Digi International’s Q3 Earnings Call: Gross Margin Guidance and DANI’s Role Spark Contradictions

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Date of Call: Aug 5, 2026

Financials Results

• Revenue: $139 million, up 29% year-over-year
• EPS: $0.75 to $0.78 per diluted share (guidance for Q4); $22.67 to $2.70 per diluted share (guidance for full year)
• Gross Margin: 64.8%
• Operating Margin: Not explicitly provided; adjusted EBITDA margin is 29.1%

Guidance:

• Q4 revenue expected between $138 and $142 million.
• Q4 adjusted EBITDA expected between $40 and $40.15 million.
• Q4 adjusted EPS expected between $0.75 and $0.78 per diluted share.
• Full-year revenue expected between $529 and $533 million, up 23.5% year-over-year.
• Full-year adjusted EBITDA expected between $146 and $147.5 million, up 35.5% year-over-year.
• Full-year adjusted EPS expected between $22.67 and $22.70 per diluted share.
• Full-year ARR growth projected to be at least 27% year-over-year.

Business Commentary:

Record Revenue and Financial Performance:

• Digi International reported record revenue of $139 million for Q3, up 29% year-over-year.
• The company also reported record adjusted EBITDA margins of 29.1% with adjusted EBITDA of $40 million, and cash flow from operations of $33 million, up 38% year-over-year.
• This growth was driven by strong delivery of customer solutions and increased operational leverage.

Annual Recurring Revenue (ARR) Growth:

• Digi International's annual recurring revenue reached a record $191 million, reflecting a strong growth trend.
• The company's ARR and profits are growing faster than its revenue, indicating effective operational leverage and value delivery to customers.

Sales Funnel and Days to Win:

• The company observed an improvement in the days to win metric, with customers making decisions faster.
• This was attributed to increased pipeline growth and some urgency in deals, likely influenced by supply chain challenges and strong PMI.

OpenGear and Data Center Performance:

• OpenGear, a part of Digi International, has been a strong performer in edge campus and data center applications.
• The company is also engaging with hyperscalers, although these sales cycles are long and unpredictable, and not factored into current guidance.

AI Integration and Digi Artificial Network Intelligence (DANI):

• Digi introduced DANI, an AI tool that allows users to interact with Digi equipment and connected systems using natural language.
• This innovation is expected to enhance customer experience, improve system management, and drive more value from Digi solutions, supporting future growth.

Sentiment Analysis:

Overall Tone: Positive

• Management stated they are "very proud of our accomplishments this quarter" and "reporting Record results." They "increased our guidance for Q4 and subsequently our full year guidance" and noted that "ARR and profits continue to grow faster than revenue" with "operational leverage as a company." They expressed confidence in achieving long-term objectives and described strong pipeline growth and sales improvements.

Q&A:

• Question from Tommy Mall (Stevens): Hi, Tommy. A question for you on the sales funnel and the days to win, which is an important KPI I know you monitor. you've exceeded expectations this quarter and have guided revenues up sequentially. And so I'm just curious what insight you could give us on the sales funnel and how fast deals are converting.
  Response: Management cited improvement in the days-to-win metric due to faster customer decisions and some deals with urgency, combined with overall pipeline growth across all stages.

• Question from Tommy Mall (Stevens): Follow-up for you on the data center theme. Ron, OpenGear has an existing presence in that vertical. I'm interested in any update you can give us there in general, and then specifically on the hyperscale side. I know that historically you have not sold directly there, but have any of the tectonic plates maybe shifted in your favor?
  Response: OpenGear is performing well in edge and data center applications, including with neoclouds, but sales cycles with hyperscalers are long and unpredictable, with no expectations embedded in guidance.

• Question from Timothy Shespa (Piper Sandler): This is Tim. I'm for Jim Fish. ARR kind of accelerated nicely quarter over quarter here. I was just hoping you could talk about any areas of strength that you are seeing, anything specific to call out.
  Response: Strength was balanced across product, services, and solutions, with high attach rates on product and strong contributions from enterprise deals in both Ventus and SmartTents segments.

• Question from Timothy Shespa (Piper Sandler): And then just to follow up, you had strong gross product margin this quarter. Anything to talk about there? What's driving the strength and how should we think about this kind of heading into fiscal year 27 and maybe longer term?
  Response: Strong margins were due to favorable product mix; the base camp is low-to-mid 60s with variability, but longer-term improvement of 10-15 bps is expected as ARR grows faster than revenue.

• Question from Tommy Maul (Stevens): Ron, you mentioned Danny, the AI agent. And, you know, I noticed in the press release there's... some good insight in there, including some dollar signs that are helpful for financial analysts like us on the call here. But maybe can you just help us connect some dots on the commercial opportunity here?
  Response: DANI (Digi AI) is a natural language interface for the remote management platform to improve customer service, training, and system usage; monetization is not the current priority, but it enhances value and adoption.

Contradiction Point 1

Days to Win Metric Explanation

Different primary factors cited for improved days to win metric.

Tommy Maul (Stevens) - Tommy Maul (Stevens)

2026Q3: The improvement in days to win is due to customers making faster decisions, though not back to a normalized level... some deals have urgency due to supply chain challenges... - Ron Koneczny(CEO)

How did improvements in the sales funnel and days to win drive the outperformance of expectations and sequential revenue guidance?" - Tommy Moll (Stephens)

2026Q3: Days to win metric improved as customers made decisions faster... Additional factors: strong PMI, AI wave impacting data center/utilities, and supply chain challenges prompting customers to secure orders... - Jamie Loch(CFO) & Ron Konezny(CEO)

Contradiction Point 2

Commercial Focus on DANI, the AI Agent

Shift in stated primary goal from enhancing customer understanding to enhancing customer service.

What are Stevens' earnings results? - Tommy Maul (Stevens)

2026Q3: DANI is embedded in the Digi Remote Manager platform... The primary goal is to enhance customer service and adoption, not immediate monetization... - Ron Koneczny(CEO)

What is the commercial opportunity for DANI, the AI agent? - Tommy Moll (Stephens)

2026Q3: Digi is in our Digi Remote Manager platform... It’s really to help better service our customers, improve their understanding and use of our system... - Ron Koneczny(CEO)

Contradiction Point 3

Long-Term Gross Margin Targets

Inconsistent guidance on the magnitude of expected long-term gross margin improvement.

Timothy Shespa (Piper Sandler) - Timothy Shespa (Piper Sandler)

2026Q3: Long-term, as ARR grows faster than revenue, a 10-15 basis point improvement is expected. - Jamie Locke(CFO)

What factors contributed to the strong gross product margin this quarter, and how should we expect it to evolve in fiscal year 27 and beyond? - Rian Bisson (Craig-Hallum)

2026Q2: Expect 15-25 basis points of improvement per quarter on average as ARR grows faster than revenue... - Jamie Loch(CFO)

Contradiction Point 4

Hyperscale Market Engagement and Sales Cycle Outlook

Contradiction on the predictability and engagement timeline with hyperscale customers.

What are Tommy Maul's earnings call insights for Stevens? - Tommy Maul (Stevens)

2026Q3: The company remains optimistic about engaging with hyperscalers but notes the sales cycles are long and unpredictable, and no expectations are embedded in forward guidance. - Ron Koneczny(CEO)

What is the current status of OpenGear's presence in the data center vertical and any shifts in the hyperscale market? - Thomas Moll (Stephens Inc.)

2026Q1: The demand environment is improving and increasing... The data center segment, particularly the Opengear product line, is also showing success. - Ronald Konezny(CEO)

Contradiction Point 5

Memory Component Supply and Pricing Impact

Contradiction on the current impact and management of memory pricing volatility.

Tommy Maul (Stevens) - Tommy Maul (Stevens)

2026Q3: There is also increased pipeline growth across all stages, and some deals have urgency due to supply chain challenges, leading to quicker cycling through the pipeline. - Ron Koneczny(CEO)

How have the sales funnel and days to win contributed to exceeding Q4 expectations and raising revenue guidance? - Anthony Stoss (Craig-Hallum Capital Group LLC)

2026Q1: AI demand is pressuring specific memory components (DDR4/DDR5, eMMC) used in newer products. Digi's priority is securing supply allocations. The company can usually absorb price increases and is working to qualify alternate memory suppliers to mitigate risk. - Ronald Konezny(CEO)

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