Digi International Balances Recall Hit With Growth Plans

Digi International ((DGII)) has held its Q2 earnings call. Read on for the main highlights of the call.

Digi International’s latest earnings call painted a picture of a company navigating a tough quarter while trying to keep its long-term story intact. Management acknowledged sizable hits from a voluntary product recall, weaker procedure volumes and sharply lower profits, yet emphasized resilient cash generation, strong supplement growth and a robust practitioner pipeline as reasons to stay constructive.

Dietary Supplements Deliver Double-Digit Growth

Dietary supplement revenue surged 19.1% year over year to $11.0 million in the first quarter of 2026, powered mainly by ongoing strength in the e-commerce channel. Management tempered expectations for the remainder of the year, guiding investors to anticipate mid- to high-single-digit supplement growth for full-year 2026 as comparisons toughen.

Salesforce Buildout Targets Future Top-Line Upside

The company expanded its commercial organization aggressively, adding more than 25 sales hires in the first quarter and lifting total sales personnel from just over 90 at the end of 2025 to roughly 120 planned for 2026. Leadership indicated this buildout is largely complete and is designed to fuel future practitioner recruitment and revenue growth once current disruptions ease.

Practitioner Training Signals Pipeline Strength

More than 200 new practitioners were trained in the quarter, representing a 16.5% increase versus the same period in 2025. Management highlighted that practitioner training is a leading indicator of future procedures and supplement sales, typically starting to contribute around six months after training, suggesting a pipeline that could support a rebound.

Full-Year Guidance Held Despite Q1 Setback

Despite an 8.3% drop in first-quarter revenue, management reaffirmed 2026 guidance for revenue above $190 million and adjusted EBITDA greater than $38 million. They expressed confidence that procedure revenue will return to growth in the second half of 2026, viewing the recall-driven disruption as temporary rather than structural.

Operational Recovery Actions at Asteria Health

To restore supply, Digi International implemented a second production shift at Asteria Health and leaned on third-party pharmacy partners to meet demand. Asteria produced about 30% of shipped pellets in the quarter versus more than 50% in the prior quarter, but management expects supply continuity at Asteria to be fully restored by the end of the second quarter of 2026.

Cash Generation Supports Balance Sheet Cleanup

The company generated $3.9 million of operating cash flow in the first quarter and ended March with $5.3 million in cash and equivalents. Management also noted that all remaining share repurchase liabilities were fully repaid in January, reducing future obligations and giving the balance sheet more flexibility.

Revenue Decline Driven by Recall and Procedures

Total revenue fell 8.3% year over year to $44.9 million as procedure revenue weakened and the voluntary recall caused supply disruptions. The company pointed to the recall as a key factor behind the shortfall, underscoring that the setback is time-limited but nonetheless material for the current reporting period.

Procedure Revenue Contracts Amid Supply Strain

Procedure revenue declined 13.2% year over year to $31.3 million, with management estimating that roughly $1.7 million of the decline was directly tied to the recall and related supply constraints. Additional pressure came from lower procedure volumes in existing clinics and slower productivity ramp from newly added clinics, reflecting both operational and commercial headwinds.

Margin Compression Hits Profitability Metrics

Gross profit margin slipped to 68.9% from 74.3% a year ago, a 5.4 percentage-point drop largely attributed to about $1.1 million of incremental recall costs and a greater reliance on third-party pellets. Adjusted EBITDA fell to $8.7 million, translating to an adjusted EBITDA margin of 19.4%, underscoring how quickly margins can compress when volume and cost pressures collide.

Sharp Year-on-Year Net Income Decline

Net income dropped to $2.7 million, or $0.06 per diluted share, from $15.8 million and $0.37 per share in the prior-year quarter. Management explained that a much smaller gain from changes in the fair value of earn-out liabilities this year, $2.1 million versus $10.7 million previously, played a major role in the steep year-over-year earnings decline.

Recall Costs and Sales Distraction Weigh on Results

The voluntary withdrawal of certain bio-identical hormone pellet inventory shaved an estimated $1.7 million off revenue and added about $1.5 million in incremental costs. Beyond the direct financial hit, the recall diverted sales resources toward servicing affected accounts, slowing new clinic productivity and contributing to softer near-term performance.

Higher SG&A and Legal Expenses Add Pressure

Selling, general and administrative expenses rose 4.1% year over year to $27.8 million, driven by higher legal costs and approximately $0.4 million of recall-related SG&A. These added overheads layered on top of recall costs and margin compression, reinforcing the message that the first quarter was an unusually expensive period to navigate.

Reduced Vertical Supply Dampens Margin Benefits

Asteria Health’s share of pellet output fell to about 30% of shipped pellets in the quarter from more than 50% previously, increasing reliance on external suppliers. This reduced vertical integration temporarily pressured gross margins, but management expects the profitability benefits of internal supply to return once Asteria’s production is fully restored.

Guidance Signals Confidence in Second-Half Recovery

Looking ahead, management reiterated guidance for 2026 revenue above $190 million and adjusted EBITDA over $38 million, even as they acknowledged weaker first-half procedure growth than previously forecast. They expect Asteria’s supply restoration by the end of the second quarter, a return to procedure growth in the back half of the year and dietary supplements to grow at a mid- to high-single-digit pace for 2026.

Digi International’s earnings call underscored a classic transition story, with near-term pain offset by signs of emerging strength. Investors will be watching whether supply normalization, an expanded salesforce and a growing practitioner base can translate into a second-half rebound that validates management’s steady guidance and restores confidence in the company’s growth trajectory.