some time in a regulated environment to make sure that we can get a second shift up and running. So those steps started about one month, 1.5 months ago.

I can tell you, as far as where we are in the second shift, we just recently started that second shift. And as you can imagine, the shop at Asteria is working even before the second shift around the clock to maximize production. But the second shift now would eliminate a lot of the constraints, if you will, that exist with vialing and packaging some of these smaller items.

So I would tell you, in the next -- Bret mentioned in a couple of weeks -- in the next couple of weeks, we should be in a solid position. I believe that, that would be the case primarily because of the advent of the second shift. And probably in a month's time -- in a month, maybe a little bit longer, we should be ahead of our safety stock levels so that we can start looking forward to regaining traction from a vertical integration perspective at Asteria, so we can really start ramping back up to where we once were.

This concludes our question-and-answer session. I would like to turn the conference back over to Bret Christensen for any closing remarks.

I want to thank everyone for joining us today. We appreciate your interest in Biote and look forward to speaking with you on our next conference call. Thanks, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, everyone, and welcome to Digi International, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Chief Financial Officer, Jamie Loch. 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. Joining me on today's call is Ron 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 website 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.

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 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-K 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. Good afternoon, everyone. Digi is off to a strong start in fiscal 2026, and we step closer to achieving our $200 million of ARR and adjusted EBITDA goals. Our first fiscal quarter set several new all-time records, $122 million of quarterly revenues, up 18% year-over-year. $157 million of annualized recurring revenue, which is up 31% year-over-year and our fifth consecutive quarter of double-digit growth. $32 million of quarterly adjusted EBITDA, which is up 23% year-over-year. Our 25.8% adjusted EBITDA margin is also a new quarterly record. $36 million of quarterly cash generation.

We are encouraged by contributions from all of our product lines across a variety of vertical industries and applications. This broad-based strength is critical to sustaining double-digit growth rates. Both of our reporting segments contributed to our strong ARR growth this quarter with IoT Solutions growing 32% and IoT Products & Services growing 26% year-over-year.

The integration of Jolt is progressing well. We have combined the SmartSense and Jolt organizations and offerings into SmartSense ONE. We're seeing strong customer response to this combined platform and the cross-selling opportunities we envisioned are materializing.

On January 27, we announced the acquisition of Particle, a leading IoT solution provider. Founded in 2012 and inspired in part by our own Digi XBee, Particle has grown into an industrial IoT leader. Particle brings robust AI-ready embedded edge devices, coupled with wireless services and a cloud-based solution supporting over 240,000 developers across 14,000 companies. This acquisition strengthens our edge-to-cloud capabilities and expands our addressable market in the IoT device management space.

The combination of Particle with our existing OEM solutions creates compelling opportunities for customers seeking seamless connectivity and device management at scale. Jacuzzi, Goodyear and Watsco are amongst the over 150 enterprise customers that have accelerated their go-to-market IoT visions with Particle. We are integrating the Particle and OEM solutions teams to further drive Embedded as a Service globally.

Particle brings our IoT Products & Services reporting segment $20 million in ARR and further balances ARR contributions across Digi's 2 reporting segments. Particle provides a catalyst for OEM solutions, which is now named Particle by Digi. Digi's comprehensive industrial IoT portfolio spanning embedded solutions, edge intelligence and vertical-specific turnkey offerings resonates across a diverse range of industries and positions us to capitalize on secular trends in AI, edge computing and industrial automation.

Our AI initiatives continue to advance. Beyond the internal productivity gains we've achieved, we're now actively embedding AI capabilities into our products and customer-facing solutions. Digi is uniquely positioned to take advantage of the less publicized wave of machine-driven technology advances. Like the wireless and Internet advances that preceded it, AI will ultimately benefit machines like it will humans.

Digi Solutions approach aims to accelerate our customers' industrial AI outcomes. Acquisitions remain our top capital deployment priority as we strengthen our balance sheet, and we continue to evaluate additional opportunities. Following our successful integration of Jolt just months ago, Particle demonstrates the strength of our organizational structure and our ability to execute multiple acquisitions while maintaining operational excellence.

We remain confident in our goal of achieving $200 million of ARR and $200 million of adjusted EBITDA by the end of fiscal 2028. Strategic acquisitions may accelerate this time line. Next, Jamie will provide comments on our financial guidance.

Hi, everyone. For fiscal 2026, our guidance reflects both our updated operational outlook combined with the January 2026 acquisition of Particle. We anticipate ARR growth of 23%, revenue growth of 14% to 18% and adjusted EBITDA growth of 17% to 21%. The impact of Particle and its expected synergies to this guide is approximately $20 million to $22 million in ARR, $13 million to $14 million in revenue and $1 million to $2 million in adjusted EBITDA.

After capturing synergies, we expect Particle to contribute $5 million to our fiscal 2027 adjusted EBITDA. Particle will be integrated into our IoT Products & Services segment and will not be reported on a stand-alone basis. For the second fiscal quarter, revenues are estimated to be between $124 million to $128 million. Adjusted EBITDA is expected to be between $31.5 million and $33.0 million.

New for fiscal '26. We are including interest expense in our adjusted net income per diluted share metric, and we have done the same for comparison periods. Adjusted net income per diluted share is anticipated to be between $0.56 and $0.59 per diluted share, assuming a weighted average diluted share count of 38.8 million shares. This includes an expected impact from interest of between $0.05 and $0.06 per diluted share.

We provide guidance and longer-term targets for adjusted net income per share as well as adjusted EBITDA on a non-GAAP basis. We do not reconcile these items to the most comparable U.S. GAAP measure as it is not possible to predict without unreasonable efforts, numerous items that include, but are not limited to, the impact of foreign exchange translation, restructuring, interest and other tax-related events. Given the uncertainty, any of these items could have a significant impact on U.S. GAAP results.

With that, I will turn the call back over to our operator to take your questions.

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

Ron, my first question is on the demand environment. Can you make any general comment to update us? And then if you could go one layer deeper and make a specific comment around data centers, what you're seeing there, that would be appreciated.

Yes. As we talked in the past, we've got the good fortune of applying our technologies to a wide range of verticals. So at any given time, there are certainly some verticals that are stronger and some that are maybe not as strong. And we're seeing a lot of success in mass transit and utility segment. We're also seeing a lot of success in retail, digital signage. We also are seeing some success in data center as well, in particular the Opengear product line.

Maybe just benchmarking versus when we spoke a quarter ago, do you get a sense, things feel a little bit better, a little bit worse, about the same? Just any general comment would be helpful.

Yes. I think they're improving and increasing. I think we're all worried about how long the AI infrastructure build-out will sustain. But for now, it's been improving.

Follow-up for you, Ron, on Particle, specifically around the sales synergy opportunity. You mentioned, I think, in the press release originally, the opportunity to pull sales through your existing team and your channel. That's relatively straightforward. I'm mostly interested in how, from an end user standpoint, this technology intersects with your current offering. You mentioned the OEM business a number of times in the press release. Maybe that's a lead into your answer.

Yes. I think to date, most of our solution approach has been, I'd say, on the IT side, where we're providing a completely enclosed device with software services, connectivity. Examples would be the Opengear solution, cellular routers in addition to SmartSense and Ventus.

This really marks a foray into Embedded as a service where a lot of times, we're now going into an engineering department, and we're embedding that IoT solution inside of our customers' machines, whether they be spas or whether they be in the ag or industrial field. And that's an area that is newer for, I think, both the industry as well as for Digi. And so leveraging this as the catalyst to really get OEM solutions more in line with both the company's objectives of ARR and contributing at a relative scale has been really important for us.

What does that as-a-service component look like where it's an OEM relationship. So the device is used in the field by someone else that you don't have a direct relationship. How do you close the loop there with the as-a-service?

Yes. We absolutely do have a direct relationship with the end user and the end users, the OEM, we may not have it with the final consumer, if you will. But it's very important that we're in touch with whether it's Goodyear or Jacuzzi or Watsco that we're contacting and staying in touch with them to make sure they're accomplishing their business objectives.

But it's very similar to our Ventus offering, where it's provided as-a-service includes the edge device, software, the connectivity, a cloud platform that gives you the insights into both the Digi equipment, in this case, Particle as well as the customer's end device. And that end device is really critical to understand its performance, any conditions that might affect its performance and in some cases, even perform software updates on that OEM's device.

Our next question is from James Fish with Piper Sandler.

Maybe just sticking on Particle here. I think it strategically makes sense. It aligns with what you guys have been doing for many years now. But maybe just walk us through what makes Particle different? And how should we think about you guys managing this for a push behind growing the business as opposed to more or less managing the profitability? In other words, is it going to be trying to accelerate the growth of the business given your reach and your customer base? Or is it going to be growth -- growing EBITDA more so?

Yes. What's attracted us to Particle, who we've known for several years now. What attract us is they were born this way. They were born as-a-service and the processes, the way you go to market, the way you price your offering, the culture of the company is, I think, sometimes harder to appreciate that combination of things. And we're looking forward to bringing that culture inside of OEM solutions where traditionally we've been providing more just the device and let the customer arrange for connectivity and cloud services.

And so we don't underestimate that combination of things and the impact it can have. You saw this with the Ventus acquisition. You've seen it with the combination of SmartSense acquisitions that have led to that company today. So that's very, very important. And we're looking forward to leveraging the combined company to really do profitable growth. Our game is not growth at all costs. It's profitable growth. We want to scale the business. And when you get to $20 million of ARR, that's when you can really start thinking about that scale profitably. Before then, you're a little bit more in growth mode and you're making pretty big investments to -- on the product, on the go-to-market. And as you start maturing and figure out what wins and what doesn't win, you can be much more selective on resources. So we want to grow the business. Don't get me wrong. It's imperative we grow. But I think Digi's mantra is really profitable growth.

And so the crux of it is, is there a way to think about the growth rate of Particle moving forward and how much overlap with existing products and to layer on here, Jamie, can you just help me here on the guide. As prior guide was about $484 million on the revenue piece at the midpoint and with Particle adding about $13 million to $14 million, that would take us $498 million or so, but midpoint is only $499 million.

So it's not really much of a raise despite the upside here in fiscal Q1. So can you just walk me through why it's pretty much just raising at this point on particle as opposed to some of the strength you saw in Q1? Was there any pull-in of demand? Or are you guys just being kind of prudent around the rest of the year organically?

Yes, it's a good question, Jim. As a rule, we have not increased an annual guide after the first fiscal quarter from a combination of things. 90 days, you get some timing elements where you have some items that time out to the positive or to the negative historically. And we think it's a little bit more responsible to give yourself at least a midyear point before traditionally we would do an operational raise.

In this instance, there is an impact on the operating performance. If you look at the guide, the guide does have a slight uptick on operational performance. So it's not just on Particle when you look at it. There's about a 4-point lift in the guide and about 3 of those points are Particle. But to your point, 1 quarter in, we think there's a reason to be prudent. Our historical practice is we don't adjust total year after the first quarter. So it's kind of a combination of those 2 things.

Our next question comes from the line of Josh Nichols with B. Riley.

Great to see another strong quarter for ARR growth and cash flow generation. On the gross margin front, it's continued to charge upwards as you've been ramping revenue. Just in terms of directions, what should we expect? I know Particle is mostly ARR business. But when we think about gross margins for the remainder of the year, is that going to continue to tick up from what we saw in the first quarter?

Yes, Josh, this is Jamie. I do think we're in that space where it's a combination of, as ARR continues to grow at a rate that is at least on pace with revenue, you'll continue to see some margin expansion. Historically, we've seen sort of in that 10 to 15 basis point expansion sequentially. I think we're going to continue to see that.

The variability that you would have from that would be in any particular 90-day window, you could have product mix that could swing that up a tick or down a tick. But if you look at it over a longer range, it's reasonable that gross margins will continue to tick up, all else constant, just as your ARR continues to be a bigger percentage of your revenue.

Appreciate the context. And then I think someone touched on it before, but maybe looking at a little different angle. I mean you've already executed well in Q1 and you have the guidance with Particle for fiscal 2Q. There's -- that implies like a relatively wide guidance range for the top line for the fiscal second half. I'm just wondering if you could provide a little bit more granularity on what are the puts and takes between like what would get you to that higher end versus the low end of the growth guidance range for this year?

Yes. So we are seeing strength in certain verticals. It's a chaotic time out there in the marketplace between tariffs and prices for commodities. We also, I think, are battling our way through the highly publicized memory challenges that AI expansion has created. We feel confident we can fight through those, but those are some risks out there.

There remain a tremendous number of upsides, including the Jolt acquisition, the Particle acquisition, further strength in adding additional data center customers, especially with neoclouds and AI. Our cellular router segment, as predicted, has started off the year as our fastest-growing product line. So continued strength. They've got some new products coming out next quarter. So there's a lot of upside, but there definitely are risks there. And as Jamie said, we have traditionally used that midpoint to update annual guidance. With the Particle acquisition, it just makes sense to at least provide an update. We do expect after Q2 to do an additional update as we know more information and obviously have another quarter in the books.

Our next question is from Scott Searle with ROTH.

Nice job on the quarter. And I hope that you, your families, your team and communities are doing well during some unprecedented events. Maybe just to dive in, Jamie, I just wanted to clarify, in terms of how you're treating interest now in your guidance that you are now adjusting that $0.04 to $0.05 is related to interest expense. So all things normalized in terms of where Street and consensus numbers are for the first quarter would be $0.04 to $0.05 higher would be the app comparison.

And then maybe just to dive in on the competitive landscape front on the gateways. Ron, it seems like the dynamics in that market has recovered. I think you're largely through getting higher attach rates on that front. I wonder if you could talk about some of the dynamics for growth there and what you're seeing in terms of the competitive landscape from, I'll call it, a little bit of a [indiscernible] cradle point as well as some of the Chinese competitors being pushed out and some of the dynamics moving that business right now?

Scott, this is Jamie. I'll take the first part of that question. On the adjusted EPS, consensus and our prior estimate did not include interest. The new metric now includes interest. And if you refer back to our press release, the impact of interest on the quarter was $0.06. So if you were to compare apples-to-apples, you would be looking at $0.06 of impact to the current number that is because of interest baked into it.

On the go forward for F Q2, what we indicated in that adjusted EPS guide is that the impact of interest embedded in that number is about $0.05 to $0.06. So the F Q1 impact of interest was $0.06, and that's embedded in the number that we reported out now at $0.56. Is that -- does that make sense?

Yes, it does.

Yes. And Scott, on the competitive landscape, we're really excited about the momentum building in our cellular router and Ventus business segments. We've got some unique offerings, some new products coming out. We've got a great team with a great culture, and we're really optimistic that the momentum can continue. We can't take it for granted.

You mentioned one thing that's -- in particular, there are certain segments that are very, very concerned about having Chinese-originated parts, especially radios. They will literally open up a device and look to make sure that there's no, Chinese manufactured radios in particular. And so those are segments where our products really can play well.

In addition to rest of world that doesn't have as much concern as some U.S.-based customers, we can offer more price competitive offerings. The big push, as you mentioned, is really becoming more of a solution provider, of which the device is a critical component, but it's the combination of device connectivity, device management, cloud-based platforms, APIs that allow you greater insight and control of that entire solution. And it really helps with what we continually see as an overburdened set of IT resources at our customers.

Great. And Ron, maybe just to follow up on that. I guess that's kind of where Particle couples in as well in terms of some edge compute, edge AI capabilities. I'm wondering if you could talk about how you see that market opportunity expanding in terms of processing requirements at the edge and how you're positioned to capitalize and deliver on that.

Yes. Some nice complementary technologies that we're bringing together with OEM and Particle. OEM has got very strong ConnectCore business, which is powered by NXP and STMicro. Tachyon brings on Dragonwing and the Qualcomm chipsets. So we've broadened our offering there.

On the radio side, Particle brings in LTE Cat-1 BIS, which further extends the portfolio on our wireless side. Digi's global reach and channel can really help propagate more and more Particle kits out there. Those dev kits get in the hands of corporate makers, some of those grow to be bushes and trees. And so we think we can amplify what's been a proven playbook for Particle.

And in combination with that, we are having really nice conversations with Digi enterprise customers that are looking for a more complete solution set from companies like Digi. And so that combination of leveraging our really long-tenured enterprise relationships with amplifying the kit process. We think that combination is going to help with growth.

Our next question is from Anthony Stoss with Craig-Hallum.

Nice execution. Ron, I wanted to follow up on your comments on the memory pricing. I'm just curious if any of the device customers of yours are pulling in their horns already or if this is a few quarters out. I'm sure guys are still getting most of what they need right now, but I'm just curious what you think the impact would be? And then the second question is just an update on the Jolt synergies. I think you guys are looking for about $11 million in incremental EBITDA. I'm just curious where you stand out of the gate.

Yes. I'll handle the memory piece. Jamie can comment on your second question. Memory, for those of you that have been around for a while, is a highly volatile business. What goes up can go down and vice versa. The AI push is putting a pressure on DDR4, DDR5 memory as well as eMMC. So they're very specific memory components that are mainly in our newer products.

Our legacy products are using older technology. We don't see as much pressure. Our #1 objective is to make sure we have our supply allocations. And so we fight very hard to make sure we've got the parts available to us. Pricing then becomes a secondary topic. And memory is a portion of our devices' price. We can usually absorb and handle certain amounts of variation.

One of the challenges in the market is that, in some cases, you may issue a PO and that PO actually is accepted with a condition that price may be subject to change. So some of it is the fear of the unknown is our price is going to change in the future. But we do feel like, for the most part, we can handle those price increases. We're, as you know, emphasizing the software and services portion of relationship. We don't want to put that at risk playing games on the product side. And so we think we can navigate it.

And we're going, in many cases, to alternate providers and having our engineering teams qualify those parts just to make sure we have more than one source of memory. But it will be a lot of work as we fight through the AI demand and how stable and how long running that will be. I'll let Jamie comment on the Jolt piece.

Yes, Tony. When you break down the synergy and the integration efforts at Jolt, kind of think of it as field integration and then support services and home office integration. Both of those, I think, are proceeding right on target. The field teams have really done a great job, being in the same space, understanding the offerings, collaborating, working through both their pipelines as well as a unified front with customers.

And in the support services, we are right on track in terms of integrating things like finance, HR, all the way from payroll to benefits and all the minutia details. So right now, it's tracking. When we do an acquisition, we've got a time line that lays out all the integration activities. And so far, everything is right on time and nothing that would change our outlook going forward.

[Operator Instructions] As I see no further questions, I will pass it back to Ron Konezny for closing comments.

Thank you. Our team's dedication to our customer success and our ability to adapt and evolve is inspiring. Thank you for joining this update on Digi, and have a good night.

Thank you for participating in today's program. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Fiscal Q4 2025 Digi International Inc. Earnings Conference Call.

[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, 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. Joining me on today's call is Ron 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 website 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. 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 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-K that can be accessed through the SEC Filings section of our Investor Relations website.

Now I'll turn the call over to Ron.

Thank you, Jamie. Good 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 of ARR with the inclusion of Jolt Software acquired in August of this year, 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 Ventus 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 the 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 now in the process of leveraging AI for our products and solutions. Integrating AI as a search tool within our web applications and exploring the use of tiny language models at the edge are potential examples we are beginning to explore. These types of advancements can enhance our customer experience and unlock additional ROI. Acquisitions remain our top capital deployment priority, and we are tracking a number of opportunities in the industrial IoT space.

In fiscal 2026, we expect double-digit growth for all 3 of our key metrics: ARR, revenue and adjusted EBITDA. We are confident in our long-term goal of reaching $200 million of ARR and $200 million in adjusted EBITDA by the end of fiscal 2028. Additional strategic acquisitions aligned with these metrics may accelerate this time line.

As we celebrate Digi's 40th anniversary, I want to recognize our team's incredible dedication and laser focus on our customers' success. I'm so incredibly proud to work with these outstanding teammates. Very few companies that went public in 1989 remain independent today. For perspective, the median lifespan for all U.S. companies is 7 to 8 years. For the current day S&P 500, it's about 18 years. Our team's ability to adapt and evolve is a testament to our enduring culture and commitment to continuous improvement.

With that, I'll turn the call back to the operator. Thank you.

[Operator Instructions]

And our first question comes from Tommy Moll of Stephens.

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? 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?

Yes, Tommy, good question. As you know, we've talked about it for several periods here about wanting to sell solutions and having 100% attached, and we really are getting closer to that goal. And so you're seeing that progress, and it's a testament to our teams, but 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 co-termination, those kind 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 going to 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 2? 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.

Yes, yes. So I mean, we were very deliberate in the guidance. We're taking 2 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 has tended, Tommy, to sell a little bottoms up, the smaller customers reaching into the enterprise. We tended 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 '26.

Regarding revenue, 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 onetime revenue, which helps that incorporated with Jolt. As you recall from our acquisition, we indicated Jolt contributed over $20 million in annualized recurring revenue. So you can kind of add that into the organic growth rate or that's embedded in '26, which, of course, the ARR is incorporated the revenue we had about half a quarter that we were able to enjoy in fiscal '25.

And our next question comes from Scott Searle of ROTH Capital.

Really nice job on the quarter, guys. 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 contracting and 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 any sort of government headwinds on that front as well?

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 1.5 months, 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 in 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 on the marketplace. And so I think, 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 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 is 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.

Got you. And Ron, maybe if I could, your 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, 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 it 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.

Yes. On the first one, I'll provide some context to my comments that I think AI in the industrial IoT world will be very long fuse. It will have different durations depending upon industries because the very first part of AI is you 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, 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, if you're attached to an elevator, that's all you care about is elevators, right? In fact, you only care about your providers' elevators. And that data set is very small. And 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 at someday, getting a little far out, even dispatch a humanoid robot to fix it. So I think that's the future we have unfolding. Again, it will take many stages. There'll be some bumps along the road, but that's the vision that I think a lot of our customers want to be able to realize, and it's an exciting one.

Regarding the acquisition piece, the industrial IoT world is massive, and it's incredibly fragmented. It is a perfect environment for Digi and our acquisition strategy. So there are a number of opportunities out there. As you know, we have very specific criteria we're looking for. We're looking for right to own them strategically. We're looking for ARR to be a big part of their genetic DNA as well as their business model. We're looking for them to have some degree of scale within our terms. So although there's a ton of opportunities, just like their life out in the universe, we have to be very selective on what teams we want to partner with.

So we do think that there's tons of opportunity. As you mentioned, we are generating cash. We're paying down our debt. We've got a bit of a flywheel model as we're getting bigger and generating more profitability and more cash, we're able to pursue larger opportunities or smaller ones, but in multiple frequencies. So we're excited about our playbook and our ability to execute.

One last one, if I could. 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 '28 time line 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 and just the general operating leverage now you're expecting to get going forward.

Yes. The ARR, that's an easy one, I think, to envision starting fiscal '26 with $152 million, literally 10% growth annually gets us to our goal by the end of '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%. We're going to need 20% plus growth rates in '27, '28 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 going to 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 end of fiscal '28.

And our next question comes from James Fish of Piper Sandler.

This is Caden on for Fish. I was just wondering what kind of tailwinds are you guys seeing on the AI infrastructure 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?

Yes. 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 out-of-band connections so that you don't have to use the network to troubleshoot the network. And that's really where we're seeing the most presence within our product line in data centers.

And 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 some of the major providers over the last 1.5 weeks 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 overinvesting 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 dentist 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.

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?

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

Europe?

Yes, Europe.

Yes, Europe, I'd say most of our revenue is still North American-centric. We're 70% plus North America, let's say, 15% to 20% Europe and the rest is other geographies. 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.

And our next question comes from Josh Nichols of B. Riley.

Great to see just another sequential quarter of pretty significant margin improvement. I know you have half a quarter benefit from Jolt. But when looking at the revenue and then the sharper increase that you're expecting for EBITDA guidance in fiscal year '26, 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?

Yes, Josh, it's Jamie. I think we -- we've moved our segment reporting of profitability to op income coming out of the Jolt acquisition. So if we rewind the tapes we've said as ARR continues to expand, we've seen historically that there's a 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 of 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.

And 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 '28 targets for top line and EBITDA?

Yes, Josh, great question. In certain product lines, we're at 100%. In certain product lines, we're 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 '28 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 that you could provide in terms of like -- 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 curious if you could give us a little bit more color on that.

Yes. I mean it's -- we think it's a positive, but we're incredibly diverse. So 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 -- Opengear's business is about half data center, half edge.

And our next question comes from Anthony Stoss of Craig-Hallum.

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, et cetera, IoT solutions, what you think might be kind of the fastest-growing segment within each for 2026? And then I had a follow-up.

Yes. 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. But -- 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 4 product groupings that we have inside of IoT product services.

Got it. And is it fair to say that you're -- in addition to the tariffs kind of 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 less certainty than probably everybody would like, but you've got Fed that's helping out on that side. You've got certain verticals that are really investing in 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.

[Operator Instructions]

And our next question comes from Greg Mesniaeff of Kingswood Capital Partners.

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?

Yes. Thanks. It's a good question. At the time that we did the acquisition, we had indicated really 2 things. We had said that Jolt was coming in with over $20 million of ARR, so you can envision how the revenue was going to fold in. We have 1.5 months remaining in Q4, so we adjusted our revenue guidance to account for that incremental revenue coming from that ARR. We had also indicated that by the end of calendar '26, we would be at an $11 million run rate EBITDA through the acquisition. And that was going to 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 have 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 the top and bottom line synergies that we had 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 2 companies together. And I feel like we're executing well towards the objectives we laid out.

I'm showing no further questions at this time. I'd like to turn it back to Ron 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 40th birthday, Digi International.

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