Digi International Inc. Aktie

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.

Good day. Thank you for standing by. Welcome to the Digi International Jolt Software Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Jamie Loch, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, everyone. It's great to talk to you. Thanks for joining us today to discuss Digi International's acquisition of Jolt. Joining me on today's call is Ron Konezny, our President and CEO. We issued the Jolt acquisition press release after the market closed yesterday. You may obtain a copy of the press release through the Financial Releases section of our Investor Relations website at digi.com. This morning, Ron will provide a few comments on the deal, 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 press release yesterday and the Risk Factors section of our most recent Form 10-K and subsequent reports on file with the SEC. The press 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, which will be filed shortly. Now I'll turn the call over to Ron.

Thank you, Jay. Welcome to Digi's investor call focused on the acquisition of Jolt announced yesterday. Jolt is a natural fit to both extend and enhance SmartSense market leadership. Jolt's operational intelligence platform optimizes workflows, adds printing and labeling solutions and labor scheduling capabilities. Based in Lehi, Utah, just outside Salt Lake City, Jolt team will work with SmartSense to bring more comprehensive ROI to our customers. SmartSense and Jolt have very little overlap with existing customers. Jolt leadership in food and beverage will complement SmartSense's leadership in health care.

We've known Jolt for nearly 10 years and have followed their progress closely. We share cultural values, including customer focus, positive energy, outcome orientation and caring deeply about each other, our work and the success of our customers. As stated in our press release, Digi paid $145.5 million in cash, net of Jolt's cash and subject to customary adjustments, utilizing our existing line of credit to fund this transaction. Jolt contributes to both of our long-term goals as it generated over $28 million in annualized recurring revenue, or ARR, as of their fiscal 2025 year-end of January 31, 2025. Jolt has been growing ARR at a faster rate than Digi's IoT Solutions business segment. Based on expected synergies, the combined SmartSense and Jolt business plans to achieve $11 million in incremental annualized adjusted EBITDA by the end of calendar 2026. Lastly, Jolt brings approximately $30 million of net operating loss carryforwards for Digi to utilize subject to Section 32 analysis. We are thrilled to welcome Jolt to SmartSense and to the Digi family, and we are confident in our joint success. We will now open the line for questions.

Our first question coming from the line of Jim Fish with Piper Sandler.

On the deal. I guess just wanted to understand Jolt a little bit more. What makes them different? Who are they mainly competing against? And it does seem like there might be some overlap with some of your existing products. Can you just walk through if there is any?

Yes. Jolt really grew up based on the founder, Josh Bird, servicing food and beverage. Josh actually owned a Baskin-Robbins prior to -- and operated prior to starting Jolt software. And his inspiration was really optimizing the workflow for restaurants and franchise owners and operators. And so they've kind of grown up bottoms up, if you will, and have gone slowly into enterprise customers.

They've added in condition monitoring through third-party resources. and then added printing labeling and labor and scheduling. So they've been really more focused on that food and beverage segment, where Digi has historically grown up in the condition monitoring area. And so we have our own condition monitoring solution with sensors. And then we've evolved into both enterprise deals, but also into task management.

So there's some overlap in task management and condition monitoring. But clearly, Jolt got, I think, a world-class task monitoring task digitization platform. And we've got, we think, a world-class condition monitoring system that will ultimately emerge and prevail. So our existing customer overlap is very, very modest. Jolt would compete against companies like Zenput that's a part of now CrunchTime, which is owned by a PE firm and to another company called Logile. Those are -- these are companies that focus on task management. We compete more against condition monitoring companies like Sensor Scientific and which is now a part of a larger company and other companies like that.

So we both compete against generally smaller private companies. So the customer overlap is very modest. And in many cases, our customers are asking for the other company's solutions to complement an existing implementation. So we're excited to really cross-sell against each other's customers and focus our innovation on the things that really we're both founded on and do best.

Got it. And maybe, Jamie, for you, can you just help us where the annualized $11 million in added synergies is coming from? And just a little bit of understanding around the business model. Is it completely 100% subscription? Or is there some hardware product revenue associated here? Just trying to understand essentially like the gross margin kind of level for this part in terms of the IoT Solutions impact?

Yes, Jim, the -- when talking about the synergies on a forward-looking basis, it's a combination of both top line and cost savings synergies. Clearly, we would expect to see more of the synergy come from the top line, but there is some natural overlap on the cost side that we would expect to work its way through the model over that period of time. And so the focus really will be on growth. The focus will be on accelerating that growth, but there will be some overlap on the cost side.

And again, calendarize that to a run rate number that would be achieved by the end of '26 because as we talk about really overlapping those sales forces, focusing on the cross-selling nature and bringing these 2 solutions together will really be the focus. From a revenue perspective, there is some onetime revenue, but I would say it's pretty immaterial to the overall outlook of the business. And so the primary focus is going to be on that ARR side, where as we've discussed, their ARR number is growing at a rate faster than what we've seen in our solutions business so far. But the onetime is pretty immaterial in nature.

Our next question coming from the line of Tommy Moll with Stephens Inc.

Ron, just to stick on the $11 million annualized EBITDA that you framed for us. Is it safe to assume that to hit that number, you're embedding a double-digit ARR growth rate. It sounds like that's how fast the business has been growing, but I just want to try to understand the art of the possible here going forward.

Yes, you're absolutely spot on, Tommy. We think the combined company is going to be growing at double digits. That's what Jolt has been able to achieve, and we think the combined business can sustain that.

Okay. And then you've referenced the the overlap or the adjacency in the offering here with SmartSense. So how do you envision integrating the 2 sales organizations and going to market? Or do you run them independently and just have each one cross-sell the other?

No, we're going to be really combining the 2 organizations pretty effectively. And we want to leverage the best of each company's practices. Jolt has done a really, really nice job of that cadence with SMB. And Digi has done a really nice job with the enterprise. What we are probably going to do is have a vertical focus, which SmartSense has had and apply that to the Jolt go-to-market team that's been a little less vertical focused, a little more territory focused. But we think that combined organization is capable of delivering consistent double-digit ARR growth.

Maybe one for Jamie here, just on the updated guidance, Jamie. My assumption would be that the update is purely reflective of the acquired revenue and earnings. But I just want to make sure there's not also some operational update that you're embedding today.

Yes. Tommy, you're right. The update to the guidance is purely based on the addition of Jolt. There is no operational update that we provided to guidance from our earnings call.

Okay. That's what I expected you would say. And so Jamie, as we all look at what those numbers imply for the current run rate of Jolt, it's going to be a little tricky because it's partial quarter, and we don't know the seasonality across the quarters. But is there anything you would go ahead and call out for us now as we all just look at what's implied for what you just acquired?

I think that -- Tommy, I think when you take a look at it, you can really see, again, you're dealing with a partial quarter. The run rate on ARR is in excess of $20 million. You can see the impact that we're seeing coming down at the bottom, and then you can kind of visualize how that impact this quarter has over a period of time to annualize to an $11 million number by the end of calendar '26.

So you can kind of visualize from an adjusted EBITDA rate, how that's going to manifest itself through the P&L, if you say, starting with FQ4 for us right now going all the way through to FQ1 of '27, kind of how that would ramp up at a rate perspective. Again, the onetime revenue is pretty immaterial. So you can see from an ARR perspective and then mapping that out, how that probably adds into the forward look.

Okay. Last one for Ron. On Jolt. Is this purely a software offering, Ron? Or is it more like Digi where in the recurring revenue context, it's going to be more a bundle of the hardware, software service altogether?

Yes. As Jamie mentioned, Jolt is really a software company and provides some hardware solutions based on some third-party solutions, combined with a few things have done on their own. They have not traditionally done a lot of what we would call OpEx or asset deals.

And that's going to be an element we're going to consider, especially on the printing side, where that's a really key capability some of our customers have been asking for in food and beverage. So that's going to be an element we're going to try to exploit and take advantage of inside the SmartSense business model.

Yes. So would that potentially be what most excites you about how you can accelerate the growth here? Or is it more of the sales organization? It sounds like you may have some tweaks in mind about their go-to-market. If you had to really just isolate one thing that you're most excited to really drive change and accelerate growth around, what would that be?

Yes. I mean, listen, I think we're creating a clear market leader here, well over 200 employees between the 2 businesses. You've got 2 businesses that can really focus on what they're best-in-class at with SmartSense on the health care side with condition monitoring applying to all their customers and Jolt on the food and beverage side with world-class operational intelligence and workflow automation.

So that combination is really thrilling. There's opportunities that, quite frankly, both companies we're engaged in separately that combined make us a much more comprehensive solution. A lot of our customers, Tommy, are looking for one provider to be a more comprehensive provider versus bolting together point solutions. And we have an opportunity to really better meet that customer need as a combined force than separate.

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

One, just on margin profile, fair to assume since this is largely SaaS business that's comparable. Two, the recurring ARR piece of your business where you're looking at stuff where gross margins are likely 80% plus and significantly higher than your corporate average? And two, any comment you can make just about like the average customer relationship at Jolt in terms of length churn, net retention, overall with how those things are typically trending?

Yes, Josh, it's Jamie. Thanks for the question. I do think the financial profile of Jolt mirrors really the financial profile of our solutions business, both in terms of growth profile, gross margins and adjusted EBITDA margins. I think when you're dealing with a company that's a little bit smaller in scale, I think you could see coming out of the gate, maybe an adjusted EBITDA margin that would be reflective of a company that's got a little bit smaller scale, a little bit higher growth as they're focused on in terms of percent. But I do think the financial profile really mirrors what we've seen here at Digi, both in terms of top line growth as well as gross margin profile. So I think you're spot on, and I think that mirrors up well with us.

I do think from a retention perspective, we've not been at the spot where we've really disclosed either gross or net retention. But I would say from an ARR perspective, again, that overall profile really mirrors what Digi has seen in terms of churn over the period of time. With an SMB profile that Jolt has, you can see a little bit smaller, again, soft churn, maybe where you've got a location closure.

But from an overall basis, a lot of those metrics really line up well. And to Ron's point, when you're talking about the mirroring of the solutions from a condition monitoring and task management, the financial profiles also line up very well. So there's a lot of similarities there that really line up with the solutions side of the business, a lot of commonality.

Yes. We do think there's some positive synergies on the customer success side. I'd say the SmartSense customer success organization is a little bit more mature than Jolt. So I think there's going to be some added value there to potentially even improve retention further.

And then last question for me, just as a quick follow-up. You mentioned the financial profile is pretty comparable. I think the IoT Solutions business is probably doing 20% or so EBITDA margin on like a segment level. So obviously, already profitable.

But in terms of that, do you think that that's comparable to where Jolt is today? And then in addition to that, do you think that there's an additional $11 million of revenue and cost synergies that would bump that up from the $4 million to $6 million EBITDA run rate that it's kind of running at today. Is that correct?

So before Jamie comments, I just wanted to emphasize the very first thing we think about is the acceleration of growth. And as growth accelerates and you gain scale, you get really good efficiencies and you start to really improve the profitability. So the growth is going to be our primary focus.

We're certainly going to be efficient along the way, but the key is growing. Jolt has been very, very growth-oriented, smaller company, private funding to emphasize the growth. And as we combine the companies, we want to maintain that growth and then get them to a more mature financial profile as well.

Yes. Josh, this is Jamie. I think that the -- again, when you look at the impact that we've had on guidance and then carry that through to a run rate adjusted EBITDA number of $11 million by the end of calendar '26, I think you can see how as those synergies are obtained, both in terms of the top line synergies as well as any cost synergies that we'd be profiling, that growth is going to provide, let's call it, adjusted EBITDA rate improvement over that period of time. That lines up well again with Digi's model that as we continue to grow, you're seeing a lot of that fall down into the bottom line in terms of rate. I think you would see the same thing here. Jolt immediately gets to take advantage of some of Digi's scale as it navigates through.

And so where there will be a little bit of cost synergy, you'll be able to see how that does come down to the bottom line and continue to enhance that adjusted EBITDA rate performance over that period of time. So you'll see that as it kind of scales up.

You can see from the adjustment in guidance, that's no change in operational and then carry that forward into the end of calendar '26, where we're projecting a run rate EBITDA performance of 11%, how we see that falling down to the bottom line in terms of that enhanced performance.

Our next question coming from the line of Scott Searle with ROTH Capital Partners.

Congrats on the acquisition. Ron, maybe to start from a combined company standpoint now when you look at the competitive landscape, you ran down the list of competitors. Who has the same sort of comprehensive suite that you'll now have with Jolt?

Does this materially change the landscape for you? And second, from a cross-selling opportunity standpoint, when you look at the existing SMB base for Jolt, how much of that is immediately addressable with SmartSense opportunities and vice versa, taking Jolt into your existing SmartSense installed base?

Yes. Good questions. We think, obviously, the combination of Jolt and SmartSense creates an even stronger and more comprehensive leader. I do want to emphasize restaurant technology and health care technology is a very broad area that has a lot of room for growth, both within our capabilities, but outside of them as well. And we don't take that for granted. So we think we've got a great platform. We think there's even opportunities to go further, to be quite honest. And we remain active. But I think this does materially change the landscape. I think where companies may have looked for 2 different providers, they may now look to one.

And we may be changing that narrative quite a bit with this combined portfolio of offerings because there's going to be fewer and fewer companies that can provide this comprehensive solution set in both health care as well as food and logistics settings. So we think this is a bit of a game changer. But we also acknowledge that there is even further to go to meet customers' needs that span into inventory and other areas that we don't cover right now.

And maybe just 2 quick follow-ups. Being the cost of capital on the acquisition, I'm just kind of wondering what you guys are paying from an interest rate standpoint. And yes, just start with that.

Yes. Scott, we took advantage of our existing credit facility to be able to execute on that in the 8-K, we'll be releasing that based on the leverage profile that we have, we expect the markup on the borrowing to be at a SOFR rate plus about 250 basis points, 225 on the markup and 25 basis for commitment.

Got you. Helpful. And lastly, Ron, look, not that the ink is drying the deal yet, but in terms of your existing management capacity and debt capacity to pursue other M&A opportunities, are you guys on the sideline for a little bit here as you digest this? Or are you guys still active on that front looking?

No. Yes, good question. We remain active. We -- our leverage position, we feel is both modest, but you can see now between the Opengear and Ventis acquisitions, you can see our both propensity and capability to rapidly delever. And so we remain active, and we continue to look for solutions that can really enhance our customers' ROI and contribute to our long-term goals of both ARR and adjusted EBITDA contributions.

And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Ron Konezny for any closing remarks.

Thanks again for joining this special investor call. We welcome the Jolt team to both SmartSense and Digi. Looking forward to giving you an update on our progress here as we finish our fiscal 2025, and have a great day, everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you for standing by, and welcome to Digi International Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to 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 sections of our Investor Relations website. Now I'll turn the call over to Ron.

Thank you, Jamie. Good afternoon, everyone. Before we open the line for questions, I'd like to share a few highlights from our third fiscal quarter. Digi delivered a strong quarter returning to year-over-year revenue growth. Annual recurring revenue grew double digits year-over-year for the third consecutive quarter. ARR now represents a new record of approximately 30% of our trailing 12-month revenues. Importantly, both of our reporting segments contributed to this growth. Our tailored IoT solutions make it simpler and faster for customers to deploy intelligent and cloud connected Edge solutions.

Our solutions enable remote monitoring, improve machine uptime and deliver actionable analytics, which produce rapid ROI for our customers. This value proposition is resonating across industries and applications. Profitability improved, driven by ARR and favorable product mix, partially offset by increased freight and duties costs. Adjusted EBITDA margins hit a record 25.6%. We expect ARR and profit growth to increasingly outpace revenue growth as our model scales.

Free cash flow generation is a hallmark of our fiscal 2025 performance. Our results were driven by disciplined operations, increased productivity from our AI initiatives and continued inventory optimization. After retiring $30 million in debt this quarter, we now stand at $20 million in net debt and remain on track to be net cash positive by the end of our fiscal 2025.

Our CapEx-light model delivers a 9% free cash flow yield, underscoring the efficiency of our business. Strategic acquisitions remain a top priority. We continue to evaluate opportunities that align with our ARR, growth and scale objectives.

Looking ahead to the final quarter of our fiscal 2025, our outlook assumes a dynamic macro environment. Digi's 40-year legacy demonstrates our ability to adapt and to thrive. Our diversified global supply chain positions us to respond quickly when needed, while maintaining a long-term focus on our customers' success. I'll now turn the call back to the operator for Q&A.

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

Ron, on products and services ARR, another big step higher this quarter. So I wanted to get an update from you there. A couple of aspects I had in mind and then anything else you want to offer. But maybe an update on how you're managing these attach rates through your channel. I know there's a decision you have to make about how quickly you want to move there. And then another one that came to mind was if you can give any color on which product categories you're having the most success with or the most challenges with, frankly, that would be interesting as well.

Yes. Good questions, Tommy. We're really seeing some increase on take rates. We've increasingly moved towards having almost all new business now being attached in the IT area. So IT would include our cellular routers, our Opengear console servers and our infrastructure management devices.

They're all now seeing really much higher levels of attach, and that's helping drive that recurring revenue. We saw really good contributions across the board. We did have some product mix with some products with improved margins having a little bit higher weight than others. But we did see some broad-based contribution, which is always good to see that you got a diverse set of contributors.

Ron, on the guidance for fourth quarter, looks like sales flat sequentially, EBITDA dollars a touch lower sequentially. What do you want to call out? Maybe there was some goodness that hit the P&L in the most recent quarter that we shouldn't expect to recur. Anything you can do to bridge us from one to the other would be helpful.

Yes, Tom, we had a similar profile to last quarter. And so we're always a little bit cautious on the mix side. And so the mix driving gross margin is the thing that would really impact that adjusted EBITDA number. I would point out, although it appears to be relatively flat quarter-over-quarter, it still would mark another year-over-year return to growth, which we're pretty excited about. But that profit assumption will be driven mainly by gross margin rather than, say, OpEx.

Next question comes from the line of Matthew Maus with B. Riley Securities.

This is Matthew on for Josh Nichols. I guess just first off, I mean, in terms of demand outside of APAC and setting tariff concerns aside, are you seeing customers move from wait-and-see mode to pulling the trigger more on larger projects?

You know what -- we're optimistic that between U.S. financial policy, the One Beautiful Bill Act as well as now tariffs becoming more certain, whether you like them or not, I think that's going to open up some improved decision-making. We hadn't seen as much of that in F- Q3, but I think we are starting to see that here in this particular period. And so we're optimistic that increased certainty will help drive more effective and timely decision-making by our customers.

Helpful. And if I remember correctly, I think Opengear is benefiting from AI infrastructure build-out. Can you kind of size that opportunity as hyperscalers kind of move from planning to deploying a little bit more?

Yes. As a reminder, Opengear really services both data center applications as well as Edge. We saw a slight improvement increase in data center business this fiscal year, and that continued in F Q3. But it's still around a 50-50 split between those applications.

The data centers that we're doing business with are both AI and non-AI and increasingly, actually, one of the bigger trends is hybrid deployments where a customer wants to have some of their compute in the cloud, but they also want to have some compute locally. And that's becoming more important as customers look to protect their data as they're leveraging AI models. So that's been a really growth area for that hybrid data center environment.

Got it. And I guess just on inventory, I mean, it looks like it's basically normalized to historical levels. Should we expect customer reordering to accelerate in fiscal '26?

Yes. The -- it's a good point on inventory. We feel like we're getting really to that optimized level. In fact, if anything, we want to make sure we have enough of the right product. We're seeing some positive signs from the channel as well that their velocity is improving. It's hard to say how much that will continue in FY '26, but we are seeing some improvement there.

Next question comes from the line of James Fish with Piper Sandler.

This is Caden on for Fish. My first question, what was the linearity of the quarter like? What did you guys see through July? Was there any impact from tariff/macro volatility?

I think the -- again, we had favorable mix that navigated its way through. I think the -- I don't know that there was really anything unusual about the way the linearity came into the quarter. And frankly, there's not anything unusual about the way the demand is shaping up either. There is some tariff impact. This is Jamie, by the way.

There has been some tariff impact, but we've really been navigating through that either through some accelerated buys that we had as well as leveraging our lower tariff regions for manufacturing. So we've had some tariff impact. Again, that's been a very volatile situation. And with some of the more recent information that's come out, we're analyzing how we think that's going to play into Q4. But as it relates to F Q3, there wasn't anything unique really about the linearity.

Got you. And then just how are you guys feeling about the M&A environment? Like what are the opportunities shaping out there?

Yes, it's still a robust environment out there. We've got a real healthy pipeline. It's always an arm wrestle of valuations for the right opportunities. And -- and we continue to emphasize opportunities that have really strong ARR, good growth profiles. We have a right to own them clearly, and then we want them to be profitable as well. So -- but it's a healthy market out there. So we feel like we've got a good pipeline.

Next question comes from the line of Scott Searle with ROTH Capital.

Ron, I was hoping you could provide a little bit of color maybe geographically and by some of the vertical end markets. I know you had a big win with -- I think it was NYC DOT. But where is the activity? Where are you seeing the demand and the pull-through in the pipeline building right now?

Yes, it's a really good question. One of the hallmarks of Digi is we have tremendous diversity across different industries. And that diversity has really helped us through good times and challenging ones. For example, right now, as you can imagine, that renewable market isn't as strong as it had been traditionally. And so we're not seeing maybe as much demand there as we've had in previous periods.

But we've seen really good demand in the utility segment in water. Mass transit has come back as well as -- we talked about earlier, it's been good business in both the Edge as well as in data center environments, and AI has been a nice boost there as well. So those positives right now are outweighing the challenges. And North America, I think, is gaining more prominence as compared to the other geos.

APAC, in particular, I think, has been softer for us than maybe we would have liked, but more than offset by some strength in North America. Europe is going to be a bit of a wildcard here as they're working through a lot of things on that side, and we remain optimistic, but there may be some bumps along the way in Europe.

Got you. You already addressed the channel issue. It sounds like things are starting to normalize there. But from a cost and component standpoint, I wonder if you could give us some updated thoughts in terms of the competitive landscape with China-based vendors, that's creating opportunities for you. It sounds like you guys have been able to manage your cost structure or your BOM pretty well from that standpoint. And it sounds like, if anything, just tariff certainty is going to drive decision-making, whereas we've been a little bit more of a holding pattern.

Yes, Scott, you nailed it. I think as things become clear, even if you don't like them, it enables you to make really effective decision-making. We're very, very fortunate to put in the work prior to have a diversified supply chain. So we've got some flexibility. Of course, you can't just turn on a dime, but we're trying to take advantage of those areas where the transit routes are very favorable, whether it's Mexico into North America or Asia into Europe.

And so we've got some flexibility there. And we're going to take advantage of that. We have really moved all of our manufacturing out of China. So we don't have the exposure to what we think has been more of a longer-term risk there. And there could be some opportunities as we run into some competitors that maybe don't have as flexible supply chain. There is a tremendous amount of tariff engineering going out there where transformation is occurring. There's competitors considering opening facilities in North America, but there could be a short-term opportunity for us.

Got you. And lastly, if I could, just in terms of the near-term visibility, I'm wondering if there's a turns number that's required to hit maybe the middle of the range. And Jamie, just in terms of capital allocation, you guys have obviously been doing a great job on the free cash flow generation front and paying down the debt. As you basically get to a net cash position, where does the buyback stand in terms of the level of priorities versus keeping a little bit more in the kitty for M&A?

Yes. Scott, good to hear from you. I think the priority continues to be M&A. And I would say we would prioritize it that way. We've been pretty clear as that being part of our strategy, and I would largely look for any deployment to go that route versus, say, a buyback. We are focused on finding the right acquisitions. And so we would deploy our capital with priority there.

Another question from Tommy Moll with Stephens.

One final one for me today. Ron, on the 2025 outlook, you've got revenues flat year-over-year, recurring revenue up double digits. And I think I heard you say in your prepared comments that you continue to expect that the recurring piece would grow faster. I'm just looking at the consensus for 2026, well aware, you're not prepared to guide today.

But the consensus does assume, call it, a mid-single-digit growth rate on that reported line. And so I just wanted to give you the opportunity to make any comment about the interplay there where potentially the more success you have on recurring revenue. There can be some optical headwinds there on the reported revenue. Anything you could do to frame how you're thinking about next year would be helpful.

Yes. In my prepared remarks, I talked about how we expect ARR and profitability to outpace our top line growth. And we think that will persist beyond FY '25. We haven't characterized the percentages. And when there's opportunities for us to service a customer with more of a solution that is over a multiyear period, we're going to take that every time.

And that will dampen our onetime revenue, but it's got a higher IRR, and it's a better opportunity for both the customer and for Digi. We continue to see those opportunities, and we're going to take advantage of those. And that's one of the big reasons that ARR is going to outpace revenue for the future. That ARR also contains a higher gross margin than what our onetime revenue, and that's what's going to help drive improved margins that we've seen and drive down to the bottom line, which will lift that adjusted EBITDA.

And we're seeing really a version of that happening as 2025 period unwound. We're seeing double-digit growth on ARR that's contributing to the gross margin. And now you're seeing us in the last two quarters lift our profit expectations. So we expect that model to continue. If I could, I'd sell all of our solutions recurring -- we're at a record 30%.

We do have customers and products that are appropriate for that, but we're going to keep emphasizing that because we think it's in the customers' best interest. It really matches investment with return. It's very cash flow friendly for our customers as well. And it's just easy. It makes it a lot easier. It holds Digi to a higher level of responsibility than providing a product and having break fix support. If you get a real engagement at that ROI level, then you're just a component of a broader solution. So it's part of the color behind that real strong belief that the ARR and profit will outpace top line.

Seeing no further questions, that concludes our Q&A session. I'd like to turn the call back over to Ron Konezny, CEO, for closing remarks.

Thank you. We look forward to participating in the Piper Sandler Annual Growth Frontiers Conference in mid-September in Nashville. Please seek out your Piper representative for a meeting at that event. And thank you for joining Digi's earnings call today. We appreciate the continued support of our customers, distributors, suppliers and our exceptional Digi team. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.