DIGI INTERNATIONAL INC

Previous wording

This report contains forward-looking statements, which are statements based on management’s current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," or "will" or the negative thereof or other variations thereon or similar terminology. Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, inventory levels, perceived marketplace opportunities, debt repayments, attributions of potential acquisitions and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary and trade policies of governments globally as well as present and ongoing concerns about a potential recession, the potential for longer than expected sales cycles, the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, regulatory risks that include, but are not limited to, the potential expansion of tariffs, risks related to cybersecurity, risks arising from the present military conflicts in Ukraine and the Middle East, the highly competitive market in which we operate, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and adverse ways, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control.

Current wording

This report contains forward-looking statements that are based on management’s current expectations and assumptions. These statements often can be identified by the use of forward-looking terminology such as "assume," "believe," "continue," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," or "will" or the negative thereof or other variations thereon or similar terminology. Among other items, these statements relate to expectations of the business environment in which Digi operates, projections of future performance, including (but not limited to) expectations regarding the Company's profitability and net cash position, inventory levels, supply chain normalization, perceived marketplace opportunities, debt repayments, attributions of potential acquisitions and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Among others, these include risks related to ongoing and varying inflationary and deflationary pressures around the world and the monetary and trade policies of governments globally as well as present and ongoing concerns about a potential recession, the potential for longer than expected sales cycles, the ability of companies like us to operate a global business in such conditions as well as negative effects on product demand and the financial solvency of customers and suppliers in such conditions, risks related to ongoing supply chain challenges that continue to impact businesses globally, regulatory risks that include, but are not limited to, the potential expansion of tariffs and potential changes to regulations impacting the functionality or compliance of our products, risks related to cybersecurity, data breaches and data privacy, risks arising from the present military conflicts in Ukraine and the Middle East, the highly competitive market in which we operate, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, the potential for significant purchase orders to be canceled or changed, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to integrate and realize the expected benefits of acquisitions, our ability to defend or settle satisfactorily any litigation, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring, reorganizations or other similar business initiatives that may impact our ability to retain important employees or otherwise impact our operations in unintended and a…

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Previous wording

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the second quarter of fiscal 2025 that we feel are most important in these evaluations, with comparisons to the second quarter of fiscal 2024:

Current wording

We utilize many financial, operational, and other metrics to evaluate our financial condition and financial performance. Below we highlight the metrics for the third quarter of fiscal 2025 that we feel are most important in these evaluations, with comparisons to the third quarter of fiscal 2024:

Previous wording

•Consolidated gross profit was $65 million, an increase of 4%.

Current wording

•Consolidated gross profit was $68 million, an increase of 10%.

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•Net income was $10 million, compared to $4 million.

Current wording

•Net income was $10 million, an increase of 6%.

Previous wording

•Adjusted net income and adjusted net income per share was $19 million, or $0.51 per diluted share, respectively, compared to $18 million, or $0.49 per diluted share, respectively.

Current wording

•Adjusted net income and adjusted net income per share were $20 million, or $0.53 per diluted share, respectively, compared to $18 million, or $0.50 per diluted share, respectively.

Previous wording

•Adjusted EBITDA was $26 million, or 24.9% of revenue, compared to $24 million or 22.1% of revenue.

Current wording

•Adjusted EBITDA was $28 million, or 25.6% of revenue, compared to $25 million or 23.5% of revenue, an increase of 11%.

Previous wording

•Annualized Recurring Revenue (ARR) was $123 million at quarter end, an increase of 12%.

Current wording

•Annualized Recurring Revenue (ARR) was $126 million at quarter end, an increase of 12%.

Previous wording

In addition, like many companies we are monitoring the impact recently announced tariffs by governments around the world may have on our business. Given the fluidity of these announcements and their ability to be changed, the exact impact of tariffs on our future results is not certain.

Current wording

In addition, like many companies we are monitoring the impact recently announced tariffs by governments around the world may have on our business. Given the fluidity of these announcements and their ability to be changed, the exact impact of tariffs on our future results is uncertain.

Previous wording

IoT Products & Services revenue decreased $5.6 million for the three months ended March 31, 2025, as compared to the same period in the prior fiscal year. The decrease consisted of a $6.8 million decline in one-time sales, with no material impact from pricing. This was driven by lower demand for some products, as some customers are bleeding down inventory stockpiled from when supply chains were stressed, partially offset by increased demand for some products from new project-based customer initiatives. This decrease was partially offset by $1.2 million of recurring revenue growth.

Current wording

IoT Products & Services revenue was flat for the three months ended June 30, 2025, as compared to the same period in the prior fiscal year. This consisted of a $1.3 million of recurring revenue growth, offset by a $1.3 million decrease in one-time sales, with no material impact from pricing. The decrease was driven by lower demand for some products, as some customers are bleeding down inventory stockpiled from when supply chains were stressed, partially offset by increased demand for some products from new project-based customer initiatives.

Previous wording

IoT Products & Services revenue decreased $9.8 million for the six months ended March 31, 2025, as compared to the same period in the prior fiscal year. The decrease consisted of a $11.5 million decline in one-time sales, with no material impact from pricing. This was driven by lower demand for some products, as some customers are bleeding down inventory stockpiled from when supply chains were stressed, partially offset by increased demand for some products from new project-based customer initiatives. This decrease was partially offset by $1.7 million of recurring revenue growth.

Current wording

IoT Products & Services revenue decreased $9.8 million for the nine months ended June 30, 2025, as compared to the same period in the prior fiscal year. The decrease consisted of a $12.8 million decline in one-time sales. This was driven by lower demand for some products, as some customers are bleeding down inventory stockpiled from when supply chains were stressed, partially offset by increased demand for some products from new project-based customer initiatives. This decrease was partially offset by $3.0 million of recurring revenue growth. Overall, there was no material impact from pricing.

Previous wording

IoT Solutions revenue increased $4.4 million for the six months ended March 31, 2025, as compared to the same period in the prior fiscal year. The increase consisted of a $4.5 million increase in recurring revenue, driven by growth in both SmartSense and Ventus, partially offset by a $0.1 million decrease in one-time sales.

Current wording

IoT Solutions revenue increased $2.3 million for the three months ended June 30, 2025, as compared to the same period in the prior fiscal year. The increase consisted of a $1.7 million increase in recurring revenue, driven by growth in both SmartSense and Ventus and a $0.6 million increase in one-time sales.

Previous wording

IoT Solutions revenue increased $2.4 million for the three months ended March 31, 2025, as compared to the same period in the prior fiscal year. The increase consisted of a $2.4 million increase in recurring revenue, driven by growth in both SmartSense and Ventus.

Current wording

IoT Solutions revenue increased $6.7 million for the nine months ended June 30, 2025, as compared to the same period in the prior fiscal year. The increase consisted of a $6.2 million increase in recurring revenue, driven by growth in both SmartSense and Ventus and a $0.5 million increase in one-time sales.

Previous wording

ARR was $123 million as of March 31, 2025, compared to $110 million as of March 31, 2024. IoT Products & Services ARR was $28 million as of March 31, 2025, compared to $23 million as of March 31, 2024. This increase was due to growth in the subscription base across remote management platforms and extended warranty offerings. IoT Solutions ARR was $95 million as of March 31, 2025, compared to $87 million as of March 31, 2024, driven by growth in both SmartSense and Ventus.

Current wording

ARR was $126 million as of June 30, 2025, compared to $113 million as of June 30, 2024. IoT Products & Services ARR was $30 million as of June 30, 2025, compared to $23 million as of June 30, 2024. This increase was due to growth in the subscription base across remote management platforms and extended warranty offerings. IoT Solutions ARR was $96 million as of June 30, 2025, compared to $90 million as of June 30, 2024, driven by growth in both SmartSense and Ventus.

Previous wording

IoT Products & Services gross profit margin increased 500 basis points for the six months ended March 31, 2025 as compared to the same period in the prior fiscal year. This increase was driven by a favorable margin mix among product sales partially offset by an increase in inventory related adjustments.

Current wording

IoT Products & Services gross profit margin increased 620 basis points for the three months ended June 30, 2025 as compared to the same period in the prior fiscal year. This increase was driven by a favorable margin mix among product sales.

Previous wording

IoT Products & Services gross profit margin increased 490 basis points for the three months ended March 31, 2025 as compared to the same period in the prior fiscal year. This increase was driven by a favorable margin mix among product sales partially offset by an increase in inventory related adjustments.

Current wording

IoT Products & Services gross profit margin increased 540 basis points for the nine months ended June 30, 2025 as compared to the same period in the prior fiscal year. This increase was driven by a favorable margin mix among product sales partially offset by an increase in inventory related adjustments.

Previous wording

The IoT Solutions gross profit margin increased 40 basis points for the three months ended March 31, 2025 as compared to the same period in the prior fiscal year. This increase was the result of growth in higher margin ARR subscription revenues.

Current wording

The IoT Solutions gross profit margin decreased 240 basis points for the three months ended June 30, 2025 as compared to the same period in the prior fiscal year. This decrease was the result of increased depreciation of capitalized subscriber assets driven by customer deployments and increased inventory-related expenses.

Previous wording

The IoT Solutions gross profit margin increased 50 basis points for the six months ended March 31, 2025 as compared to the same period in the prior fiscal year. This increase was the result of growth in higher margin ARR subscription revenues.

Current wording

The IoT Solutions gross profit margin decreased 50 basis points for the nine months ended June 30, 2025 as compared to the same period in the prior fiscal year. This decrease was the result of increased depreciation of capitalized subscriber assets driven by customer deployments and increased inventory-related expenses.

Previous wording

The $3.0 million decrease in operating expenses for the three months ended March 31, 2025, as compared to the same period in the prior fiscal year was due to a $6.3 million litigation reserve increase in the second fiscal quarter of fiscal 2024 that did not reoccur, partially offset by a $2.1 million gain on the sale of an intangible asset in the second fiscal quarter of fiscal 2024 that did not reoccur and a $1.2 million increase in non-labor expenses. The $0.9 million decrease in operating expenses for the six months ended March 31, 2025, as compared to the same period in the prior fiscal year was due to a $6.3 million litigation reserve increase in the second fiscal quarter of fiscal 2024 that did not reoccur, partially offset by a $2.1 million gain on the sale of an intangible asset in the second fiscal quarter of fiscal 2024 that did not reoccur and a $2.9 million increase in labor expenses and a $0.4 million increase in non-labor expenses.

Current wording

The $4.0 million increase in operating expenses for the three months ended June 30, 2025, as compared to the same period in the prior fiscal year was due to a $2.8 million increase in labor expense and a $1.2 million increase in non-labor expense. The $3.1 million increase in operating expenses for the nine months ended June 30, 2025, as compared to the same period in the prior fiscal year was due to a $5.6 million increase in labor expense, a $1.7 million increase in non-labor expense and a $2.1 million gain on the sale of an intangible asset in the second fiscal quarter of fiscal 2024 that did not reoccur, partially offset by a $6.3 million litigation reserve increase in the second fiscal quarter of fiscal 2024 that did not reoccur.

Previous wording

Other expense, net, decreased $2.4 million for the three months ended March 31, 2025, as compared to the same period in the prior fiscal year. Other expense, net, decreased $15.5 million for the six months ended March 31, 2025, as compared to the same period in the prior fiscal year. These decreases were driven by a write-off of debt issuance costs in 2024 and a reduction in interest expense due to a decrease in average debt outstanding and our effective interest rate (see Note 5 to the condensed consolidated financial statements for additional information).

Current wording

Other expense, net, decreased $2.3 million for the three months ended June 30, 2025, as compared to the same period in the prior fiscal year. Other expense, net, decreased $17.8 million for the nine months ended June 30, 2025, as compared to the same period in the prior fiscal year. These decreases were driven by a write-off of debt issuance costs in the second fiscal quarter of 2024 and a reduction in interest expense due to a decrease in average debt outstanding and our effective interest rate (see Note 5 to the condensed consolidated financial statements for additional information).

Previous wording

Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that actually were recognized by Digi. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. We believe these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs. We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense related to acquisition permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals and changes in fair value of contingent consideration, is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired.

Current wording

Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance. The disclosure of these measures does not reflect all charges and gains that actually were recognized by Digi. These non-GAAP measures are not in accordance with, or, an alternative for measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies or presented by us in prior reports. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. We believe these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. Additionally, Adjusted EBITDA does not reflect our cash expenditures, the cash requirements for the replacement of depreciated and amortized assets, or changes in or cash requirements for our working capital needs. We believe that providing historical and adjusted net income and adjusted net income per diluted share, respectively, exclusive of such items as reversals of tax reserves, discrete tax benefits, restructuring charges and reversals, intangible amortization, stock-based compensation, other non-operating income/expense, adjustments to estimates of contingent consideration, acquisition-related expenses and interest expense related to acquisition permits investors to compare results with prior periods that did not include these items. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of these matters, which while important, are not central to the core operations of our business. Management believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, acquisition-related expenses, restructuring charges and reversals and changes in fair value of contingent consideration, is useful to investors to evaluate our core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the consolidated statements of operations. We believe that the presentation of Adjusted EBITDA as a percentage of revenue is useful to investors because it provides a reliable and consistent approach to measuring our performance from year to year and in assessing our performance against that of other companies. We believe this information helps compare operating results and corporate performance exclusive of the impact of our capital structure and the method by which assets were acquired.

Previous wording

(2)For the three andsix months ended March 31, 2025 and 2024, discrete tax benefits are a result of changes in excess tax benefits recognized on stock compensation.

Current wording

(2)For the three andnine months ended June 30, 2025 and 2024, discrete tax benefits are a result of changes in excess tax benefits recognized on stock compensation.

Previous wording

Our condensed consolidated statements of cash flows for the six months ended March 31, 2025 and 2024 are summarized as follows:

Current wording

Our condensed consolidated statements of cash flows for the nine months ended June 30, 2025 and 2024 are summarized as follows:

Previous wording

Cash flows from operating activities increased $24.3 million as a result of:

Current wording

Cash flows from operating activities increased $23.3 million as a result of:

Previous wording

•a $19.6 million increase in net income in the first half of fiscal 2025,

Current wording

•a $20.2 million increase in net income in the first nine months of fiscal 2025,

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•a $11.5 million decrease in net operating assets for the first six months of fiscal 2025 compared to a $4.6 million increase in the first six months of fiscal 2024,

Current wording

•a $15.1 million decrease in net operating assets for the first nine months of fiscal 2025 compared to a $0.2 million increase in the first nine months of fiscal 2024,

Previous wording

•and a $0.4 million increase in deferred income tax benefit for the first six months of fiscal 2025 compared to a $1.9 million increase in the first six months of fiscal 2024.

Current wording

•and a $2.5 million increase in deferred income tax benefit for the first nine months of fiscal 2025 compared to a $3.0 million increase in the first nine months of fiscal 2024.

Previous wording

Cash flows used in investing activities decreased $2.6 million as a result of:

Current wording

Cash flows used in investing activities decreased $3.1 million as a result of:

Previous wording

•and a $0.3 million increase in purchases of property, equipment, improvements and certain other intangible assets.

Current wording

•and a $0.9 million increase in purchases of property, equipment, improvements and certain other intangible assets.

Previous wording

Cash flows used in financing activities increased $13.3 million as a result of:

Current wording

Cash flows used in financing activities increased $22.7 million as a result of:

Previous wording

•and a $3.8 million increase in taxes paid to satisfy tax withholding obligations of holders of options to purchase common shares and restricted stock unit awards in connections with net share settlements.

Current wording

•and a $3.3 million increase in taxes paid to satisfy tax withholding obligations of holders of options to purchase common shares and restricted stock unit awards in connections with net share settlements.

Previous wording

•debt payments of $53.3 million in the first half of fiscal 2025, compared to debt payments of $256.0 million in the first half of fiscal 2024

Current wording

•debt payments of $83.3 million in the first nine months of fiscal 2025, compared to debt payments of $276.2 million in the first nine months of fiscal 2024