The study discovered that organizations with a high level of readiness for technology, competitive pressures, and business resources are more likely to successfully undergo digital transformation. Innovation is a crucial factor in driving this process. Efficient management of knowledge assets and promoting an innovative culture assist organizations in adapting to the demands of the digital era. The organizational culture also moderates the relationship between digital transformation and innovation. In general, this study provides valuable insights into the dynamics of digital transformation in small and medium-sized enterprises (SMEs) in Sabah, Malaysia. The data analysis was carried out through Partial Least Squares-Structural Equation Modeling (PLS-SEM) techniques by using the SmartPLS 4.0 software. A total of 200 questionnaires were distributed to small and medium-sized firms resulting in 126 were returned. The investigation reveals that digital transformation has a significant relationship on innovation. Furthermore, it is evident that the relationship between digital transformation and innovation is influenced by organizational culture. These findings underscore the importance of strengthening connections within the context of SMEs, while also creating opportunities for further exploration and research. The knowledge gained from this study lays the groundwork for future research to gather additional information and delve deeper into the realm of digital transformation and its effects on innovation.