DGII — Q3 2026 Financial Report Analysis

Overview

Digi International, which sells industrial connectivity hardware (cellular routers, gateways, embedded modules) and the subscription software that manages it, grew fiscal third-quarter revenue (quarter ended June 30, 2026) 29% to $138.7 million, and GAAP net income rose 54% to $15.7 million. Two acquisitions supply much of the top-line gain — Jolt (bought August 2025, not in last year's quarter at all) and Particle (bought January 2026) — but the profit jump comes mostly from costs growing slower than sales: operating expenses rose 25.7% against 31.7% growth in gross profit, and a prior-year inventory charge did not recur. Management raised its full-year outlook for revenue, adjusted EBITDA and recurring revenue.

At a glance

• Operating margin 16.5%, up from 13.9%. Operating margin is the share of revenue left after running the business, before interest and tax. A 2.6-point gain in one year means each extra dollar of sales is carrying less overhead.
• Annualized recurring revenue (ARR) $191 million, up 52%. ARR is the yearly value of all subscription contracts in force at quarter end. It now equals roughly a third of yearly revenue, and it is the metric management is steering by.
• Operating cash flow $110.4 million over nine months vs. $38.8 million of net income. Cash is coming in at almost three times reported profit, which paid down $85 million of debt even after buying Particle.

Results vs. a year ago

Nine-month figures: revenue $391.9M (+24.1%), operating income $56.3M (+34.0%), net income $38.8M (+25.7%), diluted EPS $1.00 vs. $0.82.

Where the growth came from

Digi reports two segments, and they grew for different reasons.

• Products & Services (+$19.8M) is mostly organic. The filing splits the gain into $12.4 million more one-time (hardware) sales and $7.4 million more recurring revenue, "with no material impact from pricing", and says "a significant majority of the increase in revenue was driven by organic growth from increased customer demand and supported by the Particle acquisition." The segment's ARR doubled from $30 million to $60 million, "driven primarily by the acquisition of Particle." So Particle mainly shows up in the subscription base, while the hardware growth is customers buying more.
• Solutions (+$11.4M) is mostly bought. Of the increase, $8.9 million was recurring revenue and $2.5 million one-time sales, "with the significant majority of both driven by the Jolt acquisition." Segment ARR rose from $96 million to $131 million.

Digi does not say how much revenue Particle and Jolt contributed in dollars, so the underlying (organic) growth rate can't be calculated from the filing. What the wording does support is that hardware demand grew without help from price increases, which matters because management also flags rising memory-chip costs.

Why profit rose faster than sales

• Gross margin +130 bp "was the result of heightened inventory-related costs in the prior year that did not repeat." This is a favorable comparison, not a new pricing or mix gain. Over nine months the same effect dominates, "with a lesser impact from favorable product margin mix."
• Operating leverage. Operating expenses rose $13.7 million ($9.2 million labor, $4.5 million non-labor), driven by "incremental costs from Jolt and Particle, including an increase in amortization expense … and higher labor costs among existing employees." Total opex fell from 49.6% to 48.3% of revenue. In Solutions, the 570 bp margin gain came entirely from "improved operating expense efficiencies as volume expanded at a greater rate than operating expenses."
• Below the operating line, net interest expense rose 72% to $1.6 million because Digi borrowed to pay for Particle. The quarter's effective tax rate was about the same both years (26.0% vs. 26.6%).

What the headline numbers hide

• Cash conversion is strong, but partly tax timing. Nine-month operating cash flow of $110.4 million was 2.85x net income. Some of that is normal for an acquirer: $33.3 million of depreciation and amortization and $13.4 million of stock-based pay are non-cash. One part won't repeat at the same size, though. Deferred tax expense of $11.4 million (vs. a $2.5 million benefit a year ago) reflects "accelerated utilization of tax assets caused by the One Big Beautiful Bill Act", and cash taxes paid fell to $2.2 million from $12.9 million. Unearned revenue (customers paying ahead) also grew from $40.7 million to $55.5 million since September, which helps cash now.
• GAAP vs. adjusted. Adjusted EPS of $0.75 is almost double GAAP's $0.40. The $13.4 million gap is mainly $8.2 million of acquisition amortization (a non-cash write-down of the purchased intangibles) and $4.9 million of stock-based compensation. Stock pay is a real cost to shareholders: the diluted share count rose 3.4% to 38.9 million, and Digi paid $11.3 million in withholding taxes to settle share awards over nine months. Since fiscal 2026, adjusted net income no longer adds back interest expense, and prior years have been restated on that basis. That makes the adjusted figure a bit more conservative.
• EPS growth came from operations. Net income rose 54% while EPS rose 48%. The difference is share dilution, not buybacks (there were none). The tax rate was flat, and higher interest was a headwind.
• Working capital looks clean. Receivables slipped to $62.8 million from $63.5 million at fiscal year-end while revenue grew. Inventory rose 16% to $45.0 million, slower than sales and partly from consolidating Particle.
• Jolt purchase-accounting adjustment. In Q2 Digi booked a $5.0 million reserve for "potential product replacement" at Jolt through purchase accounting, so it raised goodwill rather than running through earnings. The Jolt price allocation was finalized this quarter.
• Year-to-date tax rate is higher. The nine-month effective rate was 22.6% vs. 17.6% a year earlier, so nine-month net income (+25.7%) grew more slowly than pre-tax income (+33.9%).

Balance sheet and financing

Revolver debt was $109 million at June 30 (down from $159 million at September 30), against $28 million of cash, or $81 million of net debt. On guided full-year adjusted EBITDA of $146–147.5 million, that is well under 1x. On August 27, 2026, after the quarter, Digi replaced its $250 million revolver with a $350 million facility maturing in 2031. It has a lower margin range (1.25%–2.625% over SOFR, vs. 1.35%–3.10%), and its accordion feature can expand without limit as long as net leverage stays at 2.5x or below. Management restated that "acquisitions remain a top capital priority."

Takeaway: Digi's margin expansion is real operating leverage on top of acquired subscription revenue, but this quarter's 130 bp gross-margin gain is a favorable comparison against a prior-year inventory charge, and part of the outsized cash flow is a one-time tax-law benefit. The durable signal is ARR at $191 million, now about a third of revenue, which carries the margin story from here.

Outlook

Management raised its full-year fiscal 2026 guidance (year ending September 30, 2026):

• Revenue $529–533 million (+23–24%), up from +20–22%.
• Adjusted EBITDA $146.0–147.5 million (+35–36%), up from +23–26%.
• ARR growth at least 27%, up from 25%.
• Q4: revenue $138–142 million, adjusted EBITDA $40.0–41.5 million, adjusted EPS $0.75–0.78 on 39.1 million diluted shares.

The Q4 revenue range is flat to slightly up from Q3's $138.7 million, so the guide doesn't assume a step-up. Management reaffirmed its target of $200 million each of ARR and adjusted EBITDA "within our targeted time horizon", and at $191 million, ARR is close. Fiscal Q4 results (and the 10-K) should land in early-to-mid November. Three things to watch: whether ARR clears $200 million, whether gross margin holds near 64% now that the easy prior-year comparison has passed and memory-chip costs are rising, and whether the new $350 million credit line is followed quickly by another acquisition, which would reset the deleveraging.