Digi International Inc. (DGII) | The Buildout — AI Infrastructure
The Verdict
Digi International makes the connectivity gear and the management software that let operators reach equipment they cannot physically get to — industrial routers at remote oil wells, console servers in data centers, monitoring devices in pharmacies and hospitals. Its role in the AI build-out is indirect: operators of data centers and edge campuses need a way to keep distributed assets visible and controllable, and Digi sells the out-of-band access and remote-management software that does it. It is not a semiconductor supplier, not a data-center builder, and not a power or cooling supplier. Management describes the company as providing the edge device, the connectivity, the software services, and now an AI layer on top.
| Market Cap | — |
| Revenue (TTM) | $506M |
| Revenue Growth | +20.2% |
| EBITDA Margin (TTM) | 26.6% |
| Net Debt | $90M |
| Earnings Beats | 6 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Fiscal Q3 2026 revenue was a record $139M, up 29% y/y, after roughly 25% y/y growth in the prior quarter — the growth rate rose rather than fell.
- Non-GAAP ARR reached a record $191M and is guided to at least $193M by FY2026 year-end, at least 27% growth — faster than the 23.5% guided revenue growth.
- Adjusted EBITDA reached a record $40M at a 29.1% margin, and FY2026 is guided to $146–147.5M, up 35.5% against 23.5% guided revenue growth.
- Cash flow from operations was $33M in Q3, up 38% y/y, and net debt stood at $90.4M at 2026-06-30 against a revolver expanded to $350M on 2026-08-31.
- Service revenue grew 42.4% y/y in Q2 FY2026 against product's 17.3% — the recurring mix is compounding faster than the transactional business.
What We’re Watching
- Q4 FY2026 revenue is guided to $138–142M — essentially flat sequentially against the $139M just reported.
- Part of the pipeline improvement comes from customers ordering early to secure deliveries amid component shortages; management has not quantified how much is pull-forward.
- Ventus relies almost exclusively on a manufacturer in China, and one distributor was 13% of FY2025 consolidated revenue.
- Management said year-to-date cash flow from operations exceeded year-to-date adjusted EBITDA, but that claim does not reconcile like-for-like on the disclosed quarterly figures.
The disclosed numbers point to a business strengthening rather than stalling: revenue growth accelerated, ARR and adjusted EBITDA set records in the same quarter, profit is guided to grow far faster than revenue, and the recurring mix is compounding roughly two to two-and-a-half times faster than the transactional one. The balance sheet supports the stated acquisition flywheel — net debt of $90.4M and leverage well below 1x — and the credit facility was enlarged. What keeps this from being settled is the guide itself: Q4 revenue is guided flat sequentially immediately after the strongest quarter, and part of the pipeline improvement is self-described order pull-forward that management has not quantified. The open question is whether that flat Q4 guide reflects conservatism or the first sign of pull-forward unwinding.
Earnings Beat
Digi reported record fiscal Q3 2026 results on 2026-08-05: revenue of $139M, up 29% y/y, and gross margin of 64.8%, up 130 basis points y/y. Non-GAAP ARR reached a record $191M, and cash flow from operations was $33M, up 38% y/y. Adjusted EBITDA of $40M was a record at a 29.1% margin.
| Metric | Q3 FY2026 | Q2 FY2026 | Q3 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $139M | $131M | $108M | +29.0% |
| Gross margin | 64.8% | 64.0% | 63.5% | +130bps |
| EBITDA | $56M | $28M | $23M | +140.8% |
| EPS | $0.40 | $0.29 | $0.27 | +49.2% |
| Non-GAAP ARR | $191M | $184M | n/a | — |
| Cash flow from operations | $33M | $41M | n/a | +38% y/y |
For the quarter, we're reporting record results, $139 million of revenue, which is up 29% year-over-year, 64.8% gross margins, $33 million in cash flow from operations, which is also up 38% year-over-year.— Jamie Loch, Chief Financial Officer, 2026-08-05
Management tone: Management opened the 2026-08-05 call on record results and raised guidance for both Q4 and the full year. They described confidence — 'We feel confident that we make promises and we keep them' — while declining to put hyperscaler revenue into the guide, cautioning that days-to-win is 'not back to. a normalized level,' and volunteering a 200–300 basis point quarterly gross-margin range while reporting a record margin. No prior-quarter Digi call is in the source material, so no sequential tone comparison can be made.
Management Guidance
Management guided Q4 FY2026 revenue to $138–142M, adjusted EBITDA to $40–41.5M and adjusted EPS to $0.75–0.78 on 39.1M shares, and raised the full year to revenue of $529–533M (+23.5%), adjusted EBITDA of $146–147.5M (+35.5%), adjusted EPS of $2.67–2.70 and ARR growth of at least 27%. On gross margin they set a durable framework rather than extrapolating the strong quarter, flagging 200–300 basis points of quarterly variability. The Opengear-to-hyperscaler opportunity is explicitly excluded from guidance, and no FY2027 guidance has been given.
Trajectory
Revenue has risen sequentially for four straight quarters — $108M, $114M, $122M, $131M and $138.7M through fiscal Q3 2026 on reported figures — and the y/y growth rate rose from roughly 25% in Q2 to 29% in Q3. Gross margin has expanded from 63.5% in the year-ago quarter to 64.8%, and adjusted EBITDA margin reached a record 29.1%. The composition is shifting underneath the total: in Q2 FY2026 service revenue grew 42.4% y/y against product's 17.3%. Management attributes the pipeline improvement to PMI strength, the AI-driven data-center build, and customers ordering early to secure deliveries amid component shortages. The tension is in the guide: Q4 revenue of $138–142M is essentially flat sequentially after the strongest quarter, and it implies a slower y/y rate than the 29% just delivered.
The Model
The model projects FY+1 revenue of $630.0M and EBITDA of $158M, a 25.1% margin, then FY+2 revenue of $729.0M and EBITDA of $191M, a 26.15% margin. The near-term anchor is the company's own FY2026 guidance of $529–533M of revenue and $146–147.5M of adjusted EBITDA, plus the guided ARR growth. FY+2 depends on the recurring-revenue mix continuing to outgrow the transactional business and on the acquisition flywheel deploying the enlarged revolver.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $430M | $630M | $729M |
| YoY Growth | — | +46.4% | +15.7% |
| EBITDA | $90M | $158M | $191M |
| EBITDA Margin | 21.0% | 25.1% | 26.1% |
Projections are the median of 4 independent model runs. The model’s revenue sits 8.4% above analyst consensus.
Management guided Q4 FY2026 revenue to $138–142M, adjusted EBITDA to $40–41.5M and adjusted EPS to $0.75–0.78 on 39.1M shares, and raised the full year to revenue of $529–533M (+23.5%), adjusted EBITDA of $146–147.5M (+35.5%), adjusted EPS of $2.67–2.70 and ARR growth of at least 27%. On gross margin they set a durable framework rather than extrapolating the strong quarter, flagging 200–300 basis points of quarterly variability. The Opengear-to-hyperscaler opportunity is explicitly excluded from guidance, and no FY2027 guidance has been given.
What Could Go Right — and Wrong
- ARR crosses the $200M objective set for 2028 — guided FY2026 ARR of at least $193M implies management may cross that milestone early.
- A named or quantified hyperscaler win lands, which today sits entirely outside guidance and would be additive.
- Opengear or any AI-attributable revenue is disclosed as a standalone line, letting the data-center slice be sized.
- The $350M revolver is deployed into an acquisition that compounds ARR and EBITDA while leverage stays below 1x.
- Gross margin holds near 64–65% through FY2027, above the 62–63% floor management describes as base camp.
- Supply-chain pull-forward reverses — customers ordered early amid component shortages — producing a revenue air pocket and a pipeline slowdown.
- A distributor correction hits quickly: one distributor was 13% of FY2025 revenue, and roughly 65% of Q2 FY2026 revenue was point-in-time.
- The Ventus China sole-source supply or the multi-country contract manufacturing base in Mexico, Thailand, Taiwan, Cambodia and China is disrupted.
- Memory and component cost inflation flows into cost of sales; Digi is a buyer of memory, not a seller, and has not quantified the exposure.
- A large debt-funded acquisition pushes leverage up from well below 1x and raises the interest line.
Looking Ahead
Over the next 12 months the visible checkpoints are the fiscal Q4 2026 print, full-year FY2026 results and the year-end ARR figure. Guided FY2026 ARR of at least $193M implies the $200M objective laid out for 2028 could be crossed early. The other open item is the enlarged revolver: no acquisition had been announced as closed as of the news digest generated 2026-09-17, and no FY2027 guidance or timing for it appears in the source material.
- Not dated in sourceQ3 FY2026 10-Q filing — First Q3 balance-sheet, RPO and distributor-concentration data.
- Q4 FY2026Q4 FY2026 results — Tests guided revenue of $138–142M and adjusted EBITDA of $40–41.5M.
- FY2026 year-end (September 30, 2026)Year-end ARR print — Tests full-year revenue of $529–533M and ARR of at least $193M.
- No date given$200M ARR crossing — Guided FY2026 ARR of at least $193M implies the 2028 objective could be crossed early.
- No date givenRevolver deployment — No acquisition closed as of the 2026-09-17 news digest.
- Not yet givenFY2027 guidance — No FY2027 guidance or timing for it appears in the source.
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $424M | $430M | $506M | +1.4% |
| Gross Margin | 59.0% | 62.9% | 63.8% | +392bps |
| EBITDA | $82M | $90M | $134M | +10.8% |
| EBITDA Margin | 19.3% | 21.0% | 26.6% | +177bps |
| Net Income | $22M | $41M | $49M | +81.3% |
| Free Cash Flow | $81M | $105M | $135M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)63.8%
- EBITDA Margin (TTM)26.6%
- Net Margin (TTM)9.6%
- ROIC7.2%
- FCF Conversion100.5%
- SBC / Revenue5.1%
The Company
Digi International describes itself in its FY2025 10-K as 'a leading global provider of business and mission-critical Internet of Things (IoT) connectivity products, services and solutions.' It sells cellular routers, cellular modules, console servers, XBee radio modules, embedded system-on-modules and single-board computers, infrastructure management products, the Digi Remote Manager software, and technical services — reported in two segments, IoT Products & Services and IoT Solutions. The company is deliberately shifting toward recurring revenue: non-GAAP ARR at June 30, 2026 set a record, and management runs acquisitions as a stated operating model it calls 'acquire, integrate, generate, compound.'
Digi subcontracts most product manufacturing to outside firms across Mexico, Thailand, Taiwan, Cambodia and China. Its only owned property disclosed in the 10-K is a 58,000-square-foot manufacturing and warehousing site in Eden Prairie, Minnesota; its Hopkins, Minnesota world headquarters is leased to January 2032, with leased sites in Utah, Connecticut, Massachusetts, Indiana and Queensland, Australia. The FY2026 Q2 10-Q lists foreign offices and employees in Australia, Belgium, Canada, China, France, Germany, Japan, Mexico, Poland, Spain, Singapore, Sweden and the United Kingdom.
Business Segments
Competitive Landscape
The competitive picture is a broad and largely competitive hardware market wrapped in a software and service layer that is harder to replace. Competitor tagging in the supply-chain wiring file names Cisco (cellular routers), Belden (industrial networking), Lantronix (IoT device servers and out-of-band), Ericsson (cellular routers) and Semtech (cellular routers). The component evidence shows standard merchant silicon underneath from Marvell, NXP, Qualcomm and Silicon Labs, which is the definition of a replaceable bill of materials; the source's read is that Digi is harder to replace at the installed base and easier to replace at the point of sale. A separate 10-K sentence lists larger distributors by sales volume — Arrow Electronics, Avnet, Bressner, Digi-Key, Express Systems, Ingram Micro, MiTac, Mouser Electronics, Synnex and World Wide Technology — and the source treats those as channel rather than competitors, flagging a classification conflict in the wiring file.
- CiscoTagged as a competitor in cellular routers in the supply-chain wiring file; no discussion in Digi's own disclosures.
- BeldenTagged as a competitor in industrial networking in the supply-chain wiring file; no discussion in Digi's own disclosures.
- LantronixTagged as a competitor in IoT device servers and out-of-band in the supply-chain wiring file; no discussion in Digi's own disclosures.
- EricssonTagged as a competitor in cellular routers in the supply-chain wiring file; no discussion in Digi's own disclosures.
- SemtechTagged as a competitor in cellular routers in the supply-chain wiring file; no discussion in Digi's own disclosures.
Supply Chain
Digi buys standard merchant silicon, subcontracts most manufacturing to third parties in five countries, and sells through distributors and direct enterprise relationships. No supply-chain neighbor transcript mentions Digi by name, so every read-through in the source is inferential.
More on DGII: Earnings recap