加载中...
共找到 40,189 条相关资讯
Operator: Good day, and thank you for standing by. Welcome to the StoneX Group Inc. Q4 FY 2025 earnings conference call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Dunaway, CFO. Please go ahead, sir. William Dunaway: Good morning, and welcome to our earnings conference call for our quarter ended September 30, 2025, our fourth fiscal quarter. After the market closed yesterday, we issued a press release reporting our results for the fourth quarter and the full fiscal year. This release is available on our website at www.stonex.com as well as a slide presentation, which we will refer to during this call. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you and all participants should note that the following discussion should be considered in conjunction with the most recent financial statements and notes thereto as well as the Form 10-K to be filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties and which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied for the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll begin with the financial overview for the quarter and we'll be starting with Slide #4 in the slide deck. Fourth quarter net income came in at a record $85.7 million with diluted earnings per share of $1.57. This represented a 12% growth in net income. However, EPS grew at 1% rate due to the additional shares outstanding as compared to the prior year, primarily related to the issuance of approximately 3.1 million shares related to the acquisition of R.J. O'Brien. It is of note, the current quarter includes pretax acquisition-related charges of approximately $9.3 million, including $1.3 million of bridge loan financing charges and $8 million of investment banking fees which equates to approximately $0.13 per diluted share. Net income and diluted EPS were up 35% and 29%, respectively, versus our immediately preceding third quarter. This represented the 15.2% return on equity despite a 72% increase in book value over the last 2 years. We had operating revenues of just over $1.2 billion, up 31% versus the prior year and up 17% versus the immediately preceding quarter. As a reminder, our operating revenues include not only interest and fees earned on in our client balances, but also carried interest that is related to our fixed income trading activities. Net operating revenues, which nets off interest expense, including that which is associated with our fixed income trading activities as well as introducing broker commissions and clearing fees were up 29% versus a year ago and 20% versus the immediately preceding quarter. Fixed compensation and other expenses were up 24% versus the prior year quarter. This also represented a 14% or $36.3 million increase versus the immediately preceding quarter, with $32.4 million of this attributable to the acquisition of RJO and Benchmark during the quarter. Fixed compensation and related costs were up 23% versus a year ago and up 12% or $14.2 million versus the immediately preceding quarter. The increase versus the immediately preceding quarter was almost entirely as a result of the acquisitions I just noted. Professional fees increased $12.2 million versus the prior year, primarily as a result of the $8 million investment banking fee noted earlier. They were up $3 million versus the immediately preceding quarter with the investment bank fee just noted, partially offset by a $5.8 million decline in legal fees, primarily driven by an insurance recovery. The acquisitions of R.J. O'Brien and Benchmark contributed $22.1 million and $2.4 million in pretax net income, excluding acquired intangible amortization, respectively, for the quarter. Looking at it from a longer standpoint, our full fiscal year results show operating revenues up 20%. Net income was a record $305.9 million, up 17%, with earnings per share of $5.89 and a return on equity of 15.6% for the fiscal year, above our 15% target. We ended the fourth quarter of fiscal '25 with book value per share of $45.56 per share. Now turning to Slide #5 in the earnings deck, which compares quarterly operating revenues by product as well as key operating metrics versus a year ago. We experienced growth across all products with the exception of FX/CFDs. Transactional volumes were up across all of our product offerings with the exception of FX/CFDs and spread in rate capture increased in all products with the exception of payments down 4% and FX/CFDs, which declined 32%. Just touching on a few key highlights for the fourth quarter. We saw operating revenues drive from listed contracts increasing $89.4 million or 76% versus the prior year with the acquisition of RJO contributing $89.5 million. This also represented a 64% increase versus the immediately preceding quarter. Operating revenues drive from OTC derivatives increased 27% versus the prior year, however, declined 1% versus the immediately preceding quarter. Operating revenues drive from physical contracts increased 24% versus the prior year, primarily driven by a $19.5 million increase in physical, agricultural and energy revenues, which were partially offset by a $6.8 million decline in precious metals operating revenues. Operating revenues drive from physical contracts were up 18% versus the immediately preceding third quarter. Securities operating revenues were up 26% as volumes were up 25% and the rate per million increased 23% versus the prior year, with the improvement driven by strong growth in both equities and fixed income. Payments revenues were up 8% versus a year ago, but down 3% versus the immediately preceding quarter, primarily due to a decline in rate per million. FX CFD revenues were down 34% versus a year ago, resulting from a 7% decline in ADV and a 32% decline in rate per million, primarily driven by low volatility in FX markets. This also represents a 36% decline versus the immediately preceding quarter. Our interest and fee income earned on our aggregate client float, including both listed derivative client equity and money market FDIC sweep balances increased $52 million or 46% versus the prior year with the acquisition of RJO contributing $50 million. Average client equity and average money market FDIC sweep client balances increased 71% and 25%, respectively. For the current quarter, the average client equity includes the effect of an incremental $5.6 billion per month from RJO for the 2 months post acquisition or an incremental $3.8 billion increase to the quarterly average. Turning to Slide #6. This depicts a waterfall by product of net operating revenues from both the prior year quarter to the current one, as well as the same for the full fiscal year periods. Just a reminder, net operating revenues represents operating revenues less introducing broker commissions, clearing fees and interest expense. For the quarter, net operating revenues increased 29% and principally coming from securities and listed derivatives, up $48.7 million and $43.1 million, respectively. On a net basis, interest and fee income on client balances increased $28.8 million with RJO contributing $32.5 million, which was partially offset by a modest decline in legacy StoneX. As noted earlier, due to the lower FX volatility, we saw FX/CFD's net operating revenues decline $29.7 million versus the prior year. Looking at the bottom graph for the full fiscal year period. Once again, it is securities with the largest increase, up $126.1 million versus the prior year. driven by a 27% increase in ADV and a 9% increase in rate per million. In addition, listed derivatives and interest and fee income increased $46.3 million and $31.2 million, respectively, primarily as a result of the acquisition of R.J. O'Brien. Finally, physical contract net operating revenues added $34.7 million versus the prior fiscal year. Moving on to Slide #7. I'll do a quick review of our segment performance. Our Commercial segment net operating revenues increased 25% or $42.9 million, with $20 million of this being contributed by the RJO acquisition. Listed in OTC derivative contract volumes increased 32% and 27%, respectively. In addition, physical contracts increased 26%, while net interest and fee income increased 22%. The growth in listed derivatives and interest income were primarily driven by the acquisition of RJO. Segment income increased 25% versus the prior year. While on a sequential basis, net operating revenues were up 23% and segment income was up 35%. Our institutional segment saw record net operating revenues and segment income with growth of 67% and 73%, respectively. Versus the prior year, this represented growth of $117.5 million with the acquisition of RJO contributing $50.2 million. The growth in net operating revenues is principally driven by a $48.9 million increase in securities revenues. In addition, listed derivatives and interest and fee income increased $30.5 million and $20.7 million, respectively, primarily driven by the acquisition of RJO. On a sequential basis, net operating revenues and segment income were up 46% and 53%, respectively. In our self-directed retail segment, net operating revenues declined 35% and segment income was down 51%, primarily driven by a 4% decline in average daily volumes and FX/CFD contracts combined with a 31% decline in rate per million. On a sequential basis, net operating revenues were down 37% and segment income declined 62% in this segment. In our Payments segment, net operating revenues were up 7% and segment income increased 21%. ADV was up 13% versus the prior year, while rate per million was down 4%, versus the immediately preceding quarter payments and net operating revenues declined 2%, while segment income increased 7%. Now moving on to Slide #8. Looking at segment performance for the full fiscal year. We saw strong growth in our institutional segment with net operating revenues up 36% and segment income increasing 45%. In addition, our self-directed retail segment increased segment income 12%. Our Commercial and payments segment added 1% and 4% in segment income, respectively. Finally, moving on to Slide #9, which depicts our interest and fee income on client balances by quarter as well as the table showing the annualized interest rate sensitivity for a change in short-term interest rates. The interest and fee income, net of interest paid to clients and the effect of interest rate swaps increased $28.8 million to $112.2 million in the current period, and as noted, the acquisition of R.J. O'Brien contributed $32.5 million in the net interest in the current quarter. As noted in the table, with the addition of the $6.3 billion client assets from the RJO acquisition, we now estimate a 100 basis point change in short-term interest rates either up or down would result in a change to net income by $53.8 million or $1.02 per share on an annualized basis. With that, I will turn you to Sean O'Connor, our Executive Vice Chairman. Sean O'Connor: Thanks, Bill, and good morning, everyone. It is very gratifying to see that we've achieved yet another record financial result in what is a long string of record performances. We have managed to exceed our ROE targets despite our stockholders' equity increasing by 72% over the last 2 years. It is no easy feat to continuously compound at a high rate when you're reinvesting 100% of your capital. something we have managed to do for decades now. Turning to Slide 11 in the deck. As you are aware, over roughly the last 20 years, we've been active in the M&A market. especially following the financial crisis, having now completed over 30 acquisitions during this time. During the COVID pandemic and the years immediately following, our facility was notably limited on the M&A front. The prevailing market conditions at that time were characterized by bubble-like valuations based on peak earnings for most companies active in our space as well. We chose to focus on organic opportunities and to wait for valuation demands to become more rational. 2025 was our almost active year ever with us completing 6 transactions culminating in the acquisition of R.J. O'Brien, our largest ever and one we believe will be transformational for the organization. I thought it might be useful here to review our M&A approach, something that a lot of investors have asked me in calls over the last few years. We are very opportunistic around acquisitions. As an old M&A banker, I'm acutely aware that most transactions don't succeed for the simple reason that buyers are often desperate, maybe for a growth strategy, maybe a new strategy overall, new talent. And as a result, they tend to overpay. We pride ourselves on being very disciplined and we can afford to be disciplined because we have such a strong organic growth track ahead of us given the market dynamics we have spoken about previously with banks withdrawing and smaller firms being consolidated. When we evaluate a new opportunity, we always have to consider the risk and disruption that this may cause to our existing organic growth initiatives, and therefore, any opportunity needs to be compelling and accretive. We passed potential acquisitions through a number of screens. First, they need to be accretive to our ecosystem, adding either new products or capabilities or adding to our client footprints and increasing market share in existing or new markets. We then need to clearly understand how we drive value for our shareholders. Most often, that is by selling these new products and capabilities to our existing client base to drive incremental revenue. or in the case of client acquisitions, by leveraging our ecosystem of products into these new clients. Then of course, culture is all important. We are a client first business, and we seek to establish long-term embedded relationships with our clients. We also look at the requirement for resources and capital as well as cost structures and margins to make sure that these transactions can be quickly accretive to our bottom line and to our ROE. In many instances, we can achieve capital and cost synergies given our larger scale and global footprint. Then of course, we need to get to price. And given our desire to compound our capital, we tend to be on the conservative end of the value spectrum. We need to see how the acquisition can be accretive to our ROE and also quickly earn back any goodwill that may be incurred typically inside 36 months. I also strongly believe that we should take the leading role in due diligence rather than rely too heavily on bankers and advisers. This forces our team to roll up their sleeves and take ownership for the business we are acquiring and leads to quicker integration and synergies being achieved. Despite our strict criteria laid out above, we continue to find many good opportunities and I think our discipline and rigor on the front end have resulted in us having a very high success rate with acquisitions. Almost all have gone on to become multiples of the size they were at the time of acquisition. Turning to Slide 12. In the last several years, we get approached on around 85 to 100 opportunities per year, many of which are sourced internally by our own teams. We typically engage with around 70% of those at some level and getting to initial due diligence on around 50% and full due diligence on around 25% of those opportunities. That ends up with our submitting bids at around 15%. As you probably realize, this entails a fair amount of work and focus, and we are very lucky to have an extremely capable albeit small corporate development team who, of course, can leverage the internal expertise we have when needed. We are also likely to have an exceptional in-house legal team, which is involved in the process. We have received numerous complements over the years from our external bankers and lawyers on the exceptional corporate development and legal teams we have in-house here at StoneX. With that background, let's turn to Slide 13, and take a look at how we did in 2025 fiscal year. As a reminder for this year, we made 5 acquisitions, and we made one strategic investment. Starting with R.J. O'Brien, which we continue to believe will be a transformational acquisition for us, RJO was one of the oldest independent FCMs in the U.S., transacting with over 45,000 clients and over 200 IBs. This acquisition has made StoneX the largest nonbank FCM in the United States and a market leader in global derivatives, reinforcing our position as an integral part of the global financial market infrastructure. This acquisition has brought us new clients in the likes of regional banks, to whom RJO provides clearing and risk management and interest rate products, a large introducing broker network, which we believe we can leverage further, almost becoming an extension of our own sales team as well as an agency execution capability where we can offer block trading and futures options and customized solutions. It was an acquisition, which we also believe provides significant opportunities to improve our efficiency. As stated in our announcement, we expect there to be $50 million of expense savings and at least $50 million in capital synergies as we consolidate regulated entities. Abby Perkins from our executive team will be on this call and shortly provide an update on our integration progress with RJO. Coincidentally, we closed Benchmark on the same day as RJO. Benchmark is a midsized investment banking firm, offering a sales and trading platform, equity research and a highly experienced investment banking team. Benchmark brought us deep relationships in the hedge fund community, which were incremental to us as well as an investment banking capability. We are looking to leverage our broader trading and clearing capabilities into these new clients and, of course, offer investment banking capabilities to our StoneX clients. Additionally, Benchmark has been able to leverage our balance sheet to take larger roles in transactions than before. Lastly, on capital synergies by leveraging the existing larger StoneX broker-dealer balance sheet, which already supports our FCM and Securities businesses, Benchmark can reduce the capital requirement for its business. We acquired the assets of JBR, a leading U.K.-based silver recovery refiner at the beginning of our fiscal year, which allows us to produce our own silver London Good Delivery bars and further extended our physical capabilities in metals. This has proven to be -- to have been particularly valuable during the recent metals volatility and shortages experienced this year as we can now produce our own metal. It has also expanded our customer base by adding numerous industrial clients who see StoneX as a better capitalized counterparty and who can offer a range of storage, refining and hedging services. In September, we announced the acquisition of Right Corporation, a physical meat trading business in the U.S. RJO has a dominant position in the meat and livestock industry in the U.S. And with this acquisition, we now bring a downstream physical capability to our clients, much like the rationale behind the very successful acquisition of CDI back in 2022, which extended our cotton derivative experience into the physical. It adds a new relationship with meat suppliers and branches across beef, pork, poultry as well as buyers in the processor and distribution space. In February, we completed the acquisition of Octo Finance, a leading French fixed income broker, which provides credit research and expertise in the trading of European bonds and convertibles, we are now able to offer the European-based clients access to our broader product mix, enable Octo to participate in larger transactions and to add credit research and expertise in European bonds and convertibles to our suite of capabilities. We have begun to cross-sell clients of Octo new products and services as well as expanding their available credit products to include investment grade, high-yield and U.S. treasuries. Lastly, we made investments in Bamboo payments. which was accompanied with an option to acquire full ownership down the road. Bamboo brings deep expertise and a well-established in-country payment ecosystem in South America, which has extended our cross-border capabilities. Bamboo serves large regional marketplaces, ride-hailing services and HR platforms, which are new client types for StoneX to interact with. Turning now to Slide 14. Alongside our inorganic M&A growth, we continue to iteratively improve our product and services offered organically. This has included several enhancements to our business, which extends our ecosystem and addresses additional client needs with the intent of capturing more of their business. Some of these enhancements this year include the following: the build-out of our metals vault in New York, which now has more than $1 billion of assets under custody and is a CME designated depository and custodians. It has not only been a value-add to our wholesale precious metals business but also has attracted the global banks who would like to diversify their holdings away from other competing banks. It is highly complementary to our overall metal strategy of providing a full service offering in the market. And we are a unique industry participant in that we're both a regulated FCM and an exchange approved depository. Towards the end of the year, we entered into 2 agreements, bringing in the business of 2 LatAm focused wealth management firms, which have expanded our capability to service clients by providing brokerage and investment of revisery services. These 2 transactions bolstered our existing wealth management business further strengthens connection into Latin America and provide us with incremental clearing opportunities. Late last year, we were approved to provide digital asset services to institutional clients in Europe. This will allow us to provide execution and custody services alongside our existing suite of global prime brokerage services and other complementary offerings, including equities, ETFs, futures and fixed income. We have also been improving our digital offering, which provides automation of management, merchandising and origination of grain products. This is done through our proprietary platform called StoneX Hedge. This platform form integrates with existing grain elevators enterprise systems and back-office systems, to automate and proactively manage the industry -- inventory, sorry. We announced last year that this platform has surpassed total volume of over 1 billion bushels of grain, which is a significant milestone for us. Interestingly, RJO has a similar product offering, and we will be merging these 2 platforms to provide clients with the best of the 2 offerings. In prime brokerage, we offer a comprehensive custody and clearing platform across the globe aimed at financial institutions and funds. During the year, we have made several enhancements to our service offering which have included an expansion of our cap intra capabilities, improving consolidated reporting and margining for clients and addition of cross-currency products to the suite. These improvements have driven increased engagements particularly among large ETF issuers and mutual funds, resulting in strong momentum for this product in this business. Lastly, regarding our OTC and structured product capabilities. As we have mentioned in previous discussions, we see OTC as a tremendous growth opportunity to help our commercial clients run more complex and intricate scenarios, determining the best products for their needs and to get quotes instantly. In the year, we have further expanded our OTC products focus on agriculture, which includes shell [ A ] contracts and dairy derivatives. We believe we have one of the most comprehensive OTC platforms in the market today. These are just a few examples of our recent organic rollout of products and services, and we will continue to grow our ecosystem by launching adjacent products and services to better serve our clients. Moving back to RJO. We'd like to provide some time giving an update on the integration. As mentioned earlier, I would like to introduce a new one of our executives to you all, Abby Perkins who is a member of our Executive Committee. Earlier this year, we asked her to lead our M&A integration efforts, in particular, the RJO integration, given its importance and its financial impact to our company. She will be providing a more detailed update on our integration plans, actions taken and key milestones ahead. Abby, over to you. Abigail Perkins: Thank you, Sean. For those I haven't met, I'm Abbey Perkins. I've been with StoneX for 9 years and in finance for over 2 decades. For the past 5 years, I've served on the Executive Committee and until recently, I was the Chief Information Officer overseeing infrastructure, IT services, procurement and cybersecurity. As Sean mentioned, I stepped into a new role leading our M&A integration efforts with the primary focus on the R.J. O'Brien initiative. This is where I'm spending the majority of my time and energy today. So to get started, please turn to Slide 16. We remain very excited by the potential value creation for StoneX from the R.J. O'Brien transaction our most transformative acquisition of 2025 and the largest one we have done in terms of deal size. As we noted in the announcement, the acquisition rationale rests on 4 pillars. First is the transformational nature of the acquisition and the significant scale we have added as a result. With this combination, we are now the largest non-bank U.S. FCM by client assets and one of the largest FCMs globally. We are seeing a positive trend in growth in balances with RJO's average client equity increasing from $5.5 billion to $5.8 billion since close principally due to inflows from ID and institutional clients. This increase has helped drive our combined client equity balances to the highest ever at $13.7 billion at the end of September. In addition, during the trailing 12 months ended September 30, 2025, RJO cleared 156 million derivative contracts, which will now be consolidated on a single combined infrastructure, so truly achieving substantial scale. And ultimately, we know that the long-term transformative value will rest on the quality of the RJO clients and its people and both have exceeded StoneX leadership's expectations. Our second pillar was the strong opportunity to expand both our products and capabilities across the combined basis of both organizations and to reach new markets. We are seeing numerous opportunities to offer new products and services to the legacy RJO and StoneX clients alike. These include offering new OTC and physical products to existing listed derivative clients, interest rate derivatives and relative value trading strategies to fixed income clients and new hedging products and strategies to agricultural and other commercial clients. We are also quickly moving to leverage RJO's footprint in new markets with the regulated presence in the Dubai International Financial Center, becoming a key focus. StoneX has had a long-standing and successful presence in Dubai, offering precious metals trading in the Emirate metal zone, and operating a branch office to retail products in the Dubai mainland zone. The addition of RJO's business in the DISC, the Emirate Financial Institution Hub has provided a valuable complement to our efforts in this key growth market through the opportunity to compete with other financial brokerage firms by offering the full complement of StoneX products, which is an important enhancement to RJO's offering there. Lastly, we are able to achieve a combined and optimized technical ecosystem, taking the best from our world. The benefit of the StoneX complex of the combined technical offering will be significant. Our third pillar focused on the achievement of significant cost synergies. Our work since the closing of the transaction has strongly validated our cost synergy estimates, and we are working actively to achieve these cost savings. We've established a robust governance framework with a dedicated cross-functional team leading the numerous integration work streams. I will touch base more on the time lines of these cost synergies as well as an update on capital synergies on the next slide. But before we get there, on more pillar to cover. The fourth pillar is that the acquisition will be accretive to both EPS and ROE. I want to say that, first, across the board, our top priority is delivering a powerful combination that strengthens outcomes for our clients and supports both our internal and external brokers. And in line with that focus, the integration planning and progress we've achieved so far underscores our confidence that RJO will be accretive to both EPS and ROE over both the near and long term, creating lasting value for our shareholders. Moving to the next slide, we summarize our integration objectives and results. I'll be starting with our cost synergies. At the time of the transaction, we estimated $50 million of annual run rate and potential cost synergies. We now have a detailed plan with over 100 people involved in the process with over 50 defined work streams and are in full execution mode. We are first prioritizing the savings that are more readily achievable through the combination of the overlapping non-U.S. entities in U.K., Hong Kong, France and Singapore. This can be achieved relatively quickly as the RJO activities and business in these jurisdictions is well understood and more modest than StoneX's activities in these regions. We are also prioritizing combining our U.S. broker-dealer footprint as it is a relatively easy process as well as RJO's activities encapsulate just 1 pillar of the activities we have in our diverse U.S. broker-dealer offering. These 2 initiatives can happen relatively swiftly, and we anticipate completing them in Q2 of fiscal '26, accounting for roughly 25% of the aggregate synergy target. Our focus then turns to the integration of our 2 U.S. FCMs, the most complex of the entity combinations, which is currently being planned and will follow the non-U.S. integrations. Combination is set for around Q4 2026, while we both operate in the same system of record and the underlying products are identical, RJO has built customer tools with migration of which we need to make sure is as seamless as possible from a client perspective to ensure no revenues lost as a result. We will err on the side of caution here, and may delay we feel it's warranted. We estimate that the merging of the 2 U.S. FCMs will account for roughly 40% to 50% of the synergy target. The remaining 25% to 35% results from the runoff of contracts and space, and as such, may take a further 6 to 12 months to fully realize. Based on our work to date, we are confident that we will achieve our targets of $50 million in run rate cost synergies within 24 months of deal close. Indeed, just 4 months from the closing of the transaction, we have realized approximately $20 million in annualized cost savings. We believe that the remainder of the cost synergies are well defined and achievable. We will move on now to capital synergies. These synergies will be achieved as we collapse the operations that we set out before. We anticipate a $20 million to $30 million release of excess capital following the first set of business integrations of the U.K. business and the broker-dealer business, which is to be realized in approximately Q2 26. The remaining capital synergies will be realized from the merger of the U.S. FCMs in the approximate fourth quarter of 2026. We anticipate this to be north of $30 million. Lastly, and in addition to this, while technically not a capital synergy, we recently executed a $42 million dividend of excess cash from the RJO parent entity, providing additional liquidity to the StoneX Group of companies. In terms of brand revenue synergies, we did not disclose a specific target because these synergies are both hard to realize in the short term, it's very hard to track when they happen as revenue gets split between teams, et cetera. Despite this, we continue to have a high conviction around the revenue synergies opportunity over time. A first significant driver is that StoneX's equity and balance sheet is around 5x larger than RJO's, which should enable us to win more wallet share from the larger RJO clients. Alongside this is our position as a public company eases onboarding activities. Both of these were constraints experienced by RJO. To this end, we have already held and continue to hold numerous teach-ins and cross-desk meetings. On the fixed income side, we have seen extremely strong cross-group collaboration already resulting in the deepening of relationships and placement of new trays in from clients of both firms. On the IB side, where RJO has a major presence, we've introduced many of these [indiscernible]. Sean O'Connor: Operator. Did we lose Abbey operator? Operator: It looks like we lost her, but she still connected, sir. Sean O'Connor: Okay. Let's give it a second and see if he reconnects. Otherwise, I can finish up her comments. All right. Operator, I'll carry on. Okay. Operator: All right. Sir, go ahead. Sean O'Connor: Okay. So I think Abbey was talking about where we are with the IBs, so I will just follow on from there. So we've introduced many of our brokers and end clients, our OTC and physical capabilities. Many of them have asked for the necessary paperwork, are going through the paperwork and many of them have signed up with our swap dealer and our physical entity. So very encouraging signs there. People don't do the paperwork if they don't see an opportunity. On the metal side, we see clients expanding the business they have with us into new products. On the negative side, there was always a risk of some revenue attrition, either due to revenue producers leaving or due to the fact that there was client duplication. At the time of evaluating the deal. This was a key consideration for us. And our view was that the client overlap was limited and thus the risk of revenue attrition was not material. We're happy to report at this stage, the overall attrition is limited. So overall, we're tracking very well against all of the metrics related to the integration of RJO. In summary, we continue to believe as a management team that the RJO transaction will prove to be transformational for StoneX and this expanded group of clients as the integration of our collective client focus, the ability to leverage our combined scale and the complementary product expertise positions us as the leading franchise around the globe. We are highly encouraged by the early results and are pleased with and grateful to our teams affecting this work. We remain focused on executing with discipline and precision that have become the hallmarks of StoneX. In the end, the common thread across all our acquisitions is the exceptional collaboration between company leadership teams and the exceptional work being performed by a talented and dedicated employees. We are pleased with the value these transactions provide to StoneX and remain optimistic about our long-term growth. So with that, let's move to Slide 18, closing summary. This quarter was a record for us to close out what was, in fact, a record 2025. The quarter included 2 months of the RJO results as well as some of the one-off acquisition and related costs, which reduced diluted EPS by approximately $0.13 per share. The quarter saw strong results across most of our segments, especially equities, prime brokerage and fixed income and improved results in physical commodities. We recorded $85.7 million net earnings or $1.57 in EPS with an ROE of 15.2% on book value and just over an ROE of 20% on tangible book value. We achieved another record quarter for the year with operating revenues of just over $4 billion and net earnings of $305.9 million, giving us an EPS for the year of $5.89 and an ROE of 15.6% on book value and 17.9% on tangible book value. In addition, RJO and Benchmark and our other acquisitions should be strongly accretive. And together with strong organic growth should drive our results for 2026. There has been a notable growth in our client assets that we custody where the segregated funds on the exchange or through clearing and prime brokerage and storage of precious metals. This has significantly grown our recurring income stream providing a stable and predictable underpinning to our financial results. Our unique and best-in-class ecosystem underpinned by a fortress balance sheet, diverse offerings and exceptional client service enables us to deliver innovative solutions that provide clients with market access and create long-term value. I'm very proud of the StoneX team, who continued to propel us to new heights, and we'd like to thank them for the exceptional work during 2025. I would like to thank our bankers for their support and our Board for both their support and guidance and an amazing are around StoneX team. So with that, operator, let's see if we have any questions. Operator: [Operator Instructions]. Our first question from the line of Jeff Schmitt. Jeffrey Schmitt: How are early cross-selling efforts with RJO clients going? I know it's pretty early innings, but anything that's kind of standing out there -- and then when can we expect your estimate, I guess, on -- for revenue synergies overall. Sean O'Connor: So on the revenue synergies, I think it's going about as well as we expected. Obviously, this takes a lot of education. I think it takes time for people to understand the products. make sure that the products are suitable for their clients. They obviously -- people are always -- and we've gone through this 30 times. So we know how this works, right? So oftentimes, the relationship people are reluctant to open up a relationship to new people, to products, they're not certain of. So this just takes a lot of education. I think there's been a tremendous amount of interest from RJO in learning about all the new products we have. So they're being engaged. And I think in certain parts of RJO, there's been tremendous uptick. I mean we already have people -- on the fixed income side, going together to meetings, pitching products together, the actual transactions happening that are generating revenue. I think, as I said with IBs, we have a ton of IBs who asked for documentation. A bunch of them have signed the documentation. I think a couple of trades have happened. So all of those things are all very encouraging, and I think sort of validate our thought that this is going to provide us with a big boost. In terms of putting out a hard estimate, as Abbey said in her comments, it's really, really hard to do that because this stuff becomes really hard to track. If someone does more treasury business with us because they sort of like the fact we can do something with them on the RJO side. How do we measure that if they are really a customer, right? So it becomes pretty arbitrary to sort of measure this, so we can report back on the target. And that's our reticence in doing that is it just becomes very hard to audit and provide sort of a detailed feedback. The revenue often gets split between groups and it's hard to track that as well. So I'm not sure we are going to give you a target just because I don't think we can accurately report back on that. What I think we will see though is just a revenue uptick generally, and I think that's what we should be watching for. I don't know, Bill, if you think differently, but I think that's sort of where we stand on it. But I think our view is very happy about it. I think if anything, there's been sort of quicker uptick and better interest from any -- from everyone in sort of taking our new products. And as I said, we are already seeing tangible signs across various desks of new clients trading with us, existing clients doing more with us. And then the other thing with RJO is I do think the fact that all those clients know now, particularly they're sort of larger clients, we have a much bigger balance sheet. So if there was ever a sort of a constraint around RJO's size, maybe they really liked the RJO, but we're limiting what they did just because of the size of RJO. That's gone, right? Because we like 5 exercise, onboarding is very hard when you're a private company in the world today. You have to do all your KYC, you have to get verification of the owners of the company are. And it's just very hard. A lot of people just don't want to do it. But if you're a U.S. public company, it's the easiest possible route to onboard. So I think we've made things very easy. And I think that's going to just of itself is going to drive some additional revenue. So I'll stop there and see if there is anything to add. William Dunaway: I think you summarized it, Sean very well, and we'll -- I think we'll continue to just try to point out kind of the overall growth from RJO here over these next couple of quarters and we'll be able to demonstrate some of that growth that Sean is talking about. Jeffrey Schmitt: Yes. Okay. That makes sense. And then it looks like there was still some weakness in precious metals trading in the quarter. Did that improve after gold was officially exempted from tariffs in September? And maybe how did you see that trend in October and November? Sean O'Connor: Yes. So we had a lot of people -- well, the people we normally speak to shareholders and you guys asking us sort of last quarter, what happened on the commercial side because, obviously, it was a reasonably big delta. And it was really affected by 3 things, right you had just low volatility in the ag space generally, which has sort of continued into this quarter. Metals, notwithstanding. But if you look at the ag side, it's been pretty muted general tariffs have sort of disrupted the underlying commercial flows. So people don't know or I'm sure whether they should export what the prices should they hold on to their product. So those kind of disruptions just lead to sort of lack of hedging. And then on the margin, one of the biggest factors was our precious metals business because of the dislocation in the CME metals price, we started to impute a value for tariffs. Now obviously, everyone around the world, including us, used to use the CME derivative contract as the most liquid contract is the best way to hedge your precious metals. But if you were delivering precious metals to someone in Europe, you now had an ineffective hedge because the hedge was imputing a percentage of tariffs being imposed. And if you completed that transaction, you would have to close your hedge out at a loss. So that created a lot of dislocation in the market. Our way of handling that was to deliver our metal into the CME and in that way, we had an effective hedge effectively because you can deliver metal into a contract. But what it meant is a lot of additional costs for us because we had to hold on to that metal for a good number of days. We had to ship that metal, that cost money. And all of that significantly eroded the profitability of that business. Now it was better than what we would have taken as a loss on the hedge, so it was economic to do that. That has led to the precious metals business in Q3 being so close to breakeven, right, when it's generally a pretty profitable business for us. That carried on into this quarter. Obviously, the business sort of adjusted. So the impact was not as great as it was in Q3, and we are now not using the CME hedge. So we now have the flexibility. And in fact, it's now given us an opportunity to take advantage of those dislocations. So what was a negative is starting now to turn into a positive. So that's the story behind the metals. So it was sort of much worse in Q3. It was better in Q4 and I think you'll see in Q1 that it's actually turned into a pretty positive environment for us. So I think that's sort of gone full circle for us. Does that help? Jeffrey Schmitt: Yes. Perfect. And if I could just slip in 1 quick one on the institutional -- on the institutional business that the RPC for listed derivatives jumped quite a bit. I'm just curious what drove that or how sustainable that is. Sean O'Connor: Do you want to take that Bill? William Dunaway: Sure. I'll take that. That would be the introduction, Jeff, of the RJO business. So when they came in, there's they were incrementally higher than what we were doing. So that's really kind of what's driving it up. I think they were incrementally about $1 higher on average on their institutional rate per contract than we were, so the combination of the 2 drove that up. Sean O'Connor: Sure. So it's kind of a business mix issue, I guess, between us and RJO. William Dunaway: Correct. Operator: Our next question comes from the line of Dan Fannon with Jefferies. Daniel Fannon: Great. So I guess just sticking with the institutional business. So the other question is just on the security side. The rate per million also went up pretty significantly quarter-over-quarter. Just curious about the sustainability of that. Sean O'Connor: Bill, do you want to handle that? William Dunaway: Sure. I think we've seen -- Dan, I think we've kind of talked about this a bit last year, right, with some of the conditions that we saw in equity markets with some of the lower volatility and also kind of us expanding into more U.S. stocks that we kind of -- we expected to see a bit of a trough there and continue to increase from there. And we have seen that, right? The conditions have improved. And then the fixed income space as well, right, with that becoming a bit more volatile with the rates moving around, defend actions, I think we've started to see where last year, we kind of dipped as well when it came to the addition of more and more U.S. treasury activity. Now we're seeing spreads widen a bit in those markets. So we've seen a nice uptick both on the equity side as well as the fixed income and then also really nice contribution from our overall prime brokerage business on the security side contributing more and more revenue there, which is helpful. Sean O'Connor: I would say, Dan, one thing, and if you remember back over the last 2 years, we spoke about this a lot, as both the equities and the fixed income teams, and this started probably 3 years ago, expanded into sort of lower margin, but higher volume products. We saw a continual erosion of the rate per million, but an increase in revenue, right? Because we're doing lower margin business, a lot of it making money, but it was really affecting those numbers. And as that business ramped up, it continually sort of dragged down the higher margin that we saw previously. I think we've now got -- to I'm sort of -- I could be wrong here, but I think you've sort of got to a point where that business is now large enough that it sort of averaged out, so I think that sort of ongoing sort of slide as we built the business up, we've now sort of troughed out. And I think what's now going to affect it is sort of market conditions, right? So I think the sort of business mix argument as that adjusted over the last 3 years, I think, is sort of kind of close to the bottom and at the end now. And now, hopefully, that number reflects sort of a more keen view of the underlying market conditions available in the business. if that makes sense. Daniel Fannon: Yes. No, that's helpful. Just another question on the integration. I just want to make sure what I heard in the road map. So I think you said roughly $20 million has been realized in terms of the expense synergies and then, I guess, middle of Q2 of this year with the U.K., we should get I think another -- I just want to make sure what the next wave of and then you have the FCMs in the U.S. So can you just kind of walk through the amounts that kind of -- if you've already got $20 million, that maybe only $30 million left or you're raising the amount of synergies. Sean O'Connor: Yes, go ahead, Abby, you back with us. Abigail Perkins: I am -- thank you for your patience. The -- so we have achieved synergies from sort of natural movement and the ability to do some streamlining inside the organization. Right now, that annualized run rate is about $20 million going forward. We will then see the next uptick really in the spring time, a bit more that we expect from the U.K. combinations. We'll get capital synergies at that point as well. And then the dominance will come post the U.S. integrations, which are late Q4 2026. So you're talking sort of June, July, August time frame. Does that help, Dan? Daniel Fannon: Yes, but no change in the aggregate amount. Like I guess as you guys have gone in, do you think that $50 million is conservative? Do you think there will be more in the context of what you'll be able to save as a result of the combination? Unknown Executive: No, go ahead, Abby. Sorry. Abigail Perkins: We're pretty comfortable with the $50 million. We are very focused on ensuring that we do client support with added flow. There is a big chunk of the organization that is not impacted within StoneX on this. So we're pretty comfortable with the $50 million right now. Daniel Fannon: Okay. Cool. And then just a follow-up for you, Bill. Just looking at the balances now from an interest rate sensitivity perspective, they're higher. And as you look into next year, obviously, you've got some rate cuts. Any thoughts on the hedging strategy or other things to do to limit the impact or fluctuation from rates and the movements there? William Dunaway: Yes. I mean we'll continue to be active, Dan, like we have in the past, that's kind of looking out and trying to lock some of that in. We're taking a bit of a view right, that we may want to lock some in around that kind of 2-year window-ish. And this isn't anything new. We've kind of done this a couple of different times over the last 10 years. We've kind of viewed that 2-year 2-, 3-year window is kind of a good space for us. And so we will continue to kind of monitor that market and potentially go out on the curve a little bit with swaps, kind of almost like an insurance policy on this new group of assets that we've brought in, in order to kind of put a floor there. And then what we're excited about is just kind of bringing in the capabilities of RJO that's been more active on managing the portfolio and have seen to where they've been able to typically exceed kind of the 1-month treasury rate, which has kind of been our benchmark. So the combination of the 2 are trying to lock some in to keep a floor for us and incrementally increase kind of over that 1-month target, I think, is what we expect to do on a go-forward basis. We never will be hedging all of it or never be locking in all of it, but we will look to be active to try to put -- roll into some floors there that kind of protect us to the downside. Daniel Fannon: Got it. But you're not doing that currently that's the perspective? William Dunaway: That we've been -- look, we've been active in doing that since the integration, right? So there's -- we didn't have anything, any activity on it in the September quarter, but we have been starting to do some of that since then, modest amounts at this point. Just reflective in the sensitivity that we put out there. Sean O'Connor: I think they're not to be repetitive, but maybe just to sort of clarify Bill's comments, I guess, there are 2 ways to think about this, right? The one is all of our contractual arrangements with our clients in terms of how we pay interest are referenced off the 1 month or the 3-month T-bill rate. So that's the sort of benchmark rate. And typically, what we did is we invested that float in the one month or 3-month T-bill rate, right? What RJO was very good at and were sort of a market leader is they were more actively managing that money, and they were earning a spread to the 1 month and 3 months T-bill by going into floaters and things like that. So to the extent you can do that, 100% of that excess basis comes to us. So that can be quite impactful. Now that's not a huge amount of money. You're never going to make 75 basis points extra. But I think the target is somewhere around sort of 20 basis points potentially on some of that float. But on a $13 billion float, if we can add 15, 20 basis points on top of that base rate, which we get to keep 100% of, I mean, that can be quite meaningful. And then secondly is, do we try to protect ourselves by taking out swaps and taking some duration, protect ourselves against possible downside in the short-term rates. And when we took on RJO they had done that with -- I can't remember the amount, but it was sort of $1 billion or something of their float that had actually locked in to the 2-, 3-year range that we've taken that position on. And as Bill said, we are now starting to add to that position opportunistically when we see rates that we like. So I would like to think that at some point, if the world stayed where it is today, we would probably like to maybe sort of hedge out something like 30%, 40% of our underlying float to sort of the 2-year rate. But obviously, the world doesn't stay as it is and we still have to sort of keep looking at that as rates change. But that feels to be to sort of be prudent. Maybe you earn less because the negative yield curve environment, you're paying a bit of a price for that, but it does give you certainty over that period as to what that underlying revenue source is. And as I said in my comments, what's quite notable now at StoneX and something that over time, we would not probably try give you more clarity on is we are growing as a custodian of client assets in everywhere. Seg funds in OTC products, clients are leaving more money with us -- we are actually now a custodian for gold, and we charge just like we do on seg funds, we earn interest on the gold deposits we have. We have prime brokerage, we have equity clearing everywhere you look we are growing our underlying asset pool. And those assets kick off now a really large number, which gives us a fantastic underpinning to our business, right? So all the sort of transactional revenue, which is affected by sort of volatility and so on, is sort of the gravy on the top here for us. So if we can get to a point where as a custodian, we've sort of got the costs covered. We've got a stable underlying flow of revenue and then the sort of more volatile forms of revenue, which, again, we've diversified pretty broadly but those tend to be the incremental revenues. And I think we're getting to an interesting sort of situation where it's starting to look like that. So something to watch and something we're working hard to do. Does that help? Daniel Fannon: Great. That's very helpful. And just yes, it does. So lastly, just on the retail business, I know that volatility has been pretty subdued. But obviously, the fee per million or rate per million came in a lot. Anything else of note outside of just vol within that segment to think about on a kind of go-forward basis? Sean O'Connor: Well, I think this has come up a few times over the last maybe 2 years, I would say that we generally sort of budget and the way we look at the vol in this business, and I'm talking about the self-directed retail business is we look at a sort of a long-term average, right? Because the revenue capture number there can move around pretty materially. I mean, Bill, correct me if I'm wrong, but I think we are up at sort of $130 million in recent quarters as the high, right? William Dunaway: No, we actually have been as high as $185 million back in December, but that was December. Sean O'Connor: Oh my God. William Dunaway: That was an exceptional quarter. But if you go back a couple of years, we were $82.95 million range back in '23, '22. Sean O'Connor: So the long-term average range for us is sort of in the '80s, right? And I think over time, we've lifted that from, I think, in the game days, they were more like $75 million is what they use. And I think we've lifted that into the mid-80s, because of all the things we've chatted about, right? We're combining flow better, there's more internalization. All of that stuff is helping. But I don't think this is necessarily a bad revenue capture number. I think what's happening previously is we were outperforming a little bit on the revenue capture. So obviously, we'd like it to be a little bit higher than it is now, but this is sort of the long-term average. And so I don't think you should look at this and say, "Oh my god, what happened?" I think this is sort of the business as it sort of has performed over the long period. maybe slightly under trend. But I think we were significantly over trend when we were sort of reporting numbers $120 million and higher. I think that's sort of unsustainable. I don't know if that helps, but that's my thought on it. Any more questions? Operator: I'm showing no further questions, and I would like to hand the conference back over to Sean O'Connor for closing remarks. Sean O'Connor: All right. Well, thanks, everyone. Thanks for your time. We appreciate it. We're very happy with the results that we have managed to deliver to all of you in 2025. And as you gather, I think we're all pretty excited about what's coming in 2026. We've had a busy year, a lot of great acquisitions Obviously, RJO, very significant. I think Abbey and her team have really got their arms around that. We feel really good with the way that's tracking up, but benchmark is also doing great and some of these other acquisitions are all sort of kicking in. So we're very excited about the prospects for 2026. Looking forward to that. And with that, all I can say is to those who celebrate and are in the states happy Thanksgiving and happy holidays to everyone. I guess, next time we speak to you will be in the new year. So thanks again. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Operator: Ladies and gentlemen, welcome to today's VIG Conference Call and Live Webcast. I am Matilda, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Hartwig Loger. Please go ahead. Hartwig Loger: Yes. Very warm welcome from Ringturm in Vienna, and thanks for joining our call with information to the main topics we have prepared for you. So we already last week announced the outstanding performance of our group for Q1 to Q3. So today, we have the chance to deepen the information about this very successful first 3 quarters of this year and which was also announced that we already raised the outlook for our profit before taxes for this year 2025 to EUR 1.1 billion to EUR 1.15 billion. And Liane Hirner, our CFO, will then give more details to the topic of the results of the first 3 quarters. The second big topic, and we know that there is big expectation also from your side that we today are ready to give you first information about our interest in Nurnberger, and we also released the information that the public purchase offer, which ended on the 21st of November this year at an acceptance rate of 98.38%. So out of that, Gerhard Lahner, he is responsible Board member of VIG for this project. He also will give some information in detail about this topic. Myself, I will then follow with information about the new strategic program in the name of Evolve '28, which will be the new strategy for '26 to '28, and which will not only further strengthen our group, but mainly will focus also on the long-term profitable growth. Today, I will offer you the structure, the main topics. And I have to excuse that the targets to this strategic program will be approved by the Supervisory Board next week. So we will come to the detailed targets back to you as soon as possible after the approval of next week. We also are happy and glad that Peter Hofinger, Deputy CEO of Vienna Insurance Group is also attending this meeting and is also ready for questions from your side after our presentation. Saying this, I hand over now for the first topic about the performance to our CFRO, Liane Hirner. Please go onward. Liane Hirner: Thank you, Hartwig. Let's start on Slide 4 with the key figures over the first 3 quarters this year, which highlights the ongoing strong performance of VIG. Insurance service revenue of EUR 9.7 billion is up by 8.6%. Here, both P&C and Life & Health showed top line growth of more than 8% each, and I will go into more detail on that on Slide 6 in terms of the individual market development. Profit before taxes as preannounced last week and despite the goodwill impairment taken already at half year for Hungary increased by 31% to EUR 872.8 million. Main driver for this outstanding profit before taxes growth in the third quarter was an excellent technical result in P&C supported by low net combined ratio. The biggest contributor to this more than EUR 200 million additional pretax profit in absolute terms was Czech Republic, followed by Austria in the Special Markets segment. VIG's P&C net combined ratio improved to 92.1%, driven by favorable weather conditions. Our strong capitalization is reflected in a solvency ratio of 286% compared to the solvency ratio at half year of 278%, the SCR of roughly EUR 4.1 billion remained fairly stable, mainly due to the slightly higher capital requirements for non-life, life and health insurance, reflecting the increased business volume. The own funds of VIG of about EUR 11.7 billion increased by almost 4% or more than EUR 400 million in the third quarter. This is driven by operating earnings and the positive development also on the capital markets, resulting in higher market values of our investments. The solvency ratio, excluding transitional measures, stands at equally very strong 267% and increase also compared to the half year. It is clearly above our solvency target range of 150% to 200%, which does not consider transitional measures, and this also underpins the capital strength and the resilience of our group. Now on the next slide, we show the gross written premium development by segment. Premiums overall increased by 8.6% to EUR 12.5 billion. Double-digit growth rates were recorded in Poland, plus 13.5% and the Special Markets segment, plus 18.4%. The strongest contribution in absolute terms is coming from the Extended CEE segment, plus EUR 314 million, where especially Romania, Hungary, Slovakia and the Baltics made up for close to 3/4 of the additional premium. Special Markets, mainly driven by Turkiye as well as Austria, Poland and the Czech Republic, all increased their premium volumes by more than EUR 130 million each. In IFRS terms, this relates or translates into a very solid insurance service revenue development, which is shown on Slide 6. Here, in line with gross written premiums, the insurance service revenue also increased by 8.6% to EUR 9.7 billion. I would like to draw your attention to the Extended CEE segment. Insurance service revenues of overall EUR 2.87 billion already exceeds the level of Austria. Again, it's the market in the Extended CEE segment, for example, Baltics, Slovakia, Romania and Bulgaria, performing extremely well. In the Special Markets segment, it's a dynamic business in Turkiye despite hyperinflation, which accounts for the significant increase. This segment also includes Germany, Georgia and Liechtenstein with Germany and our Life and Non-Life companies InterRisk, they are contributing EUR 140 million in insurance service revenue. Last but not least, Austria, Czech Republic and Poland, all 3 with solid growth rates and a strong performance also in the first 3 quarters this year. The dynamic top line development of our group supported by weather-related claims translated in the third quarter into an exceptionally strong increase of our profit before taxes. On Slide 7, you will find a short summary of the results development and the figure for the net weather-related claims recorded in the first 3 quarters. Compared to about EUR 338 million in last year in the first 9 months last year, which were related to storm Boris, we recorded only EUR 160 million of weather-related claims so far this year, thanks really to the absence of the severe nat cat events. As already mentioned by Hartwig, the strong performance of our group so far this year provides us with the confidence to raise the target range for the group profit before taxes between EUR 1.1 billion to EUR 1.15 billion for the whole year 2025. Finally, I would also like to highlight the rating upgrade by Standard & Poor's, confirming VIG's excellent A+ rating and raising the outlook to positive. This was driven by our progress in broader diversification and followed the announcement of our intention to acquire a controlling stake in NURNBERGER, which was very positively received by Standard & Poor's. With this, I hand over to Gerhard, who will now share his insight to NURNBERGER with you. Gerhard, please go ahead. Gerhard Lahner: Thank you, Liane. Let me provide you with some background and also my personal take on the NURNBERGER transaction to explain you the strategic rationale and why we are highly confident that this is an excellent fit and will increase shareholders' value over the mid and long term. The following slides in this presentation will substantiate my top-down view and provide you with further details on German market and NURNBERGER. Let me draw your attention to the disclaimer on Page #8 and specify that we are still in the nondisclosure phase of the due diligence. And let me stress out that any figures published by NURNBERGER are seen in -- are to be seen as National GAAP German accounting principles, which are not comparable to IFRS 17/9. Well, earlier this year, VIG was approached by NURNBERGER management whether we would be interested to start talks about potential strategic partnership. Given the attractiveness of the German insurance market for VIG as a Special Market, with a high insurance density and penetration while being one of Europe's largest and most mature markets, well governed by BaFin, we entered into these discussions with a clear aim to increase our exposure in Germany in combination with our local company just recently mentioned by Liane, InterRisk Life and Non-life. So it should be clearly stated that this is not a market entry, but this is an expansion on an existing market that is with the VIG portfolio for 35 years plus. After first talks, both sides quickly realized that joining forces and simplifying the shareholder structure would be the most efficient way to return NURNBERGER back to a profitable and stable company. With a state-of-the-art IT landscape to best leverage on the strong brand and the sales footprint in across Germany. From our perspective, it became clear right away that NURNBERGER management has a clear strategic vision for the company to become a profitable player in the German market with a clear focus on prevention, occupational disability and a restructured Non-Life portfolio. Well, against this backdrop of the strong commitment of NURNBERGER's management, the cost efficiency program started by them Back to Black for the Non-Life part, but also the further diversification potential through the partially complementary life insurance portfolio and the experience in turnaround and IT transformation that VIG would bring to the table, we intensified our discussion. We strongly prepared for the nonbinding offer phase and we were finally granted exclusivity for a detailed due diligence. And in this due diligence, we clearly found ourselves confirmed in our basic assumption, which was further supported by the publication of NURNBERGER half year's result that the management is well on track to deliver. Right from the beginning, it became clear that the solid solvency position of NURNBERGER is, of course, combined with the attractive brand, the countrywide operating sales force and the strong determination of the local team to get back to the historic level of profitability, a very attractive asset. The unrestricted Tier 1 of EUR 1.9 billion will strengthen VIG's resilient foundation for further expansion in CEE, which clearly remains the strategic focus of our group. Through this transaction, right after closing the deal, all Tier 1, Tier 2 and 3 limits will increase as NURNBERGER has become part of VIG Group and therefore, provides the potential for further growth in CEE without diluting existing shareholders. At the same time, the risk profile of the SCR of NURNBERGER will provide a buffer when it comes to VIG's sensitivity of shifting interest rates downward out of the Austrian life back book. Most importantly, the investment can be financed from VIG's own liquid funds, providing us with the flexibility to optimize our funding structure in a more opportunistic way and taking benefit of deleveraging the last period. In addition to VIG's own funds, there is also a EUR 500 million revolving credit facility in place. So given the spirit of local entrepreneurship at NURNBERGER, the multichannel distribution system across Germany and a conservative reinsurance policy, we are very confident that the multi-brand approach with a strong NURNBERGER brand, combined with the additional scope for further diversification is going to support our operations in Germany in a profitable way, providing a resilient internal financing structure source when it comes to the future expansion in CEE region. As we are convinced that biometric risk in connection with occupational disability is a core competence that will be increasingly relevant to support our business in different Central and Eastern European countries, the addition with NURNBERGER team and their know-how in this field is just a perfect fit for VIG. In terms of cultural fit, with NURNBERGER being an independent insurance group for the last 140 years, the entrepreneurial management style as well as the historical proximity for Germany and Austria will provide a good foundation for NURNBERGER to become a strong member of VIG. In summary, we had a chance to look into the books of NURNBERGER and are confident that the company's turnaround will be successful. And through the acquisition from VIG truly supported by our involvement. So given, first, VIG's experience in turnaround non-life portfolios in challenging market environment; second, VIG's experience in IT transformation, especially in Austria, where the digital landscape is very similar to the ones at NURNBERGER and was successfully completed in 2023, a strong NURNBERGER management with a clear vision how to generate consistent cash streams for VIG's further growth in Central and Eastern Europe and VIG to leverage on the know-how of NURNBERGER in biometrics and occupational disability, VIG will benefit from the NURNBERGER's strong solvency position from day 1, enhancing its internal financing capacities over the midterm. Please note that after the announcement, intention to acquire NURNBERGER, Standard & Poor's, as mentioned by Liane, upgraded our rating A+ with a positive outlook with a particular focus on our financial strength and diversification potential for further growth in Central and Eastern Europe. If you allow me now, I would like to go -- to hand over to Hartwig Loger, CEO, for the presentation about the strategy. Hartwig Loger: Thank you, Gerhard. I will now give you the first insight about the structure of the new strategic program for '26 to '28. As you all know, we are still in the end spirt of the group-wide strategic program, VIG '25 ending this year. And I think with the expected performance, we raised, as we already said, to EUR 1.1 billion to EUR 1.15 billion, we see also the success of the activities of our running strategic program. With Evolve '28, as you can see also on the Slide #16, we used also a name which gives the first intention what we are looking for. It is not the big revolution, but a dynamic evolution, which is built up on the success of the last years and also the current performance we can show as VIG. The frame, which is shown here is in our understanding of the, I would say, USB model we are living as VIG. Our understanding is not being a big tanker in a centralized form, but being a dynamic fleet with responsible ships and this framing, which is shown here in these 4 parts will secure that this fleet has a common direction and the strategic performance also in the upcoming years. To start, maybe also in the description, you see on the bottom Values and Principles. I will go deeper afterwards, but we already were sure that it is the need maybe also to evaluate and also to a little bit, yes, renew the values and principles for the upcoming years and the challenges we are seeing in front. On the left side, with country portfolio and company strategies, this is more or less the backbone of this strategic part for the next years. What is meant, and I will also show afterwards, there are 50 individual company strategies. So over the last year, we developed under a common structure and on the basis of deep analysis of each market, a common strategic implication for each market of our group. And then the CEOs of the companies in the markets developed their company strategies for the next 3 years, and they were following a common structure of 5 strategic fields. This means that this framework for the next 3 years already has a detailed definition for each company of our group in targeting and action plans for their activities to improve the performance also for the next years. You see the group programs. We defined also 5 group-wide programs. These programs are not initiatives as we have defined it in VIG '25 because initiatives have been the offer to the companies in our group if they will also join these initiatives, the 5 group programs now we are focusing are really for group-wide activities seen, and they are coordinated by the holding or also competence centers out of our group. On the right side, you see also the fourth part, which is ongoing in CO3. Here, we define our activities in communication, collaboration, which is needed to really bring added value out of the best practice and the innovation and creative projects in between the group and cooperation, which is focusing also to find the synergies in between the companies working on one market. On the next slide, you get the overview. I will not now present in detail, but we clearly define the 5 values for our group. Plurality, which is the basis for our fleet. We have not only 50 companies in 30 countries, we also have a very high diversification in between also the different markets, the different brands, also the different sales channels. We are active all over our brands and companies. We have the basis of our 33 million customers already, which will be improved and increased also by incoming NURNBERGER customers in Germany soon. And this is the Plurality basis, which is also our understanding that this Plurality in the activity of the fleet is the added value of our model. Entrepreneurship following this Plurality idea means that especially the local entrepreneurship, the self-responsibility in between the management of the ships in our fleet and the companies, it is the strength and the motivation and identification of all our managers and leaders. Responsibility on one side, of course, to the society, but also as we know, out of the challenges of climate change, there is a broad basis in our understanding that we want to make sure that our economic value today is not in any form destroying the future of our society. Excellence, which is clear in the focus of our company activities on the customer basis to make sure that in all our services, products, processes, we are focusing also to deliver excellent services and products, and that's the base of our performance. And passion, it is needed also to create and find out the right form that we are clear for our 33 million customers, yes, I would say, best partner in all our solutions. The Principles on the next slide, we also evaluated to make sure that the description in the way how we work together in this group. And I'm open to say that the interest also in the partnership, which was developed now also in the purchase of NURNBERGER that NURNBERGER, as it was also said by Gerhard Lahner, it will be a perfect strategic fit also in the understanding of a group-wide common activity also in the future. Now a little bit deeper in the content on Slide #19. You see here the 5 strategic fields. This is the common structure of each individual strategy of each company of our group. The one field, the most important and the first one is the expand of the customer base and also the enrichment in the activities that there, we will focus in all the companies in also cross-selling and upselling potential out of this base we already have and this base, we also want to increase in the number of customers. The second topic in line is to enhance the distribution footprint. As you know, we have a very strong diversified sales channel activity. And including also bank and direct sales, it will be the basis to improve on a better way and also to use also the challenges and advantages which will come up in the development also on digital basis. And also, we will come further on to that in artificial intelligence solutions in services which are provided in this form. Next part is Products. We enlarge also the product offerings. It was mentioned that here, we use the collaboration in between the group really to improve also the broad Plurality of offerings we have. And also besides this, there will be added services also as basis to strengthen our customer experience. Next is Operation. This field, the strategic field in each of the strategies of the companies is focusing on the effectiveness and effectivity of processes in our operations and also with improving the automation in between these processes in best practice forms in between the group. And last but not least, the fifth and very important basis employees to foster the people who are already active and to find also the best experts in our companies, which are needed for the innovation transformation we see all over our base. On the next slide, here, you see the 5 already mentioned group programs. which were developed also on a broad discussion basis in between the CEOs of our group. Here, we build on the relevant trends. We also discussed on broad basis, the trends already existing and upcoming for the next years and the challenges. And out of that, we clearly defined the main programs on one side, sustainability, which is an ongoing program, which has already been started 3 years ago. But there will be, again, a strong focus in delivering also solutions on the basis of underwriting as our key activity, but also in the asset management and operations field and which is important also for VIG to not only focus on the ecological part, but also on the social part, which includes society, our customers and also our employees. Capital management. In the understanding of the group, it's very important also for the efficiency in between the capital management of our companies in the group. And Gerhard Lahner is leading this capital management program starting in a pilot last year, and we will work out for the next 3 years that we have a very professional also management of the upstream of dividends out of the performance of our companies. Banking cooperation, which is mainly driven by the backbone, which we have in the strategic partnership with Erste Group, but we will not only work on the improvement of this strategic partnership with Erste, where we are active already in 7 markets together. And we also see the opportunity all over the group in all the other markets to expand with additional partners beside the 7 markets of Erste. Artificial intelligence, I think it's clear for all of us that there has to be a focus in the activities, which already is on a broad basis. I sometimes already mentioned that in the activities of our VIG Accelerate program, more than 50% of the projects which are brought in by the companies in this kind of platform of project for digital solutions, we have more than 50% already on the basis of AI. But it is needed, and this is what we will focus in the next 3 years to optimize also the efficiency in the use of the use cases in between the group and all over the group. And the fifth program, focusing on health, which we see in all the markets in different forms as a high potential for developing not only on product, but especially on service basis, and there, we also will have a focus in analyzing and then also supporting our companies in a group-wide form on these solutions. The next slide, evolve28, CO3, I already mentioned, I will not go deeper. Just repeat, collaboration here shown in the symbol of Spider-Net. This is really supporting the added value created out of the broad innovation and creative basis of all our companies. This is really, I would say, a boost in the way of creating new solutions in all forms in between our business. Cooperation, yes, inside, we say ensures independence in the way that there is a clear focus in the optimization of the cooperation in between our companies in one market. For example, in the back office optimization between Wiener Stadtische and Donau in Austria, also other companies in Czech, Slovakia, Poland, and there is a big range where we can deepen also the optimization, partly also automization of common activities. Communication already mentioned, we have as information already provided more than 40 communities, which are active in between our experts and specialists in between the group. So there is also a very strong interlink between our fleet. Last but not least, on the Slide #22, I offer to you also knowing your expectation. And we already mentioned by myself and also Gerhard Lahner, there is still a little need of patience from your side. Why? We have now the performance of Q1 to Q3 for this year, and we also raised our outlook for the result of '25. Regarding now the program evolve28, which I shortly presented in its structure and content, there will be the next week, our Supervisory Board meeting where we will approve the targets for the next 3 years, including also the targets coming up from evolve28 strategic program. What we can offer is then next week after the Supervisory Board meeting, there, we will also then comment and declare the targets and the figures for the next 3 years to you. And Peter Hofinger and me, we will join also in a dance program, all bank conferences, which are offered in London, in Frankfurt, in Hamburg and also the others, where we then hope that we will have the chance also to present to you maybe also in personal talks then not only the program, but also the targets and some interesting discussions. The closing of NURNBERGER. And I know that there is a big expectation also regarding the detailed KPIs and targets from the inclusion from NURNBERGER, but we still have the need that the closing, which we expect until the second half -- beginning of second half of '26, there will be then the start of the financial integration, which cannot be done before. But immediately after this financial integration phase, we will also have the chance then to integrate the targets of NURNBERGER also in the strategic targets of this evolve28 program. And then we really can not only opens, but give a deep insight in also the calculations and also the valuation of all this influence of integration of NURNBERGER. So I know that there might be a bigger expectation, but there are also the legal frameworks we have to declare. And out of that, we are also open now to answer your question, and we are looking forward to the first questions you have. Operator: [Operator Instructions] Thank you very much. The first question comes from the line of August Marcan from UBS. August Marcan: I have too many, but let's start with 3. First one on the combined ratio. This year, the 9-month combined ratio benefited a lot from benign weather. And last year, we had worries. So in the last 2 years, we kind of had the opposite extremes. So I was wondering if you could tell us what you see as a normalized combined ratio level for the group going forward? Then the second question, a rather simple one, apologies for that on your new strategic plan. I'm not sure I fully understood the time line. You said that next week, you're going to have the approval from the Board. Are you then immediately going to have an event or publish this? Or what exactly is the time line? And if -- again, on the CMD, you said that the financial targets are going to be published there. Could you just tell us now if -- what the KPIs are, not the numbers, but what the metrics are that we're going to be looking at because I think your last strategic plan didn't have a lot of financial KPIs. So I'm not sure what this one will include. Peter Höfinger: Thank you for the question to the combined ratio. Yes, you are quite right that the comparison of last year to this year is quite difficult as having Boris, which was a gross claim of but you know and we have presented this that we do have a quite conservative reinsurance policy. We are still able also over the last years in the hardening of the reinsurance market, keeping low self-retention. So also last year, for the first 9 months, we had a combined ratio of 94.3%. This year, it is considerably better with 92.1%. But you also see that the difference, if you compare the amount of the events is not so significant as we have as a mitigation element, reinsurance, which we are willing to buy in quite in a bigger amount. What was beneficial this year to our results, and this is outstanding is the phenomenon of having less frequency of small- to medium-sized events. So this has had quite an impact on our improvement of our loss ratio. The mild climate and the absence of this frequency of small to medium events, we are not impacted in a year by the big events due to our reinsurance. So therefore, I think you see the limited volatility of our combined ratio from last year to this year, having a very big event and having this year an outstanding event. So I think between 92% and 94% is what is our combined ratio to be expected going forward. Hartwig Loger: Okay. Thank you, August, for your question. I will take question 2 and 3 from my side. First, yes, there will be also an information immediately next week when we have the approval from the Supervisory Board to the targets 26 to 28 next week. And what you can expect, there will be a very transparent basis also in the information about these targets. It will be a target about the growth a target about profits. It will also include combined ratio, which you asked before to Peter Hofinger. And there will be also a target clear on return on equity as an operative return on equity, and there will be also targeting the solvency ratio. So these are the targets which will be discussed in the Supervisory Board, and then we will clearly make it transparent to the capital market about the targets we have for the next 3 years out of our program. Operator: Next question comes from the line of Rok Stibric from ODDO BHF. Rok Stibric: Yes, I would have just one question and it's -- forgive me if I'm being a bit impatient. Usually, you disclose these things with half year and full year results, but I would still like to hear your view on future investment income expectations. So the question is, do you expect future investment income to be roughly at the same level as this year? Or do you expect this line of your P&L to improve in the future or maybe given the changing interest rate environment to even decrease? I was just wondering what your thought is on developments in the future. Liane Hirner: Liane, I'm happy to take your question regarding the investment income. What I can say is that we have a very positive development in the investment income in the first 3 quarters. So this year, so no impairments, no one-offs. Also, we have a positive development of the interest rates, especially in CEE also, for example, including Turkiye. And due to the increased business volume, also interest income or financial income is increasing. So I would expect a positive development also on this side in the upcoming quarters. I hope this answers your question. Operator: We now have a question from the line of Youdish Chicooree from Autonomous Research. Youdish Chicooree: I've got 2 questions. The first one is on the top line development. I was wondering whether you could provide a split between Life and the main lines in Non-life, like [indiscernible] other property, et cetera? And then secondly, on NURNBERGER, could you tell us, I mean, how long will the turnaround of this business take? And are you able to share what your view is of the sustainable earnings power of that company, please? Peter Höfinger: Okay. I'm happy to take the question about the development of the business lines. If you look on our non-life portfolio, so we are growing all over the group in health business. And what is very positive to see, we are growing by 12% in health. What is very positive to see that we have a quite very good dynamic in health business in Central Eastern Europe. We see a growing demand by our clients and by our markets getting health insurance, and we are having quite innovative concepts and also offering this market-to-market depending on result. On the framework of the social security laws there. We do have a growth in property and casualty of around 5.6% all over the group. Also here, you will see a stronger growth dynamic in Central Eastern Europe as this is also linked to the overall GDP growth and the economic dynamic. And as you know, there is a quite positive GDP growth in Central Eastern Europe, where we are benefiting with our property business. When we come to the motor business, we have to differentiate between motor TPL and motor own damage. In motor TPL, it is around 11%. And in motor own damage, it's more than 6%. The background here is over the last years, we have seen in Central Eastern Europe quite an overproportional salary inflation. Differently to maybe Western Europe, increased salaries more or less go immediately into consumption and not just on the savings book. Part of this consumption also goes in cars and buying new cars. This is the growth driver for motor own damage, but also in motor TPL. If you look on the Life business, I think you also asked, overall, the life business is growing by more than 8%. Here, it is the classical life business, which is growing, but also in unit-linked, we are closer to 6% of the performance. So also here, we have, I think, a quite attractive dynamic. The same true, what I said for the other business lines. The driver of this growth is Central Eastern Europe, where the demand for old age savings is growing, and we also see this as one of our further future potentials of growth in the years to come. I hope I have answered your question. Gerhard Lahner: Let me take the second one on NURNBERGER. I will -- in my first part of the answer, I will refer to publicly available information. NURNBERGER itself has announced that the turnaround for the non-life part will last until 2027. We have seen quite a strong development this year, supported, of course, also by favorable claims development as well as a positive market cycle on the German insurance market when it comes to non-life profitability. So we trust the management to be well on track with the turnaround of the non-life part. The IT part will take probably a little longer. Nevertheless, given the status as which -- in which we are as of today, I think that we will have the chance to have more deep dive with NURNBERGER management on that issue when the closing has been done. Nevertheless, we are aware of that this will, of course, also long term decrease the cost base. So I think that from our point of view, we are -- I think that the NURNBERGER management is well aware of that we are expecting them when you ask me to return to historical profitability levels. As you know, not only you are impatient, but we as well -- I guess this is also well known to the NURNBERGER management. Youdish Chicooree: And can I ask a follow-up question, please? Gerhard Lahner: Yes. Youdish Chicooree: So you're expecting the closing in the second half of next year. So do we have to wait till then to get, let's say, IFRS 17 numbers for NURNBERGER basically? Gerhard Lahner: I would like to give you a different answer, but the answer is clearly yes. Operator: [Operator Instructions] The next question comes from the line of Thomas Unger from Erste Group. Thomas Unger: I'll connect to the last question and answer on. NURNBERGER. What can VIG do here to advance and accelerate the transformation process for NURNBERGER? And you already said that the time line remains about the same as what NURNBERGER guided. But when do you expect the first dividends from NURNBERGER to VIG? That will be my first set of questions. And upon closing, do you expect any significant one-offs to be incurred or immediate major investments that you anticipate for the second half of 2026? And then also, I'd like to ask you now that you're in the process of this takeover, how does that affect your growth strategy in Central and Eastern Europe? Are you able to take advantage of any M&A opportunities or other growth opportunities that may arise in the next 1 to 2 years? I don't know you haven't said anything or any details given any details on the capital hit that you'll be taking as you attractive opportunities in Central and Eastern Europe in the next 1 or 2 years? And if you allow me to also ask you on the dividend, the upcoming dividend from 2025 earnings. Will the NURNBERGER acquisition in any way affect the management Board's decision process leading up to the dividend proposal from 2025 earnings? Gerhard Lahner: On what can VIG bring to the table? I think that in different markets and especially in challenging market circumstances, I guess that VIG has shown that we know what it means to turn around, especially non-life portfolios. But I think that what we see is that the NURNBERGER management is very well in place and know what they do on the restructuring and turning around the non-life portfolio. Nevertheless, I guess that we can bring some know-how. In addition, I think that I'm not sure if everybody is aware of, but VIG has taken advantage of IT transformation program executed by Wiener Stadtische and Donau [Insurance] the last years ended in 2023. And what VIG can bring to the table is that given the fact that the IT landscape is very, very comparable to -- between VIG in Austria and NURNBERGER IT landscape, we are very confident that we know what needs to be done, first point. Second point is when it comes to talent, we have the team that was successfully doing this transformation in the DACH region still on board. You just should probably know that we decommissioned a lot of all systems in Austria which finally gives you also going forward, quite some flexibility on the digital journey that, of course, you need sooner or later. Second of all, dividend expected. I think that, in general, our intention is that NURNBERGER will keep on paying dividends in general. Nevertheless, of course, we -- and this leads to, I guess, your third question, one-off investment, we will need to judge what is the best way to finance the long-term IT transformation program of NURNBERGER. Nevertheless, we don't expect this to be a big upfront amount, but probably be spent over several years. And then we would probably judge on what is the most efficient way to deploy capital in NURNBERGER or within the entire group. I guess the fourth question is twofold. One is the financial part of the flexibility for further -- taking further advantages of inorganic growth or M&A transactions in Central and Eastern Europe. And the second one is the managerial question. I would take the first part. So definitely, given the deleveraging that VIG has gone through the last periods and the financial flexibility that we have from our balance sheet, I do not see any immediate restriction out of either the transaction nor anything upcoming. The managerial part of the answer, I would ask probably Hartwig Loger to give you the answer. Hartwig Loger: Okay. Thank you, Gerhard. I will take also the question about our possibility also to invest and go on in the growth of Central Eastern Europe. This is clear the target, and we also including our investment in NURNBERGER, we are ready and also in part of the program of evolve28, we are still interested in possible profitable growth and also investment in the enlargement of our activities in Central Eastern Europe. And as we expect maybe coming up soon also with some targets, we have also already on our radar. I think the most important thanks also for that question, our investment in NURNBERGER will not have any impact to the dividend payment out of the outperformance of '25, which is expected. So we have the clear definition of our policy to dividends. So there is the floor, and we are clear that with the performance on the operative side, there will be also the definition and the increase on the dividend payment for this year. I hope this gives security to you. Operator: We have a follow-up question from the line of August Marcan from UBS. August Marcan: Two quick questions on NURNBERGER. One is with this acquisition, you're getting some businesses that maybe are not core for Vienna like the banking business. Have you considered what you want to do? Do you want to keep the business, keep NURNBERGER as a whole? Or are you looking to dispose of the non-insurance asset that NURNBERGER has? And then the second question, you're also bringing from NURNBERGER a sizable investment portfolio and their asset allocation is quite different from yours. They have much more equities and a bit more real estate than you do and much less bonds. Have you considered what the plan is here? Are you going to move them to your strategic asset allocation? Or are you going to leave it as is? Gerhard Lahner: Thank you very much for those questions. The first one is it's probably still too early. Definitely, the focus of the acquisition for us is the core business, which is the entire insurance business of NURNBERGER. So this is the focus. The rest we will see further down the road when we are able to judge immediately after closing. The second one is on the asset allocation. VIG will not move away from the conservative asset principles that we have in place. Of course, there is an interlink between the asset portfolio of NURNBERGER. So we will first very thoroughly analyze what are impacts. But definitely, we are supposing to continue VIG's conservative investment approach in the long run. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Nina, Head of Investor Relations, for any closing remarks. Higatzberger-Schwarz Nina: Thank you for your participation in today's call and your questions and interest. As mentioned by Hartwig Loger, our CEO, our evolve28 targets will be announced next week. Investor Relations is available to provide support and assistance with any further questions or requests for meetings. And I hope to be in touch soon. In the meantime, goodbye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines.
Brian Bruley: Good morning, and welcome to United Bancorporation's Third Quarter 2025 Earnings Call. I'm Brian Bruley. I'm joined today by Mike Vincent, our President and CEO; Leigh Jones, our Chief Financial Officer; and David Stewart, our Chief Credit Officer. We'll be taking questions through the Q&A function of the Zoom call, [Operator Instructions] So with that, Mike, I'll turn it over to you. Michael Vincent: Very good. Thank you, Brian, and good morning, everyone. We appreciate you joining us once again for a quick call just to highlight some of the activities for the third quarter. So let me just jump right in. For Q3 2025, we are reporting a net income of $4.2 million and earnings per share of $1.29, that is compared to $5.1 million and earnings per share of $1.45 for the same period last year. Year-to-date, we are showing net income of $13.5 million and EPS of $4.07, that is compared to $20 million and $5.63 for the same period last year as well. Thus far, we talk about this almost on every one of these calls. Our net interest margin has remained strong as it has in prior quarters, this quarter was no exception. Year-to-date, we are reporting 4.59% on the margin. One thing I'll highlight, and we may touch on this a little bit later in the call, we do continue to repurchase shares. We have acquired 56,000 shares during the quarter. And I will tell you, for year-to-date, that's 163,000 shares that we have been able to repurchase thus far. So just with those few highlights, I'll turn it over to David Stewart, our Chief Credit Officer, let him talk a little bit about the loan book. David Stewart: Sure. Good morning, everyone. Glad to have you this morning. Year-over-year loan growth has been right at $46.5 million or 5.4%. Loan growth in Q3 was right at 1.4% or $12.3 million. Kind of the same story we've been along -- same story line we've been on for the entire year and most of last year. That's driven by multifamily construction, continue to see good production within that book as we exploit our specialty within the affordable housing space. And we've also seen good growth in commercial real estate. So pleased with what's going there. You will notice that non-accruals decreased in Q3 by $1.2 million to $7.5 million. Doing a little cleanup work. I think we've talked about this on prior calls. The Camden portfolio in Wilcox County, continue to see some adjustments there we're having to make associated with some cleanup work, frankly, that's a forest county in the state of Alabama, a heavy book of consumer loans. So we're just sort of working through resolution in that book. Also, you'll see that the charge-offs for the quarter were right at $1 million. That's related to that book and taking some marks on a couple of other credits as well. On the positive side, you will notice that ORE did decrease by just over almost 800 -- $701,741. We had a piece of property that had been in the bank's inventory for quite some time. We had possibly help for branch expansion. We decided to go ahead and market that and take that off the books. So that was due to -- that's kind of tells the story on the decrease in ORE. I did want to just highlight nonperforming are still a little higher than we would like to. They've come down quarter-over-quarter. They were at 70 basis points and then past dues ticked down a little bit as well, hovering around 2%. That's primarily driven, as we've talked about, some sticky larger credits. They're just taking time to resolve. We do have one that's got a resolution in our target. I don't have an estimated time frame, the associated government shutdown has slowed down some of that. And then we've got some other kind of larger credits just working through resolution, spend a lot of time there. But I think we are optimistic right now. As you guys know, we have a pretty sizable ag portfolio. We've had pretty good weather through Q3. So everybody's crops look good, yields look good. So we're hopeful on that front as long as prices on commodities hold up. So that's all I've got on the loan book. So I'll pass it over to Leigh for securities discussion. Leigh Russell-Jones: Sure. Good morning, everyone. So the securities book still maintains a book value of about $316 million with a yield of about 3.64%. The weighted average life fluctuates a little bit, but that is 6.7 years at the end of September and the duration just under 5 years. We still have about 20% of the book is floating on the securities side. Switching gears to talk about deposits. Year-over-year deposit growth has been about 3.9% or about $42 million. So we still continue to see growth there, primarily in time deposits -- and we have a train coming through. So bear with us here for a second. Anyway, the time deposit rates, we've maintained those yields a little bit higher to be competitive in the market and to continue to attract new depositors into the bank. And the competition does still remain strong in our markets. This has all supported our liquidity position. Our cash-to-asset ratio is 11.15%, and we still continue to monitor liquidity on a daily, monthly basis. And that's really all that I have. So I'll turn it back over to Mike now. Michael Vincent: Thank you, Leigh. I'll interject as well. That is our local economic barometer, I suppose. So the frequency of trains going by is actually a good thing, although maybe not as timely as we would like. So let me speak a little bit about the margin. I mentioned earlier that we've been able to maintain a pretty robust and strong margin year-to-date at 4.59%. That is pretty comparable to 2024 when we were reporting 4.57%. Earning assets at $5.78 versus 5.63% for prior year. Cost of funds, 1.40% versus 1.24% versus prior year. So all in all, pretty strong numbers, and we work very hard to maintain those levels. Quarter-to-date margin of 4.58%. So that's pretty well in line. You may see a few basis points tick up, tick down. But all in all, I think we're in pretty good shape. Looking at some forecasted impact of the rate environment that we find ourselves in. When we kind of shocked the balance sheet down 100 basis points, has an impact on net interest income of about 5%, down 200 is about 9.6%, 9.7%. So we recognize kind of what the interest rate environment looks like. Most likely, assuming a gradual 100 basis point decrease over a 12-month period, does show an income decrease of about $400,000. So we are managing it, I think, very closely, knowing what rates are likely to do over the next 12 months or so. One thing we've talked about with anybody that we've met with individually or we've had group conversations. This year has been a little bit different than many others. What you see in bank performance has pretty well been core bank activity. There's been very little impact from some of the CDFI programs that we have historically participated in. I will say UBCD, UB Community Development, our CDE entity recognized $560,000 in new market tax credit fee income during the quarter. So that is one thing I did want to point out to you as well. On the non-interest expense side, obviously, we've carried some elevated expenses higher than previous year. Much of this is related to the core conversion that we've talked about. Upgrading our cloud environment comes at about $1 million cost. Consulting fees to get us through the conversion about $0.5 million in cost. Miscellaneous, and I'll say miscellaneous, it's a very big number for miscellaneous, but $480,000 in various conversion-related expenses as well. So some of that -- much of that is, I would say, is onetime hits when you look at kind of a go-forward run rate. Some of these obviously will remain, the cloud environment kind of is where we are. But a lot of this, we will be glad to see in the rearview mirror and have behind us. On a capital perspective, tangible book increased to $45.06. That's up from $43.07. Price to tangible book at 1.23. Dividend is something that we continue to talk about. We focus on, we've been focusing on it for a couple of years more strategically with a yield of right around 2.5%. So all that being said, that gives us an ROA of 1.45%, return on tangible equity of 12.3%. I'll touch on ECIP. I know -- in fact, I think I saw an ECIP question. Leigh, I may enlist your input on this a little bit, too. So obviously, we have signed -- as we've talked about before, we've signed the ECIP option agreement outlining early disposition. We continue to measure and monitor. Obviously, with what's been going on with the government shutdown, there's been a lot of, I guess, a question and about what's going to happen, when it's going to happen. Leigh and her team continue to monitor and to measure what we're doing from a lending standpoint. Leigh, I don't know if there's something you may want to contribute from that perspective about how that's going. Leigh Russell-Jones: Sure. We are required to report quarterly to the Treasury, regarding our lending in the various categories of deep impact and qualified lending. So we are looking at that in relation to repurchase. I think that repurchase according to the lower guidelines as far as being able to repurchase through the mission-aligned nonprofit looks pretty favorable at this point. It's still kind of early to tell. We're very focused, as Mike said, on lending and what we can do to ensure that we are able to repurchase the capital in a timely manner and at the lowest rate possible. Michael Vincent: So let me give you just some -- I guess, some high-level comments on the quarter itself. We've mentioned core conversion multiple times. So that was finally put to bed. And I say put to bed, at least the actual conversion itself, it went about as well as I think a core conversion can go. Obviously, there's always going to be some hiccups here and there. You try to minimize the customer disruption, any kind of issues from a customer-facing perspective. But I think, all in all, that went extremely well. We are working on what we are calling day 2 items, things that were not part of the initial conversion weekend. We've got teams working on things like consumer lending efficiencies, that sort of thing, online activities. So there's more to come. There's more efficiencies to be gained. But all in all, having that behind us, one, from a cost perspective; and two, from an employee focus perspective is a very positive thing. It's been a heavy lift, as you would expect, for a whole lot of people, and we're glad to get that behind us. I do want to speak a little bit about CDFI and kind of what we hear, what I know, and what this means for us. So obviously, all year long, there has been some uncertainty regarding the fund itself, funding for the various programs, what support do you have or not have on a congressional level. So I will tell you, this year, it's really no different than other years, but we've certainly focused on congressional advocacy, making sure that we're in front of our leaders, both in the House and the Senate, making sure that they understand the importance of these programs, which they do. They have understood it. But it's interesting time right now, obviously, in Washington to try to get certain things done. Overlaying this, the government shutdown certainly did not help working through some of these issues. The employees, the fund, themselves received a reduction-in-force notification. So that put a lot of things at a standstill. Now that the CR has been approved and people are back to work, what that means about recertification applications, the various programs, the funding and that sort of thing. Still remains to be seen to a degree, the experts in that area seem to think that they would likely consider some extension to some deadlines. As we sit, there's a 12/31 deadline on recertification applications. Being shut down for as long as they were, obviously, has put them well behind the 8 ball, and they've got a lot of ground to make up. So what happens with that deadline remains to be seen. From our perspective, we have tried to take it as business as usual. We have continued to administer the funds as we were supposed to. We are doing all the reporting as we're supposed to, and we'll go from there. So -- as far as funding that is waiting to be, I guess, given out, that is a function of what can get pushed through OMB. We've had conversations with the Treasury Secretary, with others. And frankly, that process is just going to play itself out just a little bit, I think. As far as our group in Alabama, though, everybody seems to be really on board with what we're doing and they understand the importance so much so that the greater amount of our delegation did, in fact, actually sign a letter to Treasury and OMB advocating for the program and the funding to be released. So we keep on fighting and keep on making the calls and doing the things that we need to do. Running concurrently with all of that, though, interestingly enough, is the New Market Tax Credit Program itself being made permanent through the Big Beautiful Bill. It's something that we, along with many others in the space, have been advocating for, for quite some time. So we are excited to see that, that is going to happen. And as you might expect, those groups, our new markets group, our affordable housing group, they've got ample deals. They've got more deals, frankly, to get them through next year than we can really report on here. So it's not as if things have come to a grinding halt because they do have prior awards that they're trying to work through as well. So from that perspective, that's kind of where things are. So we've got a little bit of time. So I thought maybe we could kind of go through some of the questions. We do have a few in the queue here. So let's see if we can address some of this. Michael Vincent: I have a question about repurchasing shares, given our capital levels and what are we expecting in '26 on buybacks and capital allocation, generally speaking. So good question. We have tried to keep a buyback program in place. I'm pleased that we've been able to make up some ground this year and find shares to repurchase as we obviously feel like it's a good value and a good investment for us. I have no plans on changing that. We have -- we continue to find, albeit smaller blocks. That's fine. That's perfectly fine with me. So we continue to be in that space, looking for sellers if they exist. As far as just capital allocation in general, yes, it's really no different than what we've been doing. I think the M&A space certainly has picked up and gained a little bit of momentum, maybe not so much in Alabama, but we do know that any momentum is a good thing as far as that is concerned if you are a potential buyer. So we continue to kind of work our contacts, work with as many people as we need to and have those discussions, and we continue to do that. So I think that's certainly well in play. Leigh, there is a question in here. You may have touched on it just a little bit, but I'll ask you if you want to -- if you have any comments about the outlook for deposit pricing and just general cost of funds. Leigh Russell-Jones: Sure. So I guess thinking about deposit pricing, how we're thinking about it is we do have a strong margin right now. So we feel like we do have a little leeway on deposit pricing to continue to try to grow and attract new customers, as I said earlier, with some higher rates and establish those relationships. So that's kind of our thought process for this year, and we'll see how things kind of go into next year. We are anticipating some lower rates, and so we will be reviewing our deposits and pricing accordingly. So I guess I would expect deposit pricing to remain steady to fall slightly depending on what happens with Fed funds and markets. Competition, as I said earlier, still remains pretty strong in our markets for deposits and rates still remain on the higher end by some of the more local banks. So thinking about that, we're just having to be strategic about how we're pricing it and thinking about that. Michael Vincent: Okay. David, I wanted to hear for you maybe to speak about the level of the allowance to loans comparing to what it looked like earlier in the year, that sort of thing. David Stewart: Sure. As discussed, we have taken some right, some charge-offs and non-accruals off the table with the Camden book. So we were a little heavier on the allowance previously as we saw that there were some emerging issues there we would have to address. And also, we had some larger credits with kind of work towards resolution as well in the legacy United Bank book. So we're confident with the allowance where it is. I don't predict any substantial changes at this point. We proactively on a monthly and quarterly basis, identify specific credits that may need -- have some impairment, and we reserve accordingly. So we've also been very proactive in ensuring that we've got sort of a forward-looking view of any credit challenges. So short or long, I feel like we're in a pretty good spot where we are. It is down from where it has been in the past. But like I said, we've taken some of those credit issues and work them through to resolution. So that's kind of why you're seeing a little lower amount. Michael Vincent: There was a question here, and I'll speak to this and then maybe, Leigh, I'll see if you have any comments about it. Regarding salaries and benefits expense line item up from similar period from 2 years ago and then looking at deposits up substantially less than that over that same period. Asking for guidance on what this may look like in 2026. So I will say a couple of things about salaries and benefits. One, we've -- obviously, the cost of attracting and retaining talent continues to go up. It's obviously something that we look at very closely on a monthly and quarterly basis. We have made some strategic hires as well, knowing that the bank is growing. We're moving into new areas. And then I think the roll-in of the branch in Camden came with a little bit of, I guess, I'll say, maybe not the efficiencies that you might have expected to see with something like that. I do expect that to stabilize a little bit. I mean, as we go into 2026, that's been a very hot topic of discussion as far as controlling salary and benefit expenses, making sure that if we bring somebody else on that they are going to be somebody that can contribute to our revenue generation and not really wanting to add to overhead expenses as much as possible. I mean, Leigh, I don't know if you've got maybe a different perspective or some thoughts on that. Leigh Russell-Jones: No. I mean I think you touched on all the things. Like Mike said, that's been a hot topic, and we've been very focused on salary and benefits, and where the number is and just trying to manage it. So I think you should start to see some gains and some efficiencies into next year, I think, as we focus on that. Michael Vincent: A question about the M&A environment. I hope I've answered that, but I'll just say that in Alabama specifically, it has not been as robust as other areas. I work and I have conversations with a number of groups that are advising, counseling, helping us consider our options. Certainly, when we look at growth, I mean, it's going to come from either organic growth within the footprint, which is not off the table. We look at some of our existing markets and think where do we -- where can we bolster the franchise, and we've got some opportunities there. I look at our franchise in the Florida Panhandle and oftentimes, we talk about Alabama, and we don't talk as much about the Florida markets, but I think there's a lot of opportunity there. Obviously, in some of these areas, there is a glut of competition. You've got the overlay of the credit unions and that sort of thing and what that means from the M&A space. But I will say I'm not less optimistic. I won't say on the call that I'm more optimistic, but sometimes patience will pay off, I think, with this kind of stuff. And as long as you've got conversations in the works. I think we're, as an organization, are probably respected as much as anybody about how we have done things in the past. And certainly, we will have a seat at the table whenever there's opportunities that are there. There is a question about thoughts on receiving a Capital Magnet Fund award in 2025. Leigh, you can tell me the hush, but I don't see a Capital Magnet Fund award in 2025. Leigh Russell-Jones: Yes, I would not count on it. Michael Vincent: No, I don't think so. And I just -- with, frankly, the backlog of what's going on right now, I just don't know how they would even get to it if they really wanted to try to get it done. Now what that means for 2026, I don't know. But obviously, it's an impactful difference when you look back at prior years and you see Capital Magnet Fund awards of $9 million, I mean, you're going to see obviously a definite impact on the balance sheet and the income statement. So we will keep advocating and keep communicating, I guess, regarding what we hear from the CDFI fund in these various programs. But until something moves in Washington, I don't know that I would feel good about predicting anything on any of these words. So if nothing else, I'm asked often, what does the bank look like if you strip back some of this other stuff. And I think 2025 is going to be a good example of that. In what ways are we using AI in the organization? That is a great question. And one that we wrestle with almost daily at this point. We know that AI has got -- it is immensely powerful from a banking organization strategy perspective. It's -- I won't say dangerous, but it's something that we better understand how we're using it. Certainly, from a back-office noncustomer-facing perspective, if you can gain efficiencies either with meeting minutes, with policies and procedures and things like that, then I think it's immensely powerful. But what I will say is we are committed to making sure that we are at least -- I won't say on the cutting edge, but at least on the front end of how AI can be used in the banking space. Right now, I have got our head of our IT department that is going through a certification program, if you will. It's basically an AI strategist designation to try to help us determine what our options are and what makes sense. Certainly, we've got to have conversations with regulators and make sure that they understand how we're using AI. But I recognize the power of it and I recognize the necessity. If you don't figure it out and if you don't use it to the extent that you can, you're going to get left behind. And certainly, from a cost control perspective, it's something that we just have to have. So that is a great question. It's very timely, and it's one that we are wrestling with really on a monthly basis right now. So that is something that we'll talk more and more about going forward, I'm sure. I don't know that I've missed any questions. So if there's nothing else, Brian, I'll turn it back over to you. Brian Bruley: Thank you. If you have any other questions or think of something else you'd like to ask the team, you can send them to me at brian.bruley@unitedbank.com, B-R-I-A-N dot B-R-U-L-E-Y @unitedbank.com. Thank you for joining us today.
Operator: Good day, and welcome to the Abercrombie & Fitch's Third Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions]. Today's conference is being recorded. At this time, I would like to turn the conference over to Mo Gupta. Please go ahead. Mohit Gupta: Thank you. Good morning, and welcome to our third quarter 2025 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer; Scott Lipesky, Chief Operating Officer; and Robert Ball, Chief Financial Officer. Earlier this morning, we issued our third quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our website is an investor presentation. Please keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and in the investor presentation issued earlier this morning. With that, I will turn the call over to Fran. Fran Horowitz-Bonadies: Thanks, Mo, and thanks, everyone, for joining as we head into the important holiday season. I am happy to report our 12th consecutive quarter of growth, with sales up 7% to a record of $1.3 billion. We again delivered on the goals we outlined for the quarter, with net sales and operating margin, both at the high end of our outlook, earnings per share above our expectations and inventory levels aligned with trend. Along with these strong financial results, we repurchased $100 million worth of shares in the quarter, bringing our total to $350 million, or 9% of shares outstanding as of the beginning of the year. Our team continues to stay close to our customers while reading and reacting to the current environment. In the quarter, we made further progress on key brand, regional and foundational investments. Based on our third quarter momentum and our fourth quarter outlook, we are narrowing our full year sales outlook towards the top end of the range we provided in August, targeting a strong finish to 2025 on top of a record 2024. Financially, in addition to record net sales, we delivered a gross margin of 62.5% and a 12% operating margin for the quarter, both of which include an adverse tariff impact of around 210 basis points. We exceeded our outlook range on earnings per share, delivering $2.36 for the third quarter. On the regions, we saw continued growth in the Americas with net sales up 7% on balanced traffic gains across channels. In EMEA, total sales increased 7% with comparable sales higher by 2%. Similar to last quarter, strong sales performance in the U.K., our largest country in the region, continued to be fueled by localized marketing, inventory distortions and strategic partnerships. Strength in the U.K. was partially offset by softness in Germany and the remainder of European markets. In APAC, net sales were down 6% with comparable sales down 12%. Across regions, we remain excited about the significant long-term global growth opportunity for our brands through a blend of go-to-market strategies, including owned and operated, franchised, wholesale and licensing. Turning to the brands. In line with our expectations, we made sequential improvement in Abercrombie brands that sales were down 2% and comparable sales down 7%. We continue to see positive cross-channel traffic to the brand and we managed inventory tightly, enabling improved AUR trends compared to the first half. The sequential improvement was led by Women's, where we had a good seasonal transition to cold weather categories across top, bottoms and outerwear. In Abercrombie, we continue to remain active in marketing, building on early fall denim and NFL campaigns with our recently announced collaboration with luxury retailer Kemo Sabe. Putting these 2 brands together with a great way to connect with new and existing customers offering authentically crafted leather apparel and accessories, highlighting the Western trend. Abercrombie has inventory in the right place and a strong marketing plan heading into holiday. We've opened 30 new stores in the third quarter, aiming for a total of 36 this year. We remain focused on bringing the brand back to growth by diligently executing the playbook that has delivered a double-digit CAGR on sales from 2019 on strong double-digit AUR improvement over that time. This holiday, you'll see a lot of Abercrombie is known for, fashion, comfort and authenticity, and you'll continue to see it expressed through newness across categories. With this combination of investment across product, voice and experience, we are aiming for Abercrombie brands to be approximately flat in the fourth quarter on net sales against a record in Q4 last year. We're excited to see that milestone within reach. In Hollister, we saw exceptional growth trends continue with 16% net sales growth in the third quarter. Comparable sales were up 15% on continued strong cross-channel traffic. Both Men's and Women's contributed to growth in the quarter, and we saw balance across categories. Consistent with our Read & React model, we've been keeping inventory tight while continuing to flow in newness allowing for AUR improvement on lower promotions. Coming off a very strong back-to-school season, I was proud of the team transition to fall and into holiday. Speaking of holidays, Hollister has some exciting campaigns and collaborations planned that will highlight some must-have for the season. We kicked off a couple of weeks ago with 6 college athletes co-designing special items in our Collegiate collection for football rivalry week. And you might have seen yesterday's announcement with Taco Bell with the brands collaborated on 90s and Y2K styles across graphics and fleece. We are just getting started. And importantly, our team has been reading and reacting and has the right product to support sales throughout the season. We're also enhancing the Hollister brand with investments in physical retail. We are on track to open 25 new stores this year while refreshing more than 35. The theme across our brand portfolio and company is consistent. We remain on offense. From both a brand and regional perspective, we are investing in marketing, stores and talent to support sustainable long-term growth. We also continue to make opportunistic investments in digital, technology and our infrastructure to improve the agility and speed needed to support our growing global business. These tech investments have the power to enhance the entire customer journey, especially when paired with AI. We recently deployed AI agents and customer service to improve the experience while driving scale and efficiency. And we're very excited about a new partnership we're kicking off this week with PayPal and SymBio, one of our technology partners in marketplace sales, that will enable agentic commerce and AI answer engines like Perplexity, where customers can seamlessly complete transactions directly within their AI conversation without even leaving the chat. As our business continues to evolve, we're making future focused investments to deliver for customers and strengthen our operating model. And for us, that's really the story of 2025. More than 3 quarters in, I am proud of how the team has worked through this year, responding to the dynamic tariff environment and evolving with our customers. We are fully prepared for the holiday season having used these past months and quarters to test and learn and build confidence in our assortment and brand positioning. We've also continued to keep inventory tight with the goal of reducing promotions and clearance selling to mitigate some portion of the tariff cost. With our holiday plans in place, we expect to deliver top-tier profitability and earnings per share, reflecting the consistency of our model. And with that, I'll hand it over to Robert. Robert Ball: Thanks, Fran, and good morning, everyone. Recapping Q3, we delivered record net sales of $1.3 billion, up 7% to last year on a reported basis at the high end of the range we provided in August. Comparable sales for the quarter were up 3%, and we saw a benefit of approximately 50 basis points from foreign currency. By region, net sales increased 7% in the Americas, 7% in EMEA, partially offset by a 6% decline in APAC. On a comparable sales basis, Americas was up 4%, EMEA was up 2% and APAC was down 12%. Across regions, the spread from net sales to comparable sales was driven by net new store openings and third-party channel performance. EMEA also benefited from favorable foreign currency. On the brands, Abercrombie Brands net sales declined 2% with comparable sales down 7%. Consistent with our third quarter outlook, the sales decline was primarily due to lower AUR, but the AUR decline was less than the first half of the year. Hollister Brands net sales grew 16% on comparable sales growth of 15% with both unit growth and AUR improvement from lower promotions. The comp to net sales spread for Abercrombie brands in the quarter was driven by third-party channel performance, along with net store openings. I'll cover the rest of our results on an adjusted non-GAAP basis. Operating margin of 12% of sales was at the top end of the outlook range we provided in August, delivering operating income of $155 million, compared to $175 million last year. Adjusted EBITDA margin for the quarter was 15% of sales on adjusted EBITDA of $194 million compared to $219 million last year. The 280 basis point decline in operating margin from Q3 2024 was driven primarily by 210 basis points of tariff expense included in cost of sales. In addition, as we forecasted in August, third quarter marketing was up 100 basis points from the prior year. This was partially offset by leverage in general and administrative expense on lower payroll and incentive compensation. The tax rate for the quarter was below our outlook at 29% driven by outperformance to expectations in EMEA. Net income per diluted share was above our outlook at $2.36, compared to $2.50 last year. Moving to the balance sheet. We exited the quarter with cash and cash equivalents of $606 million and liquidity of approximately $1.06 billion. We also ended the quarter with marketable securities of approximately $25 million. For the quarter, we repurchased $100 million worth of shares, ending the quarter with $950 million remaining on our current share repurchase authorization. Year-to-date, we repurchased $350 million in shares totaling 9% of shares outstanding at the beginning of the year. We ended the third quarter in a clean current inventory position with costs up 5% and units up around 1% and have seen freight and other unit cost mix normalize. Shifting to the outlook. We entered the fourth quarter with momentum, and we are narrowing to the upper end of the full year sales expectations we provided in August. We continue to reflect tariffs and mitigation consistent with our second quarter call commentary and the team continues to find cost efficiencies through vendor discussions as we plan 2026. For the full year, we now expect net sales growth to be in the range of 6% to 7% from $4.95 billion in 2024. We've narrowed the range to reflect third quarter performance and for expected fourth quarter sales. We currently anticipate 60 basis points of favorable foreign currency in the outlook. We continue to expect full year GAAP operating margin in the range of 13% to 13.5%. As a reminder, this range includes the impact of the $38.6 million benefit from litigation settlement or around 70 basis points of sales. Also, the assumed tariffs included in the operating margin carry a cost impact of around $90 million for 2025, or 170 basis points of sales. We are forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around $48 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $10.20 to $10.50. For clarity, the $38.6 million benefit included in our outlook carries a favorable impact of $0.59 per share. For capital allocation, we continue to expect capital expenditures of approximately $225 million. On stores, we continue to expect to deliver around 100 new experiences, including 60 new stores and 40 right sizes or remodels. We also expect to be net store openers with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we are targeting around $450 million in share repurchases for the year, subject to business performance, share price and market conditions. For the fourth quarter of 2025, we expect net sales to be up 4% to 6% to Q4 2024 level of $1.6 billion. We expect operating margin to be around 14%. We continue to expect lower cost of goods sold from freight at around 150 basis points of sales for the quarter. We also continue to expect $60 million of tariff impact net of mitigation efforts or around 360 basis points. Operating expense will be around last year as a percentage of sales. We see opportunities to incrementally invest in marketing, but this will be largely offset by leverage in other areas. We expect the Q4 tax rate around 30%. We expect net income per diluted share in the range of $3.40 to $3.70 with diluted weighted average shares expected to be around $47 million, including the anticipated impact of around $100 million in share repurchases for the quarter. To close things out, we entered the fourth quarter ready to compete with inventory aligned with trend and the right composition. We have great momentum having delivered against expectations these past 3 quarters on both top and bottom lines. Our brands are in great shape with Abercrombie brands making sequential improvement and Hollister brands taking share with impressive growth. We remain on the offense, investing in marketing through key brand collaborations and partnerships and with store expansion and digital enhancements that enable us to win in the long term. We look forward to a great holiday selling season. And we thank our teams around the globe for putting us in reach of record sales for fiscal 2025. And with that, operator, we are ready for questions. Operator: [Operator Instructions] First question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey: So nice to see the sequential progress. Congratulations. Fran, as you think about the Abercrombie brand and the plan it's tracking to, what did you see by category, Men's and Women's? Does it differ by channel? How are you seeing the progress of the brand? And then just overall, international, any puts and takes on the different regions and countries? Fran Horowitz-Bonadies: Dana, so super excited about the results we just put up for the third quarter. I mean total company 12th consecutive quarter of growth, top line is 7%, comps at 3%. So the Abercrombie brand specifically continues to be strong. This is evidenced by a few things. Our traffic is positive. Our customer file continues to grow. We're seeing nice engagement in our digital and our stores channels, excited about where we're headed for the fourth quarter. The team has been busy at work all year testing and learning and really reacting to what's happening, heading into the fourth quarter, well inventoried and denim, fleece and sweaters very strong categories for us. As I mentioned, also 30 new stores to date, 6 more opening up this quarter. So we're fully prepared to compete for the fourth quarter. Robert Ball: Yes. Dana, I'll jump in here on the international side. So obviously, we continue to be really excited about the opportunities that we see for EMEA. We have invested in this region. We've got the infrastructure in place to take our brands to the market. This quarter, when you think about puts and takes, U.K. results were really strong. That's where we've been investing most to improve awareness and service our customers there. We're still in pretty early innings here in Germany and more broadly in the other European countries. We don't really have much of a presence or awareness. So we would anticipate seeing some shorter-term fluctuations here as we ramp those brands. But obviously, we see that as opportunity to go after. On the APAC side of the house, very similar dynamics here. The market is huge. Our business is relatively small. We're focused on building our brand awareness there and building a stronger presence. So again, not surprising for us to see some shorter-term fluctuations. But overall, really confident in the global opportunities that we see for our brands. Obviously committed to getting closer to those customers, deploying our playbook and ultimately taking these brands to market and growing this business longer term. Operator: Our next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Fran, the Hollister momentum has been really impressive and it seemed like the back-to-school momentum is continuing into holiday based on what we're seeing in stores. So just curious on how you expect to continue to build on that momentum as we look ahead into 2026. Fran Horowitz-Bonadies: Corey, yes, wow, what a year we're having with Hollister. Congrats to that entire team, super excited to grow the business another 16% on last year's 14%, the tenth consecutive quarter of growth. We are seeing balanced growth, Corey, across genders, across categories. We're seeing our AUR growing on lower discounts. The customer file is growing. Our traffic is strong. Most importantly, we're holding our inventory tight, so we can really Read & React to the business. We've got great momentum heading into holiday seasons. Honestly, there's almost every category is working, which is super, super excited. I'm sure you saw the announcement yesterday, this Taco Bell partnership for Cyber Monday, we're excited about. So lots of good things happening as we head into the fourth quarter. Corey Tarlowe: That's great. And then just a follow-up for Robert. How best to think about traffic versus ticket as we head into holiday? And then any comments on what that could mean for next year as well? Robert Ball: Yes. I mean, Corey, so across our brands, when we think about sort of tickets, I guess touching on tickets real quick, haven't taken any sort of meaningful tickets. We've been talking about this for a couple of quarters now through the holiday season, it's a nice interplay as you think about this holiday season, the best way to drive traffic and to engage with that consumer is going to be through promotions and pricing. So our tickets are pretty stable. We have started to think through and take tickets here post-holiday. So you'll start to see some ticket increases across the assortment here with spring deliveries. But the good news is the AURs are growing. We made sequential improvement from spring into fall across actually both brands, Hollister and A&F and we're seeing nice positive traffic. So traffic is growing across both Hollister A&F and across channels, which is great to see, and AURs are headed in the right direction. So customer files are growing, customers are engaged. Our teams are locked in with those customer bases. We've got the right inventory here in our stores to compete for the holiday. So we're excited to push through into Q4. Operator: Our next question comes from Matthew Boss with JPMorgan. Matthew Boss: So Fran, at the Abercrombie brand, could you speak to the cadence of trends that you saw over the course of the third quarter and elaborate on trends that you're seeing so far in November? And then Robert, could you speak to the composition of inventory across both brands and gross margin puts and takes to consider for the fourth quarter? Robert Ball: Yes. So, I'll jump in here. So we obviously had a really strong third quarter, delivering our 12th consecutive quarter of growth, reaching the top end of our guide. Abercrombie, obviously, sequential improvement here. Hollister continues to grab share with that customer. We're excited about the momentum that we're carrying into Q4. In terms of the outlook, I think we're being reasonable, responsible here. We're happy with how the quarter has started. But as you know, Matt, all the volumes ahead of us here, and we're ready to compete. As it relates to the inventory side of the house, inventory is in good shape, up 5% year-over-year at cost with tariffs being about 3% of that. Units are pretty clean here and in control at up 1%, you know how we operate. We're going to keep units tight here and aligned with our forward growth expectations by brand. We didn't provide a brand breakout, but as you'd expect, Hollister units are up more than the A&F units. And again, both brands are positioned to chase to close out the year. So we feel good about where we sit from an inventory standpoint. On the margin front, gross margin puts and takes here, down about 260 basis points year-over-year in Q3. 210 basis points of that is tariffs. We did see a benefit from freight. It was a smallish benefit from freight and AUR. And then we had a couple of offsets from third-party channels and some inventory reserves to keep ourselves clean headed into holiday. So that's Q3. And then Q4, we'll see some of those themes continue, Matt. You'll see about 200 -- or about 360 basis points of impact from tariffs from that roughly $60 million. And then the freight tailwind, as we've been talking about for the past couple of quarters will continue here, and you'll see about 150 basis points of tailwind here for Q4. And then you know how we operate from an AUR standpoint. We've been on this great multiyear journey of AUR growth here. We had a great holiday last season, so we're going to come into the fourth quarter assuming AURs hold. So assuming AUR is flat here as we think about the go forward. Operator: Our next question comes from Marni Shapiro with the Retail Tracker. Marni Shapiro: Congratulations on another great quarter, best of luck for the holidays in case I forget. Can you talk a little bit about the collaborations you've been doing, the NFL, the NCAA, but you also have Kemo Sabe you did crocs. I'm curious, are these all global collaborations? Or are these specific to the U.S.? And if they're not global, will you do global? And as we think about the brands going forward into '26, I think these pops of excitement are fun. Are they bringing new customers into your store? And should we see an increase or similar cadence into '26? Fran Horowitz-Bonadies: Marni, the clubs are interesting. Our goal with our collaborations, honestly, is a real authentic branding moment. You know we talked about this a lot. We stay close to our customer and we listen to them, what's important to them, what's happening in their life moments. That's how we make these decisions to do these collaborations, so they are planned accordingly. . The NFL has been very exciting. Yes, it's definitely bringing in new customers. Our goal with that with the partnership was about brand awareness and customer acquisition. There's a big crossover with their fandom and our customer base, and we listened to the customer. They told us several years ago how important football fandom was to them, and we took that and tested our way into it and have seen a nice success with it. Kemo Sabe is another great example. Western was happening. Our consumer was responding to it. We went to an authority in the business and made a terrific collaboration. The Taco Bell, we're super excited about for Cyber Monday. So as far as 2026 goes, we will continue to listen to our customer. We'll look for authentic moments to make sure that we stay close to them, and we'll continue on this journey. Scott Lipesky: Marni, it's Scott. Just to add on here. It really speaks to where the brands are today. Each brand is in such a strong position, which is enabling us to partner with other strong and great brands. So like Fran said, it's a great way to authentically connect to our customers and lots more ahead and it's been fun for the brands. Operator: Our next question comes from Alex Straton with Morgan Stanley. Katherine Delahunt: This is Katy Delahunt on for Alex Straton. Just thinking about the Abercrombie banner, I know you've all talked about sales growth being about flat for the fourth quarter. But what is the time line you're thinking about for return to sales growth and then even comp as well? Robert Ball: Yes. So Katy, it's Robert. So obviously, delivering sequential improvement here in Q3, that's important for us. The team has been focused on that customer. We're seeing improved product execution. Inventory is clean. And as Fran mentioned, we're placing our bets here for the holiday here in sweaters, fleece, denim. So we're happy about where the brand sits, heading into holiday. Marketing is resonating new collaborations that we just talked about with Marni here earlier. Those are great brand moments. They're driving traffic. Our customer file is growing. We've got strong engagement across both stores and DTC platforms here. So we're excited about this holiday season. We're aiming to continue to progress here, hold that brand flat against last year's record, which sets us up well for next year. Operator: Our next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: Great. First, on the marketing front, could you elaborate a little bit more about what you're doing across each brand, the plans for marketing this quarter, as you mentioned in the guidance for Q4 that assumes that there's more investment happening. And then maybe on the Abercrombie brand performance in Q3, could you break down like how the comps reflected AUR versus units or total sales? That would be very helpful. Robert Ball: Yes, Mauricio, let me jump in here real quick. Obviously, I'm not going to share a ton in terms of our specific marketing plans. We've got some exciting collaborations that we either have announced in terms of like Taco Bell and you'll see the campaigns kind of continue as we move through the holiday time period. It's been effective. Our traffic is up, as we've mentioned a couple of times. We're pretty intentional with our marketing here. We're obviously focused on our brand building, driving customer engagement and ultimately supporting both near term and long term. So it's not all just what are we going to see this quarter, but we're really building these brands for the long-term growth. Obviously, looking at performance as we work to optimize that spend and where we see value, we're going to lean in. And we have 2 strong healthy brands, both exactly where we want them to be, and so we're going to keep our foot on the gas here. As it relates to A&F, Q3 performance, you heard us talk about comps there, the down 7%. AUR was sequentially improved. So we did see improvement there. So if you think about the KPIs and the puts and takes, we've seen traffic on the positive side. AUR was still down, but sequentially improved here from the first half into the third quarter. And then we had a little bit of pressure here on conversion as well, but conversion also headed in the right direction. So nice to see improvements in conversion, improvements in AUR and continued engagement from our customers with positive traffic. Operator: Our next question comes from Rick Patel with Raymond James. Rakesh Patel: Congrats on the progress. I was hoping you could double-click on the expectations around SG&A. I know marketing is going to increase, but you touched on being able to mitigate some of that pressure through other areas. So if you can expand on that, that would be great. And then second, just on comps, wondering if there's any variability performance to flag in the U.S. due to the weather or any regional differences. Robert Ball: Yes. So quick on the SG&A side of things, yes, we'll see a little bit of increased marketing investment year-over-year. We've obviously been leaning into this throughout the first 3 quarters of the year. That will continue, but at a slightly slower clip here in Q4. Q4, obviously, with the sales growth, you're going to see some expense leverage on the G&A side of the house. We've been delivering that throughout the entire year. And given the midpoint of our guide, we wouldn't expect a ton of leverage or deleverage in total at the midpoint of that 4% to 6%. We'll see as we have the rest of the -- as we have all year, as we outperform on the top line, you might see some leverage roll through. But again, we're going to be balanced in our investment approach and where we see opportunities to continue to invest in this business for the longer term, we will. Nothing really to call out from a regional standpoint. We've got a really broad store fleet. So weather in one area, it kind of offsets across the board. Might there be a day or a week here in there that you start to see little blips based on weather events, when you think about the broader quarter, it kind of all works itself out, and it's been pretty consistent for us across the regions. Operator: Our next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Congrats on the progress. One more question about Abercrombie. It sounds like a lot of the improvement sequentially was led by Women. Can you just elaborate on what's going on in the Men's side. If I recall, the comparisons there maybe weren't as challenging as what you had in the first half with Abercrombie. So just help us understand what's going on with that side of the business? Fran Horowitz-Bonadies: Janine, it's Fran. Yes, led by Women's but also seeing nice sequential improvement in Men's as well. Again, inventories are clean, super excited about where we are for the fourth quarter. Team has been busy at work, testing and learning all season, so -- or all year pardon me, heading into the fourth quarter to make sure our inventories are where we want them to be, focused on categories like denim, fleece, and sweaters. So we feel good about the fourth quarter, heading into a big week, right, excited for seeing all the excitement out there for Black Friday and ready to compete. Janine Hoffman Stichter: And then maybe one for Robert, just on the tariffs, I think you said $60 million in Q4 net of mitigation. Any initial thoughts on just how to think about that in the first half of next year as you proceed with more mitigation efforts? Robert Ball: Yes. So we've talked quite a while, Janine, around our sourcing footprint. We've been obviously at work at this for quite a long time, starting way back in tariffs, 1.0. We've got a really well diversified sourcing footprint here. We source from over a dozen countries, which obviously gives us a benefit both from a cost negotiation standpoint as well as speed to market, which is obviously core to our model here. I think it's important for us to take a step back real quick and think about how we're entering this next chapter of tariffs. We're coming at this from a position of strength. We're coming off of 15% operating margins last year to go along with record net sales. The teams have obviously been active. We've got a proven playbook here. So they're leveraging the playbook. They're looking at country of origin footprint as well as finding expense efficiencies. And we've touched on this earlier. But while we haven't moved tickets broadly, through the holiday we are taking targeted price increases here for the spring. So that inventory will start delivering here post-holiday. We've done all of that as we've kind of been navigating 2025, and we've delivered record sales for the first 3 quarters of the year. We're positioned to do the same for the fourth quarter. And we've continued to invest in this business and return cash to shareholders. So bought back 350 million shares year-to-date, on track to do another $100 million here in the fourth quarter. So we're doing all this, all while delivering 13% to 13.5% operating margins despite this 170 basis points of tariff impact. So the company is strong. We feel like we're operating and executing at a high level. We'll detail a lot of the components out and the magnitude of some of the stuff for 2026 when we get into our next call. But suffice it to say that we're confident in our ability to navigate this environment. And obviously, our goal is to meaningfully offset these tariff headwinds longer term. Operator: [Operator Instructions] Our next question comes from Janet Kloppenburg with JJK Research Associates. Janet Kloppenburg: Congratulations on the upside. I wanted to ask a few questions. I'll give them to you right now. The tariff impact will be greater in the first quarter than the fourth quarter, Robert? I'm not sure on that. And the price increases, when do you expect those to be complete, like what we see a big bump in the first quarter and then you'll be done. Maybe you could talk to that cadence. And on cadence plan, I thought that the assortments that Abercrombie started to get better in mid-October and continued. And I'm wondering if you saw some response from the consumer on that unless I'm wrong. And then the fourth question is just on promo levels. What you saw in the third quarter year-over-year, what you experienced in the third quarter? And what's your thinking about for the fourth quarter? Robert Ball: All right, Janet. Fran Horowitz-Bonadies: Where do you want to start, Robert? Do you want to start to take the tariff one? Robert Ball: Yes, let's just keep the tariff conversation going here a little bit. So haven't quantified anything related to 2026. But as you think about how this is going to cadence out Janet, we would expect that a lot of our mitigation tactics, which we've been working at for the last 9 months here. Those will start to take hold heading into 2026. So the hope here and our confidence level and obviously, the pricing adjustments that we've made, which I guess is your second question. Those will start to show up here with spring deliveries. So think late December and into January, you'll start to see those tickets go up. And that will just kind of work through as the assortments and the newness flows through into the quarter. As you think about vendor negotiations and all those pieces and parts, that will also start to impact the first quarter here in 2026. So expectation would be that we would see some relief off of that Q4 tariff headwind of 360 basis points. Janet Kloppenburg: Yes, promos, and then Fran can talk to the A&F assortment. Fran Horowitz-Bonadies: Go ahead, finish the promos. Robert Ball: Yes. So from a promo standpoint, we feel good about the cadence that we've been operating under. We've obviously got a track record here of pulling back on promotions and improving AURs here wherever we can. AURs did see sequential improvements from front half into back half across the brands. Hollister is continuing to grow units on lower discounting with higher AURs. So headed into the fourth quarter, we're confident in our promotional plans. We've got the flexibility, and we've got the reactivity to adjust to demand as we see it come through. We're looking to hold those AURs flat for Q4. And like we do always, we'll come in every day. We'll see if we can pull back on a day of promos here, go a little bit shallower there. But it's been a nice formula for us with this multiyear AUR growth, and we're just going to keep -- we're going to keep executing that playbook. Fran Horowitz-Bonadies: And then just real quick on the last piece of that question. So I'm very excited to have announced that we made the progress that we committed to at the beginning of the year that we're seeing sequential improvement in Abercrombie, and that's really across the board in categories. So we're heading into the fourth quarter. We've committed to having clean inventories, and that's where we are. We feel really well positioned, Janet, for the fourth quarter. We are expecting to be -- our goal is to be approximately flat for the fourth quarter. That's on top of a record fourth quarter for last year. So we're happy with the start. The customer is resilient. Our file is growing, as I've said before, our traffic is positive, and we're ready to compete for the fourth quarter. Janet Kloppenburg: You're talking about A&F, Fran. Fran Horowitz-Bonadies: Janet, I'm talking total company, but yes, with A&F specifically, we committed to sequential improvement, and that's what we have delivered with a goal of approximately being flat for the fourth quarter. Janet Kloppenburg: Do you feel like the challenges that you faced in merchandising in the first half at A&F are now behind you? Fran Horowitz-Bonadies: Yes. We committed to getting clean. The opportunities in the first half, which we talked about on both of those calls are really the opportunity that the inventory was much more balanced between sale clearance and regular price. That was something that we didn't really have in 2024. And that's what drove the reduced AUR. As Robert mentioned, we've made sequential improvement in the AUR as we continue to see the customer responding to the newer product. Operator: There are no further questions at this time. I'd like to turn the call back over to Fran for any closing remarks. Fran Horowitz-Bonadies: All right. Thanks, everyone. Just wishing you all a happy holiday season, and we look forward to updating you soon. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Good morning, and welcome to the Analog Devices' Fourth Quarter Fiscal Year 2025 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Jeff Ambrosi, Head of Investor Relations. Sir, the floor is yours. Jeff Ambrosi: Thank you, Gigi, and good morning, everybody. Thanks for joining our fourth quarter fiscal 2025 conference call. Joining me on the call today is ADI's CEO and Chair, Vincent Roche; and ADI's Chief Financial Officer, Richard Puccio. For anyone who missed the release, you can find it and relating financial schedules at investor.analog.com. The information we're about to discuss includes forward-looking statements which are subject to certain risks and uncertainties, as further described in our earnings release, periodic reports and other materials filed with the SEC. Actual results could differ materially from the forward-looking information as these statements reflect our expectations only as of the date of this call. We undertake no obligation to update these statements except as required by law. References to gross margin, operating and nonoperating expenses, operating margin, tax rate, earnings per share and free cash flow in our comments today will be on a non-GAAP basis, which excludes special items. When comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release. References to earnings per share are on a fully diluted basis. And with that, I'll turn the call over to ADI's CEO and Chair, Vincent Roche. Vincent Roche: Thanks, Jeff, and good morning, everyone. So our fourth quarter results reflect the ongoing business recovery with continued growth in revenue and earnings per share, both of which finished above the midpoint of our outlook. Now widening the aperture to our fiscal '25. Revenue accelerated throughout the year and returned to meaningful growth despite the persistent macro and geopolitical headwinds. All of our end markets increased by double digits, reflecting both cyclical and company-specific drivers, including strong execution against our Maxim revenue synergy targets. Top line strength, combined with margin expansion, resulted in earnings per share growth of more than 20% in fiscal '25. Our strong operating results and reduced CapEx enabled us to generate record free cash flow of more than $4 billion or 39% of revenue. We also returned more than $4 billion to our shareholders, supporting an 8% dividend increase as well as share count reduction. Innovation has always been integral to ADI's brand and our value proposition, forming the foundation for strong financial performance. Consequently, R&D activities received capital prioritization with record investments made in FY '25 to advance our leadership in analog, mixed signal and power technologies. We've also intensified our focus on software, digital and artificial intelligence capabilities to strengthen our core franchise, enabling us to address increased customer complexity and expedite their innovation cycles and time to market. Our comprehensive technology portfolio, combined with extensive application domain expertise uniquely positions us to proactively identify and resolve the most complex engineering challenges for our customers. As a result, we're realizing stronger value capture as reflected in the increase in our average selling prices, particularly in new products, where ASPs significantly exceed those of legacy offerings. Beyond product innovation, our dedication to customer success encompasses ongoing investments to streamline and accelerate their product development activities. To this end, we are rapidly expanding our development support environment from research to deployment with a combination of proprietary ADI tools and leading ecosystem and open-source platforms. Furthermore, following the acquisition of Maxim, we've allocated over $3 billion in capital expenditures to substantially enhance capacity, optionality and resiliency for our customers supporting our long-term vision for sustained growth. Now as you've seen, our relentless focus on driving customer success translates to strong results and a diverse design pipeline that grew more than 20% in fiscal '25. So I'd like to share a few examples of our success this past year. Within industrial, every sector grew, driven by improved cyclical dynamics and powerful secular trends such as AI, automation, and the drive for efficient and reliable energy generation, transmission and distribution. For example, the exponential growth in demand for AI and high-performance compute drove a record year in our automatic test equipment business, building upon and extending our strong position in the SoC and memory test markets. We anticipate further growth in FY '26 due to our expanding design pipeline industry transitions to HBM4 and expected double-digit growth in hyperscaler CapEx. In '25, robust automation design and growth was propelled by the burgeoning demand for enhanced productivity, efficiency and reliability across key sectors such as manufacturing, logistics and health care. This momentum was particularly evident within our Robotics segment, which saw notable expansion as customers increasingly prioritized automation to streamline operations and improve business outcomes. As highlighted in our previous quarter, we foresee tremendous long-term opportunity as advancements in AI fuel the emergence of content-rich humanoid robots positioning ADI at the forefront of the next wave of robotics innovation. Within health care, the proliferation of robot-assisted surgical systems represents a vibrant vector of growth alongside our Imaging and Diagnostics segments. Additionally, we expect growing demand for our suite of diabetes management solutions to continue to contribute to growth in FY '26. Energy was our fastest-growing industrial segment this past year, driven by high demand from the industrial, transportation and data center sectors. Design and activity was especially strong for grid management and battery storage systems, and we anticipate continued growth in '26 and well beyond. Aerospace and Defense achieved record results, and we expect further growth in the year ahead, driven by our expanding portfolio of advanced sensor, mixed signal and power solutions, coupled with an increasingly strong opportunity pipeline. We also expect to maintain our strong presence in the growing low earth orbit satellite market. Turning to automotive. Advances in autonomous driving and cabin digitalization led to a record year for ADI in fiscal '25 with growth outpacing light vehicle production. Our intelligent audio and video connectivity solutions, which avoid bulky and expensive cabling, drove multiple new growth awards across GMSL, A2B and our signal processing and safe power portfolios. Building on this success, our new E2B Ethernet bus is expanding our market, simplifying customer systems, boosting power efficiency and lowering costs as it gains traction. In the communications sector, AI CapEx investment led to a record year for our data center segment with design and activity more than doubling. Strong demand for high-throughput connectivity and power delivery solutions support our confidence in continued growth through '26. Wireless communications is one of the few areas of softness in '25 but we believe customers have completed their inventory digestion phase and that the market bottomed during the year. In addition, we see a positive impact of new products such as our software-defined AI-enabled macro base station on a chip solution for which we secured design wins from leading OEMs and service providers and see additional opportunity beyond telecommunications in private industrial networks as well as other secure communications applications. And finally, as consumer markets rapidly evolve, we're expanding our SAM and growing a diverse pipeline by delivering integrated solutions in hearables, wearables, gaming, AR, VR and many related areas. For example, our new Acoustics platform combines analog, power, digital software and machine learning for advanced environmental awareness and adaptive noise cancellation. We've secured design wins for these solutions in consumer and health care segments, enabling ADI to triple the value generated over legacy designs. We've also captured several new power management design wins in premium handsets and smart glasses in FY '25, positioning us for further growth in '26. So in summary, our diversified business model has proven agile and consistently capable of generating superior outcomes reflected in both last year's resilient margins and this year's strong rebound in profitable growth. While we're mindful of the macro environment and the continued impacts of tariffs and trade uncertainty, we remain confident in our growth in FY '26 and beyond as we continue to leverage our key differentiators, namely, an enviable technology leadership position at the intelligent edge as it becomes a center of gravity for a host of secular growth markets, unrivaled application domain expertise and the trusted brand that we have developed and strengthened with our customers over the decades. And so with that, I'll pass it over to Rich. Richard Puccio: Thank you, Vince, and let me add my welcome to our fourth quarter earnings call. I'll start with a brief overview of our full fiscal '25 financial performance. Revenue for the year came in at just over $11 billion, up 17% from fiscal '24, with double-digit growth across all end markets. Gross margin finished at 69.3%, up 140 basis points driven by higher utilizations. Operating margin finished up 100 basis points at 41.9% and includes the headwind associated with the normalization of variable comp. All total, earnings per share of $7.79 increased 22% versus fiscal 2024. Now on to our fourth quarter results. Revenue in the fourth quarter came in toward the higher end of our outlook at $3.08 billion growing 7% sequentially and 26% year-over-year. Industrial represented 46% of our fourth quarter revenue, finishing up 12% sequentially and 34% year-over-year. The stronger than seasonal results underpins the cyclical momentum we see across industrial as well as the secular growth unfolding in AI infrastructure, which drove record quarter for our ATE business. For the full year, Industrial increased 15% with growth across every major application, including record years for aerospace and defense and ATE. Automotive represented 28% of quarterly revenue, finishing up 1% sequentially and up 19% year-over-year. Double-digit year-over-year growth continues to be driven by our leading connectivity and functionally safe power solutions. For the full year, automotive increased 16% to an all-time high, driven predominantly by our higher content and share position across Level 2+ ADAS systems globally. Communications represented 13% of quarterly revenue, finishing up 4% sequentially and 37% year-over-year. Our data center segment surpassed the $1 billion run rate this quarter and on a year-over-year basis has now grown more than 50% for 3 consecutive quarters, fueled by continued strength in the AI infrastructure market. Wireless revenue was up double digits year-over-year for the second straight quarter, owing to improving cyclical dynamics. For the full year, communications was our fastest-growing market, increasing 26% driven by our data center segment, which had a record year, while wireless revenue was flat. Lastly, consumer represented 13% of quarterly revenue, finishing up 7%, both sequentially and year-over-year. For the full year, consumer increased 19%, driven by strong growth in handsets, gaming and a record year for our hearables and wearables segment. Now on to the rest of the P&L. Fourth quarter gross margin was 69.8%, up 60 basis points sequentially and 190 basis points year-over-year, driven by higher utilization and favorable mix. OpEx in the quarter was $809 million, resulting in an operating margin of 43.5%, up 130 basis points sequentially and up 240 basis points year-over-year. Non-operating expenses finished at $60 million, and the tax rate for the quarter was 12.7%. All told, EPS was $2.26, up 10% sequentially and 35% year-over-year. Now I'd like to highlight a few items from our balance sheet and cash flow statements. Cash and short-term investments finished the quarter at $3.7 billion, and our net leverage ratio decreased to 0.9. As I discussed previously, we continue to build die bank buffers for our fastest-growing applications. As such, our inventories were higher by $59 million sequentially while days of inventory declined by 1 to 159. Channel inventory increased but remains lean at approximately 6 weeks. Fiscal '25 operating cash flow and CapEx were $4.8 billion and $0.5 billion, respectively, resulting in record free cash flow of $4.3 billion or 39% of revenue, up from 33% in 2024. In total, we returned $4.1 billion to shareholders through dividends and share repurchases. As a reminder, we target 100% free cash flow return over the long term, using 40% to 60% for our dividend and the remainder for share count reduction. Now moving on to our first quarter of 2026 outlook. Revenue is expected to be $3.1 billion, plus or minus $100 million. Operating margin at the midpoint is expected to be 43.5%, plus or minus 100 basis points. Our tax rate is expected to be 12% to 14%. And based on these inputs, adjusted EPS is expected to be $2.29, plus or minus $0.10. In closing, fiscal 2025 was a strong year, highlighted by a return to growth, margin expansion and record free cash flow. Importantly, I'm confident in our ability to continue navigating macro and geopolitical challenges and believe we are well positioned to drive further profitable growth in 2026. With that, I'll give it back to Jeff for Q&A. Jeff Ambrosi: All right. Thank you, Rich. Now let's get to our Q&A session. [Operator Instructions] With that, can we have our first question, please. Operator: [Operator Instructions] Our first question comes from the line of Vivek Arya from Bank of America Securities. Vivek Arya: I had a near and a medium term. On the near term, I think you're guiding Q1 slightly up, which is a little bit above seasonal. So I was hoping you could give us some color by segment where you're seeing the strength because I do think industrial was slightly below what you had thought in Q4. So just any dynamics going into Q1. And then if we zoom out, when -- say, I mean, if I were to just annualize Q1 guidance, that suggests a very strong kind of 12%, 13% sales growth year in fiscal '26. And I was really hoping to get your perspective as you start the new fiscal year on what you're seeing from a broader macro perspective and whether this kind of growth rate is possible in fiscal '26? Vincent Roche: Sure. Thanks, Vivek. Rich? Richard Puccio: Vivek, I'll take the first part of your question. So Q1, which is our weakest sequential quarter with normal seasonality typically down mid-single digits. And our outlook is up slightly quarter-over-quarter, reflects our seventh straight quarter of above seasonal growth. And another key point is additionally, our outlook assumes sell-in and sell-through are equal. So from an end market color perspective, industrial, we expect to be up mid-single digits above seasonal. We expect auto to be down mid-single digits below seasonal, where we continue to see some risk there around tariff and some of the macro environment. Comms, we expect to be up 10% above seasonal. Again, as Vince mentioned, we're seeing real strength in the AI infrastructure and demand for our data center products. And then consumer seasonally down low double digits. And then all markets, we expect to be up year-over-year. Vincent Roche: Yes. So maybe if we look year-over-year, Vivek, so we believe we're well positioned to see broad-based growth in '26. And I think cyclical as well as many idiosyncratic factors giving us tailwinds. My expectation is that in '26, industrial and communications will lead the charge. I think when you look at industrial and comms, the -- as I said, the cyclical dynamics are good, bringing inventories out there. I think both of those markets bottomed some quarters ago. Data center, which is going to see, again, we believe, a strong surge in CapEx. We've got good exposure to that sector, and it's 2/3 of our comms business at this point in time. Aerospace and defense as well as ATE, which are together about 1/3 of the industrial market. We've got strong content growth stories in both. And coupled with the AI demand surge in the ATE business, I think, is very, very well positioned. And I think as well in consumer, we talked a little bit on the -- in the prepared remarks there about the higher content in key applications. And so we've got tremendous diversity in that business at a level we never had before as a company. So both in applications and customers and platforms, we're well positioned. Last but not least, if I talk a little bit about the auto sector. It's been -- I think SAAR has really been flat now for quite a while. We see that persist in '26. And given that we've been able to show against our 10% content growth per annum, we see that continue given the strength of the pipeline that we've got. But all that said, we've got a very uncertain macro environment. But my expectation is all the end markets will be up despite the outlook from a macro perspective. Operator: One moment for our next question. Our next question comes from the line of Joe Moore from Morgan Stanley. Joseph Moore: Great. Speaking of autos, I think you guys had indicated when you guided the quarter that you'd be slightly down, you ended up slightly up. Can you talk about what's coming in a little bit better? And you guys have been pretty good about helping us understand pull forwards and things like that. Any sign of any activity now? Richard Puccio: Sure, Joe. I'll take that one. So for us, auto has been our strongest market, right, double-digit CAGR through cycle driven by secular content gains, compounded by our share gains, particularly in connectivity and power for ADAS and next-gen infotainment systems. Here, I would note we've had pretty significant share gains in China, which where you see a lot of the light vehicle share getting increased. So that's been beneficial. Near term, the market has been more resilient than we and many have predicted, right, evidenced by the stronger volumes on vehicles. We do think some of the upside we've seen in the volumes in our business this year was tariff and policy related. We've talked in prior calls about our view that there might have been some pull-ins. I can't be precise or certain, but we did make that estimation. And given this, we did approach Q4 with some caution and expected to see -- I think I said on the last call, we thought we'd see some of this pre-buying unwind in the fourth quarter. That did not appear to happen to us. Our results were fairly seasonal and bookings were normal with a book-to-bill just below 1, which is actually pretty typical for Q4. We're still being a bit cautious on the market as it's unclear how the tariffs and volatilities we saw will ultimately impact us and our customers. And also just given short lead time orders, visibility tends to be pretty low right now. So as we think about our Q1 outlook is a sub-seasonal quarter or down mid-single digits sequentially, but up year-over-year. And given the content gains in this market and the positive design win traction that Vince mentioned, we do think fiscal '26 can be another strong year. Joseph Moore: Very helpful. Operator: One moment for our next question. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Stacy Rasgon: I wanted to ask about gross margins. You sort of talked about being at 70% gross margins around $3 billion. So you're sitting over there and you're still -- I mean, even in the quarter, you came in a little below 70%. As far as I can tell, the guidance implies gross margins relatively flattish around that 70% range, you can let me know if that's right or not. But I'm just wondering why we're not seeing more leverage on the gross margin line, especially as utilizations are going up and everything else. Like why shouldn't we expect that more leverage on gross margins? Richard Puccio: Stacy, I'll take that one. So obviously, with our industry-leading gross margins, where you can see the impact that we get from the innovation premium, we did increase quarter-over-quarter and year-over-year, and we did have higher utilization and some favorable mix. We didn't get to the 70% as planned as the mix component wasn't as strong as we were expecting. As we've talked about, we had a much stronger result in auto, which kept the industrial mix a bit lower than we planned, and that's what kept us from getting all the way to the 70%. Now if I look out to Q1, the gross margin percent for us is typically lower in Q1 seasonally, given the annual shutdown factories for required maintenance and around the holidays in conjunction with customer shutdowns. However, based on our outlook, we are anticipating that the higher industrial mix in Q1, which we think will offset seasonal the seasonal component and hold gross margin flat. So you're right, embedded is a flattish gross margin where we get an offset from higher mix, which will offset the pressure from the shutdowns. And then I guess -- and the last piece, as we think about the continued go forward, Stacy, and at this revenue level, one of the things I'd like to remind is we did have a pretty significant capacity expansion while we were addressing our resilience over the last several years. And so it will take us higher revenue dollars to continue to expand beyond 70%. And also, as we've talked about, the continued movement in mix. And given the strength we see in industrial into going into '26, we expect that, that share of our business will continue to increase. Vincent Roche: Yes. I think just one other piece of color, Stacy. The pricing is in good shape. So it's really a question of mix and continuing to push the utilizations. Jeff Ambrosi: Thank you, Stacy. We move onto our next question, please. Operator: One moment for our next question. Our next question comes from the line of Christopher Danely from Citi. Christopher Danely: Just to follow-up on Stacy's question. Has the relative gross margin levels, have those changed at all between the end markets? Have any of them gone up or down versus the corporate average, I guess, just to cut to the chase, is -- have the auto gross margins gotten a little worse relative to the corporate average over the last like 2, 3 years or anything else changed? Richard Puccio: Chris, I would say that the way it was characterized the individual end market margins versus average has not changed, not in any meaningful way. Operator: One moment for our next question. Our next question comes from the line of Timothy Arcuri from UBS. Timothy Arcuri: Vincent, you talked about Maxim revenue synergies. Can you update us on that? I know you said you're on track, but maybe you can give us a sense of where that stands. And then Rich, can you tell us sort of what your sense of like a normal fiscal Q2? It seems like normal seasonal in fiscal Q2 is up like mid-singles. Is that sort of how you think about a typical fiscal Q2? And then maybe like what are the puts and takes as you kind of head into fiscal Q2? Vincent Roche: Yes. So Tim, I'll start with the synergies. So we began the conversion process, the conversion of the pipeline in '24 and began in earnest in '24. It contributed tens of millions of dollars to ADI's top line in '24. It's clearly accelerated in '25, and it's in the hundreds of millions against our $1 billion target by '27. And we expect an even stronger contribution in '26 given the momentum that we have in terms of new products and cross-sell. So we're seeing -- as we said, when we acquired Maxim, we saw tremendous complementarity in terms of some technology niches that Maxim filled, particularly in areas like power, these connectivity structures that we use in automobiles and now in industrial products. So the complementarity actually works for ADI right across the spectrum of applications, but particularly although as I've just said, consumer, health care and data center. So I think we are well on track to meet our commitment, possibly even a little earlier than what we thought. Rich, do you want to take that? Richard Puccio: Yes. Tim, you're absolutely right. Our Q2 tends to be our seasonally strongest quarter where we tend to be up mid-single digits. I think that's the right way to think about it. Jeff Ambrosi: Thank you, Tim. We move onto our next question, please. Operator: One moment for our next question. Our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: Vince, in your prepared remarks, you talked about ADO drivers led by AI in the data center. And I was hoping you could perhaps speak a bit more to a framework that we should be thinking about across both industrial and comms. Obviously, you dominate semi test analog. You've got some real design wins on the optical and power side. And then you also spoke about energy strength. So is there kind of a percentage of mix that we should be thinking about that should be growing significantly faster than the rest of your business? And if there's kind of numbers around that, that would be very helpful. Vincent Roche: Yes. Maybe I'll just give some color and Richard can give some numbers. Yes. So look, specifically when we talk about AI, there's the data center and the ATE businesses. And if I look at data center in '25, it grew about 50% and the ATE business, which also benefits from the skyrocketing compute intensities, the new memory types that are being used as well, new memory chips. That business -- so the ATE business grew at 40% last year. And we can -- we believe we'll see that growth continue in '26. If I just talk about where we are, data center, I think as Rich said in the prepared remarks, is running about $1 billion run rate at this point in time. And there are really 2 primary sectors there. One is at the electro-optical interface, and we're seeing tremendous upsurge in demand for 800 gig. Now we're seeing 1.6 terabit electro-optical interfaces that require very, very sophisticated power management and control systems. And then there's power more generally, I think, in the areas of protection, we're beginning to see a shift in very, very high-voltage technologies that require very sophisticated monitoring and control. There's power conversion and power delivery. And we're seeing our portfolios in those 3 areas gain significant traction. On the delivery side, we had mentioned before, vertical power. That technology now is beginning to be adopted broadly. So we're at the kind of -- we use the term in the electronics industry, we're at the knee of the curve. We're beginning -- I think we're in place to see exponential growth there. ATE, $800 million run rate. And as I said, very, very well positioned with all the key players, both the vertically integrated players as well as the OEMs in chip testing. And as the shift to HBM4 takes place, we're going to see higher pin count, more complexity, more speed, basically more instrumentation compute density in our chips. So I think we're in a good place from a customer engagement standpoint, from a technology standpoint. My sense is we should see double-digit growth in both those areas over the next few years. Rich, do you want to add anything? Richard Puccio: I will add my concurrence on your view about the outlook for the next few years in these areas. I look at -- if you look at the external factors, particularly around the data center piece and the high-performance compute, the like forecast continue -- forecast from all of the hyperscalers and the big buyers in the space continue to go up. And even recently, several of the large hyperscalers have added even further increases to their CapEx plans. So I do think that, that near medium-term spend is going to continue, and we should be a big beneficiary given our strength there. Jeff Ambrosi: Thank you, C.J. We move onto our next caller, please. Operator: One moment for our next question. Our next question comes from the line of Harlan Sur from JPMorgan. Harlan Sur: One of the other strong dynamics among several, which separates ADI from peers is obviously the strong exposure to aerospace and defense. This has been a growth area for ADI during this last downturn. I think the business is now driving well over $1 billion of annualized run rate revenues or roughly greater than 10% of your total revenues. It grew strongly double digits in fiscal '25. Does the team anticipate continued strong double-digit growth in fiscal '26? And maybe help us understand like what are some of the ADI-specific product cycles here that's going to continue to drive the strong growth profile going forward? Vincent Roche: Yes. Thanks very much for the question. So yes, I'd say the journey for ADI in that aerospace and defense market really took off in earnest when we acquired Hittite. And we got Hittite's really high-quality RF and microwave portfolio, which is central to all the communications activities right across the aerospace and defense market from defense systems, and every type of defense system you can imagine to satellite communications. The primary portfolios we have there are obviously microwave and RF sensors, the highest performance conversion products that we build on the precision and high -- very, very high-speed signal processing side are central. And increasingly, when we acquired LTC and Maxim, we were able to cross-connect with all those signal processing technologies, the power tech, all the power management technology. So if you look then at the market drivers, you've got -- the world isn't becoming any more peaceful. So there's going to be increasing capital deployment to build defense systems globally. We're seeing very strong demand and increasing demand in Europe and beyond. And we work with all of the primary OEMs. And so that -- all that coupled with increasing ASPs. I mean some of these products we built attract tens of thousands of dollars per system. So I think that business has the capacity by the end of the decade to more than double. Jeff Ambrosi: Thank you, Harlan. We move onto our next question. Operator: One moment for our next question. Our next question comes from the line of Joshua Buchalter from TD Cowen. Joshua Buchalter: Congrats on the strong results. I wanted to follow up on the comments about fiscal 2Q being a seasonal plus mid-single-digit percent. Could you maybe speak to what's driving the confidence in the visibility there? Any metrics you're able to give on lead times? And then bigger picture, how is your visibility looking forward changed as the mix has changed? Like do you think compared to a couple of years ago, there's more of your exposure tied to ADO drivers like aerospace and defense and data center, and that's increasing your visibility? I'd just be curious to hear because you mentioned there was some uncertainty on the shape of the year in the press release, I'd be curious to hear how you're feeling about visibility. Richard Puccio: Thanks, Josh. So first, I didn't guide for Q2. I confirm what the historical seasonality is. As we've been talking about, right, we still have -- don't have a ton of visibility beyond current quarter plus 1, right? As we've talked about, the lead times are -- most of our products have lead times sub-13 weeks. So we get a lot of orders in quarter. We get a lot of quarters -- a lot of orders with short lead times, which does reduce some of that visibility. So I think on the first part of your question, I don't think we've necessarily seen an improvement in visibility over the last 2 years. Although I do agree, I think that the -- we've now got broad strength in a number of the ADO areas that Vince described. But given where we are from an inventory on hand position as well as our cycle times, we're not getting a ton of outside of a quarter visibility. Jeff Ambrosi: Thank you, Josh. And we'll move to our last question, please. Operator: One moment for our next question. Our next question comes from the line of Tore Svanberg from Stifel. Tore Svanberg: Yes. So Vince, ADI has been always very thoughtful about allocating R&D dollars and the economy is changing in the front of eyes structurally quite significantly here. So how are you thinking about prioritizing your R&D spend right now? And are there any areas you would like to double down in and perhaps areas you would like to deemphasize as a company? Vincent Roche: Yes. Thanks, Tore. Yes. When I look at the analog space in the core analog business, we continue to push the edges of signal processing, data conversion systems and precision as well as very, very high speed. I think power management for ADI is still an opportunity with a lot -- a much, much bigger growth story. So that is a place that as we've gone through our strategy planning cycle in the last few quarters here, we're doubling down on for sure. The -- there are areas as well of our digital portfolio where we see very, very strong niches for what we do in terms of, for example, low power, low latency, these heterogeneous compute structures as well as algorithmic technologies. So I mentioned during the prepared remarks how we're enhancing the functionality of our core analog technologies by using machine learning techniques, for example, in base stations, in the consumer areas as well. So -- but I think most of what we do is making sure that we have the platforms to be able to compete globally across all the geographies, across the spectrum of markets that we find most attractive, solve the most important problems. And what I can tell you is that our customers are asking us to do more and more to tame their complexity and help them speed up their innovation cycle. So that's -- when we think about the investment portfolio. We're very opportunity-rich. And we've got a very high-quality problem, which is picking the most valuable opportunities in that spectrum of -- let's repeat with opportunity. Jeff Ambrosi: Thank you, Tore. Thanks, Tore, and thanks, everyone, for joining us this morning. A copy of this transcript will be available on our website and all available reconciliations and additional information can also be found in the Quarterly Results section of our Investor Relations website. Thank you for your continued interest in Analog Devices and Happy Thanksgiving. Operator: This concludes today's Analog Devices' conference call. You may now disconnect.
Operator: Hello, everyone, and thank you for joining us today for GBG First Half Results for Fiscal Year 2026. My name is Sammy, and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to your host, Dev Dhiman, CEO, to begin. Please go ahead, Dev. Dev Dhiman: Good morning, everyone, and welcome to the GBG results announcement for the first half of fiscal year '26. We are pleased with the progress that we've delivered in the first half of the year, we're on track to meet our financial plan for FY '26, and we're confident in the acceleration that we'll see in the top line growth as we enter H2 and beyond. Whilst today is a chance for us to take you through the financial results, it's also a chance for us to remind you of the impact GBG has on the world at large in how we enable safe and rewarding digital lives for genuine people everywhere. The slide on the screen here speaks to that impact and the scale at which GBG operates. And I'm really proud of the mission that drives every one of Team GBG to show up and give more every day of the week. The statistics on this slide also serve to remind us all that the majority of the GBG business continues to perform strongly. However, we are very clear as to where the acceleration will come from, from here. 18 months ago, you heard me talk about the need for us to focus on 4 foundational areas. I'm really pleased with the progress we've made on each of these, whether that's in the way we've come together as a single global brand to remove complexity, whether that's how we've now recently signed to migrate our entire cloud to AWS to make sure we are globally aligned, whether that's the launch of GBG Go in April, driving our innovation agenda or whether that's the way we've rebalanced and reworked our entire performance frameworks for our people. We feel like a lot of the heavy lifting on these 4 areas are done, and therefore, our attention is now firmly turning towards driving shareholder value, in particular, through accelerating the top line. So how will we focus on creating shareholder value? We'll focus on 4 key areas. The first is around protecting and growing our amazing customer base. The second is about winning more new logos, more customers that need to work with GBG. Thirdly, we will unlock synergies in the GBG operating model. We've made some good progress on being globally aligned and removing complexity, but we think there's even more we can do, not just to drive efficiencies, but also to drive top line growth. And lastly, following a period of really hard work to get our balance sheet into a much stronger position, we'll talk about how we will optimize capital allocation. In my section, I'm going to focus on how we will drive revenue and unlock synergies. David will come back to talk about how we'll optimize capital allocation in his section. The good news is, underneath those key pillars, there are really only three things that matter. The first is how we complete the turnaround of our Americas business. The second is how we transition to the GBG Go platform. And the third is how we evolve our operating model to better serve customers, to innovate more quickly and to drive efficiencies that we can then redeploy into go-to-market. So let's start with, I'm sure what's on all of your minds, the Americas and where we're at with the turnaround. When I spoke to you 6 months ago, I talked about how we needed to strengthen the leadership team, execute the turnaround by driving productivity and focusing on metrics, evolve our commercial model away from pay-as-you-go towards subscriptions and commitments to lead with the GBG brand and to focus our teams on long-term growth and not distract them with short-term headaches. So where are we up to? So when it comes to our leadership team, in the first half of this year, we have appointed 6 new leaders. And it's important to stress those leaders come with deep industry experience. These are not people figuring out how to do this for the first time. Some of the measures that give us confidence that we're on pace for the turnaround. In the first half of this year, we have driven 4x more new business than we did in the first half of last year, and we're activating that new business more quickly with 28% faster in taking a deal from signature to go-live and ultimately when we start to earn revenue. In terms of our commercial model, standout progress with 8 renewals in the second quarter signed with a minimum commitment, almost the first time we've done that as a business. More encouragingly, as we look ahead, 74% of our upcoming renewal pipeline contains minimum commitment that's already been socialized with the customer. In terms of leading with the brand of GBG, you can see on the page a screenshot of the team at Money20/20, where we showed up as one team. That wasn't just Americas Identity. It was also the GBG Locate business showing up alongside our Americas Identity colleagues, really turning up as one business as GBG. And then lastly, as we focus on long-term growth, we took the decision this year to sunset a legacy platform, one that was creating significant distraction for the team and one that was never going to get our business to be a stronger underlying one, which is our complete intent as to how we focus on making decisions that drive the Americas business forward. Turning now to GBG Go and our transition to a platform business. At the end of FY '25 in our results presentation, you saw me demonstrate the benefits of Go for our customers. But today, I want to focus on the benefits of Go for GBG. We are confident that Go will increase the pace of our growth through the ability to win new customers. That momentum will build confidence in our teams and accelerate the opportunity to upgrade existing customers, driving cross-sell and upsell. Go is an adaptive platform. It's built for what's to come. It will meet evolving customer needs and drive advocacy and also improve NRR. From a technology perspective, Go enables us to rapidly innovate, build once and scale globally, releasing new capability to customers at the flick of a switch. The outcomes of our focus on Go will be accelerated growth, sustainable differentiation and a platform that unlocks efficiencies at GBG as we focus on 1 and not 16. And lastly, let me talk about how we will evolve and transform the GBG operating model. Really, there are three flavors to this initiative. The first is how we move to a functional organizational structure. Again, we've talked about the need for GBG to be simple and to align globally, and this is about taking that and ensuring it's embedded in our DNA. It enables us to ensure that we prioritize the key initiatives because we're now prioritizing across the whole portfolio and not by business unit or segment. And obviously, it reduces cost and duplication, which enables us to reinvest into our key initiatives, largely our go-to-market function. The second flavor of this initiative is how we innovate at a scale that we've not done before. By investing in a GBG-wide innovation system, we will deliver on the opportunity to combine all of the assets that we have in the GBG shop to create powerful new solutions for our customers. And lastly, this is also about driving improvements in our go-to-market. As a business, the majority of our revenue comes from about 15% of our customers. And we need to focus on those customers differently and treat them as GBG customers, not as identity or location or fraud. We believe our focus in this area is a meaningful revenue accelerator. And by increasing singular ownership of our largest accounts, we'll be hardwiring cross-sell into pay plans and the targets that we set to our salespeople, no longer relying on collaboration and lead sharing across teams. So what does all of that mean? It means that we are really clear on the three priorities that will make our boat go faster. And this is already turning into tangible benefits in the first half with more to come in H2 and beyond. So let's just give some of the key highlights. So driving the Americas turnaround. Year-to-date, we are on pace. We've got encouraging early proof points. I've spoken about those just now. And in the second half, you should expect the Americas business to return to growth by our continued focus on driving go-to-market execution and further improving some of the metrics I've spoken about. GBG Go and our transition to the platform. We launched the platform in April. We've had 18 new customer wins in the first half. And we've also integrated 200 digital identity schemes into the platform, which those 18 customers now have access to. In terms of what's ahead, we have a very strong sales pipeline, which we will execute in second half. From a capability standpoint, next on the road map is our no-code release and also really excitingly, our AI-driven insights module, unlocking synergies in the GBG operating model. In the first half, we have signposted a move to a global functional operating model. We have already combined our product and technology teams under single leadership, and we have created and funded the GBG innovation lab. In the second half, we'll continue the move to a functional model. The next phase is really focused on our go-to-market teams, and we'll continue to find efficiencies to reinvest in our key priorities. And lastly, how we'll optimize capital allocation. After a period of really hard work in getting our balance sheet into a much stronger place, GBG is now returning to optionality in how it deploys its free cash flow. In the first half of the year, we executed GBP 35 million in share buybacks, and we completed the first acquisition of this management team with the integration of DataTools in Australia, a business that we've worked closely with for a number of years and made huge sense strategically and financially. And as we look ahead to H2, this morning, we've announced a further GBP 10 million buyback as we continue to deploy our free cash flow to drive growth and shareholder returns. With that, I'm going to pass to David to take us through the financial results. David Ward: Thank you, Dev, and hello, and good morning, everyone. Thank you for joining us. I will now take you through a more detailed review of GBG's financial results for the 6-month period to the 30th of September 2025. We are pleased that the results we delivered in the first half of this financial year are in line with the plan that we built for this year and represent the operational progress that we are making towards an accelerating top line. We delivered revenue of GBP 135.5 million, which represents growth of 1.8% in constant currency terms. Setting aside two short-term impacts that were fully anticipated and which I will explain more shortly, constant currency growth on an underlying basis was 4.4%. This illustrates the improving momentum that we have already generated and which underpins our confidence in delivering a similar level of revenue growth in the second half of this year. Adjusted operating profit, also on a constant currency basis, increased 4.6% to GBP 29.5 million, reflecting our continuing cost control and profit margin control. Cash conversion remained strong at 85.8%, leading to a net debt-to-EBITDA ratio that remained below 1x at GBP 66.6 million. And demonstrating the Board's confidence in our plan, we have in FY '26, already before today committed a total of GBP 46 million in shareholder returns. And as Dev has already outlined, we have today announced a further GBP 10 million of share buyback. I can confirm that we are today reiterating our financial outlook for the full year, which is in line with consensus. So now let me provide an overview of the income statement here presented on an adjusted basis with the statutory format included as an appendix to this presentation. The headline is that we have maintained our strong control of margin, while at the same time, we have recycled cost savings from our ongoing transformation to a single global platform business into our growth-focused priorities, specifically for our largest segment of Identity. On a reported basis, revenue declined by 1% to GBP 135.5 million, but in constant currency terms increased by 1.8%. Our gross profit margin improved by 40 basis points over the prior year as we continue to focus on pricing as well as disciplined management of our data and cloud hosting costs. Adjusted operating expenses reduced by 1.5%. This too was impacted by FX translation. And on a constant currency basis, operating expenses increased by just 1.1%. That led to an adjusted operating profit of GBP 29.5 million, which represents an increase over the prior year of 4.6% in constant currency terms. As expected, our net finance costs decreased over the prior year as a result of the lower average level of net debt. And on tax, our effective adjusted tax rate for the period was 23%, which is a little lower than the 25% that we still expect for the full year due to accounting timing differences. As a result of the combination of the growth in adjusted operating profit, the reducing finance costs and tax charge, adjusted diluted earnings per share increased by 12.6% over the same period last year. As I said in my last presentation of our FY '25 full year results, we planned to continue with our business transformation initiatives and the costs associated with a few of the larger discrete items have been recognized as exceptional costs. These included the costs incurred in the period on our business systems unification and data insights projects as well as the costs of our move from AIM to the Main Market. The total cost recognized in the first half was GBP 3.6 million. Across the next two slides, I have more detail and analysis to explain the key dynamics behind our revenue performance. As I have already said, on a reported basis, revenue declined by 1% to GBP 135.5 million, but in constant currency terms, increased by 1.8%. That 1.8% was impacted by two short-term factors that we feel has somewhat masked the progress we have made in building greater momentum. The first of those two factors is the fully expected impact of high project-driven transaction volumes for Santander U.K. in the first half of FY '25. And the second is a decision we have taken to retire one of our legacy technology platforms as part of the Americas turnaround. As you can see from the bridge chart on this slide, without those impacts that both relate to our Identity segment, the underlying growth in the period was 4.4%. We feel it is important to share this sign that we have generated improved revenue momentum and also most importantly, because delivery of our plan for the full year assumes that we will continue to grow at approximately the same rate in H2, when there is no headwind from the Santander volumes and the headwind from the platform retirement is much smaller. My last comment on this slide is that we continue to enjoy a high proportion of repeatable revenue at 95% of our total. And we have a clear focus, as you have already heard from Dev, on increasing the 54% of that, which comprises subscription revenues. We now move to our rolling 12-month metrics and a reminder that these cover our two core segments of Identity and Location, covering 93% of the total group revenue. Global Fraud Solutions, our smallest segment, is excluded. It's pleasing to see the strong growth from new logo wins with this increasing to 4.1% for the last 12 months. This was assisted by a couple of larger wins with enterprise customers in the Location segment. We continue to see opportunity for us to maintain a growth rate of 3% to 4% from this factor, particularly as we make progress in closing the strong sales pipeline we have for GBG Go. Net revenue retention at the 30th of September was a little lower at 97.8%, but this was impacted by the short-term factors that I have already mentioned and which affected our identity growth rate. Excluding these, the trend for net revenue retention has been holding quite steady at around 100%. We continue to see improvement in net revenue retention as our largest opportunity for driving an overall growth rate improvement. And Dev has already outlined a number of initiatives that we are prioritizing to get net revenue retention back sustainably above 100%. Moving on to how each of our reporting segments performed. Identity, which represents 63% of total group revenue, grew 0.4% in constant currency terms and broadly maintained a consistent contribution margin. We generated strong growth in APAC and EMEA, although, of course, the EMEA growth was impacted by the unusually high Santander volumes in the prior year. While we had a small decline in revenue in Americas, we have been pleased with how the business is generally much more stabilized and gross retention has improved. The turnaround project has the highest level of focus and the momentum we carry into H2, together with the improved sales pipeline, we have confidence that this important component of our business will return to growth in the second half of the year. And Dev has already mentioned the encouraging early signs for GBG Go. Setting aside the two short-term factors that affected the first half and the comparative period from the last financial year, there is a trend for an improving growth rate in Identity. Location, which represents 30% of total group revenue, continues to be the main growth engine for the group with constant currency revenue growth of 4.8% in H1. That was despite some tariff-related softness in Q1. In terms of notable customer activity, we were pleased with our wins at Urban Outfitters and Alibaba and our scaled-up renewals at Shein and TalkTalk. Growth via our partner channel continues to be strong with customers like Oracle. And similarly, large enterprises like Microsoft are also recognizing the value of GBG's market-leading global addressing data for use in their own data quality processes. And finally, our smallest reporting segment of Global Fraud Solutions, which represents 7% of group. In this business, we are continuing to see very strong customer retention and subscription renewals, including the logos included on this slide. New business and the related implementation services has been a little bit weaker than a couple of years ago. And overall, we are reporting 1.4% growth. The contribution margin from the segment has expanded considerably as a result of the strategic review undertaken last year and which has led to some material cost reduction, which allowed investment to be redirected to our highest priorities of Americas go-to-market and the continued advancement of GBG Go. And then finally, and before I hand back to Dev for some closing remarks, a few comments on the balance sheet and capital allocation. As I said in our last year-end presentation back in June, with our debt leverage coming into this year comfortably below 1x EBITDA, we did feel that for the first time in a while, we had a greater degree of optionality on capital allocation. And so we have been proactive in utilizing that optionality to drive improved shareholder value. Firstly, of course, we paid the final dividend declared in respect of the previous financial year. And we have been continuing with our investments via exceptional items into our transformation initiatives and the costs of our move-up from AIM to the Main Market. We are confident that these initiatives will achieve strong returns for shareholders. We have also announced two share repurchase programs prior to today, the first ever in GBG's history. Those totaled GBP 35 million. Including the GBP 10 million that we have announced today, we have committed to share repurchases totaling GBP 45 million, with GBP 17 million of this completed in the first half of the year and a further GBP 28 million now committed to be completed by the end of the financial year. Given the share prices that we have been executing these programs at, we expect that in total, we will have repurchased approximately 7% of our issued share capital, and this should drive EPS accretion on a fully annualized basis of close to 4%. And finally, we were very pleased that we were able to add the DataTools business and team into the group. This was a financially attractive bolt-on opportunity to acquire a business that was known to us and which will add additional scale in a market where we are already seeing strong growth. Based on these capital allocation decisions that we have taken so far this year, we still currently expect to be able to exit this financial year with a net debt-to-EBITDA ratio of approximately 1x. With that, that concludes my section. Now back to you, Dev, for some closing remarks. Dev Dhiman: Thank you, David. So let's close out with a summary of some of the key messages you've heard today. 18 months ago, I said that GBG was a high-quality global business with scale, and that rings out even more truly today. I said we needed to focus on getting strong foundations in place for what was to come. And I think we've done a great job in getting that to a place where we can now turn our attention to driving acceleration of the top line. In the first half, we've shown exactly how we will deliver effective capital allocation through the buybacks and acquiring DataTools in Australia. And what you should really take away from this is that we have a very clear strategic direction, a direction that means that our focus on Americas, Go and our operating model will make the boat go faster. We have confidence in improving growth rates and those growth rates start to improve in the second half and beyond. Thank you all for your time, and we will now turn to questions. Operator: [Operator Instructions] Our first question comes from Andrew Ripper from Panmure Liberum. Andrew Ripper: I hope you can hear me okay. I got two questions, if that's okay. First question is for Dev. You counted through quite a few KPIs there, Dev, in relation to North American Identity. I wonder if you can tell us a little bit more about where you are winning, where the new leadership team is making a difference. And when you referenced that new bids have been 4x the level of the previous year, how significant is that in terms of being a delta on future revenue? Dev Dhiman: Thanks, Andrew. Sorry, we're waiting for your second one to come through at the same time. So I can take that. So I think as you said, we've seen some encouraging proof points as to where we're at with the Americas turnaround. And obviously, it is one of our three key focus areas, and we're putting a huge amount of effort and energy into making sure that we are on pace, which we feel like we are. I think in terms of some of those metrics, so 4x more new business, not only that, we're also activating that new business more quickly. You all know as a SaaS business, signing a deal is great, but then actually getting the customer live is as important, if not more. And we've seen encouraging progress on both of those. One of the reasons why we have won more new business kind of plays to your supporting question, which is we are focusing much more on where we win, and that's financial services, fintech and gaming. So almost all of that new business has come from those three verticals. And as a result, our win rate has ticked up. We've also seen in Americas where a customer has a more complex need and a larger order value, our win rate again increases. So we're getting much more analytical with Tom now at the helm and doing some of the things that he's done in former turnaround roles that he has performed. In terms of significance, it varies. A lot of those deals will be mid-market, but a couple of those, and we talked about price picks before, are more significant in terms of their revenue has until this year. Operator: Our next question comes from Nick Dempsey from Barclays. Nick Dempsey: I've got three, if that's possible. First of all, can you give us some more color on the initiatives that you have in place to get NRR back over 100%? And do you expect to be at least 100% in H2 2026? Second question, can you talk about the strength of your data relationships with the key credit bureau, Lexus, et cetera? Are you confident that you will have all of the existing data built into your offerings for many years to come? And is that starting to prove a real competitive advantage for retention and new logo wins? And then the third question, do you have any more legacy platforms, which could be in line for sunsetting, which could be a headwind at some point? Dev Dhiman: Thanks, Nick. I will maybe start with some of the color on the initiatives and then let David comment on the point around 100%. So I think we -- I think the good news is that, again, I'll just refer you to three key initiatives that drive NRR. The first is Americas, which has been a laggard in terms of revenue growth and therefore, NRR. And I think we've spoken already to Andrew's question and in the presentation around the work we're doing there. The second is Go, which we think obviously underpins our NRR because we moved to a licensed model versus consumption model. And obviously, we think the opportunity to drive cross-sell and upsell is significant. And the third is our operating model. You heard me talk in the presentation around how the majority of our revenue comes from, it's effectively an 80-20 rule, 80% of our revenue from 20% of our customers. And by focusing more on those 20%, I think that's where we see a big opportunity to upsell and cross-sell the whole breadth of GPG solution rather than treating them as a kind of divisional customer, if that makes sense. Maybe, David, you can talk about the kind of trajectory of NRR. David Ward: Nick, thanks for the question. I think a couple of points I'll just add to Dev's commentary there. I think the other point that I think came through in the presentation we just gave was also how we're now seeing the benefit of pricing coming through. That's been a really big focus for us for the last 18 months or so. And that's now much more embedded into everyday practice for our go-to-market team. So that's also having an impact for us. In terms of where do we expect it to get, we've talked that -- we've said previously that across the medium term, we do think that NRR should be able to get back to 105%, so that's our goal. That's probably a goal for a few years out. And we see sort of a relatively steady improvement towards that sort of number. For the second half, specifically, we will still have a bit of a headwind from the short-term factors I mentioned in the presentation. But I think the combination of what we're doing, plus particularly the improvement in gross retention in the Americas, which I talked about, I think should see us get back to 100% even before making any adjustment for Santander. Dev Dhiman: And then moving to your second question, Nick, around data relationships with bureaus or credit reporting agencies. I think the short answer is strong and strengthening. If, for example, for a couple of years now, we've been the only provider in the U.K. that has been able to have access to all three bureaus that operate here. Similarly, in ANZ, since Experian acquired Illion, we've now stepped in -- they have now stepped into our very close commercial relationship that we previously had with Illion and is now with Experian, and we've extended the length of that contract also in the first half. And in Americas, alongside everything you've heard me talk about, there's a lot going on, and therefore, we focused on the key things, but there's also work underway to drive data advantage and some early conversations with some of the people we've spoken about. So I think we feel like we're in a good place. Obviously, it's my background. For many years, we worked really closely with all three bureaus, large global bureaus as well as [Illion]. And it's an area where we continue to have a strong relationship and are talking about more what they could also take from us. And then the third question around legacy platform. So I think really important to remind everybody, we currently talk about having about 16. In the first half, we have taken the action to retire two. And those two are the ones that were most obvious to retire, the ones where revenue was going in the wrong direction and was not significant, but also cost was high and therefore, made them really easy decisions. The next 14 won't be as easy. And Nick, just to reassure you, what we're not saying is that as we retire those 14, we're going to see revenue go the wrong way. Our focus is on driving revenue growth, not shrinkage. And therefore, we're going to be really deliberate and mindful as to how we upgrade those customers to Go over the next 5 to 7 years. I think the good news in that is that there are operational efficiencies that, therefore, are not one-off, and we'll continue to see those over the midterm, and those will continue to help us drive reinvestment into our key priorities of Americas, Go and go-to-market. Operator: Our next question comes from Gautam Pillai from Peel Hunt. Gautam Pillai: I had a couple of questions on Go and to the comment you just mentioned, Dev. So when you migrate customers to Go, what is the typical level of recurring revenue uplift you're seeing per customer? And also beyond compliance and onboarding, what would you see are the differentiated capabilities of Go that kind of ensures pricing power and stickiness against competition? And one more follow-up on pricing generally, especially in the U.S., are you seeing customers push back on pricing at all? And how are the competition strategies kind of evolving from a discounting standpoint? Dev Dhiman: I can probably have a go at both of those and David, you can chip in. So I think on Go, Gautam, just important to remember that in the first half and probably for the rest of this year, our focus is on new business. We are not launching a migration of customers across. We have offered customers on the compliance platform the opportunity to move across, but -- so the answer to your question from a proof point standpoint is it's too early to say what the NRR uplift has been and will be. We think it's accretive to growth. But for right now, it's too early. The reason we think it's accretive to growth, though is your second question in that, which is the differentiated capability. So really Go moves us away from an onboarding solution into an insights platform. When we talked in the presentation about some of the things we're doing to get our data into better shape, it's also that we can deliver more insights to customers. So how are -- how is a gaming company performing in terms of its onboarding against its competitor set? What other things could we deploy into the workflow that will increase both the customer experience, making it better, but also increase the number of accepted customers and reduce fraud. So it's the analytics and the insights that we think will really differentiate us. We already have the underlying capability. So this really puts the icing on the cake is the way we think about it. And then on pricing, so I think a little bit linked back to the question around NRR. We're not waiting for Go to drive NRR. Some of the work we've done in the second quarter, in particular, in Americas to get 8 customers to renew with commitment has been driven partially through a pricing conversation. So a conversation that says, you've got the opportunity to defray price increases by signing up for commitment. The really good news is we have not had to give any of those 8 customers a haircut on price to get them to commit. It's the benefit of having someone that's done this for 20 years, Joe, who's joined our team to run our account management book, just driving best practice. We are also in Americas, launching pricing initiatives, especially around the long tail to see where we can see uplift. And those have not yet been launched, but the work that's underway, and we'll update you on those as we close out the year, I'm sure, in June. Operator: Our next question comes from Kai Korschelt from Canaccord. Kai Korschelt: I had a couple and just one is just to follow up on pricing, maybe more at an industry level. I mean it seems like there are a lot of players in the identity verification space. And I think previously, Dev mentioned that there's been sort of a downward trend on pricing. So I'm just wondering how do you plan to avoid commoditization, I guess, if that's the right word, and offset pricing pressure. It seems like Go is an important part of it, but just sort of more general, if you had any thoughts on a midterm basis, that would be helpful. And the second one was just around the capital allocation and specifically, how do you weigh, I guess, doing more share buybacks versus paying down debt as you also get accretion from lower interest cost as you've obviously shown in the half. Dev Dhiman: Thanks, Kai. So I'll take the pricing one and David maybe can chip in on the capital allocation. I think it's really important. It's another good example and an opportunity for me to remind everybody that the majority of our business, we have been really successful in maintaining and increasing price, be that the identity business in APAC, EMEA or the Location business worldwide. So really, where we've had -- where we've suffered on NRR has been Americas and part of that has been the commercial model, which has been pay-as-you-go. We think about pricing as a growth lever. We've demonstrated that, as I said, in most of our businesses, and we'll shortly be testing that in Americas. The ability for us to move customers to minimum commit underpins my confidence. And what else underpins my confidence is the fact that the majority of our industry is pricing in that way. So in Americas only, we are catching up. The point around commoditization, I think you kind of answered your own question, Kai, Go is what we think will differentiate us, in particular, the move to an insights-driven platform rather than a point in time tick in the box, which is never what we were, but I think that's kind of the underlying question that you have in the question that you've asked. And maybe, David, on capital allocation. David Ward: I'll pick up the question on capital allocation. I think we feel good that we've got much more optionality than we've had for a few years now. I think it's been great coming into this year with a level of debt below 1x. As I outlined in the presentation, the actions we've already taken and the decisions we've announced will probably mean that we exit this year at about 1x EBITDA to net debt leverage, which I think we feel very comfortable with. And obviously, at the moment, very aware of where the share price is at and particularly versus the level of interest costs that we've got on our debt, buying back shares is attractive for us at the moment. I mentioned in my presentation that based on what we've announced in terms of share buybacks, based on our forecasting assumptions, we expect about 4% accretion to EPS on a fully annualized basis. So that's pretty attractive. At the same time, it's been great that we've been able to execute our first acquisition in a while to be able to add a relatively small bolt-on business, but actually a business that gives us a bit more scale in a market that was already enjoying good growth. So we've added a business that was growing. It has got good profit margins, and we've added some very capable team members in a region that's important to us. I think it is also attractive. So it's great to have sort of that full range of options around how we deploy capital. But I guess the punchline is we are very focused on delivering improved returns for shareholders, and we will deploy capital in the best way to be able to do that. Operator: Our next question comes from Julian Yates from Investec. Julian Yates: I'd just like to dig a little bit more into the North America business versus EMEA to try and understand where we are in the upside. Do you have any color on sort of return on investment metrics? Like what is EMEA doing in terms of revenue per sales, head revenue per account, return on investment versus what North America is doing at the moment? And when -- and can North America move up to those sort of EMEA levels? Is there quite a lot of upside to go? And then on the flip, is it just massively underinvested in [indiscernible] the fact that there's going to be a cost taker for a couple of years before we see maybe sort of margins or [indiscernible] move up to that EMEA level? David Ward: Julian, it's David. So I'll have a go answering that one for you. And I think the first thing I would say is that the turnaround that we are executing in Americas actually looks very similar to the process that we went through for EMEA a couple of years ago. So there are great similarities, which, to be honest, is very helpful for us and obviously means that some of the expertise that we have in the EMEA team has been really helpful to the Americas team as well as the new capability and stronger team that we've deployed into that region. So I think there are some similarities. I think the way we think about the Americas business -- has been that we have had to strengthen the team that we have deployed there. We've talked about all of the actions that we've done to do that. We've also given them increased and better tools. So they've got better internal tools. They've got better support from the enabling functions. And at the same time, we are -- we've talked about unifying our back-office systems and CRM tools. So all of those things we have done, and we are almost through finishing. So that gives us a really solid foundation. Dev has talked about the fact that relative to our EMEA team, the Americas team is under resourced, but we've always felt that we needed to solidify those foundations first. And once we've done that, there is a really good opportunity for us to then enjoy the benefits of economies of scale as we employ and deploy more salespeople into the region. So I think that's how we think about it. I'm not sure I'd necessarily agree that it's going to be a cost taker. I think that was the phrase you used. I think we see that it's a business that should scale relatively well from here. We do want to deploy more cost into the region, but we expect pretty constant and relatively quick returns on that cost. So I think from here on in, we expect the opportunity for margin improvement for Americas. It will be relatively modest as we put the cost in there. And obviously, there's the benefits of Go to still add on top of that. So I think there's a number of things that we're pretty excited about. Operator: Our next question comes from Tintin Stormont from Deutsche Numis. Tintin Stormont: Just -- I think it's two questions, maybe three. The first one is the quality of the pipeline. Is there anything that sort of a sense that you could give us that obviously, there's the volume and the actual increase in the pipeline. But when you're trying to convey to us a sense of the improved quality of the pipeline, is there anything that you can share in that regard? And then, David, just picking up on your point on resourcing in the U.S., where are we in terms of the resourcing? And how easy is to find that additional resource in the market and for them to sort of kind of have the impact that you want them to have? And finally, from a competition standpoint, if you could just maybe describe sort of kind of in the environment if there are particular players that you're winning against with the GBG Go product? And sort of kind of -- I think, Dev, you talked about the features that are differentiating you, but would be really interested in that, the areas that you choose to play in, FS, gaming, fintech, et cetera, if there are particular competitors that seem to be relatively losing out to you now with this platform? Dev Dhiman: I think all 3 probably for me, Tintin. So in terms of quality of pipeline, so I think, again, we don't really disclose volume of pipeline. I think we talked about the number of Go opportunities specifically, but our pipeline is obviously much broader than that. I think what I can say is I think there are a handful of key opportunities that I'm very close to that feels a bit different maybe this time last year. So I won't say any more than that because I'm breaking my own cardinal rule to not talk about those. In terms of resourcing in Americas, I think, as I said in my presentation, we've hired 6 new leaders have all come from this space. It has not been difficult to find people that, number one, have deep industry experience, and it's not been difficult to find people who want to be part of the GBG story. I think what's been encouraging is how we've seen many of those 6 leaders bring in people from their network. That's interesting to me for two reasons. One, I think we've hired the right people if they know people. But secondly, the fact they're bringing people in that they trust and trust them means that their commitment to the cause and their ability to see the end of the turnaround and the start of acceleration is quite high. So open rates in the Americas, I think we measure them in days, not months. And then lastly, on competition, I'm going to answer this slightly differently. I think we're focused on ourselves and maybe that's also a bit different to a year ago. I think we're focused on how we stand out from our competitors. And I'd rather talk about what we're doing than what we're seeing in the market. Again, a good chance for me to remind everybody that for many years now, we've won against our competitors in location. We've won against our competitors in EMEA, and that's getting increasingly so, I would say. And in APAC, for a number of years, we continue to have a really strong market share in ANZ that should only get stronger with the integration of DataTools. So yes, hopefully, that answers your questions. Operator: We have no further questions. Dev Dhiman: Yes, I think that brings us to the end of questions. So thank you, everyone, for your time and for the questions. I will just close with a few short comments that really reiterate what I said at the end of the presentation as it was. I think a good chance for us to always take the opportunity to remind everybody what a great business this is that operates in a really fast-growing space that is only getting more interesting and the scale that we enjoyed. Good to be able to stop now talking, hopefully, in these presentations around the 4 focus areas that we set out on back in June of last year, although albeit our work is kind of never done on those. I think what you have heard today is really two things, a very effective and deliberate capital allocation that is all about driving increased shareholder returns and a very clear strategic direction that really means that you'll only really hear me talk about three things: Americas, GBG Go and our operating model, all of which gives David and myself and the Board confidence in improving growth rates, which, as I said in the presentation, start now. Thank you all for your time, and have a great rest of the day and week.
Benjamin Wilkinson: Good morning, everybody. Thanks for joining us for Molten Ventures interim results. This is the results for the 6 months to the end of September, and we'll take you through key movements in the portfolio. We've moved with the trading statement at the end of October and then now giving you the final numbers here. Today, you will be spoken to by myself, CEO, Ben Wilkinson; and also our CFO, Andrew Zimmermann, who will take you through the financial highlights. I'll just give a quick introduction, a reminder to Molten, and then we'll get into the numbers. So Molten Ventures is actually, next year, celebrating our 20th anniversary as a firm and has been listed since 2016. The benefit of that is obviously that we can get to show the model working over time. And I think here in these results, you'll see the breadth of the portfolio and the demonstration of that vintage creation that's been happening over these many years, 80-plus portfolio companies in the portfolio. And when we look at the PLC numbers here today, that's what we'll be talking to, but also we manage EIS and VCT funds alongside. So the capital pool is an important function and driver of our model and how we address the market. On the right-hand side, you can see the important factors. We've targeted 20% annual growth in the portfolio fair value, and that's -- we call that through the cycle because obviously, these things tend to be up and down somewhat, but actually delivered 26% when you take into account the 6 months growth. And then in realizations, the important factor is turning that value into cash, and we've delivered 14% versus our 10% target. And again, I think that's a differentiated point from us versus some other firms and something that we've been able to demonstrate through many years. So we'll touch on those returns. In aggregate, GBP 1.1 billion of capital deployed in those years as a public company and returning over GBP 700 million coming back, which is a really strong proof point of our model. A year ago, when I took over as CEO, we refocused our strategic priorities on these key areas, really focusing on our core investment strategy of Series A and Series B investing. Particularly at Series B, this is a part in the market in Europe where there's a gap to capital, somewhere where we have strong experience and it's where you see the commercial traction in those businesses coming through most strongly, but also requiring the venture capital skills that we can bring to bear to help grow those companies and manage their scaling journey. And so it's capital, but also active management that we bring to bear with these companies. Scaling our own portfolio and developing the co-investment pools of capital further continues to be a key priority for us. We'll touch on the progress in some of those areas, but having the public balance sheet, having the EIS and the VCT funds and then growing out our third-party capital on the private side is a key strategic priority for how we scale and grow within the market. And as part of that, thinking about our fund-to-fund program, which is the investment into funds at the earlier stage from when we invest directly, we've been going through that program and looking at a narrower cohort for the next iteration of investment. So the existing program is largely funded in good shape. It gives us quarterly reporting on 3,000 underlying companies, which is great for our deal funnel. But just thinking about the uses of our capital when capital is ultimately constrained, we want to put more of that into direct investing and thinking about the shape of our portfolio, how that evolves over time. Balance sheet strength, we're going to be able to touch on that today. It's clearly getting back to growth is an important factor within that, but also driving the liquidity from realizations and then thinking around the use of that capital as it comes back. And we always talk to this NAV accretive use of capital. And importantly, that can be buybacks of our shares when we're trading at big discounts, and we've demonstrated with GBP 50 million committed to buybacks, that's something we're willing to do, and we recognize the strength of doing that in terms of buying our portfolio at a discounted value, but also NAV accretive in terms of driving investment. A lot of the companies that we're going to talk about today, we invested in those businesses almost 8 years ago. And the growth that's come through over that time and management of those companies that's come through over that time, and that will drive the growth in the future by the investments we make now. Another part of our strategy is to invest in secondaries where we can acquire mature assets at discounts to their holding value by providing liquidity to an illiquid part of the market and giving ourselves and our shareholders access to those growth companies and that are known winners, if you like, in other people's portfolios is a very sensible way for us to use our capital. So when we talk about NAV accretive use of capital, we're thinking about it in a holistic way about what is the best use of that capital depending on the opportunity set. And clearly, driving a narrowing of our share price discount to NAV continues to be a focus. Some progress has been made on that, but a lot more to go. You'll see today that the NAV is growing, and therefore, the shares have to trade up even further as we drive value in the portfolio. And I will, therefore, hand over to Andy to take you through our financial highlights and demonstrate some of that. Andrew Zimmermann: That's great. Thank you very much, Ben. So I'm Andrew Zimmermann. I'm the CFO at Molten Ventures. About a year ago, I was interim CFO, presenting my first set of interim results. So it's nice to be here 1 year later as actual CFO. And we've got a really positive set of financial results to present. So without any further ado, we will get on to that. So very pleased to have -- talk about a 6% GPV uplift to NAV, GBP 135 million of uplifts offset by GBP 49 million of reductions. FX has added another GBP 11 million to that with the GBP euro being a tailwind, but GBP USD being a slight headwind. Market comps have helped sectors like AI and deep tech and hardware have obviously been stronger [Technical Difficulty] that's been offset a bit by consumer and SaaS. Core names like Revolut, people have read the news about yesterday and ISI have shown very strong commercial traction. Sorry, GPV and NAV are both up at GBP 1.4 billion GPV and NAV GBP 1.3 billion. Realizations have been slightly ahead of investments with some of that cash going to buybacks, again, as Ben referenced, recognizing the NAV accretive additive potential of those. Realizations were pleasing at GBP 62 million to the half year. There was also an additional GBP 23 million from another tranche of [Technical Difficulty] Revolut in October. So GBP 87 million so far year-to-date that we've done with some other little bits and pieces. Freetrade, Lyst and Revolut, the 2 partial Revolut-led secondaries are the drivers of that. So been at GBP 87 million already year-to-date after a very strong FY '25 of GBP 135 million. It's really pleasing to see that momentum continuing. From that cash, [Technical Difficulty] we've put GBP 33 million into the balance sheet, GBP 33 million. We'll come on to that in a bit more detail in terms of [Technical Difficulty] some of the things that we've done. Again, there's been more invested post period end with about GBP 25 million that's either been invested already or is about to be and will be announced. We've also done GBP 19 million of share buybacks. Again, that is NAV accretive to our NAV per share, that's added about 14p to our NAV per share. And we've just announced another GBP 10 million extension to that, which will take us up to GBP 50 million committed so far. OpEx, we've managed to reduce. We've been really disciplined. We've looked at technology and how we can drive some efficiencies from that. We've been able to, therefore, reduce our general admin costs from GBP 13.1 million to GBP 12.1 million year-on-year or half year-on-year, which is an 8% reduction, some reductions in headcount there are mainly on the operational side so that we can rebalance our investment and really drive that investment quality. So we're at 0.1% operating costs net of fee income, which is well below the 1% target of NAV. So that means we end the half year at NAV per share of 724p, which is 8% up on the year-end position, which is obviously a really strong, great position to be on, and then we'll be looking to build on that in the coming period. And our balance sheet at the 30th September had cash of GBP 77 million. We also have cash plus GBP 23 million from that Revolut tranche that came in, in October. And we also have funds available in EIS and VCT of about GBP 23 million available for investment. So we're in a really strong balance sheet position where we've managed to balance the investment with buybacks and cash available going forward. So this is a chart that you're used to seeing where we talk about our performance through the cycle. We have a target of 20%. Our average return through the cycle is now 26%. You can see from this chart, we -- obviously, there was strong growth with a real peak in FY '22. We were quick to take valuations down in FY '23. FY '24, things started to stabilize a bit. And then in FY '25, there's a smaller return to growth in FY '26. That first half, 6% for the half year is obviously a good start and obviously, not quite a hockey stick yet, but starting to turn up there in terms of the growth. So we'll be looking to see that continue in H2. I think with sensible marks for our portfolio and tailwinds behind a number of the core companies, there's good signs that, that will continue. Everybody has been reading a bit about a bit more activity in IPO markets and M&A. So with our diversified portfolio and our experience managing through the cycle, we're optimistic about this continuing. So the story on realizations is really similar -- similar shape. Our target is 10% through the cycle, and we've delivered 14% so far average return. Again, you can see that builds up towards FY '22, where it really peaked. Then obviously, it was a difficult market in FY '23 and FY '24, really slowed momentum for realizations. There's a positive return in FY '25, where we did work really hard to engineer different realizations for a number of the companies. And that's obviously pleasing to see that continue into FY '26, with a GBP 62 million to the half year 30 September and an additional GBP 25 million since then. We're obviously still working on other things. So we would hope to be able to generate more realizations before the end of the year. And obviously, our evergreen model then enables us to recycle that back into future investments, which are going to drive the future NAV growth as well as other NAV accretive opportunities like secondaries and buybacks when the discount is wider to the share price. So this is just a slide a little bit about our investment deployment. We've deployed GBP 33 million in the first half of the year. We've done more since then. So the cadence will pick up a bit in the second half of the year. I'll just call out a few deals. Ben will talk a bit more about the portfolio later in the presentation. But in new deals -- yes, GBP 6 million in new deals. One example in that is General Index, which is a data-driven energy pricing provider for the commodities market. In the follow-ons, we've done GBP 5 million, which is helping to scale and build our portfolio. For example, the one I'll call out is Manna, which those of you who know me know I like to talk about just like drones delivery food. But again, it's a good example of us investing in the ones that are going to be the future drivers of growth in the portfolio. In the secondaries, we did the secondary with Speedinvest for GBP 16 million in the continuation fund. These give us access to a portfolio of companies that we understand as venture managers that are later in life, so they've got a shorter exit window, and we can get them at a very attractive price. So it's another good option for us in terms of driving NAV. And then finally, we've put GBP 6 million into our fund of funds program. Obviously, we're trying to manage a tighter cohort going forward, but this helps us to scout the future winners that are going to feed through into the emerging and then the core in due course. We've also recently signed a GBP 12 million Series B with someone in the portfolio company, which we can't announce just yet, but we'll be working on that. So watch this space, you should see an announcement of that soon. But that's just a really good reaffirmation example of us backing our portfolio and backing the winners in our portfolio and getting back to more of this focus on Series A and Series B core investments. And then just on the chart here on the right, again, just to call out the shape of it, you can see FY '23, just before things started to go south, we deployed a more normal level of capital. FY '24 and '25, obviously, a bit more capital constrained, but we're now getting back more to a normal investment cadence with targeting somewhere around about GBP 100 million by the end of the year. So this slide just walks us through the fair value movement for the period in the portfolio. So you can see investments and realizations we've talked about, so slightly more realizations than investments, which are a net down in terms of the GPV. FX has worked in our favor. As a pan-European investor, we're obviously going to be exposed to movements in euro and dollar, but that's been a small net benefit for us this period. The real talking point, I think, is the movement in the core, GBP 92 million uplift, and we'll come on to talk about the specific drivers of that with the portfolio fund in due course. But that's like an 11% uplift, which is much more where we want to be and where we feel we should be. And so that's really pleasing to see. The fund performance contributed about GBP 7 million. That was offset by about GBP 30 million, a small write-down in the emerging portfolio, which I will actually now just come on to talk about. But overall, a really strong net 6% fair value increase for the first half of the year. So we've had a lot of feedback from people in terms of the emerging. We talk a lot about the core. That's obviously the biggest part of the portfolio by value, but the emerging are what's going to drive the future. So we're trying to talk about this a bit more and shed a bit more insight into it. Ben will talk about some of the specific companies, which I know people find really interesting and exciting. So that will add a bit more color. There's 68 companies in this emerging portfolio, so it doesn't lend itself to a big list, but this table gives you a sense of the diversity and range of across that cohort. So the average age of investment in this is about 5 years. And the average cost of investment is about GBP 4 billion. So you can see the average is obviously smaller. These are the earlier Stage 1s. There's obviously a broad range within that. And you can see from this doughnut here, about 3/4 of them are the smaller sub-$5 million positions. So these are the ones that are still proving themselves out. As they start to scale and grow, and we can spot the emerging winners and we have some conviction, then we can put more capital into them. And so the remaining 2 sections of the donut are as these companies start to grow and we can follow on and help them grow, we'll put a bit more money into them. And then eventually, these companies should grow, keep growing and some of them will get into the core as the future winners in the portfolio. In terms of the fair value movement in this segment, you can see that actually the majority or nearly the majority had an uplift in terms of the number of companies, a number flat and then about 1/3, there was a small reduction. Overall, although there were more uplifts in the portfolio, there was a small net reduction. There were 2 or 3 sort of larger write-downs just in specific companies in that emerging sector that meant it was a small net write-down of GBP 13 million. But overall, still positive momentum in that cohort of the portfolio. So this is the fan, which obviously you're familiar with seeing. Again, I would just call out the point that the scales are different, which is why it looks a little odd, but Revolut because it's so large by fair value had skewed the scale. So we've split the two halves slightly. The right-hand side are the smaller ones that are growing. The left-hand side are the more mature ones in the core. So just to call out some specific ones where there's been the more significant movements. So SimScale, which is cloud-native simulation. It's doing really well in terms of starting to add logos, starting to really grow revenue. It's got good ARR retention. So that one is starting to move up the fan. And obviously, we have a strong belief in that one going further. ISAR Aerospace is one that you may have seen like the rocket launch. It's a German space rocket company, hopefully, a European SpaceX. They got their first rocket away off the platform earlier in the year. It didn't -- it blew up, obviously, partway through, but that is expected as part of the development process. So they got all the data that they needed, didn't destroy the launch pad, so they were really happy. And they're already working towards launch 2. But that first successful launch in terms of the data collection unlocks a capital for EUR 1 billion valuation. So that one has shown good growth in the half year. Thought Machine, although it's not moved that much, I just thought I would call this one out because people are interested in that one. That's obviously core native banking software. You'll maybe remember a year ago, we'd actually taken that one down quite significantly as it sort of stalled in terms of the speed of its revenue growth. In the second half of last year, we started to write it back up, and we've done a little bit again in this first half of the year. The story hasn't really changed. It's a really good business. They're signing Tier 1 banks. They've got a good pipeline of logos. It's just the cycle for that particular line of business. It takes a while to turn it to permanent ARR and longer than they originally perhaps forecast. So as they get these books of business live, the ARR will grow again quite lumpy and that speed of revenue growth should start to accelerate again, justifying more of a premium valuation. So we should see that start to pick back up and walk back up as they hit those commercial proof points. ICEYE is another one that's had a really strong period. You may have read about it in the press, dual-use technology, it synthetic aperture radar satellites, which are just a very cool technology, can see through cloud, can see at night. They've just released their latest version of them, which are even more high definition. You can see things about the size of a laptop from space. Obviously, the shift in defense, particularly for European governments, financing themselves mean they've signed a lot of contracts with different European governments. So they've got really good traction, both in terms of hardware, the actual satellites themselves, but then the software in terms of delivering the images to people. And obviously, the comps in that sector have really benefited from that as well. So it's really strong growth in that one. CoachHub is the only one in the core really that we've had to take down much. That one, CoachHub is obviously coaching software for enterprises and it matches coaches with executives. That's had a slightly tougher year. Firms are probably being a bit more mindful of what they spend their money on and things like that can be the first to be paused. It's actually profitable, but the growth has just stalled. So in terms of the valuation, you need revenue to really be growing at a stronger level to justify a higher premium. So as they get back to that growth, we would expect to be able to walk that valuation back up again. But until they hit those commercial traction proof points, we've pulled that one back slightly. Aircall is business communications software, AI cloud-based, more than 20,000 customers, really good solid business. It's profitable. It's doing more than 20% revenue growth year-on-year, consistently performing a really good example of a mature company in the portfolio that should be heading towards some kind of exit scenario, whether it's an IPO or a trade sale as it really matures. Ledger, again, benefiting from really strong tailwinds, crypto and NFTs, it's a hardware wallet and software that goes with it. Really strong revenue growth, really strong performance. Comps are doing well because of the U.S. market being very favorable towards that kind of asset class. So it's been a strong beneficiary of that. And then finally, Revolut, you'll all have seen the news yesterday about their GBP 75 billion round. That obviously came a bit late for us in terms of this performance. So we've held it based on commercial traction and commercial milestones. It's obviously still performing really well, more than 60 million customers. They did GBP 4 billion of revenue last year, should do something like GBP 6 billion this year based on the growth rates they talk about. So we've been able to take that up quite considerably, but we obviously have a bit of scope to grow further if it's going to grow into that GBP 75 billion valuation. So overall, really positive, I think, for the core portfolio. So I think I would just say just before I hand back to Ben, it's a really positive set of numbers. It's pleasing to be up there talking about fair value growth coming back, really driving NAV per share. We've obviously continued to generate that momentum in realizations, which allows us to allocate capital to the new future winners of the investment and also to allocate some to buybacks, recognizing the NAV accretive benefit of being able to do that. So a nice set of numbers to talk about. And with that, I'll go to Ben, who can tell you a bit more about the portfolio. Benjamin Wilkinson: Thank you, Andy. So as Andy described, we wanted to give you a bit more of the breadth of the portfolio, at least 10 in the call there that's showing those uplifts. We're also trying to show a little more of a -- shed a light on the emerging so that you can see the core is driving the growth. There's GBP 888 million of value there, but the emerging, there's almost GBP 500 million of value sat within that. So what we'll do here is take you through some of the drivers of the growth in the core, but also give you a little bit more of an overlay of how the portfolio comes together. You can see here that gross portfolio value that we talk about GBP 1.4 billion, core being GBP 888 million of that. And then think about the emerging, that GBP 256 million in the light blue bar. We'll talk to some of the details of that. And Andy touched on the fact that there are 68 companies sat within there. And then there's GBP 293 million sat within fund investments. If you look to the right-hand side of this chart, you'll see how that splits down. That's splitting down between some secondaries that we've been doing over the last few years, also SPVs, special purpose vehicles that we've invested in through the years, but also the fund of funds. There's GBP 120 million in that seed fund of fund program where we're an LP into funds across Europe, and there's about 80 funds across Europe that we're invested into. So small checks going into those funds, but that supports the ecosystem, gives us the data on those companies as they come through to the Series A and Series B stages of investment where we can look to invest in those companies directly. And then finally, with Earlybird, about GBP 80 million sat there as value, which is value that's not sat within the core. There are a few assets like Aiven and ICEYE, which are sat in the core, which are look-through into Earlybird investments. So if we touch on the larger part of the portfolio first, the core companies, their growth is driven by their revenue growth, that commercial traction that then feeds through into fair value growth. And we can see that the margins are very strong in that part of the portfolio as they are through the rest. That really gives an indication of really strong technology businesses with 68% gross margins, 6 of those companies being profitable, also some of those moving to profitability in coming years. So we have about 40%, 45% of that core being profitable now as well. Companies are well funded and growing strongly. You can see here that growth has continued and just touched on some of the assets, in particular, that Andy has just taken us through, but it's that commercial traction in the underlying businesses that we really look to. So where we're taking valuations up or we're taking valuations down, it's really underpinned by the growth in the underlying companies. One thing in terms of the age of the portfolio, the average age of those companies is 11 years, and our average age of the holding that we've had is 6 years. So it gives you a sense of where we're investing in those businesses on their own journey. And it's really where we start to see those commercial proof points, commercial traction selling to customers, increasing that revenue, demonstrating that you can sell to a breadth of different customers, but also increase your value within each of those logos. So upselling to those customers as well. Those are the points of reference that we're looking to when we're first putting our investment tickets into these companies. So the emerging portfolio, trying to provide a bit more color on how that comes together. On the left-hand side, we've got the capital deployed. Obviously, now we've been deploying for 9 years, over GBP 1 billion deployed. A lot of that's gone into the core, and that's driving strong returns. But then a lot of that has also gone into the emerging. And you can see here that that's been invested over a period from 2017 right through to now with the majority invested up to 2021. So you can see on the left-hand side that there's a real balance of that vintage creation within the emerging. It's not just focused on any one vintage. And I think that portfolio construction point comes across strongly when you look at that left-hand side of the chart. Average holding is about 9% equity, which is in line with our 9% to 11% probably average across the portfolio, which is also really where we start to think around 10% to 15% of initial equity. Sometimes that gets diluted down. So that's all in line with our original investment thesis. And talking to scale, you can see on the right-hand side here, how much of that is split by revenue. So the blue, the 44%, that's GBP 10 million plus of revenue. So it demonstrates a degree of maturity of those underlying companies. Some of them are pre-revenue, particularly where they're in the deep tech parts of the market where revenue might come later than the traction in the technology. But also you can see that some of those are earlier-stage businesses, GBP 1 million to GBP 5 million of revenue or GBP 5 million to GBP 10 million as they start to scale through that journey. Our job is to portfolio manage. Some of those will not scale and grow, and we'll reduce them down in our holding value or sell them on. Some of them will scale and grow into the core. And we talk in a couple of weeks about one of the investments that we've made in one of our existing companies, a Series B investment where we've led the round in that company preemptively, that's where we start to see that commercial traction coming through, and we want to put more of our shareholder capital to work in that business and then those companies can become the core companies that drive the growth going forward. So I wanted to talk for the next few slides about some of the specifics. We're touching on four of the core portfolio companies, and we'll also touch on a little bit of the emerging as well to give you a flavor of those underlying businesses. Revolut, we've talked a little bit about here, and it's obviously very strongly in the press. I think the only comment I'd like to add in addition to what Andy said here is this is a business that was founded 10 years ago, now has over 65 million customers, was a company that was scaled in the U.K. and then grown into other markets, and it is now getting licenses in South America, Mexico, and Colombia as an example. And it's just driving growth globally. So this is a really good example of a success case in Europe that we need to celebrate, and we need to make sure that the capital that goes into these companies to enable that success is there for these businesses that have the ambition to have global scale. And we're talking about productivity earlier today in some of my conversations. We need to drive more productivity growth, and these are the types of businesses that really allow that to happen. If you look back and think about when you had to go into your bank at least once a week to process checks or to go and deal with anything that required an over-the-counter service or when you traveled and maybe you had to have travelers checks, for example, at a certain stage of that journey. Think about how seamless your banking is now relative to how it was perhaps even just 10, 15 years ago. And this is the productivity that's been driven through all of the companies in our portfolio and it's been driven by this part of the ecosystem that drives job creation and innovation. In a similar theme, ICEYE, we invested in that business in 2018 into 2019. So they have now 50 satellites up in low earth orbit. And those satellites, as Andy touched on, can take images of the earth giving a range of 400 kilometers from single pictures down to the laptop scale of granularity. And that allows security to be a factor and a use case, but it also allows use cases and climate change. So thinking around forest fires, thinking about flooding and the impacts of that on the insurance part of the business, that drives a massive efficiency looking at areas that are affected or impacted by that. And our use of space is going to drive a lot more productivity in our daily lives. It already drives productivity with things like GPS. But clearly, that's becoming an important driver of growth going forward. And this company is performing very strongly. And another business that's quietly under the radar for several years while we've invested into those companies. And then they start to emerge as growth companies and drivers in our portfolio. And then in the last year as security and defense becomes more of a theme and sovereignty around assets becomes more of a theme, you can see that these companies are getting much more focus in the press. A similar business that Andy touched on is ISAR Aerospace. It's definitely worth watching the launch, 30 seconds into the air was important. There's over 100,000 components coming together in a single rocket. That's the first test of that rocket. And so demonstrating that it can get off the launch pad, demonstrating that they can safely bring that rocket down as per the plans, but also taking all the data into that next launch. This is a business that's exciting to watch. And hopefully, in the next few months, we'll be able to give you a bit more of an overview of that next launch happening, and we can all watch that one. And then Ledger, Andy touched on Ledger, cryptocurrency, hardware, security layers, security in anything, clearly very important. Even more important, as we've seen all of the cryptocurrency marketplaces have their own ups and downs over the years. A lot of people are recognizing you have to have it stored on a Ledger device. That's the most prominent device, hardware wallet for crypto and blockchain applications. And there's about 20% of the cryptocurrency market stored on Ledger devices. So it gives you a sense of their scale and what they've been building. Very strong tailwinds now for crypto and blockchain, particularly out of the U.S. And as this institutionalizes as an ecosystem and Ledger at the forefront of that with their hardware devices and the software that they can drive to allow trading. And then some of our emerging companies, equally exciting, the ones that we'll be talking about in a lot more detail in the coming years. BeZero is a carbon market. It's verifying offset projects and creating a pricing market for carbon. This is a business we invested in 2022 in the financial year and is growing strongly and undertook its Series C funding round, total funding of over GBP 100 million. And again, this is a business that's driving a new part of the ecosystem, a new part of the market that doesn't currently exist and hopefully becomes ubiquitous and something that we just take for granted in the next few years. If I look at that productivity theme, Deciphex, which is focusing on workflows and AI-driven support for pathology, that's a part of the ecosystem where we're investing a lot of capital into the NHS and investing a lot of capital into health. But a lot of that capital needs to go into the productivity tools that drive efficiencies. Public sector efficiency has reduced over the last few years, not increased. And these are the tools that allow that to happen. In a similar way to the space theme, we have Satellite View, another company in the portfolio, which is looking at thermal imaging of buildings. And so low earth orbit satellites go up, images of those buildings, looking at the heat signatures, looking at the efficiency of buildings, looking at security aspects that go alongside that. And this is a company that has a really strong order book behind it already. And then finally, Andy's favorite company, Manna, delivering -- it's interesting when you think around if you stand in London and you talk to people about drone delivery, it's a pipeline dream. In Dublin, that's already happening. There's hundreds of thousands of deliveries that have been occurring already over 200,000. And Manna, as it expands, we will go into 11 sites across Dublin, but we'll also be expanding into Finland, into the Middle East. It's a company that's born in Europe, that's scaled in Europe that is already ahead of many of the big players that we would assume would be at the advanced stages of this. So Manna is a very exciting company that we'll be hearing more about this year. Give you a sense across the board of the excitement that comes through our portfolio. But one important factor within our portfolio is how we think about driving growth. Direct investing is clearly the heartbeat of what we do and fund-to-fund investing, as we've touched on, helps to drive the ecosystem. But another important part of our platform is driving growth through secondaries. I just wanted to touch on that for a moment because sometimes when we invest in secondaries, people are trying to understand, well, why are you investing in other people's portfolios. But if you think about the journey of scaling technology businesses, they often scale in years 10 to 15 of their life. You can see in our core, the average age of 11 years. And then if you reflect on the average time horizon for a private structure is a 10-year fund. And so those technology businesses that are the winning companies in those funds are scaling and maturing at the very latest years of those funds where the managers of those assets need to show realizations and drive returns. So we provide a liquidity solution to those managers that allows them to give money back to their investors that allows those investors in turn to put new capital commitments into the managers' new funds. So you're unlocking a part of the ecosystem, which is clogged up. For us, the benefit is clearly investing in scaled mature assets. And we've demonstrated with our track record here that we can drive returns averaging 2.4x multiple. A lot of that has been realized in a short period of time. And it's really a way for us to create additional value for our shareholders by being active in the market and using our network and using our relationships and using our ability to value technology businesses and being very fundamental about the value of those companies and drives additional value to the direct investing that we have in the portfolio. So delivering returns in excess of GBP 200 million on our secondary strategy. It's not something we do every year. It's something that we do where we feel there's pockets of value and discounts that we can take advantage of. So then finally, how does that drive to returns across our entire portfolio, over GBP 700 million of realizations over the 9 years and thinking about venture capital as an asset class, the returns are skewed to the winners. You have to run your winners. And in turn, the management skill of a venture capitalist is managing an entire portfolio and ensuring that you can drive returns from the rest of the portfolio as well. And you can see here that we've had over 5x plus returns, which have driven the majority of the value. That's the pure power law playbook of venture capital. And those are the companies that we'll naturally talk about a lot, but also driving returns coming from more modest multiples in the 1 to 3x ranges, that's an important part of what we do. And I think that's been very differentiated at Molten in terms of how we think about the portfolio and consistently driving those returns coming back through -- and even in the scenarios where we might not be making positive returns, we get less than 1x our capital back. We are in the risk business. We should be taking risks. We should be investing in companies that have great potential, but clearly, not all of those companies will make it to be the key returners. And therefore, trying to drive some returns of capital back is an important part of that portfolio management as well. So finally, as we look to wrap up, I'll just give a sense of the current market environment that we're investing into. Left-hand side, you can see Europe has been scaling as an ecosystem up until '21, a lot of capital put to work in that period, but has really settled to a level of around GBP 60 billion to GBP 70 billion a year being deployed. If you compare that with the right-hand side, though, we're seeing a lower number of companies being funded. And that deal count coming down has shown that the capital has been going into companies where there are perceived winners, particularly around AI. And therefore, there are companies that can raise substantial pools of capital, substantial amounts of capital, but that's not growing across the whole of the ecosystem. The area where we invest will be in the GBP 5 million up to GBP 20 million sort of range. So if you think about that in the context of these charts, that's the dark blue lines on the left-hand side going into the lighter pink lines. That's had a reasonable amount of consistency in terms of the capital that's been deployed there, but there's still a gap to capital. And one of the things we'd like to do is drive more capital coming from pension funds coming from our own institutions to support this part of the ecosystem where the opportunity set is fantastic. The innovation that's occurring in Europe is very strong. The opportunity to invest in generational shifts in technology is here right now. And these are technologies that are going to be profoundly changing our societies and how we work and the productivity that occurs over the next 20 years. This is the time to put capital to work, and we're the vehicle to do that through, and we've demonstrated that over many years. So finishing up before we move to questions, just to reiterate the priorities that we started out with the outset of this presentation, how are we performing against those, so core investing in Series A and Series B. We've demonstrated that. We've invested GBP 33 million in this first half of the year. We've also continued with our secondary strategy. And then post the period end, another GBP 20 million has been invested. The company that we've been indicating as a Series B investment exactly in line with our strategy of supporting our best companies, helping them scale and grow, and we'll be announcing that in the next couple of weeks. Co-investment capital touched on as an important feature, bringing more capital into the ecosystem. We have Molten East, which is focused on Eastern Europe and the technologies and the entrepreneurs and the engineering ecosystem that exists there. That is a fund that we'll look to close in the next calendar year, some good progress being made there, and that will demonstrate additional capital coming into the ecosystem that we will manage. Narrower fund of fund commitment, focusing that capital back to our direct investing and secondaries. We've been speaking to all of the managers in that ecosystem, supporting the ones that we're already an LP into, but also being clear that we'll put the capital into a narrower cohort of managers going forward. And then balance sheet strength, Andy has touched on this in some detail, continued realizations and continuing to redeploy that capital into those NAV accretive areas. And finally, narrowing that gap to our discount in the share price. So NAV 724p a share, shares clearly trading at a discount to that. So the buybacks have been an important feature of the model over the last year. And I think that flexibility we demonstrated of allocating capital that comes back into new investments, into secondaries and into buybacks has been a core pillar of the last year or 18 months that has been a way of us driving value. So looking ahead, extremely positive, strong portfolio, very good growth coming through the portfolio, strong balance sheet, capital pools expanding and then the performance coming through in the NAV accretion as well. So very happy to be up here and to demonstrate all of those pillars of our strategy and our platform and seeing those coming through the numbers. So I think with that, we will say thank you and go to questions. William Larwood: Will Larwood from Berenberg. Firstly, I was just wondering if you could give us a flavor of how valuations are changing across from Series A, Series D and then sort of more towards some of the later-stage businesses. And then secondly, if we think about future capital deployment, how should we think about sort of secondaries, primaries, buybacks? I noticed that you've got GBP 39 million committed or potentially going to be invested in your forecast for this rest of this financial year. So just a bit of a sense around that for this year, but also into the next couple of years as well. Benjamin Wilkinson: Thank you, Will. So taking them in order, valuations at this stage we're focusing on is A and B. At that stage, you will see -- let's take Series A, you'll see commercial tractions, maybe a couple of million of revenue. And then what you're focusing on at that stage is how much money the companies are raising, trying to make sure that's balanced between what they need to raise versus what they'd like to raise. And what I mean by that is if they're raising [ GBP 10 million ] because that unlocks the next level of proof points for them, that's usually a better thing for them to do versus raising [ GBP 30 million ] and having excess cash. And so the valuation is a function of how much they raise versus the dilution. So getting that balance of the size of the raise is important, but also being able to demonstrate to new investments that we're an investment house that can follow on in our capital. If you keep proving your growth, if you keep proving your commercial traction, we'll put more money to work. And that's when you start thinking about Series B investing. The tickets are going to be deeper. So you're thinking GBP 20 million type tickets as an average. And then again, it's a function of dilution. But by that stage, you should be seeing GBP 5 million, GBP 10-plus million of revenue. So it starts to become a function of multiples alongside. As you get to later stages, the commercial proof points come through, and therefore, you're really valuing those businesses more on financials and pure financials and there's more capital available at those stages. So you'll often see higher, larger raises, but also more availability of capital. So when I talk about gaps to capital and why we play in a part of the ecosystem, which is very important, it's because you need people with deep pockets that can write consistently GBP 20 million investment checks plus, but also have the venture skills to balance risk and growth and help those companies with active management. So that's why I think the part of the market that we invest into is quite important, but also something that we do, which is a unique point of reference. In terms of how we deploy capital going forward, we think about GBP 100 million is where we'll end up this year, GBP 95 million to GBP 100 million is what we're budgeting. We clearly want to put more capital into those Series B deals we've been talking about supporting those later A deals as well. And then secondaries are still an important feature. I think that's a great way of us balancing the portfolio. We've got this core, which is maturing. We think that those will turn to realizations in the next, call it, 2 to 4 years, you'll see a lot of that value coming back through to our portfolio. And our job then is to be NAV accretive allocators of that capital. So we want to put it into direct investing. We want to put it at the Series B stage, which is where we feel is that right balance of commercial traction, risk and upside. But also we want to be putting that into buybacks if we're trading at these discounts. So that's the way we'll think about it. Getting back to a level of GBP 100 million, GBP 150 million of deployment might be where we'll end up. But what we will be doing is balancing our capital deployment with other pools. So if we have third-party capital coming alongside the public balance sheet, that means that we can more consistently write those bigger tickets at Series B, and that's the way we're thinking about the strategy going forward. William Larwood: I just follow on with the Series A -- sorry, just the Series A and Series B valuations, how have they changed versus sort of 12 months ago or 18 months ago? Benjamin Wilkinson: It really depends on the type of business, honestly. If it's got an AI wrapper around it, clearly, those companies have been getting elevated valuations. And if it's a more normal, let's say, business that we like to invest in, clearly, companies that are driving productivity, innovation, they are infrastructure layers into certain themes, then I think they've been fairly stable, actually. You've seen a real degree of consistency. And when I showed you the European market and the movements we've seen in the market in terms of capital, a lot of the capital that's going to a fewer number of companies has been going into the AI ecosystem. Clearly, early stages in terms of the large language model levels, that's really intensive capital area. That's not somewhere that we've been looking to play. We're more interested in those application layers thinking around how do enterprises use the underlying technology, how does it drive productivity? How do you get more customers wanting to buy it? That's where we think about technology. Patrick O'Donnell: Patrick O'Donnell here, Goodbody. A couple of questions. So just on the secondaries, in terms of sort of what you alluded to in terms of near-term realization, anything you could give us whether it's relating to Connect and some of the key assets there or anything -- any developments strategically or commercially in some of the kind of secondary funds? Benjamin Wilkinson: Yes. When we invest in secondaries, we're pinpointing key assets that are a maturity profile that we can then map that out and look to get our target returns. In terms of the Connect Ventures deal, that gave us exposure to Typeform and Soldo, 2 very good businesses, also already levels of maturity that suggest within a 3-year time frame, which is roughly the average we've seen in secondaries, you might see those turn into liquidity. So that's the way we think about it. Not necessarily right, we've invested now go and sell the asset. It's more about -- it's within their maturity window, sell it at the right time to create the right value. And those companies are on that journey, but they're also scaling their own businesses. They're at a stage where scaling that and continuing to grow might be the best option, and we're going to get the benefit of that fair value growth that goes with it. So I don't want to paint it as a picture of we're invested now. This is your time, you're on a clock. It's just about value creation and value creation from growth is just as good as value creation from realizations. In the most recent SpeedInvest deal, again, we've got companies that we haven't been able to be specific about them, but there's at least 5 assets there, one key asset in particular that we're excited about that hopefully we'll be able to talk to you about a bit more next year. Patrick O'Donnell: Very good. And just on the sort of valuation, anything you could point to sort of since you bought, say, the Connect Venture assets, anything moving in the right direction or whether it's some of the key assets? Benjamin Wilkinson: There are some uplifts in the secondaries. When we bought them, we've acquired them at discounts, more often than not because you're providing liquidity to a part of the market where the LPs who are the investors in those funds can choose to stay in and ride the upside, but they might be in for a time period when they've already been in those companies for 10 years in those funds rather for 10 years that they would feel actually taking some cash off the table now is more appropriate. So we can usually acquire at discounts. And then with the commercial traction of those businesses, they continue to grow, then we can write those up. And you've seen, I think, on the last slide that I showed you that the multiples of capital on those most recent investments are in the positive territory. Patrick O'Donnell: Clear. And just maybe one last one. In terms of sort of the operating costs that you've flagged the sort of reduction over the last 6 months in general admin expenses. Would you expect a similar pattern of cost between H1 and H2 on that? And like is the H1 number broadly sort of a 50-50 split? Andrew Zimmermann: It should be, yes. We're continuing to work on efficiencies and managing our operating cost base, both in terms of third-party costs, administrative fees, technology and leveraging the maximum from those and also with our headcount. So we've obviously reduced our operational headcount slightly by being a bit more efficient, but maintaining that investment in the investment team so that we have that quality, high part quality with the investment team to keep growing that NAV in the portfolio. But we'll be very on top of the costs going forward because we're obviously mindful of that and how that benefits shareholders. Patrick O'Donnell: Understood. And very last one, just on the sort of core portfolio. You obviously have very mature assets now. You pointed a 2- to 4-year exit time frame on revenue. I'm actually a bit surprised at the length of it. Anything you can kind of give us on that? Are any nearer term sort of which ones you'd point to as sort of from an exit point of view that have the shortest timeframe within the core? Benjamin Wilkinson: Yes. We're always quite careful to talk about our targets through the cycle because things tend to be lumpy naturally. When we talk about exits, we want to talk them within a timeframe because it's ultimately what's right for the business. If you're going down an IPO path, as you know, that's a minimum 18 months project. And then if you're going through an M&A process, that can happen at any time on your journey, and it's then about working out what's right for the company and for the returns profile. So we always talk about them in broader terms because we're not in control of exactly when these things happen. If I look at the shape of the core, though, you have companies like Revolut that have a stated IPO target. I think in the press, most recently, they were talking about that within 2 years or at least 2 years. So that might be the horizon. For us, if the business continues to grow at 70%, 50%, let's say, uplifts, then the reality is we're going to create value by holding on to our position and just managing that as a portfolio position as we see pockets of liquidity, taking some off the table. We think that that's the right balance. Companies like ICEYE clearly scaling to a maturity, supporting parts of the ecosystem where naturally you think that might be a public company, certainly has a profile of a company that would perform well. And then things like Thought Machine have talked about potentially going public at some stage on their journey also. What is true, though, is that 85% of our returns have come through trade sales. So this is often an arbitrage of larger businesses acquiring great technology companies and then putting that technology into their existing customer channel. That's the arbitrage that often exists, and we'll see many instances of that as well. So I think the maturity of the core companies, the breadth of the technologies that they're addressing and the markets they're addressing really lends itself to us seeing a lot more coming through in the next -- in the coming years. James Lockyer: It's James Lockyer from Peel Hunt. Maybe just a follow-up to the last question about exits, not specifically timing, but given that you were able to exit some of the Revoluts, which allowed you to sort of demonstrate liquidity for your trophies. Are there others out there that you have the ability to do that? Because obviously, as they grow and those core are the ones that are going to grow most presumably, that risk in terms of proportion of your business gets larger. Is there any thoughts around going, well, as it gets to a certain size, we'll think about trimming if we can because then it reduces our lingering overexposure sort of threat perception, let's say? And then secondly, you seem to allude that your particular AI exposure isn't so much the bubble or perception around there. You said your valuation has been relatively steady. Is it fair to say that if there was an AI bubble burst, the assets you've got are less exposed to that? And how are you valuing the AI adjacent companies such as General Index, Polymodels and Deciphex in that context? Benjamin Wilkinson: You're going to ask me another one then. I was going to forget them. James Lockyer: I can, but... Benjamin Wilkinson: Yes. You always have a list. Thanks, James. Let's start with the Revolut position and thinking about the shape of the portfolio more generally. We look to take value off the table, thinking around returning costs, thinking around opportunities for balancing each of the investments. So I think we demonstrated that clearly with Revolut where it becomes a more significant asset. It's still growing strongly. Commercially as a business, very, very positive. But for us, it becomes a moment of thinking around what's the shape of the portfolio, what's the time horizon over the next few years. And we would take a bit of liquidity on the journey has been our strategy. And we'll do that with other companies as well. Quite often with funding rounds, there's an opportunity to take some liquidity, and we'll take some of that off the table. But what we'll also want to do is balance that with the commercial traction and the upside. So we'll always think around this point about NAV accretive use of capital. If we're going to recycle capital, we want to put it to work into assets that are growing faster than the company we're already in. And some of it is balancing because you don't want the luxury problem of risk, if you like, in the way you've described it. I think it's certainly a luxury problem. But you don't want too much of your eggs in one basket, and therefore, the balance of the portfolio is the way we will think about that. I think we've demonstrated that we've been sensible about taking liquidity at the right times, balancing with riding the upside and also balancing with reinvesting into new opportunities. In terms of the AI assets, the companies that we're investing in fundamentally are driving business by being efficient, if you like, for the customers that they're selling to. So think about a General Index, that's driving an efficiency in a market by using technology that makes it quicker and cheaper to get the data that people like Bloomberg and ICE ultimately need for their commodity prices. That doesn't go away if there's an AI bubble burst. It's about ultimately fundamentally, what's that technology used for. That's what we care about. And then the pricing of those deals, I would say, has very much been in line with the market. I don't feel like there's been a sense where we've had to massively overpay. And you say, okay, well, why would that be? It's because we build relationships with those teams. We build a trust that we understand their companies and we understand their markets, and we can help them grow and scale. Their chance of success in those businesses is higher with our capital and our support than if they didn't have that. That's ultimately the way that we will try and create value. James Lockyer: If I may ask a third question. Just on the 6% on that basis specifically on that 6% fair value growth, how much of that was financial upgrades versus multiple reratings, I'd say as a sort of split? Benjamin Wilkinson: Andy, if you want to... Andrew Zimmermann: It's a mix, actually, because comps have helped in certain sectors. So obviously, things like ICEYE, that's obviously been beneficial. They've probably not helped in some sectors like SaaS and cloud. But -- and CoachHub is a good example, I guess, where that revenue proof point has fallen away a bit. So we've had to reduce the premium for that value. But other ones have had very strong commercial traction as well as the benefit of the tailwinds, Ledger being a good example as well as Revolut. Benjamin Wilkinson: I think that brings us to the end of the questions, and we're about time. So thank you, everybody. It was a slightly longer presentation, but we really wanted to get into a bit more of the depth of the portfolio. So hopefully, those slides are very useful. There is also appendices to the presentation, which we won't take you through now, but there's some more interesting information to look at in there as well. So just leads me to say thank you to everybody. We're very pleased to have a positive set of results, and thank you for your attention.
Operator: Good morning, and welcome to the PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2020 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference. Arthur Penn: Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2025 Earnings Conference Call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Richard Allorto: Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Floating Rate Capital. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may also include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn. Arthur Penn: Thanks, Rick. I'll begin today's call with an overview of our fourth quarter results and recent strategic initiatives, including the $250 million portfolio acquisition and our new joint venture, PSSL, I'll then share our perspective on the current market environment and how PFLT is positioned for continued growth. Rick will conclude with a detailed review of the financials, and then we'll open up the call for Q&A. For the quarter ended September 30, core net investment income for the quarter was $0.28 per share. We previously announced the acquisition of a $250 million portfolio and the formation of a new joint venture with an initial targeted portfolio of $500 million. These initiatives underscore our focus on enhancing PFLT's earnings power through scale diversification and disciplined capital deployment, key pillars of our long-term growth strategy. The portfolio acquisition adds high-quality well-known assets, that are projected to increase net investment income by $0.01 to $0.02 per share on a quarterly basis. The JV with Hamilton Lane, a respected global investor enhances our funding sources and provides a scalable platform for future growth. The PSSL 2 JV began investing this month and closed a $150 million revolving credit facility, which bears interest at SOFR plus 175 basis points. The credit facility has an accordion feature, allowing total commitments to increase to $350 million. Our run rate NII is projected to approximate our current dividend as we ramp the PSSL 2 portfolio. Our game plan is to grow PSSL 2 to be in excess of $1 billion in assets similar to our existing joint ventures. As we achieve this game plan, our NII should be well in excess of our current dividend. Regarding the current market environment for private middle market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into a higher loan origination volumes in the quarters ahead. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform. We are optimistic that the increase in transaction activity will also result in opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments. We believe the current environment will favor lenders with strong private equity sponsor relationships and disciplined underwriting, areas where PFLT has a clear advantage. We continue to see opportunities to deploy capital into core middle market companies where leverage is lower and spreads are higher than in the upper middle market. In the core middle market, the pricing on high-quality first lien term loans is SOFR plus $4.75 to $5.25. Leverage is reasonable, and we continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant light. Turning to our current portfolio. We continue to maintain what we believe is one of the most conservatively structured portfolios in the direct lending industry. This is evidenced by having among the lowest PIK percentages in the industry at 1.8% for the quarter. As of September 30, our portfolio's median leverage ratio through our debt security was 4.5x and the portfolio's median interest coverage was 2x. For new platform investments made during the quarter, the median debt-to-EBITDA was 4.4x. Interest coverage was 2.3x and the loan-to-value was 44%. We had three investments on nonaccrual status and total nonaccruals represent only 0.4% of the portfolio at cost and 0.2% at market value. These strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The PennantPark platform has a demonstrated track record of value creation through the successful financing of growing middle market companies across five key sectors. These sectors in which we possess deep domain expertise, enabling us to ask the right questions and consistently deliver strong investment outcomes. They are business services, consumer government services and defense, health care and software technology. These sectors have been recession resilient, tend to generate strong free cash flow and have a limited direct impact to the recent tariff increases and uncertainty. Core middle market companies, typically those with $10 million to $50 million of EBITDA, operating below the threshold of broadly syndicated loan or high-yield markets. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity co-investment. Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. Regarding covenant protections, while the upper middle market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital. Our credit quality since our inception over 14 years ago has been excellent. PFLT has invested $8.4 billion and 539 companies, and we have experienced only 25 nonaccruals. Since inception, PFLT's loss ratio on invested capital is only 11 basis points annually. As a provider of strategic capital, he fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity coinvestment. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through September 30, we've invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x. As of September 30, our portfolio grew to $2.8 billion, up from $2.4 billion in the prior quarter. During the quarter, we continue to originate attractive investment opportunities and invested $633 million and 11 new and 105 existing portfolio companies at a weighted average yield of 10.5%. As of September 30, the PSSL 1 portfolio totaled $1.1 billion and during the quarter, invested $89 million in 4 new and 14 existing portfolio companies. We believe that the increase in scale of PSSL's balance sheet will continue to drive attractive mid-teens return on invested capital and enhanced PFLT's earnings momentum. From an outlook perspective, our experienced intelligent team and our wide origination funnel are well positioned to generate strong deal flow, our mission and goal or a steady, stable and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in first lien senior secured instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn it over to Rick for a more detailed review of our financial results. Richard Allorto: Thank you, Art. For the quarter ended September 30, GAAP net investment income and core net investment income were both $0.28 per share. Operating expenses for the quarter were as follows: interest and expenses on debt were $25.8 million, Base management and performance-based incentive fees were $13.4 million. General and administrative expenses were $2 million and provision for taxes was $0.2 million. For the quarter ended September 30, net realized and unrealized change on investments, including provision for taxes was a loss of $10 million. As of September 30, NAV was $10.83 per share, which is down 1.2% from $10.96 per share last quarter. As of September 30, our debt-to-equity ratio was 1.6x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. Subsequent to quarter end, we sold $118 million of assets to the PSSL 1 joint venture and $191 million of assets to the new PSSL 2 joint venture. We used the net proceeds from these sales to pay down our revolving credit facility and reduce our debt-to-equity ratio to 1.4x and which is at the lower end of our target range of 1.4x to 1.6x. As of September 30, our key portfolio statistics were as follows: the portfolio remains well diversified, comprising 164 companies across 50 industries. The weighted average yield on our debt investments was 10.2% and approximately 99% of the debt portfolio is floating rate. PIK income equaled only 1.8% of total interest income. We have three nonaccruals, which represent of the portfolio at cost and 0.2% at market value. The portfolio is comprised of 90% first lien senior secured debt second lien and subordinated debt, 2% in equity of PSSL and 7% in equity co-investments. The debt to EBITDA on the portfolio is 4.5x and interest coverage was 2x. Now let me turn the call back to Art. Arthur Penn: Thanks, Rick. In conclusion, I'd like to thank our exceptional team for the continued dedication and our shareholders for their trust and partnership. We remain committed to delivering strong performance, preserving capital and creating long-term value for all stakeholders. That concludes our remarks. At this time, I would like to open up the call to questions. Operator: [Operator Instructions]. We will take our first question from Robert Dodd with Raymond James. Robert Dodd: I guess, on the portfolio acquisition, particularly, I mean how -- I mean, I guess how did that come about? And secondly, are there more opportunities like that? And what way do you think that is you obviously get a pool of assets there, you don't get to pick and choose, I presume. So I mean what's the value of an acquisition which was a big lump versus deploying the capital into individual investments? Arthur Penn: Thanks, Robert. Just to take a step back. That was another joint venture that we had with a third-party with all of the same assets in self-originated assets that we originated Actually, those were originated a couple of years ago, so the spreads are high. We know the portfolio very well. So that was really just an acquisition of more of the same type of assets that we already have in PFLT and in fact, many of the same assets that we already have in PFLT. Robert Dodd: Got it. Got it. On the -- and then just to the point on the market, I mean, it does seem like it's ramping up. Are you seeing any kind of bifurcation. I mean, I think, obviously, logistics companies have been an issue post-COVID, not you, right? I mean -- so are you seeing any kind of application about what you would like to do or what is coming to market in terms of still some things having COVID handovers or these handovers or any thoughts there? Arthur Penn: Yes. So look, logistics, as you mentioned, is an area that's still dealing with post-COVID. There is a general reversion to the mean that we're seeing throughout the economy where we're seeing softness and this has been broadly reported in the media. The consumer -- the average consumer is relatively soft. Inflation has remained high, and the tariffs did not help that. So the average consumer in America is a little soft, which is kind of in the back of our mind as we underwrite credit. We have very little amounts in consumer brands. We do have consumer services, consumer services, we tend to have are more related to the home, which generally is hanging in there. pretty well. But that's what we think about. The other area is that we focus on government services, defense, health care, those remain pretty strong. Robert Dodd: Got it. And on that, like -- you do have some good exposure to the government and contracting, et cetera. Is that the shutdown of which obviously went on a while? Did it have any impact on any of the portfolio companies? Arthur Penn: We have very little exposure to so-called civilian government activities. It's more defense, intelligence things of that nature where the shutdown did not really have an impact. So we're no pun intended, we're well defended there. Operator: We will take our next question from Brian McKenna with Citizens. Brian Mckenna: Good morning, Art and Rick. I appreciate the disclosure around the $310 million of assets that were sold to both JVs post quarter end. I'm curious, when were these loans initially originated? And I'm just trying to figure out the NII contribution from these assets in fiscal 4Q, and then really the starting point for NII in fiscal 1Q, given these sales, the scaling of the second JV as well as the full quarter run rate from the portfolio acquisition. Arthur Penn: Yes. So the -- I think we sent out a press release when we did the portfolio acquisition. I think it was kind of mid-quarter. So we did not get a full quarter of ramp from those assets that we bought the $250 million portfolio. So in our comments, when we said full quarter, it should add about $0.01 to $0.02 per share of NII for a full quarter of those assets. The JV starts to become much more accretive as it scales. So day 1, it's not really accretive. But as it gets to $500 million, $750 billion, $1.2 billion like the other JVs, that's when you start to see the benefit of the scale of it, the financing that you get. You can see the returns that our other two JVs are generating the JV we have in PFLT and in the JV we have in PNNT. If you model a 15% return on that junior capital and you deploy a reasonable amount in that in the Hamilton Lane JV, we're 75% of the junior capital. It starts to become in a very, very attractive addition to the NII. But it's it probably takes a year or 2 before you start to get the benefits of that ramp. We certainly want to ramp it, but we also want to be careful and conservative along the way. And make sure we're putting really solid assets into that joint venture. So the NII contribution for that is probably over, call it, a year depending on deal flow and all of that. So I don't know if I answered your question with that, Brian, but please continue to ask if I didn't. Brian Mckenna: Yes. No, that's helpful. I appreciate it. And then I guess just a follow-up on the dividend. I think in the prepared remarks, you said as the second JV scales NII should be well in excess of the dividend. And so I appreciate to your prior comments, it's going to take a year or 2 to full year ramp. But thinking about that comment in excess or well in excess of the dividend, I mean is that contemplating the forward curve? Is that contemplating any other kind of credit quality changes? And then what other kind of core assumptions are in that? Arthur Penn: Yes. Look, we can run models with each other. Certainly, well in excess with the existing surfer curve, certainly the market indicates we have some room to head downward with SOFR. But I think even if you take the market's assumption of where SOFR is going to be a year out, I think we should -- based on our numbers, and we can compare models, I think we're still covering the dividend reasonably well. Operator: We will take our next question from Doug Harter with UBS. Douglas Harter: Thanks. Can you just talk about kind of where you're seeing new loan spreads and sort of kind of any stabilization there? And then how that compares to what you're seeing on new financing costs? Arthur Penn: Yes. So I think we talked about our new JV guide credit facility at the SOFR plus 175. So that's kind of our most recent comparable kind of loan that we can access. I think we said in our stated remarks that we've seen it kind of in the 4.75% to 5.25% range on average in our world now our world a little bit lower risk, i.e., our average debt to EBITDA is in the mid-4s, we're not stretching for -- we're not stretching for yield. Our loan to values are kind of 40-ish percent. So in our box, we're okay taking we're okay taking a little lower yield if the credit is really, really solid. So we will do a $475 million or $500 million. If we really feel good about the credit, the and the value and the low leverage. Again, that shows up in the PIK percentage 1.8%, we're probably among the lowest in the industry in terms of the amount of PIK Obviously, if you have higher leverage in your book, whether it's 6x, 7x ARR loans, whatever you want to call them, pick is more of a requirement because of the higher leverage. Operator: We will take our next question from Arren Cyganovich with Truist Securities. Arren Cyganovich: Following up on the prior questions. The portfolio acquisition boosted leverage to around 1.6x and then subsequently to that, so it went back down to 1.4x. Is that 1.4x? Does that run rate cover the dividend? And how much if you were just to exclude PSSL, does that cover the dividend? I'm just trying to kind of have the puts and takes and put those to your comments. Arthur Penn: Yes. Look, we're happy to go through model inputs and such. Our general leverage range is 1.4x to 1.6x. So as you saw, sometimes we'll take it up to 1.6x, we'll move assets into our two JVs. We'll get down to 1.4x. And so I guess if you wanted to model 1.5x kind of middle of that range. And yes, if you kind of model -- our belief is if you model 1.5x, if you grow the JV over time, we should be able to easily cover our dividend. And even if you took a SOFR reduction and put that and we believe so. So we can go through the -- we can go to model with you and go through scenarios with you, but that's -- as we look at the scenarios of ramping the second JV. We do hope we do get some equity rotation. As M&A happens, we believe we should be able to get some equity rotation, which help out a lot if you take this joint venture and you model it out similar to our other two joint ventures, that's kind of where we land. Arren Cyganovich: Got it. That's helpful. And then the credit quality has been solid, really for the industry. Here, you have some small one-offs here and there. Maybe you could talk a little bit about the strength of your underlying portfolio companies and what you're seeing in terms of trends and average EBITDA and revenues for your portfolios? Arthur Penn: Yes. I don't know if we put it in prepared remarks, we are seeing kind of double-digit growth in revenues and probably single-digit growth and mid-single-digit growth. Again, kind of what we chatted about earlier, it's industry and company specific, of course. Logistics we talked about, there's a couple choppier credits there. we're focused a lot on the consumer and kind of how the consumer is faring in this environment. So we're focused on that. By and large, the portfolio is healthy. So to have all the names that we had well over 100 and have a handful of choppier names is totally expected. It's what we model. Of course, we're -- any of these portfolios, you're going to have a handful of names that are one way share perform experiencing issues. Sometimes they rebound, sometimes they don't. But we think the number of choppier credits is relatively minor at this point. And the watch list of things that we're kind of looking is nothing really unusual about what's going on right now. We're not seeing any systemic issues with credit at this point in the economy or direct lending at this point in the economy. It's kind of the same old story here. Operator: We will take our next question from Paul Johnson with KBW. Paul Johnson: What happened with your investment in Bilight quarter-over-quarter? It looked like maybe there was a little bit of a payoff there some sort of realization. But just curious what happened in that company? Arthur Penn: Yes. There was a dividend recapitalization and we are in the equity, that's one where we have an equity co-invest. There was a realized gain of about $0.04 a share. Paul Johnson: And that's $0.04 in terms of dividend income this quarter? Or is that just the realized gain that was taken? Arthur Penn: That was not an income element. That was a NAB element. So we had some realized gains. We had some realized losses. Walker Edison was the big realized loss that was already written down. It was unrealized, it became realized something called LAV gear was realized and when through a restructuring. So it was a realized $0.05. So Walker Edison was realized $0.12 per share LAV gear was realized $0.05 per share and then this Bilight was a realized positive of $0.04 a share. Operator: We will take our next question from Christopher Nolan with Ladenburg Thalmann. Christopher Nolan: Is it correct here that the EBITDA coverage was 4.5x, 4.4x? Arthur Penn: 4.4x would be the debt to EBITDA, yes. Christopher Nolan: Am I correct that it sort of seems like either the leverage is going down on these portfolio companies or the EBITDA is going up? I presume your EBITDA is going up. Is that a fair assumption? Arthur Penn: Well, it could be both. It depends on the company as we just said, EBITDA is going up a bit in the portfolio. And also if we're underwriting correctly, the companies are deleveraging and paying debt down, which is -- which, of course, is our goal. We'd love to see pay down and -- and then on the new deals, the new deals that come in are again relatively low leverage and kind of in the low to mid 4s. Christopher Nolan: Okay. And then on the stock price is trading 17% below book. Any consideration in terms of buybacks? Or does all the joint ventures sort of restrict your abilities to do that given the leverage ratio? Arthur Penn: The Board of Directors always considers all options including buybacks, insiders or continual buyers of our portfolios, both public funds and private funds. So it does appear to be a good value right now. Operator: There are no further questions at this time. I will now turn the conference back to Mr. Penn for any additional or closing remarks. Arthur Penn: Thanks, everybody, for your participation in this Thanksgiving season. We are certainly grateful for the trust that our shareholders have given us. We wish everyone a terrific Thanksgiving and holiday season, and we'll speak to you in early February. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Fluence Energy's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Chris Shelton, VP of Investor Relations and Sustainability. Please go ahead. John Shelton: Good morning, and welcome to Fluence Energy's Fourth Quarter and Full Year 2025 Earnings Conference Call. Before we begin, I want to share my excitement as our new Investor Relations Officer. I look forward to engaging with our analysts and investor community. I would also like to recognize Lexington May, who has recently taken on a new role at Fluence. Lex has been instrumental in leading our Investor Relations program since our initial public offering and its contributions have greatly benefited our company and its shareholders. Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; and Ahmed Pasha, our Chief Financial Officer. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding our non-GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters related to our business and companies that are not historical facts. Such statements are based upon current expectations and certain assumptions that are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and more information regarding certain risks and uncertainties that could impact our future results. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP financial measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is available in our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Julian. Julian Jose Marquez: Thank you, Chris. I would like to send a warm welcome to our investors, analysts and employees who are participating in today's call. This morning, I will review the highlights of our fiscal '25 results, the accelerating demand for energy storage and how Fluence is positioned to lead in this growing market. I will also provide an update on our product road map, our domestic content strategy and progress towards all BBBA compliance. Ahmed will then cover our financial results and '26 outlook. Turning to Slide 4 and our financial performance. First, I am pleased to report that during the fourth quarter, we signed more than $1.4 billion of orders, which represents a record level. This brings our current backlog to $5.3 billion, setting us up for renewed growth in '26 and beyond. Second, full year revenue came in at approximately $2.3 billion, about $300 million below our expectations, mostly due to delays by our contract manufacturer in ramping up our newly commissioned Arizona enclosure manufacturing facility. We have implemented corrective actions. Production is improving, and we are confident in meeting delivery commitments and capturing the shortfall during fiscal '26. I will discuss these details further in a moment. Third, despite this revenue impact, we delivered a record of approximately 13.7% adjusted gross margin for the year and approximately $19.5 million of adjusted EBITDA, which was at the top end of our guidance range. These results were the product of good execution on projects and cost efficiencies. Fourth, in terms of annual recurring revenue or ARR, we ended fiscal '26 with $148 million, slightly above our original guidance of $145 million. And fifth and finally, we ended the quarter with approximately $1.3 billion in liquidity which puts us in a strong financial position to fund our plans for growth. Please turn to Slide 5 for details on our order intake and pipeline. Our record $1.4 billion of order intake during the fourth quarter included contributions across all our core markets. Approximately half were for projects located in Australia. For fiscal '26, we currently expect the U.S. market will be the largest contributor of order intake as reflected by our pipeline as of year-end. Looking ahead, demand for energy storage solution is accelerating worldwide, driven by both the rapid decline in capital cost of storage and surging demand for electricity for intermittent renewables, data centers and industrial complexes. We have seen a significant increase in larger deals in our pipeline that as of September 30, includes 38 deals of at least 1 gigawatt hour, more than double the number from last year and nearly 5x what we saw 2 years ago. Please turn to Slide 6. Earlier this month, we announced a landmark 4 gigawatt hour project with LEAG, representing the largest battery project in European history. These projects will use our new Smartstack product and play a key role in Germany's energy transformation. We are very pleased to welcome LEAG as a customer and look forward to supporting additional energy transformation projects across European markets. Please turn to Slide 7 for other emerging drivers supporting our pipeline growth. We have seen significant pickup in demand from data center customers. We are currently in discussions with data center projects representing over 30 gigawatt hours. 80% of these engagements have originated since the end of the quarter. Fluence is ready to lead in this emerging market segment with Smartstack industry-leading density, reliability and safety in addition to its lower cost of ownership. Another set of emerging opportunities is long-duration storage, which is driven by the need for 6- to 8-hour duration batteries in markets with significant renewable penetration, such as Europe and California. Specifically, in Europe, regulatory schemes are in place to procure this capacity. Today, we have line of sight into 60 gigawatt hours of long-duration storage tenders. Smartstack is well suited to compete in this segment due to its flexible architecture and a scalable design. Please turn to Slide 8 for an update on our team. To capture the opportunities I have just described, we have sharpened our focus on sales and flawless project execution. To that end, we are excited to welcome Jeff Monday as our new Chief Growth Officer. Jeff leads our global sales and marketing teams. He brings deep experience from Qualcomm, where he built their global enterprise and channel sales teams. Prior to that, Jeff spent 18 years leading sales teams at Apple. His expertise will help us expand the reach of Fluence's brand to new customers and industries, such as the tech sector. In addition, we have also expanded John Zahurancik's role as Chief Customer Success Officer. As one of our company's founders and an industry pioneer, John will leverage our record of successful execution to further differentiate Fluence from our competition. He will also maximize the value of our solutions for our customers with our digital and services offerings. We believe that these internal changes will streamline our customer experience and position us to win a larger portion of our pipeline. Please turn to Slide 9 as I discuss our new Smartstack product. We are pleased with the market reception of Smartstack. In addition to its role in winning our LEAG deal, this month, we are deploying the first Smartstack units in a project site in Taiwan. We designed Smartstack with the objective of reducing total cost of ownership for our customers. This means in addition to a lower sales price, Smartstack offers lower cost to install and maintain the system over its useful life with top-of-the-line operational metrics. Smartstack is the only product available today that offers battery density of 7.5 megawatt hour per unit, letting customers see over 500 megawatt hours of storage per acre. That means bigger projects, optimized sites and better economics, all else equal. Additionally, Smartstack maintains all elements of fire safety and cybersecurity that have been historically a salient element of our offering. Finally, Smartstack is developed with a flexible system architecture that can adapt to customers' specifications. We expect this will be a key selling point for data centers as technology to reduce system latency evolves and Smartstack kits can be upgraded with new equipment quickly on site. We are engaged with many customers interested in Smartstack and expect it will represent a majority of our orders for this fiscal year. Please turn to Slide 10 for an update on our domestic content strategy. Our domestic supply chain is a critical advantage for our business, particularly given that we see the majority of our growth coming from the U.S. market. We have contracted with 3 key production facilities located in Tennessee, Utah and Arizona. The Tennessee and Utah facilities produce our battery cells and modules, respectively, and they have successfully met production metrics in line with our expectations at the time of our last earnings call. The Arizona facility, which manufactures enclosures, has not met its production targets during this period. Without those enclosures, we were unable to deliver our completed products and recognize the corresponding revenue during the fourth quarter. The primary cause of the manufacturing delay has been the slower ramp in staffing the facility, especially for weekend shift. We have been working with our contract manufacturer to execute a plan to improve staffing levels and further optimize the workflow. As of today, the production rate has improved and staffing levels have in great measure been met, which give us confidence that the manufacturer will meet our desired target rate by the end of this calendar year. We expect to fulfill all of our customer delivery commitments over the course of '26 and book the associated '26 mix revenue. We will continue to work with our U.S. manufacturers to scale production and maintain our leadership position. We are committed to serving our U.S. customers with a competitive domestically manufactured solution. Please turn to Slide 11 for an update on our prohibited foreign entity or PFE compliance strategy. A quick refresh. The One Big Beautiful Bill or OBBBA included regulations designed to restrict tax credit availability for products manufactured in the U.S. but supported by companies deemed to be PFEs. To that end, our strategy aims to meet our growing volume demand for domestic content from a diverse set of qualified suppliers. I am pleased to report significant progress. More specifically, this month, we have secured a second supplier for domestic battery cells. This manufacturer is compliant with all OBBBA regulations and further derisk our future growth. Turning to our Tennessee facility. We continue to work actively with AESC to find a comprehensive solution to comply with PFE regulations. The 3 key pieces to achieve non-PFE status include transfer of ownership, IP and material assistance. Significant progress has been made in addressing all these 3 items. The option of Fluence purchasing the facility from AESC remains under consideration as a possible solution. We continue to view the incremental financing need of a potential transaction as being manageable within our available liquidity. Both parties are motivated, and we continue to expect a constructive resolution in advance of the effective dates specified by the law. I will now turn the call over to Ahmed to discuss our financial results and fiscal '26 guidance. Ahmed Pasha: Thank you, Julian, and good morning, everyone. Today, I will review full year 2025 financial results and our liquidity position, followed by a discussion of our fiscal year 2026 guidance. Starting with Slide 13, covering fiscal year 2025 performance. Over the course of the year, we generated revenue of around $2.3 billion. As Julian mentioned, this figure falls short of our expectations by $300 million, largely due to a slower-than-anticipated ramp-up at one of our contract manufacturing facilities in Arizona. While this shortfall was a challenge, I want to highlight that our disciplined execution and operational focus enabled us to deliver on our profitability and bottom line objectives. Regarding production, most of our U.S.-based contract manufacturing facilities have been operating at their targeted capacities, including both cell and module manufacturing. However, the newly commissioned enclosure facility in Arizona faced some challenges, primarily due to the longer lead time to attract and train the workforce necessary to drive productivity. This was the primary factor behind the lower-than-expected revenue in the quarter. Working in collaboration with our contractor, we have seen significant production improvement since September. The majority of personnel required to execute our plan have now been hired, and we are on track to achieve our targeted production levels. Our adjusted EBITDA for the year was $19.5 million, which came at the top end of our guidance range even as revenue fell short of expectations. This outcome underscores our operational excellence and strong execution. Turning to Slide 14. We achieved a record level of 13.7% adjusted gross margin for the year, above the top end of our expectations. In addition, our rolling 12-month adjusted gross margin is consistently at or above 13%. This reflects our strong focus on productivity and successfully leveraging our supply chain. Turning to Slide 15. We also finished the year with a record of approximately $1.3 billion in liquidity, up $300 million compared to the end of fiscal 2024. This includes more than $700 million in cash with the rest available through our credit facilities. This strong position gives us confidence to make investments that will grow our business and strengthens Fluence's reputation as a reliable partner. Looking ahead to fiscal 2026, we intend to invest about $200 million in our business. This includes approximately $100 million in our domestic supply chain and the rest in working capital to support 50% revenue growth. Turning to Slide 16. Today, we are introducing our guidance for fiscal year 2026. We expect revenue in the range of $3.2 billion to $3.6 billion. We began this year with 85% of our guidance midpoint already in our backlog. This strong coverage materially derisks our FY '26 revenue compared to the historical level of around 60%. We anticipate realizing 1/3 of this revenue in the first half of the year and the rest in the second half. We expect our adjusted gross margin to be between 11% and 13%. This range reflects a period of higher costs associated with the rollout of our Gridstack Pro product, which will make up 70% of our 2026 revenue. We anticipate margin will improve over time as we continue to leverage our disciplined execution and our growing scale. We expect operating expenses to grow at less than half of the pace of revenue, consistent with our guidance in prior years. This includes increased spending on sales, marketing and R&D to support future revenue growth. For adjusted EBITDA, our guidance of $40 million to $60 million reflects expected revenue, adjusted gross margin and higher operating costs from planned investments in sales and product initiatives. With respect to ARR, we are initiating guidance of approximately $180 million by the end of fiscal '26, representing over 20% year-over-year increase. In summary, with our strong liquidity, focused execution and robust order book, we are well positioned to deliver on our plan. With that, I would like to turn the call back to Julian for his closing remarks. Julian Jose Marquez: Thanks, Ahmed. Before we take your questions, I would like to conclude with the following 5 takeaways. Market leadership. Demand for energy storage is accelerating globally. Fluence is capitalizing on this environment with notable wins such as the 4 gigawatt hour LEAG project in Europe and a rapidly growing pipeline of data center customers and other large-scale deals. Product leadership. Smartstack is a key differentiator versus the competition. With increased density and a very competitive total cost of ownership, we expect Smartstack to drive a majority of future orders. Operational execution. We have made significant progress to strengthen our domestic supply chain advantage. We have addressed production issues at the Arizona facility, and all our domestic manufacturers are now on track to meet our expectations. Compliance and readiness. We have strengthened our ability to deliver PFE compliant products to customers with the addition of a second domestic battery cell supplier. We continue to make progress towards OBBA compliance with our Tennessee manufacturer and expect resolution ahead of regulatory deadlines. Looking forward, these achievements position us to maximize stakeholder value by consistently meeting our commitments to customers and shareholders, reinforcing our reputation as a trusted industry leader. Operator: [Operator Instructions] Our first question coming from the line of George Gianarikas with Canaccord. George Gianarikas: I'm just curious if you can share any thoughts on what you're seeing in the competitive environment? Any changes there in the U.S. and internationally? Julian Jose Marquez: Internationally, not real change. It's a very competitive market, and the Chinese players continue to drive the competition in a way. The U.S., the competitive market is changing with -- we see more and more customers that prefer to use U.S. or non-PFE manufacturers, even if they're not required to do it under the -- because the projects are safeguarded under the law or of that provision. So I would say that, but it's an evolving matter that we see coming. So that's kind of today where I see the market. George Gianarikas: And maybe as a follow-up, Ahmed, I think I heard when you were talking about gross margin or margin guidance for '26 that you expect margins to improve over time. Were you referring to gross margins moving beyond the 11% to 13% range you guided for next year, say, in '27, '28? Ahmed Pasha: Yes. George, yes, I think our goal is to continue to improve the chart that we have disclosed. I think our goal is to continue to show that chart going forward to show the trajectory and the difference we are making. Our guidance, as you recall, was 10% to 15% in the past. I mean, I think our -- we haven't changed that going forward. So our goal is to continue to improve that trend line. Operator: Our next question coming from the line of Brian Lee with Goldman Sachs. Brian Lee: Kudos on the quarter here. Just I appreciate all the color, Julian, on the data center sizing. It sounds like that opportunity is coming to fruition here pretty quickly given the time line you expressed. But can you maybe help us a little bit understand, first, the sizing of the market, I guess, if we take the 30 gigawatt hours of data center projects in the pipeline and leads, that's maybe if we estimate maybe $6 billion of the total $23 billion pipeline or in that neighborhood. Is that kind of the way to think about it? And what do you think the overall TAM is and what Fluence's market share could ultimately end up looking like? Julian Jose Marquez: Good question. Let's start with the TAM. Last quarter, we talked about a TAM of around $8 billion. So I think that it's clearly -- the reality is proving that the number is significantly higher. The market has still very, very different numbers. I said we have seen numbers of the 10 times the $8 billion or more than 10 times the $8 billion. It's still unclear. We have to, I think, a little bit more. But clearly, it's a market that is expanding. Of the 30 gigas that we talked about, as of September 30, only 20% of it, one small portion were in our pipeline. The rest were contracts that we started to -- with customers since then. And then today, if you ask me today this morning, roughly half of the 30 gig are in pipeline, the other half we're working on it. And what we're looking is -- will they happen in the next 2 years, where do we see our product is suitable to do what they want. And generally, I think we are fine. So what's a big change from telling you a quarter ago, this is an $8 billion market requiring this very, very complex capabilities to today. I think there's a big change in terms of what we can do for what our technology and Fluence in particular, can do for data centers. And I would say the way to think about it is that there are 3 needs. One is what we call interconnection flexibility, the ability to manage your -- the energy demand in a way that you can interconnect easier to the grid and you can manage and the distribution companies or the service provider can manage your demand to keep the -- so that is by itself, I would say, today, the biggest driver. People who want to connect quickly to the grid and want to ensure that the data center meets the availability of the grid and can give the assurances to the grid operator that they will not disrupt the grid. And we can do that today. That's what work. This is -- there's no -- we have no need to improvements in our technology stack to be able to do it. So great. The second one that is also in a rising need or rising need is backup power. Historically, we haven't played that game. But with our costs coming down as they are and our ability to -- our density improvements, we can now provide backup power and significantly reduce. I won't say eliminate, but significantly reduce the need for diesel generators. So that's the second need that we're seeing. We can accelerate interconnection to the grid, and we can reduce some of the cost of the diesel generators by providing backup power. The third one is the one we have talked about in our last call, this power quality, this idea that we can -- we will have to manage the variability of energy demand by AI data centers. That -- if you ask me today, that hasn't been -- the first thing is that there are other technologies that can address that. That's the first one. The second one is that it is a need that is not as big as we thought it was going to be. So it's probably around that $8 billion number. And it is something that data centers, when they look at what they're doing, their speed to power is a much more important element than this one because the other one they can manage in some other way. We are committed to delivering the 3 products. The interconnection flexibility to accelerate interconnection, the backup power capabilities. And these two that we can do today, and we're very well positioned to do. Smartstack is the densest project in the world. It is a project that because of the [indiscernible], the way we are designed provides very good safety, better than, I would say, very, very good. And then third, our cybersecurity, our total control on software, our ability to ensure that no one else can get it. So the power quality is something we're working on with our inverter manufacturers. We'll get it resolved quickly, but it's still a work in progress. But we thought that was going to be a gating item the backup power is going to be a gating item for us to serve this market. That's no longer the case. I would say it's a cherry on the top. If you can deliver the last 2 and this one is great, but it's not a gating item. So great market, multiples of what we told you in terms of what we do, and we don't need to do a major technology. And my last point, we can -- we don't have a clear view today. This is just starting on how much we can capture. What I will say, we are very well positioned to do safety, density. Some of our competitors are claiming density, which is 20% to 25% less than what we can do. So that tells you we can do very, very well, and we are -- we have -- we hired Jeff. Jeff comes with knowing how to serve this market. He's been one of the structure, go and get this done. And this is not only happening in the U.S. This is a global phenomenon. We have in our pipeline. It's mostly U.S. today, but we're starting to see pipeline coming both out of Australia and Europe. So sorry for the long answer, but that we're excited about this opportunity. Brian Lee: Yes. No, I can definitely sense that. I appreciate all the color. Maybe just one more question on that topic. From a P&L timing and impact perspective, can you give us a sense of the conversion time line for this data center pipeline? And is any of it embedded in your revenue guide for fiscal '26? And maybe just lastly, margins relative to core margins. Are these going to be higher margin just given the customer subset you're dealing with? Curious on the impact on margins as well. Julian Jose Marquez: I'll say that of the 30 gigas, half are '26 order intake, half of our '27, give or take, and most likely projects that will be -- will convert into order intake later in the year, not revenue for '26. We have to see how much revenue for '27 is unclear. In terms of margin, this is a new segment. I don't want to talk about it publicly. But what I will say is that we can provide a lot of value to our customers, a lot of value. We can deliver our product quickly, give them the confidence on our security, the best density. And we are -- and so we are very confident that we can create a lot of value to our customers. That's where we're concentrated. Operator: Our next question is coming from the line of Dylan Nassano with Wolfe Research. Dylan Nassano: Just want to go back to the Q4 kind of underperformance versus the guide. I know that in the previous quarter, manufacturing delays kind of came up, but it sounded like maybe those were resolved and you were operating on schedule again. So I just want to check what kind of changed between the last call and now? And like are these incremental kind of problems that popped up? And anything you can give us just to kind of boost confidence going into the quarter that these are kind of resolved at this point? Julian Jose Marquez: So we have -- thanks, Dylan, and clearly, we're disappointed with what happened. I mean, first thing, but I don't want to say sound apologetic in what I'm telling you. But -- so what do we have? We have our suppliers in the U.S., many, but I say the 3 main suppliers. Out of the 3 main suppliers, 2 are doing great. I would say even more, the 2 that have the more complex process are doing very well. So we're very happy, ahead of schedule, doing wonderful, no problem. We have a less complex process, which is enclosure manufacturing. When we met last quarter, we had a plan that was going to be able -- going to allow the delivery of our revenue for the year, but that it required a major staffing process that I think we underestimated the ability to staff that facility. I think that today, that we have done 2 things. We have clearly gone out and continue staffing and preparing people, and we're essentially done in terms of staffing. There's still some people, but it is essentially done. And we have made some changes in the way we are with our contract manufacturer to ensure that we meet our -- that we need to facilitate the manufacturing process. That's the right word. And I think the two combinations, having staffed the place, and we're talking about a significant number of people. This is roughly 500, 600 people that we needed for that facility to work with 3 shifts and all of that. We were fully -- essentially fully staffed. And with the changes in operations, we are meeting our numbers. I think we are -- we expect to do -- we were doing at the end of last quarter, 1.5 closures per day. We are already at 5, and we are ramping up, and I don't know that we will be able to meet our numbers very well. So we are very confident today. Unfortunately, we did not meet what we could not deliver on the revenue, and we are disappointed, but we learned very quickly. Our operation and manufacturing team is very, very good and they have put in place their corrective measures to this. Ahmed Pasha: Yes. Dylan, the only thing I would add is I think that from our perspective, as Julian said, yes, because of the labor shortage, we were roughly 1.5 containers per day. Fast forward, we added 500 people. We are now running at 5 containers per day and which is in line with our expectations for the quarter. So we feel pretty good where we are. But equally importantly, I think we pulled our levers to deliver on our profitability commitments. As you saw, the margin and the EBITDA, we are in line with our top end of our range. Dylan Nassano: Got it. I appreciate that. And then my follow-up, I just wanted to check on this new cell supplier. Can you just give us any more color around how much incremental capacity this may get you? Any -- are you prepaying for any sales like similar to what you did with AESC? And yes, so mostly just curious like does this get you net additional capacity to serve the U.S. market? Ahmed Pasha: Yes, I can take that question. Dylan, yes, I think this gives us enough capacity to serve our projected loads for the next couple of years. So we feel pretty good what we have signed. And in terms of the deposits, no, no material deposit commitments. I think it's just as we get the deliveries, we make those payments. Operator: Our next question coming from the line of Ameet Thakkar with BMO Capital Markets. Ameet Thakkar: I just wanted to kind of go back to kind of the implied EBITDA margin for this year versus last year. I mean it looks like the EBITDA margin is down, and I know the gross margin is also kind of down sequentially. But it looks like the implied ASPs in your bookings are actually up pretty significantly kind of quarter-over-quarter. I was just wondering if you could kind of walk us through why, I guess, the gross margin is lower year-over-year versus kind of the rolling 12 months. Ahmed Pasha: So I think the ASPs, your question is, yes, I think is down, but no surprise. I think ASPs are down roughly, I think, give or take, 10% or so. In terms of the gross margin, I think we basically are pretty much in line. I think the EBITDA margin as you ask, is obviously, there's an operating leverage because volume was less. Last year, our overall revenue was $2.7 billion. This is $2.3 billion. So yes, I think -- but the more important thing, frankly, from our perspective is as we grow the top line, we will benefit from the operating leverage and our goal is to continue to grow EBITDA. Obviously, that is what the shareholders care. At the end of the day, top line is great, but at the end of the day, that should translate into the bottom line. And that's what we, as a management team also are on the same page. So stay tuned. I think our goal is to continue to improve the top line and also the bottom line. Ameet Thakkar: And then I know you kind of talked about a couple of kind of uses of liquidity for next year. But just in terms of kind of like the kind of the free cash flow expectations relative to that $50 million kind of EBITDA guidance at the midpoint. Any kind of, I guess, guidepost there, please? Ahmed Pasha: So yes, I think the $50 million EBITDA, I talked about the working capital, roughly $100 million as our revenue is growing by from $2.3 billion to $3.4 billion. So $1 billion or so of additional -- as if you recall, we said in the past, working capital needs are roughly 10% of our growth in revenue. So about $100 million of working capital needs and then $100 million of investments in the domestic content, as I mentioned in my remarks. Beyond that, we don't have any material commitments. So I think next year, our goal is to be free cash flow positive as our revenue grows and our EBITDA grows. So I think that is the goal. But this year, $50 million is the EBITDA, but then we have working capital needs of $100 million. But I think more importantly or equally importantly is liquidity will remain very robust with this working capital use. So our goal is to continue to strengthen our balance sheet with growing cash and our credit facilities. So we feel pretty good where we're going to land at the end of the year. Operator: Our next question coming from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Nicely done this quarter. Just following up on a little bit about some of the margin commentary and just filtering that back in with AESC. Can you comment a little bit on how you think about margins being tethered to whatever happens with respect to your domestic supply, whether that's with AESC or incremental supply. Does that -- is that part of the commentary about margin improvement? And then related, can you just give a little bit more of a detailed update around AESC specifically? I know that you've sort of "procured a backup here, if you will. But how is that relationship evolving here? How would you frame out volumes from one side or the other side of that supply arrangement now at this point? Julian Jose Marquez: In terms of margins, in terms of AESC, I mean, any deal we do, we might do with AESC will be accretive. So that's the way you need to think about it. We -- when and if it happens, we'll communicate what it means in terms of margins. And I think that Ameet's point was more general. When you looked at our performance -- at least since I got here, we got a company with negative margins of 4%. We're now on a running average of 12 month average, we're now at 13.7%. So my point is we all here want to commit to continue showing a growing line. That's kind of what we're doing, and we're finding ways to do it today and continue to work on it. That was more of that coming in that direction. In terms of AESC, what I would say is that we are -- meeting the OB3, OBBA compliance is a complex process. We have been able to make a lot of progress. And generally, you can look at it from 3 areas. You need to meet the IP. And I think we have a solution that's done and we can -- the IP in that -- for that production facility meets the criteria of OBBBA3 -- OBBA or meet the criteria. Then we have the material systems, the need that the suppliers of the facility cannot come from PFP suppliers. We have a plan that will deliver that. And then we have the ownership. And the ownership is the one where we are still debating. We are making good progress. We're committed to resolve it, but we haven't -- have not reached a final deal. What we have always said, we're not the only option in town. So there are other ways that they can resolve this issue. And I don't want to -- we clearly believe that we are the best option from my point of view, but they can do something different. So -- and then on the new supplier, I mean, what it is, is we're generally diversified suppliers. That's a rule of life. So we're diversified suppliers. And the demand we see is very big. So we need to continue to meet the growing demand. So our philosophy of diversified suppliers and the growing demand call for the second supplier. So that's where we are. We are -- we see this as one of our competitive advantages. We are a first mover in this area, and we want to continue being the first mover. So that's the reason for our strategy. Julien Dumoulin-Smith: So just to clarify that real quickly, basically, your current plan and current margin expectations assume that you're served with AESC. And would it be improved or detrimental to shift the supply, if I heard you right or understand. Julian Jose Marquez: Yes. I mean I will say the following. The -- as I said, a potential deal with AESC will be accretive to the current numbers. That answer I can provide. Julien Dumoulin-Smith: All right. You're already here cutting it. Okay. Understood. Julian Jose Marquez: No, I'm not cutting that. Having done the deals yet. Julien Dumoulin-Smith: Okay. All right. Got it. No, that's why I asked. I appreciate it. Operator: Our next question coming from the line of David Arcaro with Morgan Stanley. David Arcaro: In terms of the data center pipeline, I was curious just to get your -- what you're currently seeing. Is this bringing larger project sizes versus your current backlog? Is it more U.S. heavy in terms of region where you're seeing that demand? And would be curious what kind of duration you might be exploring for those types of projects? Julian Jose Marquez: Yes. I'll say that generally, we talked during the call with one of the big drivers of the elasticity of demand where you can see the elasticity of demand for our technology as prices has come down has been how projects are getting bigger. And we have today 38 projects that are 1 gigawatt hour or more. I don't think that the data centers are bigger, naturally bigger, they are in line with what we have when you look at it, some are smaller, some are bigger, but generally in line. In terms of where geographically today, I will say the majority come from the U.S., and we have seen some -- the pipeline development in APAC and Europe is a little bit behind, but -- so that we see what we will see this as a global market. So that's kind of our view. In terms of duration, it depends on the use case, we see from 2 to long duration storage, both the whole -- nothing below 2, but that's where we are. David Arcaro: Okay. Got it. That's helpful. And then I was just curious about strong order intake in the quarter -- in this past quarter. I was wondering if you could talk to what the -- whether there's a common driver there that you're seeing. It doesn't seem to be data center growth just yet, if I'm interpreting that correctly. So what are you seeing in terms of what drove the strong rebound? Julian Jose Marquez: It was Australia the big driver of the strong quarter in '20, the strong order intake. We have these deals in Australia, as you know, that we were delayed in '25. We signed them all and they all -- most of them occur late in the year. So that's a big driver of it. But we see for '26, the U.S. being the big driver and a little bit of a change. And we'll see some -- I expect to see some data center stuff happening in '26 late in the year, most likely. Operator: Our next question coming from the line of Mark Strouse with JPMorgan. Mark W. Strouse: I just wanted to go back to the second domestic content supplier. Ahmed, I think you said that your needs are met for the next couple of years. But I just wanted to clarify, is that capacity available today? Or is there kind of a ramp period that we should be expecting? Ahmed Pasha: No. I think the capacity is available -- will be available in about next 10, 11 months. But I think the capacity that we need to serve our load, as we discussed during the call, we have about 85%, 90% of our revenue in our backlog, and we have already secured the capacity for that. So we don't need this capacity, but we are now locking in additional capacity to basically secure our future business. Mark W. Strouse: Okay. And then on the long duration side, is Smartstack the only go-to-market solution that you have there? Are you potentially looking to partner up maybe being a systems integrator for some of the more emerging technologies that are out there? Julian Jose Marquez: Smartstack will be our accelerator. What we're going to do, and we believe that very competitive. So it will be Smartstack. Operator: Our next question coming from the line of Christine Cho with Barclays. Christine Cho: With respect to the data centers, you mentioned the 3 different ways that you can serve data centers, the interconnection backup and power quality. Would you be able to sort of like break down the opportunity set here and maybe rank it? Like is half of the opportunity for power quality and backup is the smallest? And for duration, you mentioned 2 hours is the low end. I'm assuming that's for power quality. Is it similar for those who are interested in getting storage for interconnection purposes? Julian Jose Marquez: Yes. First point, that's what -- that I would like to highlight. So we have these 3 needs. What's wonderful about our technology and now talking about battery storage, not necessarily ourselves, is that we can stack up these 3 needs with the same technology solution. While the other technology solutions can do one or the other, but they cannot do what we do, which is facilitate interconnection, do backup power and do quality. And that makes the difference. And I think that's what makes our solution so attractive to our data centers. We can resolve 3 problems with one technology. So that's very, very good. In terms of the 2 hours, these are -- depends on the need of the customer. So I cannot really put out -- can tell you this is what drives it. But generally, you're right on the view that backup power and interconnection flexibility will tend to be longer duration, while power quality will tend to be shorter duration. Generally that's true. But I think you need to think about this differently. Is the ability to serve the 3 needs with the same infrastructure. That's what we are aiming for because that's where I think that will make our technology, the preferred technology solution to resolve to address these problems. Christine Cho: Okay. And then if you are able to vertically integrate with AESC, how should we think about what the mix will be between the AESC supply and the second supplier? And with this second supplier, is a contract for a set amount of time? And then lastly, for your international projects, are you also diversifying your cell suppliers there? Julian Jose Marquez: We are -- we've always been diversified internationally. We're just being diversified locally. My view on this is that it is -- we convert any battery into a great technology solution. That's what we do as a company. So who the battery supplier is not as relevant. It shouldn't be as relevant. My customers shouldn't care and my financial investors shouldn't care. What I -- the real value we bring is the ability to make any battery great, no matter what. So that was my answer to it. I don't know what the mix will be. But as I said, for my customers, it will be irrelevant from a product delivery and capabilities, what batteries are produced. Christine Cho: But for you, doesn't it matter in that if you are using AESC and you're vertically integrated, it's higher margin for you versus... Julian Jose Marquez: I care about my customers. That's what I lose. Yes we will figure out that part. But the important thing is the ability to [indiscernible] the route to success in meeting your customer needs. That's what drives the company. But you're right, we might be able to get a capture -- if we were to be vertically integrated, there will be more margin on one or the other, but my real -- the way to win is meet the customer needs. That's the way to win. Not -- if you try to optimize something else, you get -- you lose the side. Your customer needs and that drives profitability, that drives margin, that drives everything. Operator: Our next question coming from the line of Justin Clare with ROTH Capital. Justin Clare: So I just wanted to follow up on the second source of the cell supply here. So I think you mentioned it will be available in the next 10 to 11 months. So just at the beginning of the year, do you expect to depend on the source of cells from AESC for domestic U.S. projects until that second source is available? And then so I'm just trying to get at how important is it for you to resolve the challenges with the FIAC restrictions by early calendar 2026 in terms of thinking through the outlook for the year? Julian Jose Marquez: Very, very important. That's what I will say. We have a plan, and we've been working on it, and it's very, very important to do it. So that's what I can tell you. I mean, we will get it done. Justin Clare: Okay. Got it. Good to hear. And then just a follow-up on the data center opportunity. I was wondering, are you seeing -- or could you talk about the ability to kind of successfully accelerate interconnection with storage being added to data centers? Is this being done today? Or do you need the regulatory framework to change in order to support this use case? And then wondering what the timing of orders associated with that use case might be? Julian Jose Marquez: We haven't signed any of these contracts yet. So this is a work in progress, but we believe we can -- we have the ability to ensure that the data centers meet the interconnection restrictions that they have. So I would say yes. I don't think you need a major regulatory change. It's just ensure that you meet whatever the grid is offering. Operator: Ladies and gentlemen, that's all the time we have for our Q&A session. I will now turn it back to Chris for any closing comments. John Shelton: Thanks, Olivia, and thanks to everyone for participating on today's call. We look forward to speaking with you again by first quarter results, if not before then. And please do -- looking forward to meeting with everyone as your questions arise. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Good morning, and welcome to Amentum's Fourth Quarter and Full Fiscal Year 2025 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. I would now like to turn the call over to Nathan Rutledge, Senior Vice President of Investor Relations. Please go ahead, sir. Nathan Rutledge: Thank you, and good morning, everyone. We hope you've had an opportunity to read our earnings release, which we issued yesterday afternoon and is posted on our Investor Relations website. We have also provided presentation slides to facilitate today's call. So let's move to Slide 2. Please note, this morning's discussion will contain forward-looking statements that are subject to important factors that could cause actual results to differ materially from anticipated. I refer you to our SEC filings for a discussion of these factors, including the Risk Factors section of our annual report on Form 10-K. The statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but specifically disclaim any obligation to do so. In addition, we will discuss pro forma financial measures prepared in accordance with Article 11 of Regulation S-X as well as non-GAAP financial measures, which we believe provide useful information for investors. Both our earnings release and supplemental presentation slides include reconciliations to the most comparable GAAP measures. We do not provide reconciliations of forward-looking non-GAAP financial measures due to the inherent difficulty in forecasting and quantifying certain significant items. These pro forma and non-GAAP financial measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. Our safe harbor statement included on this slide should be incorporated as part of any transcript of this call. With me today to discuss our business and financial results are John Heller, Chief Executive Officer; and Travis Johnson, Chief Financial Officer. We are also joined by other members of management, including Steve Arnette, Chief Operating Officer. With that, moving to Slide 3, it's my pleasure to turn the call over to our CEO, John Heller. John Heller: Thank you, Nathan, and thank you, everyone, for joining us today. Fiscal year 2025 marked Amentum's first full year as a public company, a transformational year that helped define who we are, our differentiated position in the marketplace and where we're going. It was a year of disciplined execution, strong performance and meaningful progress across every part of our business. I am so proud of our people and what we've accomplished together. At Capital Markets Day in August of last year, we established our objective to successfully integrate and deliver end-to-end advanced engineering and technology solutions to government, international and commercial customers across key end markets, including defense, nuclear energy, intelligence and space, and we're executing exactly as we had envisioned. As a result, Amentum has established a solid foundation for sustainable growth. This morning, I will detail how Amentum has proven our ability to operate with agility, deliver for our customers and create long-term value for our shareholders. I will focus on 3 key areas: first, an overview of how this exceptional year unfolded and how it positions Amentum for a promising future. Second, highlights from an impressive quarter, including strategic awards and key performance metrics; and finally, our strategy to drive Amentum's growth in fiscal year 2026 and beyond. Let's begin on Slide 4, which captures the core of our fiscal year 2025 performance centering around Amentum's people, operational excellence, financial performance and effective execution of our strategy. First, our people. Fiscal year 2025 tested our resilience and our people delivered. Against the backdrop of evolving customer priorities, our team stayed focused and delivered without pause. Our leadership maintained its steady focus on the fundamentals, protecting the long-term health of the business, ensuring continuity for our customers and ensuring that our people continue to thrive regardless of the market environment. Through a dynamic operating environment, our teams continued designing and delivering critical solutions for our customers. That resilience is reinforced by our ability to hire thousands of skilled professionals worldwide, maintaining attrition well below the industry average and in our continued recognition as an employer of choice. We take pride in being a company where people want to build their careers while having a positive impact on our world. To that end, we're continuing to expand our centers of excellence, which provide specialized technology to drive innovation and progress. For example, we recently opened our nuclear Center of Excellence in Oak Ridge, Tennessee, which serves as a strategic hub for nuclear expertise for North America. We've launched technical connection teams and mobilized an AI expert community network supporting upskilling and innovation at every level across the globe. The integration of our legacy businesses was one of the most significant in our industry's history, a massive undertaking that demanded focus, collaboration and discipline across every part of the company. Thanks to our team, we have exited all transition service agreements, completed all of our key integration milestones on time and within budget. And are on track to deliver at least $60 million in net run rate synergies by the end of fiscal year 2026. That operational readiness anchored in the strength of our people and culture is one of Amentum's defining advantages, and it translated directly into strong financial performance. As a result, we met or exceeded guidance across every key metric, underscoring our consistency and discipline. Starting with revenues, which increased to $14.4 billion, representing pro forma growth of 4%. Adjusted EBITDA of $1.1 billion, an increase of 5% year-over-year. Adjusted diluted earnings per share of $2.22 was up 11% and free cash flow of $516 million, supporting acceleration of our debt reduction objectives, bringing net leverage to 3.2x. These results demonstrate the strength of our operations and the reliability of our business model. And taken together, this year's achievements underscore the strength and breadth of our platform. In short, we executed with precision and strength, delivering on our commitments while positioning Amentum for sustained success. Please turn to Slide 5. Our disciplined execution and focus on growth translated into a series of strategically significant wins that strengthen our position across key markets. During fiscal year '25, we submitted $35 billion in bids, achieving a full year book-to-bill ratio of 1.2x and a quarterly book-to-bill ratio of 1.6x. Our backlog grew 5%, reaching over $47 billion. And at year-end, we had $20 billion in proposals awaiting awards. Our quarterly book-to-bill ratio was driven by $6.4 billion in total bookings, reflecting continued demand in several strategically important wins, including the U.S. Space Force Range contract, a new $4 billion 10-year single-award IDIQ. This award now adjudicated and booked into backlog is one of the largest services contracts ever awarded by this customer. It cements Amentum's leadership in space systems and technology and solidifies our position in this fast-growing market. In the U.K., Sellafield selected Amentum as a remediation partner for the site under a $1.8 billion 15-year contract, where we are leveraging our advanced decommissioning solutions, systems engineering and next-generation nuclear material processing and disposition capabilities. Another exciting win came from the civilian side of our space portfolio with the NASA Cosmos contract, which is a 9-year $1.8 billion joint venture award to deliver critical mission operations, systems and training solutions supporting NASA's current space flight programs and enabling future deep space exploration. In the quarter, we were notified that this award is being protested. Therefore, it is not included in our fourth quarter backlog or book-to-bill results. We are confident in the strength of our bid and look forward to its resolution. And finally, we secured nearly $700 million in awards providing a range of advanced engineering and technology solutions for intelligence customers, including a win developing and delivering AI-enabled software coding solutions. Together, these results underscore the trust that our customers have placed in Amentum to execute complex programs at scale, and we enter fiscal year 2026 with strong momentum, preparing to bid at least $35 billion. Turning to Slide 6. Fiscal year 2025 brought significant change, not just in Washington, but across the globe and throughout our industry. The transition to a new administration introduced a new set of priorities and objectives, impacting contracting time lines, funding cycles and future spending direction. For Amentum, this environment reinforced the strength and resilience of our business model. Our work is anchored in mission-critical long-duration programs that are essential to national defense, energy security and space superiority. Our diverse portfolio, which includes 20% of revenue tied to commercial and international work provides a degree of insulation from sector volatility. Combined with our strong backlog and robust pipeline, we have high visibility into future revenues. This structural agility allows Amentum to rapidly adapt to shifting priorities while delivering consistent results for customers. As the government refocuses on efficiency, speed and accountability, Amentum is well positioned. Our scale, performance record and proven operational discipline make us a trusted partner to our customers. For investors, that combination represents a low-risk, high visibility opportunity at a time when consistency and reliability are at a premium. Simply put, Amentum represents stability in a period of transition. Let's turn to Slide 7 to discuss Amentum's growth strategy. Our core growth areas where we have long-standing leadership positions across large, stable, mission-critical areas provide dependable revenue, strong cash flow and predictable returns, and they remain central to the steady performance that defines our company. These areas, underpinned by several core capabilities are deployed across multiyear, often multi-decade programs and some notable areas include RDT&E, intelligence operations and analysis, homeland security and border protection, environmental remediation and defense engineering, logistics and modernization. As an example, you can see this in work on our ITEAMS program in INDOPACOM, where we're strengthening C5ISR capabilities for the U.S. Armed Forces by applying rapid prototyping and digital engineering methods to accelerate speed to mission. It's also reflected in our support to the Naval Surface Warfare Center Crane, where we integrate next-generation sensors and apply model-based systems engineering to enhance reliability and life cycle management. Whether we're leveraging machine learning solutions in support of customers across homeland and national security missions, delivering digital engineering tools on behalf of intelligence customers or deploying advanced environmental solutions around the world, our core growth areas deliver consistent performance and create the platform from which the rest of our business continues to scale. Turning to Slide 8. Complementing that foundation are our accelerating growth markets powering our future growth, space systems and technologies, critical digital infrastructure and global nuclear energy. They are growing rapidly, fueled by generational investments in national security, energy resilience and advanced technologies such as AI, robotics and automation. They are also margin accretive, relying on advanced engineering, AI-enabled integration and high-value technical expertise. And they are global, creating opportunities across the U.S., U.K., Europe and other allied nations where Amentum's credibility and scale make us a natural choice for government and commercial customers seeking a trusted partner. Now let me provide a bit more detail on these markets. First, the rapidly evolving market for space systems and technologies is generating demand signals from both the national security community in a fast-growing commercial sector. Our work in launch infrastructure, systems integration and space flight operations positions Amentum at the intersection of government and commercial space, supporting missions that will define the next generation of space exploration and defense readiness. Next, we're excited about our growing work providing digital infrastructure solutions. Here, we're supporting advanced telecom systems, deploying next-generation data center solutions and engineering the backbone of networks for national security and commercial customers alike. For example, commercial awards in fiscal year 2025 encompass the design, deployment and optimization of 5G networks and critical infrastructure management. Through strategic partnerships and capabilities, including MDSE-enabled platforms often leveraged from work in our core growth areas, we're future-proofing networks and data centers to meet the demands of low latency, data-intensive mission environments. By combining our engineering depth with turnkey connectivity and resilient cloud architectures, Amentum is positioning itself as a trusted provider of mission-critical digital infrastructure for the world's most demanding users. And finally, turning to Slide 9. As I reviewed during last quarter's call, Amentum is well positioned to lead the next generation of nuclear power. Our teams deliver full life cycle nuclear engineering capabilities, including design and licensing to construction, operations, modernization and life extension and decommissioning. The global resurgence of nuclear energy driven by energy security needs and the explosive demand from artificial intelligence and next-generation manufacturing is creating a market with substantial tailwinds. For Amentum, this represents a multi-decade opportunity for sustained double-digit growth and meaningful margin expansion. I look forward to providing future updates on our work in the nuclear market and diving deeper into the space systems and technologies and critical digital infrastructure markets on future earnings calls. When you combine the durability of our core growth areas with the momentum of our accelerating growth markets, the result is a portfolio that delivers both stability and scalability. Our lower-risk, long-cycle businesses generate the cash flow and institutional strength that allow us to incubate high-growth opportunities without compromising financial discipline or balance sheet flexibility. This is how we think of Amentum's strategy for growth, a well-positioned portfolio that consistently delivers growth, margin expansion, sustainable free cash flow and compounding returns year after year. With that, I'll turn it over to Travis. Travis Johnson: Thank you, John, and good morning, everyone. I'm excited to discuss with you today another outstanding quarter of performance that capped off what has been an exceptional first year for Amentum as a publicly traded company and to share our outlook for fiscal year 2026, which reflects momentum we're seeing across the business and underlying growth across all key metrics. As John noted, our strong finish to the year demonstrates the continued resilience of our diversified portfolio and was enabled by the extraordinary efforts of our dedicated employees around the world. Their unwavering commitment to execution and operational excellence delivered both exceptional outcomes for our customers and financial results that surpassed our expectations. With that, let's begin with an overview of our financial performance on Slide 10. I'd like to again highlight that while our GAAP results provide an accounting view of Amentum's legacy business, excluding CMS, today's discussion will focus on our non-GAAP results compared to the pro forma results from fiscal year 2024. These figures offer a combined view of the new Amentum business and provide performance insights on a more comparable basis. Revenue momentum accelerated to end the year with $3.9 billion for the quarter and $14.4 billion for the year. The strong performance was driven by continued demand and year-over-year increases in both Digital Solutions and Global Engineering Solutions and exceeded our expectations as a result of nonlabor timing and higher customer spend ahead of the government shutdown. On an underlying basis, after normalizing for the previously disclosed additional working days, joint venture transitions and divestitures, revenue growth was approximately 4% for the quarter and 2.5% for the full year. Adjusted EBITDA of $300 million in the quarter resulted in $1.1 billion for the full year, representing annual growth of 5% and adjusted EBITDA margin expansion of 10 basis points. Full year margins, which were impacted by a higher non-labor mix in the fourth quarter, benefited from strong operational performance in both segments and from our cost synergy initiatives. Adjusted net income was $154 million for the quarter and $542 million for the year, which generated adjusted diluted earnings per share of $0.63 for the quarter and $2.22 for the year. Adjusted EPS grew 11% year-over-year, consistent with the strong revenue and margin expansion performance. Moving to our reportable segment results on Slide 11. Digital Solutions generated revenues of $1.5 billion for the quarter and $5.5 billion for the year, representing 11% and 7% growth, respectively. The year-over-year increases were driven by the ramp-up of new contract awards, led by continued strength in the commercial digital infrastructure market and additional working days, which more than offset expected contract ramp downs and the divestiture of Rapid Solutions. Adjusted EBITDA increased to $116 million for the quarter and $437 million for the year, resulting in full year growth of 8% and adjusted EBITDA margins of 7.9%. Turning to Slide 12. Global Engineering Solutions generated revenues of $2.4 billion for the quarter and $8.9 billion for the year, representing 9% and 2% growth, respectively. The year-over-year increases were driven by new contract awards, growth on existing programs and additional working days, which more than offset the expected contract ramp downs and the impact from JV transitions in the fourth quarter. Adjusted EBITDA increased to $184 million for the quarter and $667 million for the year, resulting in full year growth of 3% and adjusted EBITDA margins of 7.5%. Turning to Slide 13 to cover our cash flow and capital structure highlights. Fourth quarter and full year free cash flow of $261 million and $516 million, respectively, were slightly better than our expectations and reflects strong cash earnings and our continued unwavering focus on working capital efficiency. This performance enabled additional debt repayments of $550 million during the quarter, bringing full year repayments to $750 million and reducing our net leverage to 3.2x. We ended the year with $437 million in cash, an undrawn $850 million revolver and no near-term maturities. With an enhanced balance sheet position, we now have an accelerated and clear path to achieving net leverage of less than 3x by the end of fiscal year 2026. Looking ahead, we will remain disciplined in our approach, maintaining a prudent capital structure that enables flexible and opportunistic deployment. Whether we are investing to drive sustained organic growth, reduce debt, pursue accretive strategic acquisitions or return capital to shareholders, our goals are the same: maximize free cash flow per share and deliver strong compounding shareholder returns. Simply stated, we're committed to retaining the financial strength that enables Amentum to grow, invest and create long-term value while doing so with precision, prudence and purpose. On Slide 14, let's now discuss our fiscal year 2026 outlook. Based on our bottoms-up forecast process for fiscal 2026, we expect revenues in the range of $13.95 billion to $14.3 billion or 3% growth at the midpoint after normalizing for the additional working days, JV transitions and divestitures previously mentioned. The ramp-up of new program awards and on-contract growth is expected to more than offset the wind down of certain historical programs and impacts from the federal government shutdown. While the majority of Amentum's work is mission-critical and continued without interruption, our guidance contemplates an approximately 1% impact as a result of reduced spending in Q1 on certain programs and from delays in award decisions. With less than 10% of revenues expected to come from new business and with $20 billion of submitted bids awaiting award decision, we have good visibility and are confident in our position starting the fiscal year. We expect adjusted EBITDA in the range of $1.1 billion to $1.14 billion, reflecting underlying growth of 5% at the midpoint, driven by margin expansion of approximately 20 basis points as we realize the benefits of our cost synergy initiatives as well as contract mix and operational improvements. We expect adjusted diluted earnings per share of $2.25 to $2.45, up 12% at the midpoint on an underlying basis, which assumes 245 million weighted average shares outstanding and a tax rate of about 24.5%. And finally, we expect free cash flow of $525 million to $575 million or 12% underlying growth at the midpoint, driven by higher cash earnings and reduced interest from our debt reduction initiatives. As it relates to timing, we expect first quarter revenues and adjusted EBITDA to be consistent year-over-year on an underlying basis, followed by quarterly sequential increases as newly awarded programs, including the key awards John mentioned earlier, ramp up throughout the year. Free cash flow is also expected to follow normal seasonality with the majority generated in the second half of the fiscal year as a result of fringe benefit and payroll timing and as a result of expected strong collections in the fourth quarter given our alignment with the government's fiscal year-end. Additional key assumptions for our guidance are included on Slide 14 in today's presentation posted on our Investor Relations website. Wrapping up on Slide 15. As we conclude a transformative year for Amentum, highlighted by exceeding our financial commitments in a dynamic market environment, advancing our growth objectives with key strategic wins and a 1.2x book-to-bill and surpassing our cash flow and deleveraging expectations, we are excited about the road ahead. Our portfolio is strategically aligned with enduring global trends, customer priorities and tailwinds in accelerating growth markets. While pleased with our current progress and achievements, we remain focused on delivering our strategic objectives and driving long-term value for all stakeholders. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Colin Canfield with Cantor. Colin Canfield: Can you discuss perhaps the level of kind of timing or onetime margin and cash flow dynamics in the quarter? And then how much Section 174 benefits were included in fiscal 4Q versus the guide? And then maybe talk through if there are any kind of pull forward or pushout dynamics around margins and cash related to the merger? Travis Johnson: Colin. A little bit to unpack there, obviously, all focused on cash. Maybe starting at the top. Obviously, we're pleased with our year-end cash performance, which, as I said in my prepared remarks, slightly exceeded our expectations as a result of the strong revenue performance that we saw in the year. As far as onetime items in the quarter, obviously, we've talked about the additional working days, which generated additional cash, around $20 million is the impact from that. So that would be kind of an item to normalize as we head into FY '26. And then moving into FY '26, we're obviously really excited about the cash flow trajectory. We're expecting, as I said, 12% growth at the midpoint of our guidance on an underlying basis. And we do expect to receive some benefits from the OBA tax law changes around immediate expensing of R&D, also smaller benefits, but still benefits around disallowed interest and CapEx bonus depreciation. So altogether, that's about a $35 million benefit to tax cash payments in FY '26. So put all that together, and again, just right along where we expected to be at this point, driving that double-digit free cash flow growth that we committed to at Capital Markets Day and excited to continue to head in that trajectory. Colin Canfield: Got it. And then maybe level setting us on the multiyear margin progression in terms of the synergy targets. I think one of the thesis that kind of folks are focused on is essentially shutdown-related dynamics just pushing everything 1 year to the right, but still fundamentally happening. So perhaps if you could talk through kind of how you think about FY '26 margin progression, the synergy contribution and perhaps kind of the multiyear framework set out at the Investor Day? Travis Johnson: Sure. So as we talked about at Capital Markets Day, our goal kind of a long year -- long-term goal by FY '28 is to get to 8.5% to 9% margins. And as we sit here today, we're exactly where we thought we would be. Cost synergies were obviously part of it, but we drove 10 basis points margin expansion in FY '25 in our actual results and the midpoint of our guide for FY '26 is another 20 basis points. So all in all, 30 basis points in the first 2 years together is exactly the trajectory we thought we would be on. And then as we head into FY '27, obviously, we'll have the full year impact from all of our cost synergy initiatives. And as John said, we're on track with all of our integration activities, including cost synergies and we'll exceed $60 million in net run rate cost synergies by the end of FY '26. John Heller: And I think the other part that we talked about on the call and we introduced for the first time of our overall two-pronged strategy of growth. And that to us is really what this story is all about. As we started out a year ago, we knew this would be a transition year this year, integrating, identifying the real opportunities, the white space opportunities, the growth opportunities that neither of those -- of the companies we put together could go after. And we've really strongly set our sights on putting a strategy together that can leverage the broad enterprise of momentum. We talked about our core markets, which we're leaders across those core markets, which gives us great opportunity for sustained growth. But it's about the accelerated growth markets that we've identified. They are strong already. We're leaders there as well, but it's only $4 billion of the $14 billion company. And we think there, the growth opportunities are stronger and the margin accretion opportunities are also stronger. So driving focus in those 3 accelerating growth markets across Space Systems and technologies, critical digital infrastructure and global nuclear energy all will result in margin improvement. And that's why we're still very excited about the targets we set out and the goal of 8.5% to 9% by '28. Colin Canfield: Got it. And maybe sneaking in a third, if you could just update us on how you think about kind of the timing, magnitude and multiple of any potential divestitures as well as the timing and magnitude of the upcoming SLS award. Stephen Arnette: I'm sorry, repeat the second part of the question to what award, I didn't catch all of that. Colin Canfield: SLS. So there's $4 billion in the reconciliation bill. It's been 3 years since we've gotten a pretty major SLS award and the competitive dynamics of that race are obviously a national security focus as well. So I just want to make sure we're level set up. Stephen Arnette: Yes. Thank you for the repeat. Happy to provide just a little bit of color on the Space Force Range contract. It is a topical issue for us right now because we've gotten through successfully protest period, and our teams are busy work right now today even as we prepare to assume operation for that large contract in December. So really excited about the Space Force Range contract. Really, just a quick synopsis at the top level, work on that contract about making sure the U.S. has assured access to space. And actually, there was a great article just yesterday in the Space News publication where they interviewed Colonel Chatman, who's the commander of Space Launch Delta 45, and he talked about how the launch cadence just continues to ramp. And both on the Eastern and Western range, we're working with [ Apollo Aera ] infrastructure. He highlighted how Congress has appropriated nearly $1.5 billion to be invested between now and 2028 to begin to upgrade that infrastructure. And so for us, at Amentum, we're coming in at an exciting time to that contract. So we're there certainly to maintain and sustain and support this launch cadence, but we're also there to engineer, upgrade and integrate all the capabilities needed for the future. So very excited about how that's going to play out beginning in December, phase in underway. John Heller: Yes. So just to be clear, that contract cleared protest, we are executing on that contract today. And as Steve mentioned, very excited. The first part of your question just about portfolio shaping. We're excited to have the opportunity with Rapid Solutions in our New Zealand business and noncore, very clear noncore elements of the business. But I would say today, we're very excited about our entire portfolio, the capabilities we've put together. We're leveraging across our entire business, very important for us as we look at the company as an enterprise and don't create silos. And we're leveraging across all different capability areas as we look at every opportunity we're bidding. So right now, we're excited about the portfolio we have. Obviously, we go through strategic planning every year. We look at where the growth -- largest growth opportunities are, and we will obviously look if there are any noncore assets and identify those. But I would say, right now, we're really excited about what we've put together and it's working. Operator: And the next question comes from Brian Gesuale with Raymond James. Brian Gesuale: Nice job on the print here. I want to dig in a little bit to these growth areas, John, if I could. Can you remind us how you play throughout the entire kind of nuclear life cycle, how big that business is today? And maybe as you lay out these broad ambitions for nuclear power in the future that have been put forward, when you'll start to see some of those things inflect for your business? John Heller: Yes, sure. We highlighted this last quarter as well. So I do -- I would reference everyone to go back to that quarter. There's an additional slide there, but we kind of brought in one of the slides from last quarter into this quarter that kind of actually helps answer that exact question. So for us, what I would say is we play a mission-critical role across the entire nuclear energy life cycle. So it starts with design into construction and commissioning all the way through operation, maintenance and decommissioning. And it's really across all sectors of the industry, which starts with new development, construction and operation of gigawatt-sized reactors. It also covers SMRs, a lot of activity in the marketplace today around the world on developing that capability, that new design capability so that we could have small modular reactors existing in the United States and around the world, and we're working with a large number of these developers to help bring those capabilities to the market, but that's going to take some time. So a lot of engineering work right now through likely this decade. But then the other area is really on plant life extension and upgrades. We're seeing the 3 Mile Island News, other areas across the United States where we want to ensure that we have the electricity we need to fuel the AI data center demands and other demands of robotic manufacturing and just overall electricity demand generally. It's an important part of the economy. It's been deemed a national security priority by this administration, and we're seeing a lot of good policy coming out of this administration that's driving this renaissance within the U.S. Brian Gesuale: Great. Really helpful. I want to talk also maybe about one of the other growth areas that we're really excited about on the space side of things. Can you maybe help us understand how much of that business is commercially oriented in defense given there's just so much activity in both those areas? And maybe if you could help us think a little bit about how Golden Dome from a presence and a launch activity perspective would drive your business and maybe the timing of that, whether that's part of '26 or part of an unfolding '27 story that's yet to reveal itself. Stephen Arnette: Yes. The -- today, I mentioned, we're just super excited about where we're at in this market and the continuing accelerating growth opportunities. Just to start, I think most people are familiar with the leading presence we have supporting the government with NASA and the whole civilian space exploration and all of those activities. A lot of Amentum colleagues right now preparing for the Artemis II mission that's scheduled for early 2026, and we're excited to be such a critical player in putting astronauts back in space and really excited about the preparations for that mission, everything from integrating the vehicle, launch control software, mission control software. And I think that our recent win on Cosmos, where we'll have now an Amentum team at NASA Johnson Space Center becoming engaged in mission operations and all of the things that extend through the complete life cycle of the mission kind of speaks to our strength in supporting that customer and their missions. Of course, that contract currently is undergoing corrective actions, so we're not underway yet. but that's a really good one. As far as your question about Golden Dome, just to give a bit of insight there, we really think we have a great right to win in terms of being a part of the solution that the U.S. government is developing. Today, we're heavily engaged with the Missile Defense Agency and helping to take the missile defense system digital, if you will. It's allowed us to deploy things like the hypersonic next-gen satellites for detection. We're doing things like virtual engineering, digital methods to integrate new technologies into the system. That capability and that expertise, we're also deploying for the NORAD mission, which is the North American Aerospace Defense Command. And so we're really excited about those capabilities. And the way Golden Dome comes to life for us is right now, the government is moving out on a Shield procurement. Shield is the acronym for a large IDIQ vehicle. It will be a multiple award vehicle, $150 billion. We are engaged in that procurement like many other in the industry. And so our proposal is them. We're looking forward to the adjudication of that. And I think that specific to your question, as we get toward deeper into FY '26, we'll begin to see specific task orders and tasking come out under that Shield vehicle. So we're excited about the opportunity there. So really cutting across national security as well as civilian space, there's a lot for us to draw on in the portfolio. And I think the last thing I would mention, and it comes into play even with our new Space Force Range contract, John hit it in the prepared remarks, but so many of these contracts put us at the intersection of government and commercial space, and we have a great track record of working with those commercial partners. So we think that proven capability is going to be instrumental for the government to accomplish all of their objectives that they have for the space domain. Operator: [Operator Instructions] Next question comes from Tobey Sommer with Truist. Tobey Sommer: The company has reduced leverage faster than we anticipated. When do you think you'd be at a point where you may be able to go on offense with capital deployment and start incorporating inorganic growth into the story? Travis Johnson: Yes, certainly, we're pleased with the leverage trajectory sitting at 3.2x here 1 year in to our merger and public company transition ahead of where we thought we would be. I'd say we remain committed to getting to that target that we set out at Capital Markets Day last year of less than 3x net levered, and we're on track to do that by the end of FY '26. As you know, our kind of cash timing, 2H will be back half weighted. So we'll get there in the second half of FY '26. And so obviously, now it's right around the corner, right? So we're starting to shift our focus and what that could look like. It will be obviously dependent on what opportunities are out there and available at that point in time. But as I said in my prepared remarks, regardless of what we do at that given point in time with our capital deployment strategy, we'll be looking to maximize free cash flow per share could be part of that, but it also could be continue to pay down debt or returning capital to shareholders. Certainly, as we get out of the kind of 2-year restriction period of the RMC, looking at share buybacks when it's trading at something below the intrinsic value of the stock could be an option. So we look forward to getting there in the second half of '26. John Heller: Yes. And what I would put a bow on that discussion is really the fact that we have these accelerating growth markets that we see as organic opportunities given the -- what we've created in the new momentum. And we think we can leverage and exploit those 3 areas of space systems and technologies that Steve talked about and the opportunities that are upcoming there that are organic, the critical digital infrastructure, which we will talk about on future calls. We haven't dived into that, but really about helping the AI economy to succeed cybersecurity and then global nuclear energy, which, again, we feel very confident that we have the organic capabilities to exploit. That doesn't mean we wouldn't look at M&A in the future to help us accelerate those, but we're confident we can win and grow in those areas today. Tobey Sommer: I appreciate that. And I just sort of have a modeling question since some of the growth areas have already been discussed of interest. Are there timing or mix issues for us to contemplate near term in modeling the quarterly cadence of revenue and EBITDA across fiscal '26? Travis Johnson: So just as we look at the time phasing throughout FY '26, Q1 will obviously have the impact from the government shutdown, but that will normalize throughout the year. So we do expect quarterly sequential increases in both revenue profitability and cash flow for that matter. Maybe just to provide a little bit more color, we see digital solutions as the predominant driver of growth for the company in FY '26. Obviously, Space Force Range contract is in that segment, and that will be ramping up as we grow throughout the year on that contract. And some margin expansion in Digital Solutions, maybe a little bit more modest than what we expect to see in Global Engineering Solutions. But we do expect some revenue growth in Global Engineering Solutions as well due to continued ramp-up of some new work as well as on-contract growth. And that's where we believe a lot of the margin expansion will come from in FY '26. So you can think about FY '26 kind of quarterly sequential increases as we move throughout the year. Operator: The next question comes from Mariana Perez Mora with Bank of America. Mariana Perez Mora: I wanted to follow up on the nuclear opportunities. In the prepared remarks, you mentioned double-digit growth and margin accretive type of work. When you talk about these margins, are they accretive because they are coming like significant like EBITDA pure to the contract? Or it's mostly because a lot of them come through nonconsolidated like joint venture type of EBITDA added to the segment? And then as a follow-up to that, when we think about these opportunities, how fast can they actually come? For example, on the $20 billion that you have in the pipeline expecting to be awarded, how much of that is related to nuclear? Travis Johnson: Yes, I'll take the first part of the question, Mariana. And then John, maybe you can tackle the second part of that. When we look at the front-end nuclear energy market, it's more of the former as it relates to margin expansion, not unconsolidated joint ventures. A lot of that work tends to come not only in the U.S. commercial, but also international, right? And due to the nature of the work and our capabilities and what we're providing there, it does tend to be margin accretive to the overall portfolio. Not to say that especially on kind of back-end environmental remediation, decommissioning, there could be some joint venture opportunities that could also be margin accretive. But as we look to the future and where we expect the growth to come from out of that part of our portfolio, it's certainly not JV consolidation. It's more of the nature of work. John Heller: We talk about this market the global nuclear market, first of all, we are in this market today globally. In the United States, all across Europe, Japan, we are currently delivering capability across that entire life cycle. It represents about 17% of our business today, so very substantial. We are a leader, both in the United States and across Europe and recognized and brought into Japan because of the work that we have done in our history. So for us, it's a real business delivering real strong margins today. As we talk about kind of the nuclear renaissance that is happening driven by real demand for electricity and AI and the expansion of data centers to enable our AI economy, the demand is real. But nuclear takes time. You have to do significant design work, planning and then you go into construction. In the gigawatt size plants, which we have traditionally worked, we've been involved in every nuclear power plant constructed in the U.K. in its history. We have great expertise. In the United States, we've just not seen an industry that has been operating on a regular cadence, but there is absolute support from the current administration as well as industry. And there's -- to bring more of this capability online. So President Trump laid out executive order saying wanted to see 10 more gigawatt plants under construction by 2030. I think that's an achievable goal, but it will take a lot of work. And we are one of the leaders that is capable of supporting that achievement, working with the companies in the industry that have the designs that could be used to deliver that. On SMRs, it will take a little longer. We are in the phase of working with companies to actually put the designs together and then prove those designs so that they can be certified and approved designs that can then move into construction. So that's going to take more or less the rest of this decade to move the SMR capability to a point where we would see projects going into construction, but there will be quite a bit of engineering work between now and then. Mariana Perez Mora: And then as a follow-up to margins, fourth quarter and fiscal '26 margins came in a little bit lighter than expected according to what you said in the Investor Day. Besides the nuclear opportunity that will come with this accretive margins, what are the other drivers that will get you to the 8.5% to 9% that you expect to have by '28? Travis Johnson: Yes. Certainly, as John talked about, the accelerating growth areas in aggregate, not just global nuclear energy, but also critical digital infrastructure and space systems and technologies in total are margin accretive to the portfolio. And as we see those outpace growth of the rest of the portfolio in our core growth areas, that will lead to margin expansion in addition to, obviously, the cost synergy initiatives that we've talked about and little bit of Q&A on that today, but those will drive, call it, 30 to 50 basis points as we move through FY '27 into FY '28. So those combined are the predominant drivers of the margin expansion. Operator: The next question comes from Andre Madrid with BTIG. Andre Madrid: [ DOGE ] came to an earlier-than-expected end, it seems, probably 8 months ahead of schedule there. I think previously, you were anticipating that maybe there's going to be a 1% headwind going into '26 based on policy changes. I see that there's a 1% headwind based on the shutdown. Is it kind of just shifting towards that where it's like maybe you could have clawed some back on the policy shift side given the end of Dodge, but it's now headwind from the shutdown. I'm just trying to understand the moving pieces there. Should we expect kind of both layered on top of each other or. Travis Johnson: I would think about it, Andre, is not related at all. We obviously went through the administration change, those, all of that throughout '25, and we did call out the approximate 1% impact to the portfolio. That was back half weighted. We'll see some noise of that continuing kind of throughout the first quarter or 2 here of FY '26, but nothing significant to call out. And separate and independent of that, as we see in times of government shutdown in the past, obviously, this one was a little bit extended more than we've seen in the past, but some disruptions to spending on contracts and then some delays in the procurement environment is the 1% that we called out for this fiscal year. But all that being said, still feel good about the trajectory of the underlying business, excluding that government shutdown impact, 4% growth at the midpoint on revenue, above mid-single digits on EBITDA and obviously double digit on EPS and free cash flow despite those dynamics that are occurring. Andre Madrid: Got it. Got it. And then maybe -- I mean, just in terms of debt paydown, you've still got a ways to go -- a little ways to go until you get to less than 3 turns. I mean, how should we think about the pace of that through the year? Is it also -- are you guys thinking of going a step further? Should we think it's still a sizable portion of free cash flow for the year or. Travis Johnson: Yes. So the predominance of our cash flow will follow normal seasonality and be generated in the second half of FY '26, which is when you'll see us start to get to below the 3x net leverage that we've talked about. Andre Madrid: Got it. Got it. And maybe if I could squeeze one more in. I mean you talked about organic investments. I mean, which areas do you think are poised for the most? John Heller: Well, we talked about our core markets. We're still very comfortable with our core markets. So we're looking at investing there as well as those 3 accelerating growth markets. So all of those areas still represent real strength to the business. And yes, so we're -- I think we highlighted in the strategy where we're focused. Those are our priority areas. Operator: And the next question comes from Ken Herbert with RBC Capital Markets. Kenneth Herbert: I wanted to see first on the '26 and maybe midterm growth outlook, can you get more specific on what kind of growth you're expecting in -- I guess, from the accelerating growth portfolio, as you outlined it here as we think about sort of the 3% to 4% organic growth in '26. Are you at the high single digits for that market, the accelerating growth businesses? And then maybe how much does that accelerate into '27 and '28? Travis Johnson: Yes. So I'll start, and then, John, you can feel free to add in. So for FY '26, obviously, absent the government shutdown, as we've talked about, from a revenue perspective, expect underlying growth of 2% to 5% -- sorry, 3% to 5%, right? And that's kind of right in line with where we thought we would be at this point in time. And then as we kind of transition and start to benefit from all the pipeline and things that we did as a newly merged company and the accelerating growth markets that John mentioned in his prepared remarks, obviously, we think that will accelerate not only as we move through FY '26, but also into FY '27 and beyond. So those will start to tick up and awards such as Space Force Range, we mentioned the Sellafield award that's also in those accelerating growth markets. Those will continue to ramp up as we move into the back half of '26. John Heller: Yes. And Steve talked about some of the opportunities, I think, that we're seeing in the space market that we think will adjudicate this year and therefore, impact next year in a more significant way. And I think the same as we think about the global nuclear energy market, we continue to see an uptick in activity, which will accelerate this year through next year. So we should see a higher pace of activity in that market as we think about '27 and '28 as well. And then the digital infrastructure, we have strong activities in working with the hyperscalers on helping with design and development of upgrades to data centers, as an example, on telecom, outfitting 5G networks and beyond. So we see areas like this will also continue to expand for us as we continue to reach into other hyperscalers with these capabilities and push the growth of those into '27 and '28 as we kind of break into new customers with these offerings. Kenneth Herbert: Great. That's helpful. And just if you could remind us, what's the recompete risk or recompete exposure you have here as part of fiscal '26? Travis Johnson: Yes. So we're really confident in kind of the composition of revenue in our FY '26 guidance. Over 90% of it will be coming from firm and follow-on work, so less than 10% from new business, and it's less than 5% recompete risk. Operator: Thank you. And that is all the time we have for questions. I would like to turn it back to John Heller, CEO, for closing remarks. John Heller: Thank you. As we enter a new year, we're encouraged by our performance and confident in the path forward. Our strategy remains firmly aligned with long-cycle mission-critical markets, and we remain agile to meet the evolving needs of our customers. I want to extend my sincere thanks to our employees, particularly those who were impacted by and those who worked tirelessly to support our customers during the government shutdown. Their resilience and professionalism exemplify what makes Amentum a trusted partner. We are well positioned to capture growing demand in our core growth areas and our accelerating growth markets and to deliver sustainable long-term value for our shareholders. Thank you for your continued interest in Amentum. We look forward to sharing our progress in the quarters ahead. We wish everyone a safe and joyful holiday season. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, and welcome to the PennantPark Investment Corporation's Fourth Fiscal Quarter 2025 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference. Arthur Penn: Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's Fourth Fiscal Quarter 2025 Earnings Call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Richard Allorto: Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corporation. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at (212) 905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn. Arthur Penn: Thanks, Rick. I'll begin today's call with an overview of our fourth quarter results and discuss our ongoing strategy to rotate out of equity positions. I'll then share our perspective on the current market environment and how the portfolio is positioned for the quarters ahead. Rick will provide a detailed review of the financials, and then we'll open up the call for Q&A. For the quarter ended September 30, core net investment income was $0.15 per share compared to total distributions of $0.24 per share. We've previously communicated our plan to rotate out of equity positions and redeploy that capital into interest-bearing debt investments, which will drive an increase in our core net investment income. For many positions, our ability to drive exits is limited. However, we remain focused on this strategy and are comfortable maintaining our current dividend level in the near term as the company has a significant balance of spillover income, which we are required to distribute. PNNT has $48 million or $0.73 per share of undistributed spillover income, and we plan to use the spillover income to cover shortfalls in net investment income versus the dividend at this time. Regarding the current market environment for private middle market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into higher loan origination volumes in the quarters ahead. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform. We are optimistic that the increase in transaction activity will also result in opportunities to execute our equity rotation plan and rotate capital into new income-producing investments. We believe the current environment will favor lenders with strong private equity sponsor relationships and disciplined underwriting, areas where PNNT has a clear advantage. We continue to see opportunities to deploy capital into core middle market companies where leverage is lower and spreads are higher than in the upper middle market. In the core middle market, the pricing on high-quality first lien loans is SOFR plus 4.75% to 5.25%. Leverage is reasonable, and we continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant light. Turning to our portfolio performance. As of September 30, the median leverage ratio on our debt security was 4.5x and the median interest coverage ratio was 2x. For new platform investments made during the quarter, the median debt-to-EBITDA was 4.3x, interest coverage was 2.5x and the loan-to-value was 39%. Credit quality of the portfolio continues to perform well. We have 4 nonaccrual investments, which represent 1.3% of the portfolio at cost and 0.1% at market value. Two new investments were added and 2 prior investments were removed from the nonaccrual list. These strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The PennantPark platform has a demonstrated track record of value creation through successful financing of growing middle market companies in 5 key sectors, enabling us to ask the right questions and consistently deliver strong investment outcomes. They are business services, consumer, government services and defense, health care and software and technology. These sectors have also been recession resilient and tend to generate strong free cash flow and have a limited direct impact to the recent tariff increases and uncertainty. The core middle market, companies with $10 million to $50 million of EBITDA is below the threshold and does not compete with the broadly syndicated loan market or high-yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants and substantial equity cushions to protect our capital, attractive spreads and equity co-investment. Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first lien loans include meaningful covenant protections, which is a key differentiator versus the upper middle market where covenant-light structures are more common. Since our inception nearly 18 years ago, PNNT has invested $9.1 billion at an average yield of 11.2%, while maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles. As a provider of strategic capital, it fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall for our platform from inception through September 30, we've invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x. As of September 30, our portfolio totaled $1.3 billion. And during the quarter, we continued to originate attractive investment opportunities and invested $186 million in 9 new and 54 existing portfolio companies. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. As of September 30, the JV portfolio totaled $1.3 billion. And over the last 12 months, PNNT's average NII yield on invested capital in the JV was 17%. The JV has the capacity to increase its portfolio to $1.6 billion, and we expect that with this additional growth, the JV investment will enhance PNNT's earnings momentum in future quarters. From an outlook perspective, our experienced and talented team and our wide origination funnel is producing active deal flow. We remain steadfast in our commitment to capital preservation and disciplined, patient capital investment approach. We reiterate our objectives to deliver compelling risk-adjusted returns through stable income generation and long-term capital preservation. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt investments, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn the call over to Rick for a more detailed review of our financial results. Richard Allorto: Thank you, Art. For the quarter ended September 30, GAAP net investment income and core net investment income were both $0.15 per share. Operating expenses for the quarter were as follows: interest and credit facility expenses were $10 million, base management and incentive fees were $6.1 million. General and administrative expenses were $0.9 million and provision for excise taxes were $0.7 million. For the quarter ended September 30, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $10.8 million. As of September 30, our NAV was $7.11 per share, which is down 3.4% from $7.36 per share in the prior quarter. As of September 30, our debt-to-equity ratio was 1.6x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. The PSLF JV is evaluating the purchase of $120 million to $140 million of assets from PNNT, which would allow PNNT to reduce its leverage ratio to 1.25 to 1.3x, which is in line with its target ratio. As of September 30, our key portfolio statistics were as follows: our portfolio remains highly diversified with 166 companies across 37 different industries. The weighted average yield on our debt investments was 11%. We had 4 nonaccruals, which represent 1.3% of the portfolio at cost and 0.1% at market value. The portfolio is comprised of 50% first lien secured debt, 2% second lien secured debt, 12% subordinated notes to PSLF, 5% other subordinated debt, 6% equity in PSLF and 25% in other preferred and common equity investments, 91% of the portfolio is floating rate, debt-to-EBITDA on the portfolio is 4.5x and interest coverage is 2x. Now let me turn the call back to Art. Arthur Penn: Thanks, Rick. In conclusion, we remain committed to delivering consistent performance, preserving capital and creating long-term value for all stakeholders. Thank you to our team for their dedication and our shareholders for their continued partnership and confidence in PennantPark. That concludes our remarks. At this time, I would like to open up the call to questions. Operator: [Operator Instructions] We'll take our first question from Brian Mckenna with Citizens. Brian Mckenna: So on the dividend, I appreciate the equity rotation opportunity. I know that's something you guys have talked about the last few quarters here. But if you were to rotate $150 million of assets into income-producing loans at an incremental 10% yield today, that equates to about $0.20 per share of NII over the next year. So at the current quarterly run rate of $0.15, that implies about $0.80 of annual NII before any changes in base rates and credit quality, that's still $0.15 below the current dividend. So why not rightsize the dividend today so some of this incremental earnings from the equity rotation accretes NAV? Arthur Penn: Yes. Look, we're -- thanks, Brian. We're constantly evaluating the dividend. We do have substantial spillover that we need to pay out. It's really the question of how and when we do that at the same time as we're working on the equity rotation to try to figure out what the long-term sustainable NII is. So you've got 2 things going on. One is the equity rotation and the paying out of the spillover. And our current plan is to work both of those processes for the next few quarters, see where we land, come up for air and make some decisions. Brian Mckenna: Okay. That's helpful. And just in terms of timing around any realization events in some of these equity positions, I mean, has anything changed in the last quarter or 2? It sounds like a more constructive backdrop should be better for monetizing some of those. But I'm just curious if there's any update relative to expectations over the last quarter or 2. Arthur Penn: Yes. No, we're seeing more activity. As we said, we're hopeful that we're getting closer to some rotation opportunity. Nothing to announce here on this call today, but we're feeling and sensing that the M&A opportunity and the opportunity for some of these companies is closer at hand than it was. Operator: We'll take our next question from Robert Dodd with Raymond James. Robert Dodd: And just on that topic with equity rotation, we look at something like Flock, for example, it's now above -- it's marked above the original cost before you had to restructure. So a business like that, that seems to have had some stumbles that is performing extremely well. Do you think those are the kind of businesses that are more likely to transact in terms of get a realization for you, which you're not in control of or maybe a little bit more than Flock in the near term? Or do you think it's other kinds of businesses, maybe the ones that are still struggling a little bit, are those the ones that are more likely to turn over in the near term? What do you think? Arthur Penn: Yes. It's -- there's some that we have more control over like Flock. Flock happens to be in the business of busted credit card and busted receivables, consumer receivables. So we think that's a really interestingly placed company at this point in the economy with what's going on with the consumer. That's just -- I don't want to diverge from the question, but there are control positions. Flock is one, JF acquisitions is another, AKW is a third, where we do have more control. And the question there is timing and how do we optimize the exit. And then we have a variety of equity co-investments where we're not in control. But if there's a constructive M&A background, by definition, some of those equity co-investments will hopefully convert into cash. So the answer is both. We're hopeful for both. One of the flavors we have a little bit more control over. It's really just a question of how we optimize the outcome. Robert Dodd: Got it. Got it. On the other part, I mean, potentially transacting and selling some assets to, I mean, what it -- you said you're reviewing it, right? What are the hurdles that -- evaluating it? What are the hurdles that have to go through for you to feel comfortable with that? And also from a regulatory perspective, do you think the SEC would actually approve that? Because I've seen some BDCs try to do that in the past and the SEC just say no? Arthur Penn: Yes. No, I think you may have misheard. We're evaluating selling assets to the joint venture. So there, what we said is -- and we're aware that 40 Act to 40 Act company is something that has a high degree of difficulty. This is just the normal rotation of assets from the BDC, PNNT to the PSLF JV. Leverage was a little high at the PNNT level at quarter end, 1.6x. We generally like to wait to quarter end to get the freshest third-party valuation marks on the names and then PSLF is evaluating the purchase of $120 million to $140 million of those assets, which will move from PNNT to PSLF, bringing the PNNT leverage ratio back into line of our target of 1.25 to 1.3x debt to equity at PNNT. Robert Dodd: Got it. Got it. Yes, I misheard the -- on that -- I mean, to that point, right, I mean, your leverage is a little high right now. This is one of the initiatives to take it down, obviously, the others. But there's also the spillover, which you've got to distribute one way or the other. So keeping the dividend where it is takes care of it slowly. Other option would be a one-off, which would take care of it quickly. But any of those things which over distribute earnings tend to drive leverage up. So how comfortable are you that with the current dividend plan and the other initiatives, you can get down to that target leverage and stay there? Arthur Penn: Yes. Look, it's really a question of how we work down our spillover and when we work it down at the same time as we're working on equity rotation. Our target leverage long term for PNNT is that 1.25 to 1.3x. We will temporarily consider going above it if we're confident that PSLF will want some more assets and we can grow PSLF, which has been highly accretive to PNNT. So you've got multiple things going on. You've got the reduction of the spillover over time. You've got the equity rotation and you've got the leverage ratio at PNNT. So those are the constraints. We're doing our best. Some of the stuff we control, some of it we can't. We're always evaluating dividend policy. That said, we still have substantial spillover that we need to pay out, and we also need to keep our leverage reasonable and comfortable. So if you have suggestions, Robert, we're all ears, but these are the constraints we're working with. Operator: We'll take our next question from Melissa Wedel with JPMorgan. Melissa Wedel: I wanted to start on the NII this quarter. I'm wondering if there was anything maybe skewed in terms of timing during the quarter that may have been a headwind. For example, maybe paydowns came early and fundings came later. Was there anything like that we should be thinking about? Arthur Penn: I mean not off the top of my head. Rick, any thoughts from you? Richard Allorto: No, same, nothing jumps out in terms of timing of repayments. Melissa Wedel: Okay. Okay. And then a follow-up question on how you're thinking about the spillover income. I mean you've made it clear that you look at that as a way to supplement any shortfall versus the dividend. In terms of sort of banking any spillover income, do you look at that full $0.73 per share as something that could be used? Or are you looking to retain some level of spillover income? Arthur Penn: Yes. Look, there's certainly a level of spillover income that we certainly would consider and should consider retaining. For instance, if you look at PFLT, the sister BDC, I think there's like $0.25 or $0.30 of ongoing spillover, that kind of thing. So that might be a base level once you get down to that where you're comfortable that you're not required to pay it out, something like that. Operator: We'll go next to Arren Cyganovich with Truist Securities. Arren Cyganovich: With the investment activity picking up, can you provide a little color around what types of deals you're seeing? Are they more M&A focused? Are these kind of follow-on acquisitions? And maybe just if there's any particular industries that you're seeing more activity in? Arthur Penn: Thanks, Arren. It's a combination. A lot of it is add-on delayed draw term loans where we're already in existing credit and the credit needs growth capital. It's a big part of what we do is start with that company when it might be $10 million or $20 million of EBITDA, and they have plans to get to $30 million, $40 million, $50 million, and we set up a plan with them to provide the debt capital to fuel the growth. So quite a bit of it, I'd say at least half of the activity is with existing incumbent companies. Good news about that is we're on top of companies. We're not going to fund them unless they're doing very well. So by definition, the credit quality is very strong. We know exactly what we're getting into, and we're financing additional capital into companies that are performing well. And then about the other half is kind of our typical new deal, new platform, mid-4s leverage, over 2x interest coverage, 40%, 50% loan-to-value, SOFR plus 4.75% to 5.25% in this environment type of loan. Operator: We'll go next to Christopher Nolan with Ladenburg Thalmann. Christopher Nolan: For the companies that you're funding, given that the EBITDA coverage is going down, the interest coverage is going up, is this a recipe to -- for dividend recaps by the private equity sponsors? Or do your covenants prevent that? Arthur Penn: Well, certainly, it's a great question. We had a dividend recap in PFLT, we talked about, which was a nice, realized gain where we were in the equity and the debt, but we have a substantial equity position. So dividend recaps for us as a lender are something that have a high bar. As a new lender, we are always cautious around use of proceeds and having alignment of interest and making sure there's substantial equity beneath us. That said, when companies do well, they look at their options, dividend recaps being one of them, sales, IPOs. So the dividend recaps have helped us where we have had the equity co-invest. We are very cautious about participating them as a lender. So sometimes it just happens. Someone comes takes us out to give an aggressive loan to a borrower, we get financed out of our debt and our equity gets some sort of dividend. So you're seeing a bit more of that in this market more recently, and we certainly experienced that in our other BDC. Christopher Nolan: And Art, how would you characterize the trends in the private equity space that you operate in because the hold times for the private equity in general has been quite extended. And are we starting to see a break in that log jam at all? Arthur Penn: Yes. So that's -- look, that's what we think about when we talk about equity rotation, many of our equity co-invests are kind of experiencing that. We co-invested with the private equity sponsor. It was coming into 2025, it was feeling pretty good. April 1 came around, which was Liberation Day, the M&A market really slowed down after Liberation Day for at least 3, 4 months. It's starting to pick back up again. This is kind of why we're a bit more optimistic today than we were last quarter about getting nearer to some equity rotation that's meaningful. Hopefully, the markets will permit some of this. Some of it is just kind of buyers and sellers kind of finally coming together now that there's been some stability in the market to cut a deal for a while, their sellers were holding out for higher prices, buyers were trying to get lower prices. And the other thing you got to throw in here is what happens if as interest rates come down, SOFR comes down, borrowing costs come down, how that could catalyze more M&A, more refinancings, et cetera. So it's been a murky world since Liberation Day. It seems to be clearing up today. As we speak, we'll see what the Fed does in early December. But we're -- without any major market turbulence, we're more optimistic that we'll get some reasonable rotation. Christopher Nolan: Got it. And one for Rick. Rick, just to rephrase, I think, Melissa's question earlier, given that revenues seem to go down while investment assets went up and there's a small decline in average yield. Were there timing issues involved in terms of closing deals late in the quarter? Richard Allorto: None that comes to top of mind. I think the biggest variance kind of quarter-over-quarter on the top line is you're going to see is in the PSLF dividend. That dividend did decrease in the current quarter. There were some expenses at the joint venture that were kind of onetime and reduced the dividend. Arthur Penn: I'd say, that's a good point. There's been some financing activity at the joint venture in the securitization side that kind of hit expenses to some extent during the quarter. Operator: We'll go next to Brian Mckenna with Citizens. Brian Mckenna: Art, just a bigger picture question for you. You've obviously been a leader in the space for some time now, and you've done a pretty good job managing PennantPark through a number of operating and macro environments, including the GFC, COVID, et cetera. There's clearly a lot of noise in the market today around private credit. And at least from my perspective, there continues to be a good amount of misinformation. So it would be great just to get your thoughts on all the current events and what you think is still underappreciated or misunderstood about your business and even the industry more broadly. Arthur Penn: Yes. It's a great question, and we get the investor questions as well, typically from investors who haven't been in the space very long. The average person hears the word default. And in some cases, they think that means a 0. And in the lending business, the default just means that you're coming to the table and negotiating the correct capital structure for the company going forward. And that could mean conversion of some debt to equity. It could mean more economics to the lender. It could mean both. Sometimes when you convert debt to equity, that equity can have long-term value over time. And in our 18, 19 years in business, we've certainly seen that where those equity conversions can actually create value. You can make more money from converting from debt to equity. So kind of just understanding how loans work and what being a lender is and when you say you're lending to 40% or 50% loan to value, that really means 50% to 60% of the value of the company needs to disappear before we lose a dime. So it certainly can happen, and it has happened, but there's a lot of cushion that's built into these things given the substantial equity cushion. If you go back to COVID, as an example, going into COVID, we had about 120 companies that we lend money to going into COVID. And there, the economy was shut down by the government. And the fact that we had quarterly maintenance tests that every 3 months, companies had a certain debt-to-EBITDA or EBITDA to interest coverage to meet meant that they had to come to the table, and we had very constructive conversations with our borrowers. And of that 120 companies, about 15 actually needed liquidity. They needed cash. And in all 15 of those cases, the private equity sponsors offered to put money in to solve the liquidity problem. And that was in a scenario where the economy was shut down, a very severe environment. So the only other observation I had going all the way back to the GFC is when people's fears get up where they're reading articles and people starting to get fearful, what the antidote to that for us was bring people in and go line by line through the portfolio. And here with the BDCs, these are -- the SOIs, the statements of investments are all public information. Let's walk people through the name by name, what -- who the company is, what they do, what the industry is, to the extent you can share it, the credit statistics, the debt-to-equity ratio, loan-to-value, name by name by name. And I think if people went through these books name by name, they realize and we give the stats on an overall portfolio basis. The overall portfolio has 4.5x debt to EBITDA, 40% to 50% loan-to-value, interest coverage over 2x. you go name by name and after a period of time, you realize these are pretty solid loan books, not just ours, but others. And the other thing you realize is we and our peers are all over these portfolios. We are all over these names. Every month, we get in the core middle market, every month, we get financial statements from our underlying portfolio companies. So if something starts to stumble, we are on top of it every month. And every quarter, they have a financial covenant to meet. So I think the quality of these portfolios is high, and we're all over them. So I think if investors actually had the time to dedicate and the -- we and our peers are willing to spend the time to go name by name, I think that would calm a lot of the issues that people seem to be having right now. I don't know if that's helpful. Operator: At this time, there are no further questions. I will now turn the call back to Art for any additional or closing remarks. Arthur Penn: Look, I just really want to thank everybody for participating today in this season of Thanksgiving. We are certainly grateful for the support of our shareholders. We wish everyone a safe and happy Thanksgiving and holiday season, and we look forward to speaking to you in early February. Operator: This does conclude today's conference. We thank you for your participation.
Operator: Good morning. My name is Joelle, and I will be your conference operator today. [Foreign Language] I will now introduce Mr. Mathieu Brunet, Vice President, Investor Relations and Treasury of Alimentation Couche-Tard. [Foreign Language] Mathieu Brunet: English will follow. [Foreign Language] Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard's financial results for the second quarter of fiscal year 2026. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions from analysts during the web conference. We would like to remind everyone that this webcast presentation will be available on our website for a 90-day period. Also, please remember that some of the issues discussed during this webcast may be forward-looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Alex Miller, President and Chief Executive Officer; and Mr. Filipe Da Silva, Chief Financial Officer. Alex, you may begin your conference. Alexander Miller: Thank you, Mathieu, and good morning, everyone. Thanks for being with us today. Before we dive into the results, I'd like to flag something for your calendars. On February 11, 2026, we'll host a business strategy update where we'll walk you through the next phase of our growth journey and our vision for the future of convenience and mobility. We'll share a clear and thoughtful view of where we're headed and what it means for our customers, our network and the opportunities ahead. You'll receive a formal save the date and additional details in early December. Today's focus is very much on the solid progress we've made this quarter. It's been a little over a year since I stepped into the CEO role, and I'm genuinely proud of the way the business is performing and of the relentless focus our team is putting on winning the customer. Since the start of the fiscal year and for the second consecutive quarter, we've delivered positive same-store sales in every geography, along with steady, reliable performance in fuel. In an environment that remains challenging for many of our customers, they continue to respond to the value and convenience we're working hard to deliver, both inside our stores and on our forecourts. Our customer-focused initiatives are gaining traction, and we're seeing clear proof of that in this quarter's results, which are outperforming the industry. As we strengthen our value proposition and continue enhancing the customer experience across our network, we're also expanding our reach through disciplined organic growth. Together, these efforts are creating meaningful opportunities to welcome new customers and deepen the relationship with those we already serve. We are well on our way to reaching our goal of 500 new stores in 5 years with 29 new stores opened since May, and we are on track for more than 100 new locations in North America this fiscal year with many offering high-speed diesel to serve our B2B customers, and we continue to seize opportunities in rural communities, along with our traditional metro area sites. As of today, we have another 73 stores currently under construction, and our real estate team has 1,000 sites in the pipeline for potential future development. In Europe, our rebranding of TotalEnergies retail assets is progressing across our 4 new business units with the Circle K brand and programs now at 80 sites as of the first half of the year, and half of those sites feature the Circle K car wash offer. Our rebrand of the EV offer in mid-Europe is now complete. In my recent visits to these stores, I've been very pleased to see our team members energized, embracing our programs, executing them with excellence and engaging with our customers who are responding enthusiastically. Along with our efforts to grow and optimize our network, we are also investing in capabilities to support our stores through best-in-class inventory management solutions and supply chain optimization, which Filipe will address later. This past week, in Otsego, Minnesota, we cut the ribbon on the first of 3 new distribution centers in the U.S. that will open in the third quarter. These 3 facilities will support approximately 1,600 stores across 14 states. With these openings, combined with our existing facilities in Texas, Arizona and Quebec, approximately 3,200 stores across North America will be supported by self-distribution. It is an important milestone in our efforts to strengthen and better align our North American supply chain, enhancing speed, accuracy and product availability while enabling the broadening of product assortment. Now let's turn to our convenience business. As I mentioned earlier, we're continuing positive trends in same-store sales across our geographies for the second straight quarter, with the U.S. up 1.2%, Canada up 5.4% and Europe and other regions up 0.5%. U.S. revenues increased on solid performance in food, packaged beverage and other nicotine products. Canada's growth benefited primarily from alcohol and food. Food also contributed to the positive sales results in Europe and other regions segment. Given the challenging consumer environment, these results are especially meaningful, and we're seeing clear gains in customer traffic and share, which speaks to the strength of our offering and the compelling value and ease of our experience. We believe the disciplined focus on the customer is helping us distance ourselves from broader industry trends and continue delivering quality, sustainable growth. Looking at our food category, as consumers look for ways to stretch their dollars, our meal deals are meeting their needs with the choices and options they want at an attractive price point. Meal deals are winning with customers, thanks to effective communication across our in-store and digital platforms, along with a focus on simplicity and execution. Food penetration continues to rise, and the strong adoption of meal deals across markets further highlights the increasing contribution of food to our overall growth trajectory. In North America, same-store food growth had its best performance in well over a year, fueled by disciplined execution and the ongoing strength of our meal deals platform. This quarter, we sold over 10 million bundles up from 8.6 million in Q1, averaging over 850,000 bundles per week. I'm even more excited to share that at the very start of Q3, we surpassed the 1 million meal deals mark sold per week in North America. This milestone underscores the growing relevance of our food offering and the value we are bringing to our customers, and we're just getting started. In the months ahead, we'll continue expanding the meal deals platform, introducing greater variety and innovation, strengthening vendor partnerships and offering customers unmatched optionality. We are also seeing meaningful customer excitement and incremental sales growth from our exclusive partnership with Guy Fieri, which we announced in September. The Flavortown inspired menu rollout across the Northern Tier business unit is contributing to an increase in overall hot food weekly units alongside meaningful margin dollar contribution. We are encouraged by the customer response to this differentiated offer as we prepare for a broader North American expansion. In addition, our SKU reduction initiative launched in FY '25 continues to drive margin improvement in our U.S. business units, enabling us to focus on execution excellence and maintain reliable in-stock performance while also reducing spoilage. In Europe, food continues to be a bright spot driven by increased in sales per store. Sweden, Norway, Ireland and the Baltics were key markets with substantial growth in hot dogs, burgers, sandwiches and bakery items. Building on our success in North America, we accelerated the European rollout of meal deals last quarter with 3 well-defined offers at tiered price points to capture a broader range of customer occasions, from smaller impulse buys to full meal solutions. The early results are promising. Turning to our efforts to own thirst. U.S. packaged beverage category delivered solid performance with basket size and pricing offsetting category-wide declines in trip frequency. Energy drinks continue to lead the category with same-store sales growth in the mid-teens, supported by ongoing innovation, meal deal inclusion and exclusive vendor partnerships that are driving consumer engagement. Dispensed beverages are also seeing strong growth in the cold and frozen segments, lifted by our loyalty pricing strategies. Meanwhile, we're launching new programs to drive excitement into the hot dispensed category. Earlier this month in the U.S., we kicked off our win free Coffee for a Year Sweepstakes in partnership with International Delight creamers, inviting customers to enter for a chance to win 1 of 14 prices. We are also piloting an aggressive Inner Circle price on hot coffee to complement our highly popular any size Polar Pop offer for loyalty members. In adult beverages, we continue to see healthy beer and wine growth in Canada. While we expect growth trends in this category to normalize, these results more than offset the declines in nicotine in Canada resulting from the illicit tobacco trade and government restrictions on pouches in the convenience channel. In the U.S., our performance in nicotine is strong with mid-single-digit same-store sales growth. We've outpaced the convenience channel in cigarette sales and trips driven by market-centric pricing and affordability across premium and discount segments. Our September ZYN promotion sparked double-digit unit growth for ZYN as we distributed close to 8 million free cans. Not only did this offer increased total nicotine trips year-over-year and versus the pre-promotion period, but it also boosted the overall modern oral segment and sustained increased nicotine trips post-promotion. These results highlight our successful vendor collaboration and customer engagement as well as our ability to deliver value and maintain momentum in a complex regulatory landscape. In Europe, amidst a challenging regulatory and market environment, our nicotine business continues to outperform the broader market with other tobacco products driving year-over-year category growth while we still see some volume gains versus last year from the supermarket bans on tobacco in the Netherlands and Belgium. Looking at our loyalty programs with our launch of Inner Circle in Texas in September, we added more than 1 million new customers in Inner Circle, surpassing 12.5 million members across the U.S. as of the end of the second quarter. With the completion of our rollout in the West Coast business unit earlier this month, Inner Circle is now available at more than 5,000 sites across the U.S., and we expect enrollments to continue to accelerate in the coming months. As we bring Inner Circle to new customers across the U.S., our retention rates are sustained and healthy. More than 85% of members are active in fuel, 65% are active inside the store. We are leveraging some of our recent investments in our customer data platform and personalization capabilities to help drive repeat visits from Inner Circle members, and we are seeing existing members visit more frequently. Elsewhere in Europe, we've taken a major step forward with the rollout of our enhanced extra loyalty program, a unified visit-based model that rewards customers for every interaction, whether they fuel, charge, shop or wash their cars, the new platform delivers a more seamless personalized experience that strengthens engagement and customer loyalty across our network. Following a successful pilot in Sweden, we have now completed the expansion to Poland and the Baltics this quarter with other markets to follow. Turning to our fuel business. Same-store road transportation fuel volumes were down 0.6% in the U.S. and 1.8% in Europe, but up 1.1% in Canada. Despite these declines, overall volumes remain healthy and are outperforming industry peers, and margins are holding steady compared to previous quarters. We remain focused on unlocking additional value from our fuel supply chain across our global operations with our supply, trading and logistics teams working to expand lower-cost supply options and execute programs that deliver meaningful value to our customers, such as our seasonal Fuel Day events. Our October Fuel Day in Canada drove traffic and excitement to more than 1,100 sites across the country with savings of $0.10 per liter. In the U.S., we have tied recent Fuel Day events to Inner Circle not only providing great savings for our customers, but also driving sign-ups to the membership program and deepening customer engagement. In B2B, our European business continues to navigate a dynamic environment with mixed volume trends. Card volumes came in just below last year's levels, but this was offset by robust margin gains. Non-fuel income continues to be a strategic growth area as steady increases in B2B transit charging volumes helped counteract accelerated declines in traditional fuel and bulk fuel volumes remain healthy. While slightly lower this quarter due to price competition among resellers and a volatile biofuels market, they were offset by improved margins. We are seeing sustained growth in mobile payment adoption, up 30% versus last year, with the Baltics leading in customer onboarding and transaction volume with rollout of new digital platforms and functionalities such as self-service enrollment and instant virtual card issuance, we are gaining market share and operational savings for our customers. In the U.S., our B2B fuel share continues to grow as we build strong customer relationships, leverage the national scale and reach of our network and work to provide a reliable, seamless fueling and payment experience for drivers, focusing on direct partnerships, commercial diesel growth and strategic collaborations that have set us apart. We are seeing higher retention and increased usage among fleets of all sizes. We are also increasing Inner Circle penetration with B2B members as customers enjoy personal rewards for commercial fueling, enabling both acquisition and retention. Shifting over to e-mobility. We are building on our market leadership in Europe adding more than 230 DC ultrafast Circle K branded charge points and 33 new sites added across our European network during the second quarter. Overall, we now have close to 630 locations with Circle K branded chargers up nearly 30% versus a year ago. And our fast-charging network now consists of just under 3,900 charge points. In addition, we saw nearly 2 million charging transactions on Circle K branded chargers in Europe, an increase of 55% versus same quarter last year. As we expand the network with an emphasis on Scandinavia, we are also increasing our focus on new markets in our mid-European business, where our sites contributed more than 300,000 charging transactions. With that, I'll now turn the discussion over to Filipe, who will provide further details on our financial performance this quarter. Filipe Da Silva: Good morning, everyone. We closed the second quarter with growing optimism, reflecting steady progress supported by consistent execution and effective cost management across our operations. Core operating expense growth remained under control, while we continue to advance our multiyear investment journey to unlock new capabilities that strengthen our network and create greater value for customers. As Alex outlined, this quarter extends the positive momentum we began in Q1, with U.S. same-store sales growing for the second consecutive quarter, reinforcing that our self-help initiatives are delivering steady measurable progress. Food remained a bright spot, continuing its upward trajectory, supported by strong in-store execution. Shrink improved further, now at its lowest level in about 9 quarters, while food service gross margin expanded by more than 400 basis points year-over-year, providing an important lever in managing inflation and supporting margin resilience. This also marked the first full quarter from GetGo, which further broadens our food and convenience offering in the U.S. and unlocks new opportunities for customer engagement. For example, just this month, we're testing a small pilot in Ohio that lets myPerks members from Giant Eagle redeem point at Circle K. It gives customers more flexibility and helps connect directly with fuel shoppers. It's still very early days, and we'll watch how it performs before looking at next steps. In Canada, performance remained robust, supported by the ongoing benefit from the alcohol legislation changes in Ontario. As we move closer to cycling last year's favorable impacts and face a more tempered retail environment, we are approaching the coming quarters with a prudent outlook with continued focus on execution and compelling food offerings. In Europe, all regions posted healthy results with broad-based category growth driven by compelling food offers and attractive meal deals, helping us to capture additional market share. In Asia, operations were temporarily disrupted by the typhoon. However, the overall financial impact was minimal and did not materially affect EPS. Turning to our TotalEnergies assets, synergy delivery remains ahead of plan. That said, we did see a modest acceleration in the Netherlands, where the prior year benefit from the supermarket tobacco ban is not fully cycled. Overall, merchandise and service gross margin expanded by approximately 140 basis points year-over-year, and fuel margin also improved by nearly 600 basis points. These results demonstrated meaningful progress in both performance and integration. I will now go over some key figures for the quarter. For more details, please refer to our MD&A available on our website. After nearly a year, net earnings attributable to shareholders of the corporation returned to positive territory in the second quarter of fiscal 2026, which stood at $741 million or $0.79 per share on a diluted basis. Excluding certain items described in more details in our MD&A, adjusted net earnings were approximately $734 million or $0.78 per share on an adjusted diluted basis, representing an increase of 5.4% compared to the corresponding quarter of last year. Now let's review in detail each of our business segments on an FX-adjusted basis. The adjusted EBITDA for the second quarter of fiscal 2026 increased by approximately $94 million or 6.2% compared with the corresponding quarter of fiscal 2025, mainly due to the contribution from acquisitions, which amounted to approximately $75 million, improved merchandise and service and road transportation fuel gross margin as well as organic growth in our convenience activities, partly offset by the impact of the regulatory divestiture related to the GetGo acquisition, which amounted to approximately $8 million. During the second quarter, merchandise and service revenues increased by approximately $254 million or 5.8%, primarily attributable to the contribution from acquisitions which amounted to approximately $163 million in organic growth, partly offset by the impact of regulatory divestiture related to the GetGo acquisition, which amounted to approximately $20 million. Merchandise and service gross profit increased by approximately $126 million or 8.3%. This is primarily attributable to the contribution from acquisition, which amounted to approximately $56 million by organic growth as well as by improved merchandise and service gross margin in the United States partly offset by the impact of regulatory divestiture related to the GetGo acquisition, which amounted to approximately $7 million. In a context where we are delivering increasing value to our customers across all regions, I am happy to report that our gross margin expanded this quarter. In the United States, our merchandise and service gross margin increased by 0.9% to 34.7%, favorably impacted by the Zyntember promotion as well as by strong food execution. On the food side, the margin lift also reflect a significant reduction in shrink of more than 400 basis points alongside our 2025 rationalization efforts, ensuring that our promotions and assortment are relevant to our customers. In Europe and other regions, our merchandise and gross margin increased by 0.7% to 38.9%, mostly driven by a favorable mix -- product mix from lower tobacco revenues and e-mobility continued momentum in Scandinavia. In Canada, our merchandise and service gross margin increased by 0.6% to 34.2%, driven by a favorable change in product mix from cigarette revenues. Moving on to the fuel side of our business. Our road transportation fuel gas margin was $0.4586 per gallon in the United States, a modest decline of $0.0024, but overall consistent with previous quarters. In Canada, margin averaged an impressive CAD 0.1507 per liter, an increase of CAD 0.0172. Fuel margins remained healthy across the network, supported by ongoing supply chain optimization and strong in-store effectiveness. We're also advancing our data-driven approach to pricing and promotions, helping us stay agile and competitive in a dynamic retail environment. In Europe and other regions, our road transportation fuel gross profit was USD 0.1151 per liter, an increase of USD 0.01, driven by favorable foreign exchange translation and effective supply chain management, partly offset by the impact of lapping a onetime gain from a prior year fuel supply agreement adjustment. Turning to SG&A. Normalized expenses increased by 3.4% year-over-year in the second quarter of fiscal 2026 driven by disciplined core operating costs and targeted investments. Roughly 2/3 of the increase came from our core operating expenses, which continue to be managed effectively and remain on pace with average inflation across our regions, supported by our fit-to-serve. This also reflects targeted effort to scale our food service offering with resources directed towards enhancing capabilities at the store level. The remaining 1/3 reflects planned investment in technology and operational capabilities to support long-term growth and enhance the customer experience. I would like to emphasize that year-to-date, our normalized expense growth remains in line with inflation, aligned with our focus on cost discipline and maximizing operational leverage. I'm pleased to report that we exceeded our fit-to-serve target of $800 million ahead of schedule. This achievement reflects the collective commitment of our teams to deliver real measurable improvement. It's an important milestone that strengthens our ability to reinvest with purpose while maintaining disciplined expense control. Moving on, we continue to see gains in more workforce productivity. In the U.S., overtime wages remain below 3% for the 23rd straight month and below 2.5% for the 12th consecutive month, landing at 2.1% in Q2 versus 2.7% last year. These results speak to the effectiveness of handheld devices, smarter labor scheduling and automation tools that are translating into more impactful customer-facing hours. We are also capturing incremental savings through our centralized procurement efforts for goods not for resale, further leveraging our global scale to reduce cost and drive efficiency. Turning to strategic investment. We continue to advance our digital capabilities and operational tools to position the company for long-term growth. A key focus this quarter has been the North American pilot of our RELEX ordering and space planning platform now underway across 6 locations in 4 business units. Fuel scale deployment remains on track for the first half of calendar 2026. Early results are promising, with notable gain in product availability and inventory accuracy. As we scale, RELEX is expected to further reduce spoilage and also inventory efficiency, support margin resilience and strengthen vendor collaboration, all while streamlining in-store operation by simplifying ordering and optimizing shelf layouts. Beyond RELEX, we are making solid progress on other elements of our digital road map. Our upgraded handheld devices and labor scheduler are now embedded in more locations, continuing to streamline operations and improve team productivity. We're also seeing early promise from our AI task management pilot, helping store manager quickly translate data into clear, actionable insights. These investments are sharpening execution at the store level and helping deliver a more seamless and personalized customer experience. Turning over to depreciation and amortization expenses increased by approximately $59 million or 12.6% year-over-year, including the GetGo assets, which amounted to approximately $23 million, along with equipment upgrades, store remodel program, new store openings, technology enhancement and EV charger deployment. This initiative represents significant strategic investment made in recent quarters. From a tax perspective, the income tax rate for the second quarter of fiscal 2026 was 22.8% compared with 23.4% for the corresponding quarter of fiscal 2025. The decrease is mainly stemming from the impact of a different mix in our earnings across the various jurisdictions in which we operate. As of October 12, 2025, we recorded a return on equity at 17.7%, and our return on capital employed stood at 11.9%. During the fiscal year, our leverage ratio stood at 2.21. We also had strong balance sheet ability with $2 billion in cash and an additional $3 billion available through our revolving unsecured operating credit facility. During the quarter, we issued Canadian dollar denominated and U.S. dollar denominated senior unsecured notes totaling CAD 500 million and USD 1.2 billion, respectively. The $1.6 billion net proceeds from the issuance were used to repay indebtedness under our United States commercial paper program. Additionally, we repurchased 16.6 million shares for an amount of nearly $900 million through the buyback program, while for the first half of the year, we invested close to $900 million in capital expenditure, reinforcing our balanced approach to capital allocation. Subsequent to the end of the quarter, 6.1 million shares were repurchased for an amount of approximately $306 million. Turning to the dividend. The Board of Directors declared yesterday a quarterly dividend of CAD 0.215 per share, an increase of 10.3% for the second quarter of fiscal 2026 to shareholders on record as at December 3, 2025, and approved its payment effective December 17, 2025. In closing, our second quarter results reinforced the resilience of our business model and the operational excellence of our teams. We are encouraged by the continued top line momentum across key categories, particularly in food, packed beverage and fuel as well as by our progress in loyalty, underscoring the advancement of our customer initiatives. Looking ahead, we remain committed to delivering earnings growth over the course of the year by maintaining our cost discipline, thanks to fit-to-serve initiatives and by enhancing our gross margin profile through continued progress on shrink and spoilage food growth and vendor-funded promotions. We are also deploying capital with purpose, investing in tools that optimize execution and elevate the customer experience to support long-term value creation and deliver best-in-class returns. I thank you all for your attention. I will turn the call over again to our President and CEO, Alex Miller. Alexander Miller: Thank you, Filipe. As we move forward, our priority remains clear, delivering meaningful value for our customers and making every visit to our stores and forecourts easy and enjoyable. We're strengthening our execution, making better use of our scale and sharpening our operations, so our sites consistently have what customers need. We're also elevating the loyalty experience in ways that make it more personal and more engaging, helping customers come back more often. I'm proud of the work our teams are doing across the network and the progress we're making together. As we move into the back half of the year, we're well positioned to keep serving customers reliably and to be the stop they trust most when they're on the go. On that note, let's turn it over to the operator to answer analyst questions. Operator: [Operator Instructions] Your first question comes from Martin Landry with Stifel. Martin Landry: I want to touch on your U.S. merchandise margins. They have expanded nicely on a year-over-year basis in the last 2 quarters. And they've reached levels that are near the highest in the last 10 years. And you seem to have good margin drivers. You've talked about white nicotine. You've talked about food, energy drink, vertical integration of your distribution and then even SKU reduction. But -- so I'm trying to understand a little bit where are we in that journey for your merchandise margin in the U.S. How much more upside do you see there? And if you can talk a little bit about what is left in terms of drivers to get these levels higher? Alexander Miller: Yes. Thank you for the question. I'm pleased with the 90 bps improvement year-on-year for the quarter. I think the -- for this quarter specifically, about 38 of the bps came from white nic and our ZYN promotion. We continue to improve shrink, as Filipe talked about, that's contributing nice to our ongoing margin improvement. I think I've talked in past quarters about our improvements around promotions and our ability to analyze promotions and our data capability, doing less promotions but doing promotions that really add value to consumers and drive traffic and present real value to them. We talked about the ongoing new distribution centers. We just opened one. I was -- last week, I was in Minnesota and saw our new facility. These facilities are going to improve our COGS as we go forward. They're going to help us service our stores better when our stores really want and need to be serviced for the less lease disruption. So we -- and then lastly is food, right? I mean we continue to grow food. Our food, we grow in the U.S., we improved food by 480 bps quarter on -- versus last year in the same quarter, and we believe we will continue to do these things. So we're executing quite well against the items we're very focused and feel good about the direction of our margin gains, really not just in the U.S., in all 3 of our big geographies. Filipe Da Silva: Yes. And just to complement, Alex. So I think also, Martin, as we are integrating more the supply chain, we'll have the possibility also to get more control on the negotiation with suppliers. And we believe that there is also a nice potential upside there. Of course, we need to continue to reinvest in value, as mentioned by Alex, many times this morning. But yes, overall, the profile of the gross profit, we feel good about the prospect and what we can continue to build in this aspect. Operator: Your next question comes from Irene Nattel with RBC Capital Markets. Irene Nattel: Can you talk about the cadence of same-store sales improvements as you went through Q2 and where you're tracking Q3 to date, please? Alexander Miller: Yes. Thanks, Irene. The quarter was pretty consistent. We continue to see pretty big variations across the United States. So an example would be our Midwest business unit, which is Iowa, Illinois and Indiana for the quarter. Same-store sales were up 5.3%. Same-store volume was up 2.3%. And we can send -- and that's offset by challenge along our Southern states. And the Midwest BU at 7% of our merch sales. Texas and Arizona specifically remain challenged. They were slightly negative in the quarter. And those 2 areas are 23% of our merch sales. So we continue to see those kind of large differences across the United States. With that said, our teams in Texas and Arizona are performing very well from a market context and taking considerable share, and so then as we look forward, we did see a slight softening due to the government shutdown. And specifically, we believe the SNAP or EBT benefits, just slight softening for a couple, 3 weeks. Since the government has reopened and those programs are back, we've kind of pivoted back to really consistently where we've been this past quarter, Irene. Irene Nattel: So then do you think this sort of 1% to 1.5% level, Alex, should be sustainable through the balance of the year? And then, I guess, how do you accelerate it from there? Alexander Miller: We're going to -- we're feeling good. We've had several weeks and periods of success and seeing our business strengthening. And again, it's -- I'm never going to try and predict the future, Irene, but I feel really good about the activities of the team, the focus of the team. Our operating metrics are just extremely sound. Our food numbers continue to grow, and we're continuing to see that as we're into P3, our execution against those programs, our production availability. Our zero, zero for heroes, the products we sell the most, we have them in stock on the shelves, the proliferation of our meal deals really in all 3 of our geographies, consumers continue to really respond to those programs. And as I mentioned, we passed 1 million for a couple of weeks ago, which was a huge benchmark for all of us here, and we're celebrating that. Our digital platforms continue to grow. We added 1 million members in the quarter. Our visits were 6.6 versus 6.1. we grew traffic by 7%. So the areas we're focused on, Irene, we're gaining momentum, and they're working. And other nic and energy -- other nicotine, specifically white nicotine and energy, our execution, our vendor relationships and partnerships, we feel like we're clearly winning in those spaces, and we will continue to lay into those spaces. So I remain -- I'm cautiously and positively optimistic as we go forward, Irene. Operator: Your next question comes from Chris Li with [ Desjardins. ] Christopher Li: Sorry, can I just -- maybe a quick follow-up to Irene's question. So for Q3 to date in U.S. merchandise comps, Alex, is it trending more or less in line with what you achieved in Q2? Alexander Miller: Yes. P7, we softened just a bit. And again, we're pretty sure that was the government shutdown and EBT and SNAP, not a lot. We softened a bit. But as we've gone into P8, the last 2 weeks and the government reopened in those programs, we've converted right back to the trends we were seeing and really see acceleration in those programs that we saw before. Christopher Li: Okay. That's helpful. And then, sorry, my main question is just maybe on the SG&A growth rate. It did sort of accelerate in Q2. And I wanted to ask, for the second half of the year, how should we think about the normalized growth rate? Filipe Da Silva: Thanks, Chris, for the question. I think we feel good about the SG&A. Year-to-date, we are in line with the inflation, and I think we need to realize how much transformation we are doing in this company and investing for the long term. We have been talking a lot about supply chain, digital capabilities, RELEX. All these [ we mentioned ] that are really there to make us a better company. And we are doing all that, again, being able to match inflation. So it means that there is a lot going, and I have to recognize the hard work done by the team there, just to find ways to be more productive. So just on the quarter, we have been very disciplined in terms of labor hours being down in hours by 0.8% compared to last year across the regions, a lot going on from the procurement side. So Chris, I think we are -- yes, we are very confident by the plan. As I mentioned earlier in the call, we already reached the ambition that we had on the 5-year plan regarding fit-to-serve. There is more there. So when you look at the full year, yes, that's -- our ambition is to continue to be kind of in line with inflation. And at the same time, making sure that we do the right thing for the business and investing for the future. We have a lot to do there. But again, confident that we'll keep our discipline in cost. That's what we have been in the past and we will continue to be, Chris. Operator: Your next question comes from Michael Van Aelst with TD Cowen. Michael Van Aelst: So in your OpEx discussion, it did pop up in terms of your normalized operating growth from Q1 to Q2. And I think you mentioned for the first time you segregate a comment about investments to accelerate growth in food service. So can you explain to us what these investments are? And should this drive -- is this something you expect to drive same-store sales in the U.S. north of 2% eventually? Filipe Da Silva: I can take maybe on the expense side. So yes, we are investing, for example, in U.S. We are investing on the digital capabilities, helping to get a better forecasting. So we are investing on that. We are partnering there to get a tool. And that really makes a big difference, making sure that we have the food at the right time when the customer needs it and the employee knows when to put that in the shelf. So there has been a lot of investment there. And also, we are investing in -- on additional shifts from a labor standpoint to make sure that food is there when it's needed. So again, here, when you look at the overall labor hours, we have reduced the number of hours versus last year, reducing from an administrative point of view, the hours used in stores, but redirecting that to customer-facing activities and part of it is food. So we'll continue to do that because that's the right thing to do for the business. So feeling confident that, again, looking at the overall expense profile, we will continue to invest in food for sure. But having in mind that we want to be in line with inflation as a whole in expense. So looking for productivity in other parts of the business. Alex, do you like to take the... Alexander Miller: Yes. I can just build -- yes, build on that a little bit. I think that some onetime investments in food around production availability and the rollout of a specific program, I view those as onetime investments. We absolutely see food growing, and you see it in our results. And food, like anything, it's driving increased transactions and increased transactions are good. We continue to grow that percentage. And I think as I've shared with you previously, our goal is to get to 20% penetration in North America, and we believe we can do that, and we have a long runway to do that. I think from a cost perspective at the operating level, the last year has been absolutely focused on operations and back to our core, and our operating metrics are as good as I have ever seen them. Our turnover levels, our retention levels are -- just continue to improve. We referenced our overtime percentage, our labor hour compliance, our scheduling compliance, our shrink continues to go down. So the focus on our core -- at our core, we are operators, we are focused on operations, providing the tools at our stores and to our customers to be successful, and it's resonating. And part of that core culture of ours is controlling cost. We are doing that at the operating level and offsetting these strategic investments. And we will very much aim to continue to do that. Michael Van Aelst: Okay. And just to clarify, the meal deals, is that available throughout the U.S. network now? Alexander Miller: Absolutely, it is. It's not just the U.S. network, it is available across our entire footprint now. We are growing them in Canada. We've launched them in Europe and feel pretty strongly. We're already hitting levels close to our U.S. levels in Europe, where our food penetration is higher. It's really one of the most exciting things when I'm out with our teams in stores, just hearing it resonate with customers and hearing our store teams talk about how customers relate to the value that we can provide. So we will continue to lay into meal deals. We think we've really found something here that is really resonating with consumers and consumers that are strapped for cash. Operator: Your next question comes from Mark Petrie with CIBC. Mark Petrie: Hoping to just go deeper on some of your comments with regards to U.S. same-store sales, specifically the regional performance. Could you talk more about the drivers there? Is that just a matter of traffic? Or are there other factors like loyalty penetration, category mix, food, et cetera? And then if you could also just expand on the market share comment. Are you taking more share in those slower-growth regions? Or would you say it's more generally consistent across regions? Alexander Miller: Yes. I don't think -- I think our execution level continues really to improve across the company. I think it's more of a macro dynamic that's happening in the United States. The Texas and Arizona traditionally have been big growth states and big growth areas. We are very happy with our positions in these southern geographies. We absolutely believe this to be transitory. But we are seeing fairly significant differences in the Southern states versus our Midwest states currently. We think that will ultimately normalize as we go forward. And again, we're very happy to have those positions. It's not -- our loyalty penetration, it differs by business unit, but they're -- it's growing everywhere. Our execution on food differ slightly, but it's growing everywhere. And again, I'm just really proud of the teams. We've been very focused. We're executing against programs, and we're taking market share not in every business unit. But clearly, in total, we are. And in most business units, we are taking share in merch and in fuel. Mark Petrie: Okay. And sorry, just to clarify, when you talk about the slower growth in Arizona and Texas, for instance, is that mostly in traffic? Or does that show up in basket size as well? Alexander Miller: Sorry, I didn't catch the last bit of your question there? Mark Petrie: When you talk about the slower same-store sales growth in some of your regions like Arizona and Texas, is that mostly just in slower traffic versus like the Midwest? Or is it also in basket? Or how does that show up? Alexander Miller: Yes. I think traffic is a little more challenged in those geographies. We're growing basket in pretty much every business unit. So it generally is traffic driven, yes. Operator: Your next question comes from Bobby Griffin with Raymond James. Robert Griffin: Congrats on the performance. Alex, I just -- I want to double-click into the food category as a whole, given some of the success here with the sales as well as the margin improvement? Ultimately, where is that category as we stand today from its full margin potential? Is there still hundreds of basis points left? Or is it getting close to something you would say is running from a margin side of things, best-in-class or up to where you would like it to be at? Alexander Miller: So where we sit today, we are laser-focused on growing sales and continuing to grow sales. Our spoilage rates in our food category is about where we want them now. And obviously, we've improved 400 to 500 basis points versus previous year. So our spoilage rates are about where they want them. We are really focused on growing sales. As we go forward and as we grow sales and as we continue to improve our supply chain, we absolutely believe there is future margin expansion as we continue on this journey. Operator: Your next question comes from Vishal Shreedhar with National Bank. Vishal Shreedhar: Alex, as it relates to food, Couche-Tard has been on a journey for food for, call it, more than a decade and sometimes the initiatives didn't necessarily come through as investors might have anticipated. So as you look at the -- your food programs right now and you've expressed confidence, what gives you more certainty that this confidence will be realized in actual performance and hitting your targets at this time? Alexander Miller: Yes. Thanks for the question. I do have a great deal of confidence, and I think we've talked to you about it, we needed to reset. So we rationalized our SKUs. We really focused on the underlying processes and programs on the products, the taste of the products, what was resonating with consumers, and we've largely finished that reset. And you're seeing it in our results. You're seeing the growth in both traffic and sales and margin improvement, and we are now poised for significant growth. Our production availability, our operating execution continues to improve, and we are reaching levels that we believe are very solid going forward. We've talked about our meal deals and the unique nature of us to be able to really offer value and to bundle products that are unique to QSRs. And candidly, we see a lot of people perhaps copying us or taking that. So we think we might be on to something there. But I've never had this much confidence in our journey in food. This organization, we are operators, when we get focused on things, we execute pretty well. I hope that doesn't sound arrogant. But our teams are focused on food. We are executing every period, every quarter at an improved level, and I think we're in for some really strong growth as we look at the quarters ahead across our footprint. Vishal Shreedhar: Okay. And could you just update us on the acquisition backdrop, maybe what you're seeing? Alexander Miller: Yes. Thank you. Very active. We are active with files in all 3 of our large geographies in Canada and Europe and in the United States, both smaller and larger files out there today. We're engaged, and we continue to see quite a bit of deal flow. And I think we'll be able, as we have done historically, to continue to execute on M&A inside of our financial framework and at multiples and return levels that we have consistently delivered on, I think, in our 46-year history. So it remains very active. And hopefully, we'll be able to announce to you in the coming quarters that we've gotten some stuff done. Operator: Your next question comes from Luke Hannan with Canaccord. Luke Hannan: I wanted to go back to the discussion on meal deals. Alex, you talked about expanding that platform in the coming months. And I'm curious to know, what does that look like? Is that more availability of certain deals, let's say, within the existing price points? Do you anticipate there being an expansion of the price points available? And then maybe also sort of as a follow-up to that, introducing more complexity and SKUs naturally might also get to a point where similar in the past Couche-Tard has run into issues when it comes to spoilage, how do you make sure that you put the guardrails in place to ensure that you don't introduce too much complexity as part of expanding the meal deals platform? Alexander Miller: Yes. I think when we think about meal deals, first and foremost, it's about value. So the value element is resonating with consumers who are increasingly stretched. And through our vendor partnerships, our procurement capabilities, we're able to offer these meal deals at margin profiles that work for us and that work for our partners. So as we look to the future, we will continue to offer value. We will continue to keep it simple and straightforward in what we are offering, and we will leverage down even harder with our vendor partners to give the products that our consumers want. The energy sector is growing rapidly, continues to grow rapidly across all 3 of our geographies. We have great relationships. Consumers look to us for those products. So continuing to make those various drink products with our best-selling food items at value will be our focus as we look to the future. Operator: Your next question comes from John Zamparo with Scotiabank. John Zamparo: I'm wondering if you could add a bit more color on the Flavortown initiative? I know it's quite early, but can you say what level of growth you're seeing at those stores? And is there anything you can say to give a sense of how incremental this is and what impact it has on margins? And then lastly, can you remind us on the pace of that rollout, you've said national within a year, but I'm wondering when this will hit most of the U.S.? Alexander Miller: Yes. Thanks for the question. This is a great example of making sure we stay disciplined on SKUs. So we added 11 Flavortown items in our Northern Tier business unit. We stopped selling 12 other items as part of that. We've reached about 65% to 70% of our goal of unit growth from those items. And I think more importantly, it is serving to grow hot food in Northern Tier, and we are growing hot food in Northern Tier as a result of Flavortown. We're still working through some supply chain elements for the 10 states we're serving. We're still working with the Flavortown team around the various products and what -- how consumers are responding to those. But we feel good about where we're at this far into the journey, and we continue to see a strong likelihood that we will expand across the U.S. We've got a little bit more work to do. And probably we'll be able to update you more next quarter, I think, on where we're at on that and what the expansion plan will be. Operator: Your next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: Alex, I wanted to ask a high level strategic question. You talked through a lot of your key initiatives this morning to accelerate growth and expand margins. So hoping you could give us a sense of the top maybe 1 or 2 initiatives that you believe will have the greatest positive impact on your business in the next, I don't know, 2-plus quarters. And then maybe drill down a little further on how impactful you expect these initiatives to be on your top and bottom lines? And then also, where do you see the biggest risk to your business in the next couple of plus quarters? Alexander Miller: Thanks for the question, Bonnie. Our focus remains right where it's been. First and foremost, operations, execution, operating metrics, serving our customers, the equipment in our stores work friendly, customer ready. So that has been our focus the last year, and I'm really proud of the improvement. I have talked with you at length about food and the journey and meal deals, it remains right there. Growing our digital platforms is absolutely and increasingly personalizing our platforms. We are seeing just uptake in our programs, increased visits, increased basket. We're going to layer down into these programs and feel really good about those. We have some tailwinds, right? The energy sector is great. We have some mix tailwinds. We've talked a lot about other nicotine and white nicotine specifically. Nicotine was positive in both Europe and the U.S. for this quarter. And we continue to see that transition, and our relationship with the vendors in these spaces and just how we work with them strategically, we feel really good about. So Bonnie, it's going to be more of the same. We're going to lay into those things. I guess the greatest risk, I feel strongly about our teams and our culture and how we're executing and the momentum we have. I continue to see us widen our gaps versus our data that we see from various markets. It's the underlying environment and how the consumer is doing and just -- that is obviously impossible for me to predict. And that's -- I don't spend a ton of time worrying about that because it's not something I can control. We're focused on the things we can control. And we feel good about the momentum we have. Operator: [Operator Instructions] Your next question comes from Mark Carden with UBS. Mark Carden: So you guys talked about opening the 3 new DCs to bring in some more self-distribution. How long would you expect the ramp to take at those locations? And then to what degree could you see yourself ultimately using self-distribution across even more of your footprint? Alexander Miller: Yes. Thanks for the question. Our focus will -- we opened our one in Minnesota. It was great to go visit, and then we'll open our one in St. Louis and Columbus in the coming couple of months. And our focus for the first couple of 3 months is really just servicing our stores, making sure that we're getting the products to our stores in a timely way when we're supposed to. I think after those first couple of 3 months, we will then start to optimize around when we deliver to stores. We're obviously starting conversations and different things with vendors and our partners around products. We will continue to look to expand assortment and enable additional local assortment through these DCs. And for us, I think I've spoken previously, we will go into our food supply chain as well. We believe the path of going into our supply chain on the merchant food side, we see a lot of incremental value both in the assortment we can carry, our underlying cost of goods, simplifying how we serve our stores and serving them when it makes sense for them and for our customers. So this is not a near-term thing for us. This is -- we've been planning this for a long time. It's great to get this first one open, and this will be a journey for us over the coming years. Operator: There are no further questions at this time. I will now turn the call over to management for closing remarks. Mathieu Brunet: Thank you, Alex and Filipe. That covers all the questions for today's call. Thank you all for joining us, and we wish you a great day and look forward to discussing our third quarter 2026 results in March. [Foreign Language] Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good day, everyone, and welcome to Nutanix First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. You will then hear a message advising your hand is raised. To withdraw your question, simply press star, one one again. Please note this conference is being recorded. Now it's my pleasure to turn the call over to Nutanix Vice President of Investor Relations, Rich Valera. Please go ahead. Good afternoon. Rich Valera: And welcome to today's conference call to discuss First Quarter Fiscal Year 2026 financial results. Joining me today are Rajeev Ramaswamy, Nutanix's president and CEO, and Rukmini Sivaraman, Nutanix's CFO. After the market closed today, Nutanix issued a press release announcing first quarter fiscal year 2026 financial results. Operator: If you'd like to read the release, Rich Valera: please visit the press releases section of our IR website. During today's call, management will make forward-looking statements, including financial guidance. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially and adversely from those anticipated by these statements. For a more detailed description of these and other risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K, as well as our earnings press release issued today. These forward-looking statements apply as of today, and we undertake no obligation to revise these statements after this call. As a result, you should not rely on them as predictions of future events. Please note, unless otherwise specifically referenced, all financial measures we use on today's call, except for revenue, are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided, to the extent available, reconciliations of these non-GAAP financial measures to GAAP financial measures on our IR website and in our earnings press release. Nutanix will be participating in the UBS Global Technology and AI Conference in Scottsdale on December 1, the Raymond James TMT and Consumer Conference in New York on December 8, and the Barclays Global Technology Conference in San Francisco on December 11. We hope to see some of you at these events. Finally, our second quarter fiscal 2026 quiet period will begin on Monday, January 19. And with that, I'll turn the call over to Rajiv. Rajiv Ramaswamy: Thank you, Rich. And good afternoon, everyone. In our first quarter, we saw solid demand for our solutions, with bookings that were slightly ahead of our expectations, and continued progress with our partners. However, the solid performance of the business didn't translate into revenue within the quarter as previously expected. Late in the quarter, we saw more business than expected with start dates outside of the quarter. This resulted in some revenue being shifted out of Q1. As we evaluated the impact of this recent change in our business mix on our fiscal 2026 outlook, we now expect to see more revenue deferred than we had previously planned, driving a reduction in our full-year revenue guidance. Rukmini will provide more details on these changes in her comments. But there are a few key points I'd like to make. First, our view of the fundamentals of our business and bookings growth expectations for the year remain unchanged. Second, these changes do not impact our free cash flow expectations for FY '26, which we are modestly increasing. And finally, this is solely a timing issue, and the amount of revenue we expect to recognize over time from business booked in FY '26 remains unchanged. With that said, in our first quarter, we delivered quarterly revenue of $671 million within our guided range and grew our ARR 18% year over year to $2.28 billion. We also saw another quarter of healthy new logo additions and solid free cash flow generation. We continue to see success in the marketplace in Q1 with our cloud platform. Our most notable wins, a few of which I'll highlight, demonstrate the appeal of our solution to businesses that are looking to modernize their IT footprints, deploy modern apps and AI, and adopt hybrid multi-cloud operating models. One of our largest expansion wins was with a North American-based provider of agricultural products and services that is looking for an alternative to their existing three-tier virtualization solution that included a potential future path to public cloud. They chose our Nutanix cloud platform to run their mission-critical applications across their global manufacturing and business operations footprint, appreciating the public cloud optionality provided by our Nutanix cloud clusters, or NC2 capability. They also chose Nutanix Kubernetes platform in anticipation of future deployment of modern workloads, as well as Nutanix cloud management and Nutanix unified storage. Another example of a new logo win with a customer looking to take advantage of the hybrid multi-cloud capabilities of our platform was a European government agency that was looking for a solution to deploy and manage their modern applications across public and private clouds. They are planning to run their modern applications on a Kubernetes platform on top of NC2 on AWS. And we continue to add some of the world's largest companies as new customers in Q1, including a 7-figure global 2,000 new logo with an EMEA-based provider of energy products and services. This customer was looking to implement a comprehensive cyber solution. They chose the Nutanix cloud platform to run these security applications as well as Nutanix cloud management for its common management interface, superior ease of use, simple one-click upgrades, and the ability to securely run across multi-cloud environments. They also chose Nutanix unified storage for management of their unstructured data. Finally, a first-quarter new logo in our US federal business highlighted the GenAI and modern application capabilities of our platform. This government agency, looking to modernize their infrastructure and to utilize AI to enhance its effectiveness and efficiency, chose a full-stack Nutanix solution, including our cloud platform, Nutanix unified storage, and Nutanix database service, as well as our Nutanix enterprise AI and Nutanix Kubernetes platform, to support development and deployment of their modern and GenAI applications. Rukmini Sivaraman: Moving on, we also continue to make progress on our initiative to support external storage with our platform, including selling our solutions supporting Dell's PowerFlex to another global 2,000 customer in Q1. During this quarter, we also announced that Nutanix plans to support Dell's PowerStore, with general availability expected in 2026. And we remain on track to deliver our solutions supporting Pure Storage FlashArray within this calendar year. Finally, we continue to receive industry recognition in Q1. Nutanix was named a leader in the 2025 Gartner Magic Quadrant for Distributed Hybrid Infrastructure. Our inclusion in the leaders quadrant, along with several leading public cloud providers, reflects the evolution of our offering to a true hybrid multi-cloud platform. In closing, our business performed solidly in the first quarter, including bookings that were slightly ahead of our expectations, ARR growth of 18% year over year, another healthy quarter of new logo additions, and solid free cash flow performance. The change to our revenue guidance relates solely to the timing of revenue recognition. I believe the fundamentals of our business remain healthy and unchanged. We remain focused on delighting our customers while driving sustainable profitable growth. And with that, I'll hand it over to Rukmini Sivaraman. Rukmini, Rukmini Sivaraman: Thank you, Rajiv, and thank you everyone for joining us today. I will first discuss our Q1 2026 results followed by Q2 2026 guidance, and our updated fiscal year 2026 guidance. In Q1, we reported quarterly revenue of $671 million within the guidance range of $670 to $680 million, representing a year-over-year growth rate of 13%. While bookings in Q1 were slightly ahead of our expectations, we saw a larger than expected proportion of land and expand bookings with future start dates late in the quarter, resulting in a shift of some revenue from Q1 into future periods. As a reminder, under US GAAP, revenue recognition generally begins when the license starts, which means bookings with future start dates shift revenue recognition into later periods even though cash collections may occur earlier. This is solely timing-related and does not change the overall revenue expected to be recognized over time. If land and expand bookings had come in with the proportion of future start dates that we had assumed, Q1 revenue would have been above the high end of the guided range. ARR at the end of Q1 was $2.284 billion, representing year-over-year growth of 18%. NRR, or net dollar-based retention rate, at the end of Q1 was 109%, flat quarter over quarter. Note that this ARR and NRR are under our updated methodology that started with Q1 2026, as previously discussed on our last earnings call. In Q1, average contract duration was 3.1 years. Non-GAAP gross margin in Q1 was 88%. Non-GAAP operating margin in Q1 was 19.7%, towards the lower end of our guided range of 19.5 to 20.5%, primarily due to lower revenue. Non-GAAP net income in Q1 was $121 million, or fully diluted EPS of $0.41 per share, based on fully diluted weighted average shares outstanding of approximately 297 million shares. GAAP net income and fully diluted GAAP EPS in Q1 were $62 million and $0.21 per share, respectively. Free cash flow in Q1 was $175 million, representing a free cash flow margin of 26%. Moving to the balance sheet, we ended Q1 with cash, cash equivalents, and short-term investments of $2.062 billion, up from $1.993 billion at the end of the previous quarter. Moving to capital allocation, in Q1, we repurchased $50 million worth of common stock under our existing share repurchase authorization and used about $89 million of cash to retire shares related to our employees' tax liability for their quarterly RSU vesting. Both of these help to manage share dilution. Moving to guidance, our guidance for Q2 2026 is as follows: Revenue of $705 to $715 million, non-GAAP operating margin of 20.5% to 21.5%, fully diluted weighted average shares outstanding of approximately 296 million shares. Moving to the full year, our updated guidance for fiscal year 2026 is as follows: Revenue of $2.82 billion to $2.86 billion, representing a year-over-year growth rate of 12% at the midpoint of the range, non-GAAP operating margin of 21% to 22%, same as our prior guide, despite the lower revenue guide. Free cash flow of $800 million to $840 million, an increase from our prior guidance, representing a free cash flow margin of 28.9% at the midpoint. I will now provide some additional context regarding our fiscal year 2026 guidance. First, as Rajiv mentioned, it is important to note that our full-year bookings growth remains unchanged relative to our last earnings call. We are also pleased to raise our free cash flow guidance for the full year. However, as we saw late in Q1, we are seeing that the timing of conversion of bookings into revenue is evolving with our business. We believe this is due to a couple of factors, including one, increased customer demand for greater flexibility to start licenses aligned with their adoption timeline, resulting in more bookings with future start dates, and two, the growing proportion of our business through our third-party OEM partners, for which we only recognize revenue when our partners ship an appliance. As a result, we now expect more revenue to shift from fiscal year 2026 into future periods, while the total amount of revenue recognized over time remains unchanged. Second, a note on seasonality. We expect the quarter-over-quarter revenue trend from Q2 to Q3 to be similar to what we saw last year in fiscal year 2025. Third, we continue to balance prudent investments for continued growth with a focus on efficiencies and expanding margins over time. This is reflected in our updated operating margin and free cash flow guidance for the full year. In closing, we believe the underlying value of our business remains unchanged. Demand and bookings expectations are unchanged. Our free cash flow outlook is higher. Revenue is expected to be unchanged over time, but starting later. And our guidance philosophy is unchanged. With that, operator, please open the line for questions. Operator: Thank you so much. And as a reminder, to ask a question, simply press 11 on your telephone. And wait for your name to be announced. To remove yourself, press 11 again. We ask that you please keep your questions to one and one follow-up. One moment for our first question. It comes from Matt Hedberg with RBC Capital Markets. Simran: Hey, guys. This is Simran Daswal on for Matt Hedberg. Thanks for taking our question. So just to start with 2026? Yes. Hi, Simran. I can take that. So on NRR, we had talked about, as you said, some puts and takes there. Where we knew logos generally don't affect NRR directly. Because if you think of all the components that add up to our ARR growth, the first one is, you know, good retention, making sure we're retaining as many of our customers as we can. And then there is this expansion component, which is reflected in NRR. And then the third element is new logo, which then add to make up the full ARR number. New logos in general don't affect NRR. I think the point we had made in the past was that as our average deal sizes for new logos have gone up over time, potentially in some customers, we might be doing a complete migration of their estate onto the Nutanix platform. Even at the get-go. That doesn't happen all the time, to be clear. Right? There are bigger customers where it would be a migration over time. We talked about that a little bit in the prepared remarks as well. There are puts and takes here. Overall, we saw the NRR for Q1 as reported stabilize. It was flat quarter over quarter. Simran: Okay. Okay. Got it. And then could you also provide a little bit more color on fed? How did it perform relative to expectations ninety days ago? And the impact of the government shutdown? Rukmini Sivaraman: Yeah. Thank you. Let me talk a little bit about US Fed. So first, I'd say, as a reminder, we don't report US Federal as a percent of our business. Just to give people an idea. But what we have said is that US Fed has been 10% or less of our annual revenue. With the seasonal strength, of course, seen in our fiscal Q1, the quarter that we just reported. Which is fed fiscal year end. In this Q1, specifically, our U.S. Fed business saw double-digit year-over-year growth off of admittedly, off of relatively easy comparison last Q1. But we saw nice growth there. And going forward, we continue to expect a higher than historical level of variability in the US Fed business given, you know, recent personnel changes, some policy changes, of course, we just came out of the government shutdown. So given all of that, we expect some variability there. But overall, we remain optimistic on the opportunity for this business to benefit from our platform's focus on modernization, and lowering TCO, which we believe TCO being total cost of ownership, which we believe is well aligned with government objectives as well. And we have factored through all of this into our Q2 and updated fiscal year 2026 guidance. We have factored this overall uncertainty into the updated guidance. Simran: Okay. Great. Thank you. Thank you. Operator: Our next question comes from the line of James Fish with PSC. Please proceed. Jim Fish: Hey, guys. Look. Let's get right to the point here. If bookings came in better than expected and granted it's apples and oranges slightly, why did RPO bookings that you know, I'm happy that you guys are finally talking about RPO because I think it's a more meaningful metric. But why did RPO bookings themselves only 6%? Can you guys help us with what that bookings growth rate was? And and Rupini, it really shifted out of fiscal Q1, why does it seem that so much is pushed into fiscal Q4? Because if I look at your your commentary here of seasonality, it it means we have a pretty large ramp into fiscal Q4 versus fiscal Q3 then So help us out here. Rukmini Sivaraman: Hi, Jim. Yeah. Thank you for those questions. So as you pointed out, you know, we've started this quarter providing RPO remaining performance obligations in our earnings release. When before we were providing them in our filings, so in our 10-Qs and K's. We believe that this is an additional relevant metric because, Jim, as you, I think, are alluding to, RPO cap bookings activity in the period. That is expected to be future revenue. And it includes a deferred revenue, which, of course, is also on the balance sheet, and it also includes noncancelable backlogs. Those are the components of RPO. I'll also remind folks that RPO is a TCV or total contract value-based metric. And so it is you know, it has it has all of the revenue, meaning it has duration in in as well. As opposed to ARR, which is an annualized metric. Now to your question, Jim, on RPO and why we saw a small decline in our backlog component, which is part of the RPO or subset of RPO, in our first fiscal quarter. And I would say that's consistent with our historic seasonality if you look at sort of what backlog does. And then there's a small component that that is not visible, which is noncancelable That is a smaller sorry, cancelable backlog, which is a smaller proportion. And so that also typically does translate into revenue. So overall, look, I mean, look at RPO. We are pleased with overall year-over-year growth in RPO. Which is 26%. In in Q1. Your second question, Jim, I think, was on the seasonality point. So when we look at the full year, what I would say is we we still see a mix that is similar to what we've seen in fiscal year 2025 last year, for example. Example. So you look at fiscal year 2025, our revenue mix first half versus second half was 49.51 And for '26, the updated guidance we just gave you at the midpoint of Q2 and full year, it's just a touch more weighted. Towards second half. So it's not meaningfully different from what we saw last year. Jim Fish: Good. Got it. And then I I think anyone that's been following you guys for a while you know, will recall the time frame when it was out of your control. The supply chain issues a few years ago that led to you know, what we'd all call push outs. So can you walk us through in terms of what you're seeing that's similar versus different on how we should think about this sort of push out time frame? Thanks. Rukmini Sivaraman: Yeah. So why don't I start on that, Jim, and then I welcome Rajeev to to add in here as well. And maybe, Jim, it's it's a broad question. Right? So I start with first maybe broadly talking about three relevant factors that are related to the recent dynamics that we see. Our land and expand business specifically. So first, with the growth of Broadcom migrations, we're finding that these customers want to commit to us. But often need more flexibility to help them match their license deployments with their migration timeline. We have seen some of this in the past as noted in prior earnings calls. Although the impact then was minimal relative to our expectations. We saw this become pronounced late in Q1, and we now expect this trend to continue, which is why we're expecting more revenue than previously expected to be shifted out of '26 and into future periods. That was the primary factor in the Q1 revenue performance. The second one is a growing proportion of our business is coming through our third-party OEM partners. For which we only recognize revenue when our partners ship an appliance. Third, and perhaps more directly to your question, Jim, we don't believe supply chain shortages or longer lead times were a meaningful driver. Of the revenue performance in Q1. However, based on what we have been hearing anecdotally about component shortages, and the potential for longer lead times. We believe supply chain tightness could impact the business going forward. So we believe now that we have more refined insight based on recent trends on, you know, orders with future start dates, partner shipping timelines, and the extent to which these factors impact timing of revenue. Now with all that said, I'd like to reinforce a few important points or reiterate a few important points that we said in the prepared remarks. We believe the underlying value of our business remains unchanged. Demand and booking expectations for the year are unchanged. Free cash flow outlook is higher. Revenue is expected to be unchanged over time. But starting later. And our guidance philosophy is unchanged. Rajiv, anything you would add to that? Rajiv Ramaswamy: Yeah. Let me provide a bit more color on the supply chain aspect. I think you covered the other aspects well, Rupini. So on the supply chain, as you said, I mean, we didn't believe that supply chain constraints were a meaningful factor in our Q1 results. But as we all know, there is a big massive AI build-out being done by a handful of large companies. And that has a potential, and it still seems to be starting to cost supply shortages in the industry. Now we don't see this directly. But we are hearing anecdotally about component shortages and the potential for a long lead times. Now this could impact our land and expand business. Going forward. Renewal talent. Affected. So we are monitoring this closely, and and we have factored in a modest tightening of the supply chain into our updated outlook. Now again, in terms of looking at the supply chain per se, while, you know, again, we don't control the supply chain supply chain ourselves, but we have done a few things to help mitigate supply chain issues. I'll say three things. There are four things, actually. First is we do have more server partners now than we've had in the past. Notably, we've added Cisco as a server partner. So our customers have a choice of settlement vendors to pick from. And, you know, they can do do that based on who's got the best supply. Second, we have continued to expand our hardware compatibility list. So that we can include more existing server configurations that customers have already deployed. Run our infrastructure. If they're, for example, looking to get it with their existing software and putting our software on, we can run that more on the existing hardware that they've deployed. Third, we've also added additional external storage options. Such as Dell and Zoom Pure Storage. That mitigate the need for customers to purchase new hardware to run our software. And and finally, we also have more offerings in the public cloud including now NC2 on Google Cloud, our Kubernetes offerings, etcetera. So these are all I I think the the overall set of things that we are doing on our end too, to provide broader applicability of a software across different hardware. Operator: One moment for our next question, please. It comes from Matthew Martino with Goldman Sachs. Please proceed. Matt Martino: Yeah. Thanks for taking my questions. First one for me, like on the revenue that slipped from Q1 into future periods, like how much of that was tied to customer requested future start dates versus OEM shipment timing? Versus simple deal slippage? And I guess, like, what evidence more broadly do you have that this is timing only rather than emerging demand softness? And then I have a follow-up. Rukmini Sivaraman: Hi, Matt. Thanks for the question. Let me start. So in Q1, the revenue performance in Q1 think I I wanna be clear, was primarily related to the proportion of orders that we saw with these future start dates. And as we said, bookings in in Q1 were ahead of what we had expected going in. And so it's that bookings view, Matt, that gives us that that we were alluding to when we said that, look. We have seen bookings to come in Q1 in slightly ahead of what we had planned. And our view for the full year on bookings also remains unchanged. From before. But the primary factor of Q1 revenue coming where it did, which was within the range, and as we as we said, it was proportion had come in as we had assumed, it would have been above the high end of the range. Matt Martino: Got it. And then for a follow-up, just given the commentary on deal deal recognition landing in later periods, I mean, how should we think about the duration and the timing there as we kind of think about framing our models for 'twenty seven, kind of given the commentary that you expect unchanged bookings growth but a delay in that rev rec? Rukmini Sivaraman: Yeah. So when we think about '27, think it's part of your question, Matt, which is what is this change for 'twenty six imply for fiscal year 'twenty seven, if I were to paraphrase? Your question. Look, we have given you our view and of revenue for this year. Revenue growth in '27 is you know, as in any year, is dependent on three factors. Business deferred from '26 into '27, business booked in '27, and then how much we book in '27 that might get deferred into future years. So there's a net effect that, as you can see, along with actual bookings performance itself in '27. We look forward to providing more color on that really anything beyond fiscal year twenty six during our Investor Day in April, Matt. Rajiv Ramaswamy: Okay. The only thing I'll add to that, Upani, in terms of the demand side of this equation you talked about, of course, bookings coming in slightly ahead of expectations. The other thing you could look at, Matt, also is the fact that our cash flow is fine. Right? In fact, we're actually slightly taking up our free cash flow guide. And we're still collecting cash on all those bookings mostly upfront. Operator: One moment for our next question that is from Samik Chatterjee with JPMorgan. Please proceed. Samik Shiji: This is MP on behalf of Samik Chatti from JPMorgan. I I just wanted to ask on the customer spending plans, we have seen hardware cost particularly impacted by the increased component and component cost. So like, does that anyway impact the overall propensity of, like, customers and terms of spending towards IT? And, also, like, if you could help us understand FY '26 guide adjusted for the timing issues. So I'll talk about the first one. I mean, I'll we about the supply chain. I think look. I mean, hardware, again, prices could change. Prices go up. Prior lead times could go up, and like I said, our you know, approach is to provide fundamentally, to provide more diversification to customers. So that so that they can try and arbitrate amongst all the hardware providers and provide be providing the broadest flexibility to run our platform, right, on run our software on, you know, as many hardware platforms as they can. That's our approach of dealing with the hardware issues. We don't control the hardware directly. Right? Now we have it to your question. We haven't seen any drop in demand in terms of customers saying, oh, yep. Prices have gone up. Therefore, we're not going to buy as much. We haven't seen that at this point at all. Rupin, you wanna talk about the guide? Rukmini Sivaraman: Yes. So I think the question was for the full year '26 guide, what did it what would it have been if not for the timing of of revenue? And, look, I think a reasonable starting point to look to look at that is what we've guided last quarter. Which was $2.09 to $2.09 4. And our current guide is $2.08 2 to $2.08 6. And as I said, the the reason for that is we're expecting more revenue than previously expected to shift out out of fiscal year twenty six and the factors like we talked about. Right? One is this the this the fact that more customers want to commit to us but are looking for more flexibility to help them match their migration timelines with one they need licenses from us. Second is the growing proportion of our business that's coming through third-party OEM partners, for which we only recognize revenue when our partnership and appliance. And the third one, which we, you know, we really haven't seen thus far, it was not a factor a meaningful factor in Q1 revenue, is that these some of the supply chain shortage or longer lead times, were exciting to hear about. Anecdotally and which you alluded to as well. Samik Shiji: Thank you. Oh, and my follow-up question would be, like, have you seen any increased competitive increased competitiveness across the space over the last ninety days or something? Like, overall view around the competitive environment. Rajiv Ramaswamy: I would say, nothing has changed really on that front. We're seeing the same set of competitors as we've always competed with, and we really haven't seen any any major change. In the dynamics. Like I said, I think the the migrations that we're seeing customers do onto our platform, Right? I mean, they tend to be staged over time. Right? It's not everything coming upfront. And we're seeing as as we see more of those migrations and explained, I think that's driving, you know, the customers to need more flexible start dates. Right? In terms of, you know, when they actually want to activate their licenses so that they can activate those whenever they're ready to actually do the actual migration. So that I think is is is what we've seen, and I don't don't the competitive side of the equation really hasn't changed. Operator: Our next question comes from the line of Wamsi Mohan with Bank of America. Please proceed. Ruplu Bhattacharya: Hi. It's Ruklu filling in for Wamsi today. I have two questions, one for Rajiv. When you look at the rest of fiscal twenty twenty six, how do you see the pipeline of large deals and the impact from that? And you talked about a growing proportion of revenue from the third-party OEM partners. So Rajiv, what percent of revenue this year is coming from those third-party OEMs? And can you give us any updated expectation for revenue from Dell and Cisco specifically? And I have a follow-up for Rukmini. Rajiv Ramaswamy: Okay. So first on the large deals, second on the OEM. So look, I think we continue to see our share of large deals. At any point in time, we have a pipeline where we have a a good number of large deals with you know, this uncertain timing. And when you have these deals, larger deals, it takes longer to to to really prosecute them and a little less clear when. Right? So we don't factor in all those deals into, you know, a forecast about some likelihood of some subset of them hitting. I would say we're seeing quite you know, it's a good mix. Right? We're seeing you know, we did more million-dollar deals last year. Than the prior year. We probably will do more this year as well as we go through the year. It's still early in the year. So we certainly have the pipeline. Of several deals out there that we should be we are working currently. On that front. Now on the OEM side, I will say that we haven't broken it down yet. In terms of what percentage of revenue is coming from it. But it's clearly growing. Right? You know, Cisco has now been out there for a while, and they are continued to ramp along nicely. Dell is still early in that in that life cycle. But I think if we've now got PowerFlex on, we will have PowerStore on sometime next summer. And so in general, our alignment with Dell is getting better. And and so I would expect that to continue also growing. And we've also had historically Lenovo, although they're a smaller OEM partner. That's been there for a while, it's business as usual on that front. But I would say I would expect the mix of Cisco and Dell both to grow for us over time. We haven't quantified it yet. Ruplu Bhattacharya: Okay. Thanks for the details there, Rajiv. Rukmini, one for you. Sounds like there's a structural change in the business where more bookings going forward will have future start dates. I guess the first thing is like how what is giving you that confidence that this is a permanent change and not something just specific to the near term or fiscal twenty six. So am I reading this correct that this is a structural change? And then second and part of this question is, on Slide 10, it says that we're going to balance prudent investments for continued growth with a focus on margins. And you're keeping free cash flow more or less same up $10 million at the midpoint. Is there any risk that investing less now can hurt future revenue growth? In outer years. So if you can just comment on that. Rukmini Sivaraman: Thank you, Ruplu. So on the on the first point you made in terms of the the change to future start date and why we think going to continue. One thing we said earlier was that one of the factors we think that's driving this, right, primary factor has been sort of this growth in Broadcom migrations. And we're finding that these customers they want to commit with us. They often need more flexibility, though, to help them match their migration timelines and so on. And so that dynamic, as we've talked about for a while, we expect those migrations to be sort of a multiyear journey for us. And so on. And we're always looking to balance customer needs with our own business goals, and so we'll continue to do that. The reality, though, is for some of these migrations, typically the larger ones, where the customer might say, look. I need these licenses over time rather than all up upfront depending on their own migration timeline. So that's the underlying dynamic around that. Second, to your question around we're keeping margins the same margin guidance the same margin guidance same as before, while we've taken revenue down relative to before and same on free cash flow. I think when we take free cash flow up, slightly, I think, relative to last what we told you last quarter. So if you think, would say, right, on the operating margin side, we we do wanna balance those two things, which is continuing to invest, investing prudently in growth while looking to to grow margins over time. Would say a few things on this. So one is with revenue getting deferred or shifted out of '26, there's some commission expense that gets deferred with that. We're also seeing slightly higher partner payments. These nonrecurring partner payments we've talked about before, they're slightly higher than what we had assumed when we gave you the guide three months ago. And then overall, we're always looking to manage the business efficiently. Right? So when I think about all of that, we feel good about the balance between investments and growth. And then, again, on free cash flow, the one other factor I'll say on free cash flow is that while we're seeing this more revenue, shift out of 26, we still typically invoice on bookings and collect cash upfront. Regardless of when the license deployments occur. So that's another thing to keep in mind when you think about free cash flow and cash collections. Rajiv Ramaswamy: Let me add one more thing, Rupini. Sorry. On that front. So when you talk about structural change, to the business, I think one element of it is structural, which is you know, more of our business is going to our OEMs. Like Cisco and Dell. And there is a structural of that in the sense that in that case, what we do is we give them our software, and then they put it along with the hardware. They create an appliance kind of model, and then they sell that. Right? So for us, fundamentally, at that point, we only recognize revenue when they ship. Right? We don't recognize revenue when we just provide the software to them, but only when they ship to their customers. So that, I think, do expect that side of the business to continue growing. Right? And that means that from the time we get a booking to the time that, you know, they we we could get revenue for that, I think. Is is gonna be fundamentally delayed. Right? And and so the more the mix the more of that we'll see. Ruplu Bhattacharya: Okay. Okay. Thanks for all the details. Operator: Thanks, Rupul. Thank you. Our next question comes from Nehal Chokshi with Northland Capital Markets. Please proceed. Nehal Chokshi: Thank you. I do have a couple of questions. First one, Rukmini, you said that bookings came in ahead of expectations. Did you actually state, how much were bookings up on a year-over-year basis? Rukmini Sivaraman: We did not. No. We don't typically report or give you specifics on bookings. So we did not call that out specifically. Nehal Chokshi: Okay. And so that that's why you were talking about the different components of bookings, those being RPO and cancelable cancelable orders as well then. Is that correct? Rukmini Sivaraman: Yes. So just to be clear. Right? So RPO, it it captures a lot of things. RPO has deferred revenue, which is obviously coming as a waterfall from prior periods as well. The majority of deferred is is support. Ratable piece of our business, and then there's some that's licenses that are coming from prior quarters, and that's proportion that's increasing. And then we also have in RPO, the other component of our RPO is noncancelable backlog. And what I think what I was answering the prior question or the one before earlier from Jim, think, was around the fact that RPO does give you a sense of what is expected revenue in future periods. We give you CRPO as well, which is next twelve months. That is coming off of either the balance sheet or from this noncancelable So it does give you there is embedded in there is Some proportion of the bookings that we had in Q1. But did not yield revenue in Q1. Nehal Chokshi: Okay. Canceled backlog, that that that you have said something about cancel backlog in one of the other questions. What what did you actually specifically say about that? Rukmini Sivaraman: Yeah. I was just saying that there's a that's a there's a small component of cancelable backlog. Relative to the RPO number. It's small. That, we don't put out. But that's also eventually, most of it does turn to revenue over time. Nehal Chokshi: Understood. Okay. Rajeev, for you, in your best estimate, what market share do you think Nutanix is picking up of VMware migrations? Rajiv Ramaswamy: Look. I that's a little hard to estimate. Right? I mean, if you look at the customers who are doing the migrations, I mean, the choices are us, Red Hat, and then I would say public cloud, which is being I I would say a minority. Right? And I can give you some qualitative color. Quantitatively, it's very hard for us to to really say. I would say, look. I mean, the proof of the pudding is we've got 2,700 customers plus who we we added last year. And we added another product six forty or so this quarter as well on top of that. And those are all customers who are doing migrations. You know, perhaps the one that might be pertinent is Red Hat. Right? And if you look at it, I think we are winning a good chunk of business of compared to Red Hat in terms of these customers migrating. Red Hat tends to be playing primarily where containerization is the main thing. Our platform is very solid when it comes to virtualization, the ability to run mission-critical workload, and the flexibility to to provide you know, both virtualization virtualization solutions as well as container solutions. We see some significant events, some of which are public. Right? So take finance informatic as an example. Large bank in Germany, all the regional banks, And, you know, for example, they had IBM and Red Hat a significant existing deployments, and, of course, big VMware shop and migrating their VMware workloads over to Nutanix. And that's just one example of a win. So I don't have an exact quantification to your question on the number, by the way, but we do believe you're winning a significant portion of those migrations. Nehal Chokshi: Okay. And then, you know, with respect to this container versus mix environment, is it fair to say that increasingly organizations are looking for the modernized container only solution? Or is it more organizations are looking for a mixed solution? Rajiv Ramaswamy: Most companies that we talk to, most customers that we talk to have a mix with the majority of the rest is still very much virtual machine-based. And the newer stuff everything that's new, net new being built is being built on containers. So almost everybody we talk to at least, it's a mixed environment. With more of the existing asset being virtual machine-based. Okay. Nehal Chokshi: Thank you. Operator: Thank you so much, Suzanne. As a reminder, ladies and gentlemen, please leave me your questions to one and one follow-up. Our next question is from Jason Ader with William Blair. Please proceed. Jason Ader: Thank you. Good afternoon. So I think, Rajiv, what you guys have been saying is that the push outs on the license start dates are due to the complexity of migrating off VMware. It just takes a while. And we kinda knew that, but you you've been doing these migrations for almost two years now. I guess, why do you think this push out issue didn't pop up sooner What what what makes this current time period maybe special? Forget about the OEM part of the business, but just on the the flexibility question, do you think it's it's a budget issue, a macro issue, or or some other issue? Rajiv Ramaswamy: Yeah. First of by the way, to your point there, it's not entirely new. Right, Jason? We seen this in the past too. We've talked about how you know, on on some prior large deals, we've had to provide this kind of flexibility to to align with the migration timelines. Now I think in the past, there were a smaller portion. Right? Of our business. Now we've got, you know, growing set of broad migrations. Right? So and and as as that grows again, we're finding that again. There's more of this that that requires that flexibility. And that's really, I think, is the is the the infection that we saw. And and we saw this very late this Q1 as well on this front. So would say it's just the fact that we have more of this coming. Now. That's the primary driver. Rukmin, do you wanna add any color on this one? Rukmini Sivaraman: I agree, Rajeev. I think you covered it. Jason Ader: Okay. Great. And then as a follow-up, for you Rajiv also, One of the comments we've heard from the channel is that you know, when people compare the renewal from from Broadcom compared to the the upfront pricing, including hardware. From Nutanix, it's, you know, it's not that different. And I know that you guys you've talked about this. But I guess the question is, should you be more aggressive on the upfront pricing to win business? And then is it is it is it gonna be more problematic on on that delta between, you know, the renewal for the customer versus, you know, the the full hardware refresh with the NAND pricing going up as much as it is. So that I guess that's that ties into the supply chain. Question that we discussed earlier. How how do you think about sort of upfront pricing and how that might change over time? Rajiv Ramaswamy: No. That's a very good question. Right? And I think and and a lot of it is also do they need to buy new hardware or not? Right? Tied to that. Because, you know, look at it from a software perspective, we're not leading with price. But we aim to be very, very competitive, right, with Broadcom. Otherwise, we will not win the account. And and especially when we are landing a new customer, I think we will be aggressive. Now I think the big barrier is they do need new hardware and they have to purchase new hardware. Now there again, that's why this hardware timing. Timing hardware refreshes it's it's a very important question. Right? So now of course, so on our part, we've been doing a lot to try to get our software to work on as much of the existing hardware. That our customers have, whether it's external storage, with Dell and Pure or even know, their existing servers that that may have running, for example, VMware vSAN or their their equivalent of hyperconverged. So so we've been trying to reduce that hardware portion of the outlay for the customer. And that will help us also for the more that we're able to do there, the the easier it is for us to insert. So those dynamics haven't changed really I think on our part, we've been working to again again, make our software, you know, more broadly applicable so that our customers don't have to go reinvest in hardware. Now when they do reinvest in hardware, by the way, I think the other point that we should not forget is that a lot of the VMware deployments 80% of it is still three-tier storage. And if they move from three-tier storage to HCI, including the hardware, there is a significant benefit. As long as they're ready to go replace their hardware, there is a significant TCO benefit there too. So so we monitor this. We look at every deal. We look at the of the customer and then decide our strategy there. Thank you. Thanks, Jason. Operator: Thank you. Our next question comes from the line of Mike Sikos with Needham. Please go ahead. Mike Cikos: Hey, thanks for taking the questions here guys. I just have a quick one and then a follow-up. I wanted to add, though, just to make sure I was clear on it, for the first question. When I look at some of the guidance commentary here, and specifically the second point around the growing proportion of business through third-party OEM partners. Is the point here that you're dependent on those partners as far as their timeline to ship those appliances. Or does that default back to, again, the flexibility that these customers are requesting? And the the the heart of the question is, is there anything you can do on your side to help those OEM partners move boxes out the door? Rukmini Sivaraman: Yeah. I'll start, Mike. It's more the you know, the the point you made about our revenue recognition is tied to when they ship the hardware, at which point, you know, then our our license provisioning is tied to that. It's less so, we believe, tied to this customer dynamic, which is why we call them out separately. Mike. It's more the ability of the OEM partner to to get the the to get the hardware shipped from their side. Then our license deployment is kinda linked to that, leading to our rev rec. Rajiv, do you wanna add anything to that or, you know, on what we can maybe help them with? Rajiv Ramaswamy: In terms of the I mean, they're not really. Right? I mean, we don't quite control when they ship Right? So it's up to the the OEM partners to to ship their hardware. And so we don't quite control that. Mike Cikos: Understood. Thanks for the the additional color there. And then for the I was just hoping to ask an Ravini, I understand there's a complexity of layers as far as how you put the guidance out there. But if I look at some of the the the delta here that we're talking to between the bookings, and the timing of revenue how much of the if I look at the full year guidance reduction here of about $80 million at the midpoint, How much is based on what we saw exhibited in Q1 versus what is now expected to transpire as we get to q's '2, three, and '4. I I just wanted to see if there's any way to triangulate or conceptualize the different moving pieces there. And I know that's a complex one, but I again, just trying to get little bit more of a firmer understanding. Rukmini Sivaraman: Yeah. So I think what we said for Q1, Mike, was that you know, if our assumptions had played out, as we had expected from when we gave you the Q1 guide. That our revenue for Q1 would have been above the high end of the range. And in in instead, it was $6.71. Right, which is what the reported revenue number was. So and and then that gives you a, I guess, a bit of sense of much we were expecting in in q '1 before we saw this late in quarter dynamic that we've that we've talked about here. And so that's maybe I'll leave it there, Mike. We're not sort of breaking it down more than that, right, in terms of specific quarters or so on. And then the other comment I made, I'll you know, say again is around seasonality, like, first half, second half. Where for fiscal year twenty six, if you take the first half Q1 actuals, q '2 guide, and then compare it to what second half will be, that mix is no. It may not meaningfully different from what we saw. Last year. So that would be the one other way to think about the contributions. Mike Cikos: Very helpful. Thank you very much. Thanks, Mike. Operator: Thank you. Our next question comes from the line of Ben Bolling with Cleveland Research. Please proceed. Ben Bollin: Good afternoon, everyone. Thanks for taking the question. Rajeev, I I think you've touched on this a couple of times. Indirectly. I'm I'm interested your thoughts. On the progress you're making with large customers in making this transition from Broadcom to Nutanix. What you're doing to make that process easier, either you know, reducing the duration of the POC or aiding in the reengineering and the replatforming and the training. You talked about the hardware relationships. Some interested in your thoughts on some of the things you're doing to improve that process or make it easier for customers. And then I have a a follow-up. Rajiv Ramaswamy: Yeah. I mean, it's a very good question. And these large larger customers tend to have more complex environments. Right? So this typically, if you wanna go win them, there's, of course, a POC phase. And we do actually a pretty good job with the POC. It's not really a technical issue. Right? So the POC is rarely actually sticking point. So we we get through that usually easily. Num There are all these other factors that come into play. Right? The commercial relationship and the dependency that they have. Potentially across multiple products with Broadcom. Right? That's a that's a big dependency. The the hardware piece, which again is you know, we try to do, you know, support as much and more of their hardware as we can. So that they don't have to go to fresh hardware when they switch to us. The third thing that we've been working on, of course, is making sure that we can support the baby of applications that they have. Now I would say this is kind of the eighty twenty rule. We support the vast majority of applications in being certified on a hypervisor. There's always gonna be maybe a handful of outliers. That aren't fully supported. I'll give you one example. This is Cisco's unified communication appliances. And and and those until recently, were not they used to work on our platform. But they were not officially certified by Cisco. And so customers would be reluctant to run those on a Nutanix platform. But now it's certified. Right? So we are working on getting it certified Cisco officially said they're certifying it now. So that's a barrier that we have to overcome in some cases for specific applications. Then, of course, the migration itself in terms of professional services required. Almost every one of these larger customers needs a a project team to go help them with their migration. So we have we have that. And then, of course, for the larger deals, we also have a a deals, per team that looks at all of these aspects in terms of putting together an appropriate commercial proposal. Now that said, Ben, for the very largest customers, we typically tend to find insertion points as opposed to trying to do complete pro comp takeouts. Right? So we try to find places where we can actually they can use our solution for, say, specific workload specific use cases. And for example, we have a pretty good database solution. We have a good Kubernetes offering. So these are things where I think we try to differentiate and and also try to get in with a subset of applications. And so that's, I think, typically what we do. Then, of course, last piece, I would just say we go through security audits, and we've gotten pretty good at doing that well and carrying that across through. So we have one fair share of what I would call, you know, certainly Fortune 500 customers. I think as you get to the Fortune 50 at the very top of the pyramid, it's it's very hard to do a full displacement. Right? And like I said, those would be partial entry points for specific workloads. Okay. Ben Bollin: Okay. That's really helpful. And I guess the follow-up would be when you look at the enterprise footprint you are working with, obviously, AI is soaking up a lot of mind share and and dollar share. I'm interested how you think enterprise investments in AI may or may not be influencing your opportunity to go out there and capture bigger footprint. You know, they're trying to do too much at once. They gotta pick their priority. Just how you think about that. Thank you. Rajiv Ramaswamy: I mean, it's a very fair question, Ben. Mean, almost everybody that we talk to has got AI at the top of their minds. But I would just say, that it's not I mean, the vast majority of our customers are, I would say, more experimenting with AI right now than really deploying it at some massive scale. There are exceptions. There are some subset of customers that are, you know, further along the journey. But most of our customers are still very early, so it's not like they have devoted the bulk of their AI as they have spent. To AI. And so we haven't quite seen that yet. Our subset of customers. And keep in mind, our customers are in the AI native companies. Right? They are the typical, you know, industrials and financial services and and manufacturers and retailers. Who are all wanting to use AI. But still fairly early in their adoption. Ben Bollin: Thanks, Rajiv. Operator: Thank you. One moment for our next question, please. And it comes from Param Singh with Oppenheimer. Please proceed. Param Singh: Hi. Thank you. I really appreciate you taking my questions. I have a couple. So, Rajiv Rukmini, and and sorry to harp on, again, on the migration piece, but you know, really wanna understand the impact. Right? I would have assumed that, you know, with migrations, you'll probably have larger deal sizes. Because migrations from VMware are much bigger. So that should layer on and impact your RPO in a much more positive way rather than just a seasonal you know, impact to RPO this current quarter. We really haven't seen that please if you could help me understand that. And and if it is true that, you know, you are gaining all these migrations, I would assume since migrations take multiple years, you get more and more migrations, your revenue would technically start accelerate into next year. Right? Like, this year's revenue to next year. Plus whatever else you get. So you would you you will see an accelerating trajectory to 2027. Am I wrong in this? Rajiv Ramaswamy: Yeah. So let's first start with the first question, Param. Thank you for those questions. So on on the migrations, you're right that, you know, in general, it's for the typically for the bigger ones where they will say where customer might say, look. Let's can I have these licenses phased out over time versus all upfront? And so what we're saying is that in Q1, we did see bookings come in slightly higher than our expectations. And the the mix of orders that came in with these future start dates that we saw late in Q1 meant that more of that revenue got pushed or shifted out into q q two and beyond than we had previously. Expected. And so so that's the point on around just migration and so on. Now if you look at I think you were trying to tie that to RPO. And so if I look at RPO, like I said, includes, you know, revenue waterfall, which is pretty standard. Right? And you can see in the balance sheet. And it also includes this noncancelable backlog, which what I said earlier was that in Q1, seasonally, you do expect that portion to to be lower quarter over quarter. And that's what we saw in Q1 as well. And if you look at RPO growth, it's quite significant year on year. time. Which is which is a good thing. Right? And when you look at total RPO Mhmm. Growing meaningfully over So that's, I think, the first piece of the answer. And then I think the second part of your question was around, again, fiscal year twenty seven. And why wouldn't there sort of be maybe an acceleration in '27? I think it's how you'd how you'd phrase the question. Param, so what I would say there, right, like, is look. I think this is if this was sort of a onetime thing, you're right. Then we sort of have some kind of a catch up. And we've talked about, you know, three factors here as we thought about the forward-looking view. One was these migrations. And if we and if we believe as we do that these migrations are going to continue, and we're going to be able to prosecute more against the Broadcom displacement opportunity that we will see more of this sustain. And and we expect bookings to grow as well over Right? So even if you assume that the proportion of orders with which to start date stays the same, and you expect bookings in general to grow over time, land and expand bookings to grow over time, the dollar amount that's getting shifted out, that will be higher than shifted in. Right? So there's a net effect there. That will that will matter in in any given period, including in '27. And then like I said earlier, right, '27 overall revenue will also depend on our booking expectations for '27, which, you know, again, not commenting on today, but we'll we intend to cover some of that in in our investor day. Sure. Param Singh: Thank thank you for that, Rukmini. And really quickly as my follow-up, you know, strategically thinking about this, right, obviously, you know, there's an opportunity to take share from VMware here. Why not be more aggressive for the rest of the VMware business here? Know you're going through a reference architectures. But is there a way to accelerate that? Or or maybe not or you don't wanna compete in that. I don't know how you're thinking about it. On the stand-alone virtualization side and how aggressive you wanna be attacking that market. So anything you could share is appreciated. Rajiv Ramaswamy: That's another good question. I think on the stand-alone virtualization, again, we look. I mean, we have been adding. Right? And we have been investing fairly aggressively to you know, expand the support for third-party storage. Right? So we have now Dell PowerFlex, The number two coming on board very shortly is Pure. We have Dell PowerStore. And, yes, there will be more. Right? Now at the same time, we have to also balance those investments versus investing in our future. Right? Where Kubernetes and cloud native and AI Mhmm. Right, on the other side. So we have to strike that balance. Right? We don't wanna go too far backwards in time. To go support everything that's out there. We wanna support the big ones. And if you look at it, once you've got Dell and and Pure, I mean, that's a big chunk of the market. Right? And we'll probably get the other big ones too out there. So we'll focus on, again, getting sort of the big picture, big ones. Out there, and then not trying to go meet everything. And then also balance it out with investing in cloud native and AI. Param Singh: Understood. Thank you. Thank you so much for answering my questions, Rishi, for Appreciate it. Rajiv Ramaswamy: Thank you, Pam. Operator: Thank you so much. And with that, ladies and gentlemen, we conclude our Q&A session. And conference for today. Thank you all for participating. And you may now disconnect.
Operator: Involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance, and total addressable market among others. They represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these. During today's call, we will discuss non-GAAP financial measures which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in the earnings release, which can be found on our Investor Relations website. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer. Jennifer Tejada: Thank you, Christine. Good afternoon, and thanks for joining us today. In the third quarter, PagerDuty, Inc. delivered revenue of $125 million, up 5% year over year. Non-GAAP operating margin of 29% exceeded guidance by 750 basis points over last year. We also achieved GAAP profitability for the second consecutive quarter, evidence of disciplined execution and a durable profitable growth model. Annual recurring revenue of $497 million represents 3% year-on-year growth. New and expansion bookings were consistent with the first half, offset primarily by customers rightsizing seat licenses amidst budget caution. We accelerated our product innovation and operational efficiency in the market, which extends our leadership in the increasingly important and complex digital and emerging AI operation space. In order to build long-term and near-term shareholder value in a budgetary environment, we are focused on three objectives. One, expanding operating and free cash flow margins as we further increase operational efficiency. Two, extending our product advantage in surface area in AI operations and incident management, and three, scaling the initial successes in our go-to-market transformation to drive faster adoption of the full PagerDuty operations cloud and effectively monetizing the value we create for customers. This will be our sixth consecutive year of expanding operating margins as part of our commitment to profitable growth. Structural efficiency initiatives are accelerating product and business execution while lowering our cost base. With the added benefit of modern software and AI, we expect to continue expanding operating margin towards our long-term target of 30%. Demand for our platform remains strong with double-digit year-over-year growth in new customer acquisition and in total paid and free customers. Customer retention and growth remain our top priority. While the number of customers expanding with us each quarter has remained consistent throughout the year, we are focused on increasing our average transaction size by more effectively attaching new usage-based products like AI ops and PagerDuty Vans and by driving adoption through new professional services and customer success playbooks. Targeted customer retention efforts, including a more efficient proactive coverage model, delivering high-demand features, and flexible pricing have stabilized customer low retention. That said, seat license compression continues to be our most significant challenge, large enterprises where budget caution and right-sizing have had the most impact on our incident management business. During the quarter, we mitigated longer-term risk by leveraging multiyear agreements, expanding to a broader product footprint, and including professional services to ensure fast time to value. We are scaling this motion with a refined adoption and value realization program through the customer success team while at the same time enabling the field to focus on our agentic offering, both of which will support improved retention and growth over time. We have also sharpened renewal forecasting to identify, measure, and address risk earlier in what is now a multi-quarter cycle. On a strong foundation of financial and operational discipline, we extended our product advantage in end-to-end incident management and AI and agentic operations. In the past, AI ops referred to modern event management techniques that support root cause analysis and incident triage. Now in an environment where trillions are being deployed on AI investments, yet enterprise resilience is more important than ever, the need for a new operating model has emerged. Agentic orchestration is one of many new operational aspects that enterprises must manage. The new ecosystem required to support AI includes energy, storage, compute, data management, large language models, applications, agents, and the systems to test, control, and run AI solutions safely and responsibly. Connected intelligent orchestration, and operations of the entire AI stack and the functional automation application across a business create new surface area that PagerDuty is uniquely positioned to support. The operations cloud connects seamlessly via our integration ecosystem and our model context protocol, or MCP. It intelligently detects potential disruptions and risks, and orchestrates human-led agent-based and model-centric events to prevent and resolve issues. This is the new era of AI operations, real-time orchestration and action across AI agents, applications, and infrastructure. We continue to invest in our roadmap to ensure our position as a central nervous system for both digital and AI operations going forward. PagerDuty pioneered and defined the incident management space starting in DevOps and expanding to enterprise IT, security, and business operations in service of supporting the largest and most innovative companies in building resilience at scale. In October, we released over 150 platform enhancements and the industry's agentic end-to-end incident management offering. Customers can now leverage PagerDuty agents to address high-value, time-critical work at every point in the value chain. PagerDuty agents have the unique advantage of being built on our open and neutral ecosystem of more than 700 integrations leveraging the broadest context on causes and resolution of incidents in order to take the most effective actions. Early traction and positive customer feedback on PagerDuty's agents demonstrate the need for AgenTex solutions to scale operations effectively. This is especially critical as a higher volume of code is being shipped with AI. We deepened our AI ecosystem leadership in the quarter, with an initial partner as an initial partner in the Glean MCP directory. This enables teams to adopt and accelerate value realization of the operations cloud. PagerDuty is also the first incident management and operations platform integrated into Spotify's developer portal for Backstage. Which positions us at the forefront of modern development. Spotify noted that this fundamentally helps organizations shift from reactive to proactive issue prevention. Developers can now initiate, triage, escalate, and resolve incidents without leaving their workflow. Our roadmap prioritizes standards-based enterprise-grade interfaces for discovery and control deep workflow integration in developer, agentic and operations tooling, and an automation fabric that seamlessly weaves human responders and autonomous agents together. Compared to point solutions, PagerDuty capabilities, and use cases span functions such as supply chain, IoT, storage, and security. Recent global infrastructure outages also highlight the differentiated resilience that we provide every day. Go-to-market excellence is critical to our success. We are transforming the way we go to market, especially in enterprise. Where we have seen ongoing customer budget caution and organizational rightsizing and change. Over the midterm, we are establishing PagerDuty as the enterprise operations platform for AI. In the near term, we are transitioning from a traditional single-year seat-based license model to a multiyear platform usage model. On a year-over-year basis, our go-to-market execution has improved. In Q3, we advanced customer acquisition. Adding 284 net new customers year to date. Nearly four times the total in FY25 validating demand for our products and services. Leading AI native companies like Perplexity and AnyScale continue to choose PagerDuty as their primary operations platform. We have also continued to grow our high-value customer base those spending over $100,000 per year with us, by 5% year over year to 867 customers. During the quarter, we welcomed Todd McNabb to PagerDuty as our chief revenue officer. He and the team are focused on accelerating this transformation to improve our land, realize, and expand motion, activating new partners to support this effort. In his first thirty days, we have seen nearly 40 customers together and expect to see over 100 by the end of the year. It is clear from those conversations that our customers want to do more with us and need both our expertise and support to realize the full value of our platform. Initial progress in our shift from seat-based to usage-based pricing is encouraging. Flexible operations cloud packaging enables customers to seamlessly scale between human responders, agents, and automated solutions without needing to precisely predetermine users and product mix. This better aligns our customer investments to business outcomes rather than headcount and licenses. In the quarter, customers across industries made multiyear commitments to PagerDuty. A leading AI native company's multiyear renewal and expansion this quarter demonstrates the need for best-in-class and AI operations. Digital and AI operations. In a high-growth segment where proven scale, resilience, and strategic partnership are required. PagerDuty safeguards enterprise resilience at a global scale that competitors cannot match as the company's engineering footprint is expanded rapidly from research-focused to a global production platform supporting hundreds of millions of users they required a strategic partner to support their unprecedented operational scale. As AI has accelerated, they have joined our million-dollar ARR cohort. A Fortune 25 global automotive leader, selected PagerDuty for a multiyear agreement as it modernizes enterprise operations optimizes manufacturing operation operations, and advances electric and autonomous vehicle initiatives. PagerDuty won via executive alignment and enterprise-grade capabilities to support operations beyond software teams to manufacturing and the dealer network. Critical to our selection was fast time to value integration with their native ITSM system, Slack first workflow automation, and our strong track record of scale deployments in manufacturing. One of Australia's largest banks and a PagerDuty customer since July 2024 expanded for the second time this year during Q3 to support their ambitious growth goals. The bank added several thousand enterprise incident management licenses in a multiyear partnership, increasing their investment by nearly $1 million in ARR. The deployment is transforming operations for reactive and manual preventative with scaled service ownership across the entire organization. PagerDuty is the bank's enterprise platform for AI. In the competitive gaming industry, a leading digital entertainment with millions of daily active users selected PagerDuty's operations cloud with flexible pricing to enhance operational resilience. Moving beyond seat-based licensing constraints, the customer chose PagerDuty's usage-based offering to reduce expansion friction and to better align their investment with business value, automating more work as they target 99.99% availability, and reduce operational toil by 20%. Developers can now focus on innovation rather than operational issues. Our focus and sustained investment creation. continue to yield returns in talent, critical drivers of long-term value PagerDuty's recognition among Fortune's best workplace's top 50 included this quarter's placement in the small and medium company list in technology and validates our ability to attract and retain the high-caliber employees essential to deepening our competitive moat in digital operations and expanding our offerings in AI operations. Building on the digital operations category we pioneered, AI operations is a natural growth platform to support our long-term strategy and profitable growth goals. Progress in our go-to-market transformation along with flexible enterprise and usage-based pricing support both midterm growth and ongoing margin expansion. While these efforts will take time to be fully realized, we are executing from a position of strength, including product leadership, expanding operating margins, and a strong balance sheet. Our unique platform offering and improvements in underlying execution underpin our confidence in accelerating profitable growth. I would like to share one additional leadership update. Howard Wilson, CFO, has decided to retire during the financial year. Howard has been at PagerDuty for nine years and has been instrumental in growing the business to nearly $500 million in ARR. His impact has been deep and broad as he has led PagerDuty through our successful 2019 IPO and in achieving critical milestone positive cash flow, significant operating margin expansion, profitability, and then recent quarters GAAP profitability. During his tenure, Howard has built and led incredibly capable teams in finance, corporate strategy, operations, and customer success. He has opened international markets, helped to shift PagerDuty from product to platform, and led us in acquiring several companies. We have started the search for a new CFO, and Howard is committed to supporting a smooth succession during the 2027 financial year. With that, I will turn it over to Howard, and we look forward to your questions. Howard Wilson: Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before reviewing our third-quarter financial results, I want to highlight our strong operational discipline reflected in our second quarter of GAAP operating margin profitability. We expect to be GAAP profitable for the full year next fiscal year. And now unless otherwise stated, all references to our expenses and operating results on this call are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted on our Investor Relations website before the call. Moving to results. Revenue for the quarter was $125 million, up 5% year over year. Q3 GAAP net income was $160 million. This includes a one-time income tax benefit of $154 million from the release of a valuation allowance. International revenue increased 7% year over year contributing 29% of total revenue. Annual recurring revenue exiting Q3 grew 3% year over year to $497 million. Although we expected incremental ARR to be higher, there was more pressure on seat licenses and smaller expansion deal sizes this quarter. We delivered a 100% dollar-based net retention compared to 102% in Q2, DBNR was negatively impacted by lower gross retention. We expect this pressure on DBNR to continue in Q4. Customers spending over $100,000 in annual recurring revenue increased 5% year over year, resulting in 867 by quarter end. Total paid customers grew to 15,308 in Q3, growing 2% year over year. Paid and free customers on our platform grew to over 34,000, an increase of approximately 13% compared to Q3 of last year. Q3 gross margin was 87%, above the high end of our 84 to 86% target range. The overachievement demonstrates PagerDuty's ability to drive its own operational efficiency while ensuring that the platform improves that of our customers. We expect gross margin in the long term to return to within our target range as we invest further in customer success management. Operating income was $36 million or 29% of revenue compared to $25 million or 21% of revenue in the same quarter last year. The outperformance reflected our focus on increased productivity and operation execution with lower payroll and other personnel costs. In terms of cash flow for the quarter, cash from operations was $25 million, 20% of revenue, and free cash flow was $21 million or 17% of revenue. Turning to the balance sheet, we ended the quarter with $548 million in cash, cash equivalents, and investments. In Q3, we repurchased 2.4 million shares under our $200 million repurchase plan. And at the end of the quarter, $162 million of the total amount authorized to be repurchased remained available. Consistent cash generation and a strong cash position provide a solid foundation for us to advance our enterprise transformation while returning capital to shareholders. Trailing twelve-month billings were $496 million, an increase of 4% compared to a year ago. With respect to Q4, we anticipate trailing twelve months billings year-over-year growth to be flat. At the end of Q3, total RPO was $450 million, increasing 2% year over year. Of this amount, approximately $287 million or 69% is expected to be recognized over the next twelve months. $101 million or 24% over months thirteen to twenty-four, and the remainder thereafter. Now turning to guidance. When we provided guidance at the end of Q2, we underestimated the current headwinds. Operator: Retention. Howard Wilson: Although the number of customers churning and downgrading is trending downwards, the dollar value of the contraction driven by seat-based reductions and customer budget caution has been larger than we forecast. As a result, we are lowering our top-line guidance. To improve visibility, we have made changes to our renewal process and implemented operational changes to drive earlier customer engagement. In addition, in line with our ongoing focus on efficiency, we are increasing our full-year net income and operating margin guidance. So for the fourth quarter fiscal 2026, expect revenue in the range of $122 to $124 million representing a growth of zero to 2%. And net income per diluted share attributable to PagerDuty, Inc. in the range of 24 to 25 cents. This implies an operating margin of 21%. For the full fiscal year 2026, we now expect revenue in the range of $494 to $497 million, representing a growth rate of 5%. This compares to the range previously provided of $493 to $497 million and net income per diluted share attributable to PagerDuty, Inc. in the range of $1.11 to $1.12. This implies an operating margin of 24%. This compares to our prior guide of $1 to $1.04 and 21 to 22% respectively. This quarter, we expanded margins beyond targets delivered our second consecutive quarter of GAAP profitability, and generated strong cash flow, capital we have been returning to shareholders. At the same time, we are making the strategic investment position the business to reaccelerate our ARR growth while maintaining our disciplined financial profile. In summary, we are expanding margins generating cash and progressing the pricing and go-to-market transitions that support durable growth. We are executing from a position of strength with product leadership disciplined capital allocation, and a strong balance sheet. While staying tightly aligned to customer outcomes. On a personal note, as Jen mentioned, I intend to retire next year. My journey at PagerDuty has been one of incredible growth, and I am proud of what we have accomplished. I appreciate our customers, partners, investors, and our employees for their support, and I am committed to supporting Jen and the team in a smooth succession. With that, I will open up the call for Q&A. Operator: Thank you, team. We have a number of hands raised already. Analysts, first, we will hear from Jeff Van Rhee. Jeff, can I have you open up your line? Joining us from Craig Hallum. Go ahead, Jeff. Jeff Van Rhee: Yeah. There we go. Great. Thanks, guys. So I appreciate you taking the questions. And, Howard, congrats. Nine years. Great run. Wish you all the best. Hope you are doing what you enjoy. Come on out of here. So, Jen, just talk to me about, you know, the DBNR, the trend of deceleration there declines. And as Howard addressed, some gross churn issues that sound like you are trying to figure out. How do you, you know, from a leadership standpoint, evaluate what is going on there and compare it maybe to past periods where you have seen buyers be more cautious about spending, you know, pulling in the reins to say, okay. This is like something we have seen before or, hey. This is something different here. What is going on? And how is that thought process for you right now? Jennifer Tejada: Yeah. Thanks for the question, Jeff. And, you know, as we said, like, we have a lot to be proud of in the quarter with a very strong bottom line result, you know, 29% margin up 800 basis points over year over year, 70% free cash flow. But we are unsatisfied with our retention effort at this or our retention outcome from this quarter. It is a little different than anything that we have seen in the past in that what we saw this quarter was improvement around logo retention, so fewer customers leaving the platform. And actually fewer absolute customers downgrading. But the customers that did downgrade tended to be larger downgrades in size tied to pretty significant reorganizations. And those reorganizations, you are hearing about them in the news every day. They come with sometimes thousands of jobs leaving a business, a lot of leadership turnover and change, and that has made it hard to anticipate the scale and scope of those. Having said that, some of the things that we have done to better understand what is happening in those customers is, one, take a multi-quarter view on renewal planning with the customer so that as those customers make changes, we are moving in lockstep with them to giving them an alternative from a flexible pricing perspective. I talked about a gaming platform in prepared remarks. Where they came to us with this challenge. You know, we are changing our organization pretty significantly and want to reduce seat-based licensing and by moving the seat-based licensing conversation off the table, in service of usage and a platform license, we are actually able to expand with them in the quarter. So as we scale that motion, we expect this to improve as well. But, you know, overall, I am confident in the long-term outlook because we see the same customers increasing their usage on products and features. So even though there may be fewer seats in the renewal, their actual usage of the platform is actually improving, and we have seen several examples of that. In addition, you have seen we have really upped our focus on new customer acquisition, and that really reinforces our product leadership and our market not just in digital operations, but also in this broader, you know, new evolving category called AI ops where I think we are going to continue to be the choice of not only AI natives who can find less expensive offerings in the market, but also large enterprises that want to grow with us. So we are really focused on those large customers and making sure we can anticipate any changes that might be coming and focused on flex pricing and multiyear agreements to support them and to reduce risk over time with those longer-term agreements. Howard Wilson: Mhmm. Jeff Van Rhee: Helpful. If I could sneak one other in from a sales standpoint. Not long ago, I know you were watching the maturity of the sales reps as what you thought would be kind of a key indicator when they hit their productivity. I think 60% at that time had been there a year. And I am curious now, obviously got some new leadership relatively new in the sales or you know, when sitting in the CEO chair, you know, what are the indicators that you are watching most closely there for sales? What are you expecting? What are you looking for there? Number one is what are customers telling us? What are they telling us about their ability to leverage and get value from the platform? How do they feel about their account coverage, and continuity in terms of their engagement with PagerDuty? Are they getting the support that they need? Both pre and post-sale? And so, Todd and I have really been focused on listening to her and getting out and talking to our largest customers, and that has been not only very well received, but we have been, I think pleasantly surprised by the love people have for our products and services, but also the admission that some of the challenges with the adoption and realization is not purely due to PagerDuty's engagement model, but also the fact that their organizations are changing pretty rapidly. So they are asking for more proactive help in that area. From a field perspective, I think Alison Corley, joined us a few quarters ago as chief customer has really gotten her legs under the desk and has really gotten customer success oriented around a much deeper understanding of how customers are actually faring from a pure platform health perspective, and that has enabled us to have higher-level conversations with customers earlier in the process. But also to swarm customers with the care they need even if their organizations have changed meaningfully. And in the sales organization, Todd is really doubling down on what we call land realized and expand, making sure that our reps who have ramped, have the support that they need to really go after growth and expansion, focus on new product attachment, particularly those usage-based products, but also services attachment. To ensure, you know, faster time to value for our large customers as we close and move on. And we have seen that result in some really great wins this quarter. I talked about an automotive manufacturer that is doing some really interesting stuff with us, and that is a ramped rep who really understands the platform. But is also leaning into not just our core incident management, but our new AI and automation features. Operator: Yep. Jeff Van Rhee: Yep. Got it. Appreciate it. Jennifer Tejada: Thank you. Operator: Thank you, Jeff. Next, we will turn to the representative from RB. Could you please introduce yourself and join the call? Mike Richards: Hey, guys. It is Mike Richards on for Matt. Thanks for taking the question. I guess just to start understanding that you are making these changes to sort of get ahead of renewals moving forward. I was wondering maybe and it is early with these seat-based compressions, is there an opportunity to go back into these accounts you know, before their next renewal to offer the usage-based pricing or services where you can sort of, like, get back what you lost. Absolutely. For a minute. Jennifer Tejada: One of the benefits of long-term agreements is it gives us more time to go in during the period proactively with not only new pricing and packaging offerings, but also more flexibility to get across products and new add-ons. And, you know, we have seeded several thousand customers with our PagerDuty advance. Products and services and seeing really good engagement there. And in fact, had a lot of with our SKU that you are aware of called AI ops. Which is really about event management, event correlation, and root cause analysis. But that was our first usage-based pricing offering, and that is growing, you know, over 50% year over year, and it has been consistent growing on a solid base. It is not a small revenue product. So, absolutely, this gives us an opportunity to be more proactive. And in fact, the vast majority of customers that Todd and I have seen together are nowhere near a renewal. We are talking about you know, getting feedback on the product, how can we help them attach to uses. We have a bandwidth of trying to accomplish and telling us a lot of the same things. One, we are actually starting we are moving from experimentation to deploying AI investments, and we need to do that in a safe and responsible way, and we need your help doing it. Lot of interest in the MCP, which was released for general availability. Earlier in the quarter. And, also a lot of positive feedback in, very significant feature-based release, across our entire platform. I think this is the largest release in the company's history. Frankly. And that has been made possible for through our developer's own use. Of AI. So absolutely proactive. It is a team sport, and we have Allison Todd, and their teams along with Catherine who leads our digital first business. And all of the executive sponsors in the business really, focus on making sure that there are no surprises and we are not turning up to the party late. Mike Richards: That is great to hear. And then, Howard, just a quick one for you. Just in terms of the guidance system, assuming that the dollar-based churn that you are seeing now from CPaaS compressions is sort of stabilizing from here. Or are you assuming that it continues to worsen? Howard Wilson: Yes. So what you our guidance has factored in sort of the visibility that we have today around dollar-based net retention through Q4. And that is driven primarily by the renewal rate. And the visibility that we have around those renewals is now sort of taking us out further and earlier into the process. That gives us a lot of confidence in the guidance that we have given. So we have not provided a specific number around dollar-based net retention, but we do expect that some of the seat-based pressure that we have had will continue in Q4. Mike Richards: Thanks, guys. Jennifer Tejada: Thank you. Howard Wilson: Thanks, Mike. Operator: Thank you. Turning next to Andrew Sherman with TD Cowen. Andrew, please go ahead. Andrew Sherman: Great. Thanks. Good to see you. Much Jen, how much of the surprise in the quarter from some of the reorgs in the layoffs? It sounds like that pressured seats. How much of that do you view as, like, one-time because some big companies had layoffs and how much is like, is all this kind of out of your control or are there things that you can do to kind of pinpoint this sounds like some of the earlier renewals will help. And I know there is a big renewal base in Q4. So like how do you kinda prevent that happening in Q4 too? Agree. Jennifer Tejada: Question, Andrew. And it is nice to see the real Andrew Sherman. We see a name and then see a face. So thanks for being here today. You know, we already are making progress by being more proactive and explicit in, going to customers before they come to us to say they have problems. And I mentioned earlier that the absolute number of customers downgrading and of customers leaving the platform has improved. And has decreased over the quarter. So that is I think, a good leading indicator. We also are not waiting for to tell us that, they have got challenges. We are in there all the time asking questions with a pod model now that includes the sales rep, the solutions consulting, in some cases, their first-line managers as well as the customer success manager. And where we are engaging with premium support and, professional service that also gives us better visibility. So we do expect that to improve. You know, we are also seeing generally is just what our customers sort of refer to as being cautious about their budget because they just do not they are uncertain. About where that is going to be in the next couple of quarters. So by getting further out in advance of renewals, we also can capture budget even ahead of renewal timing. So we like I said, we do expect it to improve. I do not expect the macro to change meaningfully, and we are prepared and I think in a very strong position from a financial perspective with the durable balance sheet very strong operating margins, and free cash flow. To work through this process with our customers. Andrew Sherman: Yep. Okay. Thanks. And then on the consumption change, talked a bunch about it last quarter too, but sounds like consumption of the platform was still healthy. Was is that the case? And how are you kind of how quickly can you move to this consumption model so that the seat pressure becomes less and less of a headwind? Jennifer Tejada: Yeah. We are seeing usage go up across almost every usage metric on the platform and also that new customer growth that we talked about earlier both in terms of new loanable lands as well as net new customers. And new and free and paid customers, all growing in double digits. That is heartening in terms of demand for the product. And I would just remind you that it is not a one-dimensional shift from seat-based to usage-based because we have a lot of new customers and, frankly, growing customers that are very happy on a seat-based model where we do not see these tailwinds. We are really seeing them the most pronounced in the very largest customers. We have thousands and thousands of employees and, therefore, reorganizations that might impact thousands of employees that then cause seat-based compression for us. The other thing that I would say is as we move from single-year to multiyear, again, that gives us more time to seed some of these, usage-based products. And a number of our customers who are engaging in based have credits that they will be burning down, which we expect will then convert to ARR. So we will get some benefit as those customers spend more time and have more experience with these usage-based solutions. And with our Agentic incident management suite now in the marketplace, that gives us more surface area to grow in. Andrew Sherman: Great. And our maybe maybe just to emphasize one of the points that Jen made there. You know, when we see these customers who have the seat reductions, you know, the good thing is that they are staying with PagerDuty because they recognize us as the leader. In terms of how they manage their AI operations today. What we have seen is that as we start moving them to our flexible licensing model, they have access to more product footprint than they would have in the past. And as they have access to more of that product footprint, it allows them then to use more of the platform. And that we expect over time going to then lead to them growing with us further. So whilst their base might have shrunk for now, in fact, they are setting themselves up the foundation to really grow as they continue to scale their operations. Andrew Sherman: That is great. Thanks, Howard. Congrats, and best wishes. Great working with you. Howard Wilson: Thanks. Thanks, Andrew. Operator: Thank you. Next from Truist, have Miller Jump. Miller, come on up. Great. Thank you for taking the Howard, congrats on your next steps. Miller Jump: I am going to annoy you guys and ask another question about the seat count headwinds. But I guess the question is, really you know, it sounds like it is purely layoff driven. And from that perspective, would you characterize all these as businesses that are more challenged, or is there any evidence you are starting to see that AI is potentially pushing out investments in headcount in some of these businesses? Jennifer Tejada: You know, generally speaking, what I am seeing, you know, when if I try and correlate customers that are making changes, to what we are seeing in their earnings announcements, etcetera, there is really a focus on improving operating margin, reducing costs, and sort of rethinking how they might be attacking, you know, different efforts across the business. You know, frankly, we are also building more and more automation into the platform as well. Right, which, you know, over time means that seat-based licensing is not really as well tied to the value proposition that we are delivering. So this is a natural evolution, but it is more pronounced when you see a large customer with a significant headcount reduction, then come to us. So on one hand, it is interesting. It is kind of a dichotomy even within some of the same accounts. On one hand, we will see the rightsizing as a headwind, but the same customer will then come to us and say, our number one priority is resilient. So now that we have gotten the contract rightsized, how can you help us improve? To Howard's point, we almost see immediate growth opportunities following that sort of, resizing. And so and I think it is a temporal thing because we have seen our we have even seen customers who have significantly reduced their spend with us come back a year later and only to build back up. We are also seeing, you know, a number of opportunities where we are winning competitor replacement even where the competitor was less expensive. But not serving the resilience proposition. And, you know, if you think back just over the last eight to twelve weeks, there have been a number of public service failures where, you know, we are the only platform that is still standing in because of all of the architectural redundancy we built into the product. And so that sort of reinforces the tailwind that is you know, operational resilience as a priority. Miller Jump: Makes sense. I guess I want to ask one about the bottom line for Howard. Obviously, a big step up that you are now projecting this year. Point well taken about, you know, 30% is kind of that long-term target that you are working towards. I know you are not guiding the year ahead, but like, can you talk about trajectory at all and just the potential for these types of gains in the future versus how you would expect it to ramp? Howard Wilson: Yeah. Well, thanks, Miller. We are proud of the progress that we have made. I mean, this is our sixth consecutive year of us continuing to drive that improvement in terms of operating margin. And we also, you know, have looked across the threshold around GAAP profitability for the full year next year. So this has been like a steady program that we have been running. We are not setting expectations for next year. But what I can tell you is that, you know, we remain committed to looking at ways in which we can, you know, optimize the spend within the business and deliver, you know, good results. So we are continuing to make investments in the things that are important for in terms of our customers, our transition, and our product. And you can expect to see more of that. Miller Jump: Thanks very much. Howard Wilson: Thanks, Miller. Operator: Okay. Next, we will hear from, the representative from Morgan Stanley. Again, please introduce yourself. I you are a new face for us. Oscar Savedra: I am Oscar Savedra on for Sanjit Singh. And congratulations from me to you, Howard, as well. Howard Wilson: Thank you. Both at Oscar Savedra: you get to do some fun stuff during retirement. Guess my first question, you know, with regards to guidance for Q4 right now calling for 1% of growth at the midpoint, I was wondering like how much of that is based on what you are seeing in the pipeline in terms of the upcoming big renewal quarter versus maybe a bit more conservatism around you know, maybe the timeline to when that usage-based part of the model will begin to offset the seat pressure that you have seen. Howard Wilson: Yeah. Sure. So when we look at the guide that we provided for Q4, we have factored in the visibility we have around renewals. Q4 is our largest quarter. In terms of renewals. We do expect that as we transition customers to the new pricing and packaging model, that that will mitigate the impact of some of the contraction that we have seen. And set those customers up for growth. We are not expecting that to have a major impact in Q4. So whilst we are moving customers to this new pricing, that obviously is not something that you just turn on instantly. But we are making good progress and we are working with a large number of customers who have renewals in this quarter around moving them to that new model. But we have factored in both looking at the engagement that we are having with customers and early engagement we started with them now months ago with some of the changes we have implemented and also having a look at the customer's own state of usage and adoption of the platform to try and make sure that we can be really targeted to help drive and improve their adoption. So we are expecting some of the same that were emerging in Q3 would still persist to some extent in Q4. We are still expecting to see stabilization in that the number of customers that are downgrading or churning. We have got a good handle on that. We are looking at ways in which we can mitigate any contraction. Oscar Savedra: Got it. And maybe as a follow-up, you know, Jennifer, you talked about, you know, improvement in customer log retention and being less absolute customers in size. I was just wondering, like, if you can sort of, how do you square that with the downtick in we saw in the customer spending over $100,000 in ARR? Jennifer Tejada: Yeah. It really comes down to the just the impact of down sells at the larger end of the market. And customers, I think, are expanding at a similar rate that they have in the past, but they are smaller expansions and a little more cautious than they have been in the past. So it is on us to work with them to see the value from those investments quickly. So that they can continue to build on them. I also believe that as Allison has gotten closer to the business, she is identifying more opportunity in the base, particularly as it relates to giving customers exposure to new products and services across the platform, and that is something that we are working to do a better job of attaching. Oscar Savedra: Got it. Thank you very much, guys. Jennifer Tejada: Thank you, Oscar. Howard Wilson: Thank you. Operator: Thank you. And turning next to BofA. Again, please yourself and ask your question. George McGrion: Hi. It is, George McGrion on for Koji Ikeda. Really appreciate you taking our question today. So I wanted to ask about the AgenTex suite. And kind of the, you know, the tailwind that that might be to consumption as we kind of shift to consumption. You know, just among the products and features that are in, generally available today, MCP server, Shift Agent, you know, etcetera. Do you kind of see any difference in the way that customers that are engaging with those products are using the platform today? Maybe any increase or is that early? And then also on the other hand, just in terms of how the suite further differentiates PagerDuty from the competition, you see that kind of showing up in your competitive win rates today? Or is maybe that too early? Thank you. Jennifer Tejada: Yeah. And we are seeing thank you for the question, George. We are seeing really positive response to the Gentex suite for a couple of reasons. One, most agents that you will hear about in and around the incident management space can only work across the environments that they are built in. And because of our 700 plus strong integration ecosystem and the data that we have built over many, many years focused on incident management. Our agents are able to leverage a much broader context to determine what is truly a challenge to troubleshoot and triage that and ultimately resolve it. And with the benefit of MCP can work hand to hand agent to agent with other platforms, whether it is one of the cloud providers or hyperscalers or in the case of Glean who we mentioned earlier, where the agents are able to work together seamlessly. Right? The other thing is, our products and services have always been human in the loop or human in the lead, and so the user can see the agent at work and engage in that process, which builds trust. And what we are seeing is that then drives, more usage and more adoption and then more usage. So it is a bit of a self-fulfilling cycle in that regard. And I think from a competitive standpoint, because it is not a single SRE agent, we have an agentic scribe an agentic shift agent that takes a lot of the pain out of scheduling and escalation development. We have got an agentic analyst that helps you understand actually what is going on during an incident, what has happened in the past, and how you can apply some of those learnings very quickly, like during the incident, instanti And then, of course, the SRE who is doing some of the work. And you can imagine where this can go over time. Now that we are able to, add and scale agents on this platform. So I do believe it is quite unique in the market. And also resilient like all of our products and services are. So, so that we are really excited about. And with other usage-based products like AI ops, what we saw was a pretty steady, growth over a period of time. By first seeing the product, getting customers to try it and use it, and then getting them to consume in the case of AI more events, in the case of the Gentex suite. More credits. And so we do we do expect to see those customers grow as they get a hang of using not just the agents, but also our generative offering as well, which all lives under the PagerDuty, advance umbrella. And then to your question around, you know, why are we confident, one, it is just seeing the usage patterns even on a smaller base, healthy growth. Two, customers have helped us design these agents. So all of our PD advanced products and services started in an early design program. So they basically, were built in service of what our customers told us they needed. So we are meeting the demand in the market first in many cases. And, likewise, they are more intuitive to sell. In some cases than maybe some of our more technical automation offerings of the past. So the field is really excited learning how to talk about them, how to show customers how to try them, get them, enabled. And get customers discovering them in product. George McGrion: You very much. Jennifer Tejada: Thank you. Howard Wilson: Thanks, George. Operator: Okay, team. I believe we have one more question queued up from William Blair. Is that Jacob on the line? Feel free to turn your video on and unmute. Yes. Hi, everyone. This is Jacob Zirvan for Jacob Vares. For taking the question. You touched on the solid momentum with new logo ads this year. Could you give us some more color on how these logos are landing in terms of size relative to prior years? Especially as you are prioritizing larger deals and multiyear commitments. Jennifer Tejada: Yeah. This is one of the things that I look at every quarter. And, you know, frankly, we are seeing good new logo acquisition across all of our segments. And remember that the way we land customers is often through our digital first or self-service environment, and then they will either grow unaided within the digital first organization, or they will grow through the with the help and support of the go-to-market. So we are seeing both, you know, showing promising growth. And know, what I would say is I had a look last week at just the batch of new customers this quarter. I was really pleased to see this balanced mix between new AI natives, some of the hottest companies you are hearing about, some of the fastest scaling companies in the world. I think we mentioned, any scale you may be familiar with Ray and Perplexity. But, also, we are really continuing to see a lot of diversity across industry verticals and, you know, digital first customers as well as more traditional companies that are deep in the middle of transformation. You know, in some of our markets, we have seen some really good competitive replacements where other point solutions have not served customers as they have scaled, and we have been able to provide them with a much more resilient, broader product offering. So it really is a pretty balanced, base of customers. Howard, anything that you would add there? Howard Wilson: Yeah. And I would say that, you know, the size of land can vary, as Jen said. Like, sometimes we have small customers why where it may be a few 100 or a few thousand dollars. Within this quarter, we ask also had a few customers above $100,000. So lands that were, you know, large lands, so those tend to be in the enterprise segment. Sometimes that is also a mix that can be a more traditional type of industry, but certainly a lot of the software and technology and AI leaders also tend to come in at some of the higher values north of 50k. Jacob Zirvan: Got it. Thanks. Just one more on my end. You had a meaningful decline in stock-based comp this quarter. I guess as you are positioning for GAAP profitability, should we expect this level of stock-based comp like, a forward basis? Howard Wilson: The I you can expect stock-based comp to decline. The rate of decline, you know, will be different as we sort of move forward through, you know, through the end of this year and into next year, but that is the trend that you can anticipate. Jennifer Tejada: Yeah. And as you know, that is a lagging indicator. It is the result of pretty significant effort over the last several years that you sort of see show up in the out years, and we are continuing to be committed to managing stock-based comp effectively as part of our, you know, profitable growth ambition. Jacob Zirvan: You Thanks, Jacob. Operator: Howard, Jen, we have made it through another batch of questions. Jen, can I turn it over to you for any final remarks? Jennifer Tejada: Yeah, sure. Thank you. Thanks, everybody, for joining us today. We feel we are uniquely positioned to support enterprise resilience across customers' strategic digital and AI operations. Our product velocity and expansion into cutting-edge use cases continue to widen our competitive moat. We are central, ubiquitous, neutral, connected, and everywhere. And the strength of our P&L and balance sheet ensures that we are able to drive differentiated customer value in any market cycle. I just want to mention that we are grateful for the trust of our shareholders, the ingenuity and dedication of all of our employees, and the support from our customers and partners. And we wish you a wonderful Thanksgiving. Thank you, everyone.
Operator: Thank you for standing by, and welcome to Autodesk Third Quarter and Full Year Fiscal 2026 Earnings Conference. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Simon Mays-Smith, Vice President, Investor Relations. Please go ahead. Simon Mays-Smith: Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss Autodesk's fiscal third quarter results. Andrew Anagnost, our CEO, and Janesh Moorjani, our CFO, are on the line with me. During this call, we will make forward-looking statements including outlook and related assumptions and on products, go-to-market strategies, and trends. Actual events or results could differ materially. Please refer to our SEC filings, including our most recent Form 10-Q and the Form 8-K filed with today's press release, for important risks and other factors that may cause our actual results to differ from those in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will quote several numeric or growth changes during this call as we discuss our financial performance. Unless otherwise noted, each such reference represents a year-on-year comparison. All non-GAAP numbers referenced in today's call are reconciled in our press release and supplemental materials available on our Investor Relations website. And now I will turn the call over to Andrew. Andrew Anagnost: Thank you, Simon, and welcome everyone to the call. We delivered strong results today with revenue and non-GAAP earnings per share topping the higher end of our guidance ranges. Billings, non-GAAP operating margin, and free cash flow exceeded our expectations. We are again raising our full-year guidance across the board. As demonstrated at Autodesk University, shared during our recent Investor Day, and reflected in our results today, we are well-positioned to deliver for Autodesk customers and investors even in an uncertain geopolitical, macroeconomic, and technological environment. We are successfully executing on the most far-reaching transformations in enterprise software, redefining our business model, go-to-market, products, and platform. In doing so, we are making Autodesk more resilient and unlocking new avenues for growth and margin expansion. We're enhancing our products with cloud-based capabilities that seamlessly connect design and make workflows to deliver more value to our customers and expanding our addressable market opportunity. We're building a platform with a vibrant third-party ecosystem that will make our solutions more valuable, enable new monetization opportunities, and make Autodesk more efficient. And we're defining the AI revolution for our industries, empowering customers with new tasks, workflow, and systems automations, and capturing shared value subscription, consumption, and outcome-based business models that blend human and machine capabilities. Autodesk is building the future and the path to it. Our best days and greatest opportunities lie ahead. I've never been more confident in the long-term value we are creating for our customers, the industries that shape the world, and for you, our shareholders. I will now turn the call over to Janesh to discuss our quarterly financial performance and guidance. I'll then come back to update you on our strategic growth initiatives. Janesh Moorjani: Thanks, Andrew. Q3 was another strong quarter. Overall, the underlying momentum of the business was similar to prior quarters and better than the assumptions we had built into our guidance range. We again saw strength in AECO, where our customers are benefiting from sustained investment in data centers, infrastructure, and industrial buildings, which is more than offsetting softness in commercial. Upfront revenue, the Autodesk store, and billings linearity during the quarter were also stronger than expected. Our go-to-market optimization plan remains on track, and operational friction from the new transaction model implementation continues to ease. Total revenue in the third quarter grew 18% as reported and in constant currency. The contribution from the new transaction model to revenue was approximately $124 million in the third quarter. Total revenue grew 12% in constant currency and excluding the impact of the new transaction model. Please see the tables in our press release, earnings deck, and EXOR financials for details by product and region. Billings increased 21% as reported and 20% in constant currency. The contribution from the new transaction model to billings was $135 million in the third quarter. Billings grew 16% in constant currency and excluding the impact of the new transaction model. As a reminder, our billings growth this year is skewed by the new transaction model and by the transition to annual billings for most multiyear contracts. These tailwinds will significantly diminish next year. RPO of $7.4 billion and current RPO of $4.8 billion both grew 20%, benefiting from tailwinds from the new transaction model. Turning to margins, third-quarter GAAP and non-GAAP operating margins were 25% and 38%, respectively, reflecting year-over-year increases of approximately 330 and 120 basis points, respectively. This reflected operating leverage and ongoing cost discipline and was partly offset by the margin drag from the new transaction model. Our margin progress this year sets us up well to achieve the long-term margin goals we talked about at our Investor Day. We still expect progress towards that goal to be nonlinear, given incremental headwinds to reported margins in fiscal 2027 from the new transaction model. Third-quarter free cash flow was $430 million, which benefited from the earlier timing of billings in the quarter and lower cash tax payments. As a reminder, our free cash flow growth rate this year is also skewed by the transition to annual billings for most multiyear contracts. This tailwind will also significantly diminish next year. Moving on to capital allocation, we purchased approximately 1.2 million shares for $361 million at an average price of approximately $306 per share. Year to date, we have repurchased 3.7 million shares for approximately $1.07 billion. Turning to guidance, I will again speak to the numbers excluding the impact of the new transaction model and in constant currency, to give you a clearer view of the underlying dynamics of the business. In the earnings deck, you will see that we split the impact of the new model and currency movements for our fiscal 2026 guidance. We've assumed the underlying momentum of the business remains consistent with previous quarters for the remainder of fiscal 2026. We have a large pool of EBA and product subscription renewals to close in the quarter of the year. And we'll also have our toughest new transaction model billings and revenue growth with last year. The macroeconomic environment seems broadly stable, but macro uncertainty remains elevated, and we remain mindful of potential disruption as we continue to execute our sales and marketing optimization plan. So we built some risk into our guidance range for the remainder of fiscal 2026, and expect to again reflect these factors in our fiscal 2027 outlook in February. We remain disciplined and focused on the controllable factors that drive our revenue, operating margin, earnings per share, and capital allocation, which are the key building blocks of free cash flow per share. Reflecting all this, we've raised our billings guidance range to between $7.465 billion and $7.525 billion and raised our revenue guidance range to between $7.15 billion and $7.165 billion, which flows through the current momentum of the business through our full-year underlying guidance. The bottom end of our full-year guidance range reflects some macroeconomic risk for the final quarter of the year. We've also raised our non-GAAP operating margin guidance for the year to approximately 37.5% or approximately 40.5% on an underlying basis, which excludes the impact of the new transaction model. We've also raised our free cash flow guidance range to between $2.26 billion and $2.29 billion. As we said last February, utilization of U.S. deferred tax assets will mean we pay little U.S. federal cash tax in fiscal 2026. We do not, therefore, get incremental cash benefit from the One Big Beautiful Bill Act this year. Further, we now expect to buy back approximately $1.3 billion of stock, which is at the high end of our previous guidance and a 50% increase compared to fiscal 2025. The slide deck on our website has more details on modeling assumptions for the fourth quarter and full-year fiscal 2026. Andrew, back to you. Andrew Anagnost: Thank you, Janesh. Autodesk is focused on the convergence of design and make in the cloud, enabled by platform, industry clouds, and AI. We are at the forefront of convergence because we've been evolving and investing in the business models, products, and platforms, and go-to-market that capitalize on it. We are at the forefront of neural AI foundation models we are deeply integrating into our products. Not as a surface-level add-on, and have access to decades of digital data enabling us to generate greater value for the next wave of AI for the physical world. AI will enable inference across tasks, workflows, and systems which will supercharge convergence. Let me give you a few examples of our progress in the quarter. Our customers in AECO architecture, engineering, construction, and operations, are demanding convergence to reduce risk, increase quality, and optimize costs and resource use during the design and build phase of an asset. And to yield enhanced efficiency, resilience, and reuse during the operations and maintenance phase of an asset. Autodesk Construction Cloud has growing momentum with owners, designers, GCs, and subcontractors seeking to converge design and construction workflows. For example, a leading global food processor and asset owner is migrating over 700 active projects from a competitive solution to address challenges with end-to-end capital project management. Infrastructure owners, like the South Carolina Department of Transportation, will replace legacy tools with Autodesk solutions to execute long-term plans to improve state infrastructure and resolve maintenance and resilience challenges. Integrated design-build companies like Daiwa House Industry Company Limited, a pioneer of industrialized construction in Japan, is adopting Autodesk Construction Cloud and Autodesk Informed Design to connect its manufacturing and construction processes, placing Autodesk at the center of its common data environment for building systems. And general contractors like Flynn Group are migrating to ACC to unify design intent with field execution in a single data environment to improve project coordination and efficiency. These stories have a common theme: converging people, processes, and data across the project lifecycle to increase efficiency and resilience while decreasing risk. Our comprehensive end-to-end industry clouds and platform drive convergence and extend our footprint further into the larger growth segments like infrastructure and construction that we discussed at Investor Day. All this is reflected in our sustained strong revenue and new customer momentum in infrastructure and construction. Our manufacturing customers are also demanding convergence to drive cost and research efficiency during the design and make process by converging product development workflows in the cloud, leveraging centralized and granular data in unified data models, and embracing AI-driven automation capable of industry transformation. For example, industrial machinery companies like Micromatic are replacing disconnected competitive solutions with our unified design and make platform to connect data and workflows, which increases collaboration and drives efficiency and speed to market through component reuse and fast, reliable iterations. Machinists at an American cosmetics company will save hours per week by using Fusion for manufacturing and simulation to automate nesting, toolpaths, 3D printing, and programming of multi-axis machines to create spare parts. To further strengthen and scale its integrated design and manufacturing processes, Total Environment is leveraging Fusion's advanced capabilities in manufacturing simulation, design, and data management. By unifying workflows on a single platform, the company will eliminate disconnected tools, enhance collaboration, and improve efficiency across its operations. And a French automobile manufacturer is adopting Fusion to produce motor prototypes after a benchmarking analysis showed the Fusion platform could complete a machining task in twelve hours, which is ten and fifteen days faster, respectively, than competitive solutions. Converged data opens up new opportunities for Autodesk. As customers seek to drive efficient innovation, Fusion is driving strong growth with extension attach rates increasing and driving average sales prices higher. And we're delivering meaningful productivity gains to customers where we deploy AI. We have continued to see success with our AI-powered sketch auto constraint infusion. Since its launch this year, the AI model has delivered over 2.6 million constraints and has been retrained and the UX improved all along the way. The acceptance rates for auto constraint suggestions to commercial users have grown to more than 60%, with 90% of those sketches fully constrained. In education, Wake Technical Community College, Kimley-Horn, and Autodesk have entered a strategic partnership to prepare more than 6,000 students for high-demand careers in design, engineering, and construction. This initiative will integrate Fusion, Forma, Civil 3D, and Autodesk Construction Cloud into WTCC's coursework with Kimley-Horn's nationally recognized internship program, creating a direct pipeline from classroom to career. And lastly, we continue to find new ways for our customers to consume our products and services in ways that work best for them. For example, a multidisciplinary AEC consultancy firm is using flex consumption to rapidly scale and manage projects across multidisciplinary teams and distributed supply chains to accelerate project delivery and reduce risk. Attractive long-term secular growth markets, our focused strategy of delivering ever more valuable and connected solutions to our customers, and a resilient business are generating strong and sustained momentum both in absolute terms and relative to peers. Our disciplined execution is driving greater operational velocity and efficiency. We are deploying capital to grow the business, further reduce share count, and enhance value creation over time. In combination, we believe these factors will deliver sustainable shareholder value over many years. Operator, we would now like to open the call up for questions. Operator: As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. Our first question comes from the line of Saket Kalia of Barclays. Please go ahead, Saket. Saket Kalia: Okay. Great. Hey, guys. Thanks for taking my questions here and great to see the better results. Well done. Andrew Anagnost: Thank you. Absolutely. Saket Kalia: Andrew, maybe to start with you. I'd love to pick up on the theme from Analyst Day a little bit and see if you could just weigh in on sort of the seats versus consumption AI monetization debate for Autodesk. But maybe also as part of that, touch on your broader ecosystem of partners and customers. That make sense? Andrew Anagnost: Yeah. That does make sense. And thanks for that question. It's very apropos. So look, there's three things we want to pay attention to here. The first one is there's still a fundamental capacity challenge in all the industries we serve, AEC and manufacturing. There isn't enough current capacity to meet all the demand for what needs to be built or the supply chain needs that need to be throughput inside of both manufacturing and AEC. So we have a capacity challenge. The second thing I think is really important is in the future, there's still going to be projects that require intensive human engagement in order to successfully execute. They're going to be more complex. But there's also going to be projects in the future where there's less requirement for human engagement. Machines are going to execute more on these things. And there's going to be a balance between these two. You know? And the last thing is something I've been saying over and over again. You know? Our goal is to decrease the number of people that are working on a particular project but increase the number of projects that our customers and our ecosystem are working on. And if you do that, what you're going to see is we're going to be capturing incremental consumption value to the things that we do, monetizing machine-based execution, providing outcomes, and all things associated with that while also still supporting the people-based work that's going to go on in the ecosystem. This is equally true of our customers. Our customers are going to be seeing their balance shift from sometimes, in some cases, billable hours to also consumptive execution through machine-based execution based on their intellectual property and their IP. And their unique knowledge set. So we're all on the same journey together, but it's going to play out over time. And you're going to see us actually capturing more value and creating more capacity for the industry we need because the industry desperately needs it. Saket Kalia: That's that makes a ton of sense and super helpful. Janesh, maybe for my follow-up for you, appreciate the detailed guide for this year. Was I was wondering if you were able to just give us any color on fiscal 'twenty seven high level as we think about our models. Janesh Moorjani: Hey, Saket. I'm happy to do that. So let me elaborate a little bit on what I said in the prepared remarks. First off, just by way of context, the business is clearly performing very well this year. That said, we've got a lot of business to close, particularly in January. The second thing I'd point out is our sales and marketing optimization plan has gone very well so far. But we are not complete with that. As we touched on this a little bit at Investor Day. So I think there's still some risk of disruption next year. And then finally, while the macroeconomic indicators have been broadly stable, uncertainty does remain elevated in the environment. So just we just think it's best to maintain a prudent posture on our underlying growth for fiscal twenty seven. We're performing very well this year, and we're looking forward to the rest of the year. Saket Kalia: Very helpful. Thanks, guys. Janesh Moorjani: Thank you. Operator: Thank you. Our next question comes from the line of Adam Borg of Stifel. Awesome. And thanks so much for taking the question. Adam Borg: Just on the Autodesk Construction Cloud, it's great to hear the continued traction and even the customer coming over migrating 700 active projects. When you think about your existing Autodesk Construction Cloud installed base, for those existing customers, how penetrated are you in terms of the cost of the projects that are already brought over to Autodesk? Any color around that and the ability to continue selling broader parts of your growing ACC portfolio, be it payments or preconstruction, etcetera, would be really helpful. And then I have a follow-up. Andrew Anagnost: I really like that question. Okay? So first off, let me just start at the fundamental level. Alright? The reason why Construction Cloud's doing so well is that we've got this design to preconstruction through construction execution solution. It's completely unique in the industry. And it's built on a modern platform. This is not an aging platform. That's going to kind of age out of what people need in the future. It's a highly connected AI-ready SaaS-based platform. That's really a huge selling point for us. And what you just mentioned there, Adam, is completely true. As we're acquiring new customers and penetrating new accounts and displacing competitors in lots of accounts, what we're doing is we're starting off with a set of projects. So we're not even fully penetrated in all the projects that we've executed with our customers to date with I mean, in accounts where we are with our customers today. So there is actually not only increased penetration that will happen over time within the accounts we have as new projects come and light up and old projects sunset, but there's also additional expansion just driven by the power of our value prop. Adam Borg: That's really helpful. And maybe just building on the theme of convergence. In design and manufacturing, we talked about this a little bit at Investor Day. But as you think about convergence and the opportunities with fusion over time, how do you think about the PLM market more broadly? For all that? Thanks so much. Andrew Anagnost: Yes. So another great question. Alright? And I really appreciate it. So first off, remember, we're targeted at the mid-market, and that's where there's a lot of growth in supply chain activity. These customers need convergence because they need this end-to-end digital productivity. And I just want to make it super clear to everybody. Most of those customers have nothing. With regards to PLM. They don't have anything. Alright? They may have a data management solution. They may not. Most of their work is actually done through spreadsheets and ad hoc connectivity with some of their ERP systems. They don't have any kind of strong data management or lifecycle solution. We're building a solution for those customers. And we're going to go in there and say, you can get what the big boys have. And you can get the kind of control and the cloud visibility and the cloud data flow that was reserved only to a few. And they need a modern platform. They need a SaaS-based platform. They need what we're bringing with Fusion. So that's how I look at the market. We built these capabilities in the Fusion. We're continuing to enhance them, and we're already starting to see success with small accounts of two to three users expanding to larger accounts because we have these tools that are really hard for a lot of people in the mid-market to get and deploy. Adam Borg: Incredibly helpful. Thanks again. Operator: Thanks for the questions. Thank you. Our next question comes from the line of Jay Vleeschhouwer of Griffin Securities. Please go ahead, Jay. Jay Vleeschhouwer: Thank you. Good evening. Andrew, my first question for you is a corollary to the question I asked you a quarter ago about the pace of new technology adoption. And the question has to do with something interesting you said at AU. I think it might have been a main stage you said, as far as your customer base is concerned, that, quote, no one gets left behind. End quote. Which is an important general commitment. But what are the practicalities of that in terms of customer migration, packaging, promotion, all those sorts of things that you've done or will need to do with regard to migrating your customers in the way that you implied? Andrew Anagnost: Yeah. So look. We're attacking this from multiple vectors. Okay? So first off, packaging is the first one. Right? As you know, if you're a collections customer or a Revit customer, you get the Forma design application shipped with your subscription. So you're already getting something that is you're paying for the future and the present. Alright? So you're capturing the value right there. And you're part of the ecosystem. The other thing that we're doing is we're also making sure that we have the CDE available to as many customers as possible. That's Forma data management. And we'll talk more about that in the future, which is a really important piece of the puzzle as well. The other thing that's really important, and it needs to get airtime because you're going to see something similar evolve in the Fusion world as well as we talked about Revit as rolling out as the first Forma connected client next year. And what that means is what we're doing is we're tightly connecting the workflows between the feature-deep desktop product that customers use today and the evolving emerging product they'll be using tomorrow. So that they can seamlessly move between these two products in such a way that they can get the benefit of one while also harnessing simply and easily the benefit of the other. That's a really important part of the strategy as we move forward. Because the adoption does take time. It takes time for people to change these things. And we're also hyper-focused, especially on the AI side, on rolling out features that may not look sexy at the headline level, but are real productivity enhancers for our customers that get real adoption. What you're seeing with auto-constrained infusion is a great example of that. It's a highly adopted feature. Now explaining it to everybody exactly what it does usually requires a video, but to a customer, they get it. And they love it. They accept these things at, like, 60% acceptance rates. Some of these sketches are 90% constrained. It's the kind of stuff that you're going to see us continue to roll out that really makes a difference in how our customers work. Jay Vleeschhouwer: Thank you for that. Janesh, given the revenue upside across each of the segments, could you comment on any new or incremental trends you're seeing in usage telemetry, either by vertical or geo or standalone product versus collections, anything of that kind? In terms of the usage component that helped drive some of that growth. Within AUC manufacturing and so forth. Janesh Moorjani: Jay, thanks. What I'd say is the momentum in Q3 continued from the first half. And the trends we saw in Q3 were similar to what we saw in Q2 as well. And you see that strength reflected in the different product lines and the different areas of the business. I touched on some of the areas within AECO, for example, around data centers, infrastructure, and industrial that were all bright spots again. And you see that reflected in products as well. Similarly, when you look at the Autodesk store and some of our emerging geographies that did well, you'll see the trends reflected in those, the products that get sold through those routes as well. So overall, I'd say it was very consistent with what we had seen in Q2. Nothing new that I would highlight as an emerging trend. Jay Vleeschhouwer: Thank you. Operator: Thank you. Our next question comes from the line of Jason Celino of KeyBanc Capital Markets. Your line is open, Jason. Jason Celino: Hey. Great. Thanks for taking my question. I wanted to ask about the normalized growth you saw this quarter, the 12%. You know, again, similar to last quarter, slight acceleration. But was there, like, what was the inorganic contribution to that normalized number? I'm just trying to understand if there was some modest acceleration. And if there was, you know, what do you think drove that? Janesh Moorjani: Yeah. I'm happy to touch on that. There was nothing unusual with respect to M&A activity in Q3 that affected those underlying growth rates. I'd say what we saw there was just the continuing momentum we've seen in the business, as I mentioned just a moment ago. The sources of where that outperformance came from in terms of the upfront revenue, the Autodesk store, and stronger billings linearity during the quarter, I think all of those played a role in helping us get to the ultimate outcome that we delivered over here. So overall, it was a strong quarter across the board. The team executed really well, and I think that's what you're seeing reflected in the numbers. Jason Celino: Okay. Great. No. That's helpful. And then when we think about the commentary around the EBA cohorts that you have for Q4, I'm just curious what type of behavior you've seen so far from, like, a renewal standpoint or if customers are willing to engage earlier, just curious if you have any tidbits that will be helpful there. Thank you. Janesh Moorjani: Jason, in terms of what we saw in Q3 was very strong engagement from many of those customers. We closed all the business that we were expecting to close. And if I think about some of the typical metrics that we have around attach rates and so forth, those all played out as we expected they would. Q4 is our largest quarter for EBA renewals, and we also have a very large product subscriptions renewal cohort to close here in this quarter. Q4 is heavily weighted towards January, so there's still a lot that we need to get done. But, again, the team did well here in Q3, and that momentum has continued nicely. Jason Celino: Okay. Wonderful. Thank you. Operator: Thank you. Our next question comes from the line of Taylor McGinnis of UBS. Please go ahead, Taylor. Taylor McGinnis: Yeah. Hi. Thanks so much for taking my questions. Andrew, first one for you. Just on you mentioned earlier about still some elevated uncertainty out there, but it sounds like you guys are seeing some strength in areas like data centers, industrials, and whatnot. When you speak with customers regarding their spending plans across AEC manufacturing and M&E for calendar 2026, or fiscal year 2027? I guess any early insights that you could share with the group in terms of what you guys are expecting to see? Andrew Anagnost: Yeah. You know, customers aren't flagging any differences in their spending pattern. Alright? I think one of the things that's really, really important to note is one, the current momentum is going to continue a little bit. And also, what the customers are looking for is they're preparing for future productivity enhancements. So everyone's investing in their digital infrastructure. It's trying to get ready for any changes in the demand patterns, what sector might be more important as we move forward. So most of our customers are flagging a continuation of their investment. Some areas are flagging a little bit more investment because they've been kind of maybe slow on the investment in the past, but we don't see anything changing in terms of the consistency level right there. Taylor McGinnis: Perfect. Thank you. And then, Janesh, maybe just one for you. On billings growth, you made several comments in the prepared remarks just about how growth has been elevated this year because of the new transaction model and also because of the larger base of multiyear billings customers, and we're going to start to lap that going into next year and see some moderation in growth. So can you just help us unpack the mechanics there a little bit more? So as we look into 2027, could we start to see, if we adjust for FX and the new transaction model, revenue growth and billings growth start to align with one another? Or is it possible that we could actually see some tougher comps and maybe there's a divergence between the two? Any additional color you can give there, I think would be helpful. Janesh Moorjani: Taylor, I'll break that into two parts. One is around the underlying business performance that you mentioned and the second is just the mechanical aspects of modeling the growth for fiscal 2027. So first, in terms of just the underlying growth that we see in the business, we feel very good about this year. And if you look back at the last couple of years, we've demonstrated consistent growth, and that trend has continued this year. We've also talked before about the diversification of our business across industries, across geographies, and customer sizes, that's a strength for us. And again, we saw that play out here in Q3 as well. If I look ahead, we're excited by the growth potential of businesses like Fusion, Infrastructure, and some of the others that we outlined at Investor Day. So overall, I think we're executing really well, including on the AI and road map, and we feel very well positioned in that regard. So if I think about the growth for the future, I think all of those things give me confidence. But also when I guide for next year, I will consider, as I mentioned, the go-to-market optimization and the macro risks that I touched on at the start of this call. And then in terms of some of the underlying mechanics, thank you for the question. I think it's actually helpful to spell out what we expect to see next year. So to break that apart, if I think about the billings and free cash flow growth rates this year, they have been inflated because of the transition to annual billings, so most multiyear contracts. That's a business model transition that we expect to complete during Q1 of next year. And so we expect that reported billings and free cash flow growth will start to normalize during next year. Billings and revenue growth rates have also been inflated this year from the new transaction model, for which we provide the details separately on an underlying basis. And on that transition, we expect a smaller impact from that in '27 than we had in '26. We'll also have incremental headwinds to reported operating margins from the new model next year. But ultimately, as you know, these are just near-term accounting effects. And the underlying business has been performing consistently well. Our goal is to try and get to as reported numbers as soon as we can. So that will be our focus in the future. Taylor McGinnis: Great. Thanks for all the color. Janesh Moorjani: Of course. Operator: Thank you. Our next question comes from the line of Elizabeth Porter of Morgan Stanley. Please go ahead, Elizabeth. Elizabeth Porter: Great. Thanks so much for the question. I wanted to follow-up regarding some of the new AI capabilities like auto constraints, which appear to have high rates and measurable productivity gains. The question is, are these product improvements translating into observable changes in multiproduct adoption or expansion activity? And just as the platform overall delivers more value with AI, how are you thinking about the pricing power? Any sort of larger, more periodic price increases, or a steadier cadence tied to just incremental AI-driven capabilities? Is that an opportunity that you look forward to? Thank you. Andrew Anagnost: Yeah. So thank you for the question, Elizabeth. So first off, let's be very clear. This is a multiyear journey here that we're on. Alright? And I want to be clear that we're going to be kind of moving along with our customers here and focusing on key areas of adoption and finding levers of productivity that make a real impact on them. We're starting with tasks. Auto constraints is a classic example of a task within the modeling. We're going to do a lot of that. That task automation is highly protective of our existing business and the hour. What the customers love is they see large incremental productivity increases that are not classically easy to replicate in a traditional kind of development model and feature creation model. So task automation is highly protective of the existing business. It is highly retentive, and we see some of that with some of the satisfaction ratings we get with some of this technology move forward. We're going to be moving more and more into workflow automations as you see us move next year. We talked about some of this at AU. We showed some pretty compelling workflows between various products and across various products from design to preconstruction planning and things like that. Those workflow automations are going to ultimately offer additional monetization opportunities because some of it will be included with the subscription, but some of it will not. Will be charged for incrementally. And as the customers adopt those and as we find the right workflow levers, you're going to see us start to capture some of that value. Now as we move down the curve into systems level optimization, those are going to capture the most value. They're further down in the pipeline, but they're also the kind of things that have huge impacts on our customers and huge value delivery. And we're going to capture some of that value. We're going to share some of it with our customers, but we're going to capture that value. So face automations are highly retentive. They have retentive effects. You can see that with the way the customers are satisfied with the product and what they see in the product. The workflow automations are going to be also highly retentive, but they're also going to offer incremental monetization opportunities and system level optimizations will offer more monetization opportunities. But this is going to take time. Elizabeth Porter: Great. And then just as a follow-up, I wanted to ask on the margins, where it was really impressive to see the underlying margin kind of move up in the full-year guide. The question is, where are you seeing the most outsized success that's driving up the full-year view? And what are the levers that are having more of an impact in the near term versus what can be more of a driver next year for the underlying margin trajectory? Janesh Moorjani: Elizabeth, maybe I'll take that one. I think the underlying levers are the same near term as well as longer term. The biggest lever in terms of achieving our margin targets over the long term will be our go-to-market optimization. And on that, we've already made great progress so far, and that will ultimately further reduce our sales and marketing as a percentage of revenue. We also have inherent operating leverage, which is something that we've demonstrated for a few years now. And so that shows up in the near-term numbers, and that will also be a driver for us longer term. And embedded in that operating leverage, there are a few puts and takes. You know, to start with, on the gross margin front, we expect that cloud and AI workloads will be accretive to gross profit dollars, but they will pose a headwind to gross margin as they scale. We think that's actually a sign of success if that happens in terms of our strategy for adoption working quite nicely. On the R&D side, as we've shared before, we'll continue to prioritize investments in innovation and AI-driven initiatives. But at the same time drive efficiency through common components in the platform. And on the G&A side, we will just scale efficiently as we continue to grow the business. So those are some of the things that I see. And in terms of the rate of progress of getting to the 41% margin target that we outlined, as I've mentioned earlier, the path to getting there will be nonlinear, just given the additional margin headwinds we expect from the new transaction model this year. But overall, we feel we are well on our way to achieving the target, and we've already raised the current year outlook here by 50 basis points. So we feel pretty good about that. Elizabeth Porter: Thank you. Operator: Thank you. Our next question comes from the line of Josh Tilton of Wolfe Research. Your line is open, Josh. Josh Tilton: Hey, guys. Thanks for sneaking me in, and congrats on another great quarter. Two for me. One more near term, one maybe long term. Just in the near term, you know, I think if I look back, this is probably one of the biggest to the billings growth guide going into a Q4 that we've seen maybe ever. And I'm just trying to understand, or maybe you could help me unpack what exactly is driving that near-term performance. And then my follow-up to that is just more longer term. The agency transition seems to be going well. It's wouldn't say well underway, but, you know, I feel like it's hit maybe critical mass to some extent. Can you maybe talk to some of the levers that you have to incentivize this newly formed channel to drive better new business growth for you guys going forward? Thanks. Janesh Moorjani: Josh, maybe I'll start. In terms of the outperformance that we had here in the third quarter, there's a couple of sources. One is, as I mentioned, just consistent strong execution from the team, which is something that we are all very proud about. But the second is also just in terms of the guidance philosophy that we had and the approach that we took entering the quarter where, as you know, against the low end of our billings guidance, we had assumed a pretty severe macro scenario, which we had been quite transparent about. That didn't play out. The broader macroeconomic environment was relatively stable. I think you saw some of the benefits of that here as well. And as if I think about the Q4 view on that, and the extent of risk that we've got baked in, the guidance range, particularly on billings, is a little bit of risk baked in at the lower end of the range. But given that we've got basically just a little over two months here left to go in the year, we didn't feel like we needed to take as a dim view of the macro Q4 as we had previously taken. Andrew Anagnost: And to the second part, Josh, I'll weigh in on that a little bit. Okay? So there's a couple of things that we're enabling with the new transaction. One, we have better customer intelligence, which is going to allow us to be more efficient with our partner engagements. The other one is we're working really hard to automate more of the things that are associated with renewals. So if you look at the way we want to move forward, you're going to see us incenting the channel more on new business than on renewals, which is going to align the channel with kind of our long-term objectives. It's easier to make renewals now, so we should be paying less on renewals. And we should be paying more on new business so that the channel can build the right kind of capacity for the new business and hunt a bit more and renew in a more automated way. So look for us to continue to push that as we head into next year. Tighter intelligence going into the channel, more efficiency, more automation, more self-service tied to renewals. And a stronger emphasis on new business generation. Josh Tilton: Love to hear it. Thank you so much. Operator: Thank you. Our next question comes from the line of Joe Vruwink of Baird. Your line is open, Joe. Joe Vruwink: Hi, great. Thanks for taking my question. I wanted to go back to the FY 2027 outlook. And I guess what I really want to ask is, do you need the same level of prudence when you frame the forward outlook like you have been using? And I just sit here and appreciate that this year, started eight to nine. It looks like it'll end closer to eleven. There's something to be said about prudence, but also nothing wrong with communicating strength when it's evident. And I think you're not only seeing strength, but it would seem like next year, you know, definitely end of stages and some transitional elements, early stages on things like consumption or cloud adoption that can contribute more. I'm just wondering if some of that factors into a different approach to the Outlook. Janesh Moorjani: Hey, Joe. So, look. On fiscal twenty seven, it will make sense to talk about the specifics when we are actually guiding to fiscal twenty twenty seven in February. What I wanted to do today is just share our overall enthusiasm for how we're executing here in Q3. I talked about some of the momentum that we're seeing and some of the factors that continue to excite me about the business in the long run and just be transparent about some of the factors I'll consider when I set guidance. In terms of the specific levels of those, we will talk about those on the next call. Joe Vruwink: Okay. No. That's fair enough. At AU, there are some good sessions from your large customers on how they've set up kind of centralized Autodesk development teams, and you have different regional teams that are now building around platform services in a coordinated way. You know, a lot more talk about how agents are factoring into what these teams are now starting to do. I guess there's this idea still percolating out there that AI is going to make it easier for your large E&C customers, these same entities, to maybe just do more internally. And I guess, I want to ask what you're seeing on this topic and really when we see a large E&C account, talk about data scientists on staff and, you know, what they're doing. We really think, well, Autodesk is ultimately having a role here? Andrew Anagnost: Yeah. You should absolutely think that, Joe. Okay? Our goal is to make it easier for them to apply their IP with their data scientists to the workflows that make the most impact on their business. But our platform is going to be everywhere in this. And the services and agents we build associated with our platform are going to be core to how they create that value from their IT. Incrementally above some of the models that we build ourselves and that we deploy into their environments. We want to coordinate and work with agents they may build internally with the agents that we have, and one should be augmenting the other. So look for our platform to be everywhere that these customers actually execute and incrementally build capabilities on. Joe Vruwink: Okay. Thank you. Operator: Next question comes from the line of Bhavin Shah of Deutsche Bank. Your line is open, Bhavin. Bhavin Shah: Great. Thanks for taking my questions and congrats on the strong results. Janesh, I know you spoke about this briefly in your prepared remarks, but in terms of channel productivity, excuse me, how much time is still spent on operational elements? When do you think the channel gets back to full productivity? And is there any kind of impact also with all the M&A activity happening with your resellers? Janesh Moorjani: Yeah. We continue to address some of the operational friction that partners faced on the new transaction model. Andrew referenced that as well. I think we've made very good progress, and I think much of that is behind us at this point in time. There's a bit more to be done, but we are well on our way. We saw the EMEA partners get their first renewals here in September on the new transaction model, and that generally went as we expected it would. And I think at this point, we've lapped all of the first annual renewals. So in terms of the future, we continue to focus on how we and our partners can deliver more valuable and data-driven and connected products and services to our customers. We have seen, you know, the strategy working quite nicely, particularly at the low end where many of the customers previously used to buy from the non-contracted partners or the silver partners are now buying from us directly on the store. And some of our larger partners are focused on continuing to build out value-added services that allow them to build more connectivity and offer better solutions to customers, which then works quite nicely for us in the long term as well. Bhavin Shah: That's helpful there. And as a follow-up, Andrew, maybe just for you, there's been some recent headlines about agents turning 2D sketches into 3D models via CAD software. As innovation continues to evolve here, what role can Autodesk play? How are you thinking about evolving the product capabilities as agents and copilots to turn sketches into the models continues to evolve? Andrew Anagnost: I think you should assume that the level of data that Autodesk has in this particular area and the level of focus will certainly excel above anything else you see out there. We just focus where the biggest returns are right now. Bhavin Shah: Makes sense to me. Thanks for taking my questions. Janesh Moorjani: Thank you. Operator: Thank you. Our next question comes from the line of Tyler Radke of Citi. Please go ahead, Tyler. Tyler Radke: Yes. Thank you for taking the question. So the direct revenue has grown I think it was up 85% this quarter. You called out strength in the online store, the Autodesk store. Just wondering, you know, is this strength is this coming in well above your expectations? And how should we just think about the mechanics of taking more business direct and potentially that being a tailwind to the reported revenue that we're seeing? Janesh Moorjani: Tyler, I'd say in Q3, things were as we expected they would be. We were expecting to see an increase in the mix of direct revenue as the new transaction model continues to scale. So that generally played out the way we expected it would. And in terms of the impact of that on the model, it does affect the as-reported numbers, as you know, which is why we also provide the views on an underlying basis. I'd say the store strength has continued for some time. A portion of that might be channel shift, but a lot of it is also just general strength we've seen particularly in a number of the countries around the world that we've talked about where we haven't rolled out the new transaction model, we've been seeing strength in those countries as well. So I think it is a bit broader based on that. Tyler Radke: Great. Helpful. And then, Janesh, just on the underlying growth, I know you got some questions on this, specifically as we think about FY 'twenty seven guidance. But you know, you started off the year in sort of the high, single-digit ballpark. And I think we look at the Q4 guide, normalized growth is closer to kind of the low teens. Is that a fair characteristic of where the underlying growth of the business is today? Maybe there's some one-up or one-time revenue in that Q4 number as it relates to EBAs. Just help us understand, like, where is that underlying growth of the business? In your view now? And I assume that's maybe a few points higher than it was at the beginning of the year. Janesh Moorjani: Tyler, at the start of the year, when we laid out our guidance, again, we had prudent for a variety of reasons. It was also my first guidance for the full year as CFO. We had just done a restructuring. There were a number of other factors as well that played into that. But if I and at that point, I had mentioned that I viewed the business as being a consistent and resilient business, and I think that played out quite nicely. If you look at the growth we've seen over the last couple of years, and then if I look at this year, we've had very consistent growth across the three quarters of this year and that same consistency is implied in the guide for Q4 as well. So we feel very good about the way we've executed and all the irons we have in the fire to continue to sustain our momentum in the future. But again, we will consider our overall risks around go-to-market execution as well as the macro when we guide. Tyler Radke: Thank you. Operator: Thank you. Our next question comes from the line of Ken Wong of Oppenheimer and Company. Please go ahead, Ken. Ken Wong: Thank you for taking my question. Andrew, I wanted to circle back on a comment that you made about the incentive structure to partners. Realized that you guys are taking it down on renewal to incentivize some hunting. Any early feedback from partners? And I realized it doesn't take effect usually until February, but any early behavioral changes that you guys are noticing from the channel? Andrew Anagnost: Yeah. Nothing pronounced. Okay? No early changes. Obviously, partners always have lots of questions when we change their incentive structure. But generally speaking, they get what we're trying to do, and they understand what's going on here. We're not trying to take money out of the channel ecosystem. We're trying to shift how it gets paid out. Makes total sense to them. We haven't seen any initial kind of changes in their behavior right now at all. Ken Wong: Okay. Perfect. And then on the OBVA side, Janesh, I realize you're not expecting any tailwinds on the free cash side. Are you guys seeing any early impact on the top line in terms of kind of customer spending behavior or any customer project activity? Janesh Moorjani: Nothing that I would directly attribute to the One Big Beautiful Bill Act yet. Ken Wong: Okay. Great. Thank you, guys. Janesh Moorjani: Thank you. Operator: Thank you. Our next question comes from the line of Koji Ikeda of Bank of America. Your question, please, Koji. Koji Ikeda: Yeah. Hey, guys. Thanks for taking the questions. I wanted to follow-up on a previous question on free cash flow. And Janesh, I think you mentioned there's about two more quarters left before free cash flow normalization. Did I hear that right? And then beyond that, what should quarterly free cash flow seasonality look like? Is there a fiscal year example from the past that we could look at that would be a good representation of what it would look like going forward? Janesh Moorjani: Yes. Koji, the comment earlier was around the growth rates that we would expect will come down. If I think about the app dollars of billings that we have at this point in time associated with the change in the multiyear to annual billing transition, I think that that piece is done. But in terms of thinking about cash flow and providing maybe a general rule of thumb, I would say holding aside any significant discrete items, we generally would expect free cash flow growth to be correlated with our underlying non-GAAP net income growth. And, of course, we will call out any large discrete items when we provide guidance. Koji Ikeda: Got it. And then maybe a follow-up here question for Andrew and thinking about the AI strategy and the data access strategy for AI through MCP, and API calls. How have customer usage trends been around there? And any update on how we should be thinking about any timing of the monetization opportunity with the data access strategy. Thank you. Andrew Anagnost: Yeah. So there's actually fairly robust use of some of our APIs by the customers. And, you know, also we'll be monetizing some of that access as well, and a lot of customers are expecting that. Most customers won't be impacted by that, but those customers that are most heavily using machine-based kind of applications associated with our APIs will probably see impacts in terms of billings associated with their usage. Right? Again, the AI monetization will play out over time. The API monetization will play out over time. But MCPs and APIs are definitely another source of monetization that you'll see us pulling the lever for as we move forward. Koji Ikeda: Thank you. Andrew Anagnost: Thank you, Koji. Operator: Thank you. Our next question comes from the line of Michael Turrin of Wells Fargo Securities. Michael Turrin: Hey. Thanks for squeezing me in. I'll give you a chance to summarize some of the prior comments. I think high level the question is you're raising numbers across the board for fiscal twenty twenty six, it's not something we're seeing a whole lot of across software these days. So maybe just expand on your perspective around what's driving that and how much of that is beyond the scope of just macro and business model changes? And then on cats, specifically, it's another quarter of standout growth, 15%. So maybe touch on that segment and if there are any specific dynamics to be mindful of there as well. Thank you. Janesh Moorjani: Yes. I'm happy to touch on both of those. If I had to summarize Q3, I would say it reflects the consistent momentum we've seen from sustained execution this year. Against the backdrop of a stable macro, while in the guide at the lower end, we had assumed that the macro would worsen. So I think it's both our execution as well as the more prudent guidance assumptions that didn't play out. In terms of the growth of the AutoCAD business, there's a few factors there. That growth is partly affected by just the mechanical accounting on the new transaction model as well. So I think that's part of what you're seeing. But, also, we talked about strength in the Autodesk store and strength in emerging countries like India and LatAm and The Middle East. And some of the AutoCAD strengths that we've seen come from those countries and from the Autodesk store as well. Andrew Anagnost: You know, Michael, I'll just add one more thing to this because I have to. You know, we have been making some serious and important strategic decisions over the last three years about how our business is structured and how we move forward. You're seeing the results. Alright? These are the results that we ultimately said we were going to deliver, and a result of those investments and those changes. They were hard changes, difficult lifts. Now you're seeing the performance associated with those lifts. Michael Turrin: Thanks very much. Operator: Thank you. And that is all the time we have for Q&A today. I would now like to turn the conference back to Simon Mays-Smith for closing remarks. Sir? Simon Mays-Smith: Thank you, Latif, and thank you, everyone, for joining us. Looking forward to seeing many of you on the road over the coming weeks. Wishing my fellow Brits a happy Budget Day tomorrow and my fellow Americans a happy Thanksgiving on Thursday. Thanks very much, everyone. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
[speaker 0]: Good afternoon, and welcome to the Petco Third Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Tina Romani, Head of Investor and Treasury. Please go ahead. Good afternoon. [speaker 1]: And thank you for joining Petco's Third Quarter twenty twenty five Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.pepco.com. On the call with me today are Jewel Anderson, Pepco's Chief Executive Officer Sabrina Simmons, PETCO's Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward looking statements which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation and SEC filings. With that, let me turn it over to Joel. [speaker 0]: Thanks, Tina, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results where I am pleased to share that we delivered another profitable quarter in line with our plan [speaker 2]: We've continued to strengthen the foundation of our operating model improve retail fundamentals, and position Petco for sustainable, profitable growth over the long term. We delivered sales in line with our outlook and meaningfully improved our profitability. Increasing operating income over the last year by over 25,000,000 generating 99,000,000 in adjusted EBITDA and more than 60,000,000 in free cash flow. I want to thank our teams across the organization for their dedication, focus, and execution on our transformation initiatives that are continuing to gain traction as reflected in our improvement in profitability and cash flow in Q3 and year to date. You've heard me talk about the importance of culture, and you will continue to hear that as a key theme of our transformation. When I joined Petco, we had a strong culture centered around pets first. The passion of our 30,000 partners was one of the many things that attracted me to joining. Over the last nine months, as a collective leadership team, we've been building on that culture in two ways. First, through reinstilling retail fundamental discipline which is driving increased financial rigor and accountability. This is a testament how the organization has embraced new ways of working with strengthened operating principles and was a large contributor to our results. Second, creating a culture that is playing to win. We are fostering a culture equally focused on operating discipline and a winning mindset. Last month, I had the opportunity to spend time with our support center and store leaders at our Leadership Summit. Together, we aligned on what our go forward values will be for a reimagined Petco, and what that means for our customers and our plans to execute on our One Petco Way vision. We are squarely in phase two of our transformation. Which is centered on improving profitability and strengthening our foundation from which to grow. The success to date has fundamentally changed the way we think and work to continuously identify future areas of opportunity that will further unlock long term value. At the same time, we are now strategically shifting resources towards phase three. A return to growth Now that our bottom line has meaningfully been improved, Last quarter, I outlined the four pillars that support Petco's return to growth. First, delivering compelling product and merchandise differentiation. Second, delivering a trusted store experience. Third, winning with integrated services at scale. And finally, serving our customer with a seamless omni experience. Let me now provide you more specific color on each pillar. Starting with compelling product, and merchandise differentiation. I view this in two categories. On the consumable side, we have improved shoppability. With higher in stock availability, Our customers rely on us to have everyday go to product. Better integrated assortment planning, and merchandising teams have been created improved in store experience as well as online. On the discretionary side, we are focused on infusing a steady stream of newness in 2026 that complements our evergreen product assortment with more seasonal, and trend driven buys. Previously, there has been a set it and forget it mentality. Which is not a very aspirational shopping experience, and one that we are changing. As we look forward, we see significant opportunity to change our collective merchandise mindset from solely a needs based business to also a wants based business by overhauling our product offering, and surprising our customers with unexpected ideas for their pets. A great example with the success of our online pilot our new My Human product line was expanded into over 200 stores This is a small milestone, but exemplifies our team's focus and ability to lean into trend forward impulse purchases. Next. Moving to a trusted store experience. Joe Venizia, our chief revenue officer, who joined us just about a year ago, leads our operations and services team. Since joining, he has been focused on store simplification, standardizing processes across our fleet, and taking costs out of our operations. He is now shifting his focus to additionally include revenue driving KPIs like increasing transaction size, driving sales contests, and increasing customer interactions. With our passionate partners, strong customer engagement, and a full suite of services, we can create both a fun and convenient experience that pet parents are unable to get anywhere else. Our store partners are a unique differentiator for Petco. We benefit from having long time passionate and knowledgeable partners that serve our pets and our pet parents. Our opportunity today is around making it easier to run our stores. Freeing up our store associates to interact with customers, and use what we call their superpowers of pet knowledge. Improving these areas will make it easier for us to drive sales growth in 2026. Moving now to services at scale. Our nationwide wholly owned and operated services business continues to be our fastest growing category. And is our competitive moat given its in person nature high barriers of entry, and difficulty to replicate. The holistic ecosystem between grooming, owned hospitals, clinics, and center of store can only be found at Petco. What especially excites me here is the opportunity we have with our existing assets. I think about it in three ways. One, improving utilization through increased staffing and appointment availability. Two, improving engagement. Through enhanced digital capabilities. And three, improving integration of services and center of store. With regards to veterinarian staffing, I'm pleased to share that we are ahead of our doctor hiring goals that we set at the start of the year with record high doctor retention. During the quarter, we also promoted two of our longtime leaders to chief veterinarians. Reinforcing our commitment to growing our veterinary business. Simultaneously are fostering a culture of team development, top talent recruitment, and execution of our strategic veterinary initiatives. All of this is foundational and is critical to increasing the utilization of our hospitals. Additionally, we are increasing access to care by strategically adding hours back on peak client demand and making appointments easier to book. You're standardizing processes across our fleet to secure in store follow-up bookings. We are increasing efficiency through our refined grooming apprenticeship model freeing up both appointment availability and increasing volume. And finally, we are enhancing online appointment scheduling to ensure we have better coverage and better flexibility for our customers. Clearly, Q3 has been a busy yet productive time for our services businesses. Let me spend a moment on improving integration between services and center of store. As the opportunity here may not be well understood. Historically, Petco stores and services were run relatively siloed which was a missed opportunity. There is a tremendous value unlock when better integrating our stores, and services experience. I'll give you a simple example. Previously, our veterinarians did not have access to customer purchase data. We are in the process of fixing that. And in 2026, our veterinarians will be able to see purchase history, and make more informed diet recommendations based on overall pet health, and specific needs. Taking that a step further, the veterinarian will be able to direct the customer to the recommended product in store or rec store associate to assist. This is a simple example, but illustrates how increased integration of services and stores create a better outcome for pets, and improved experiences for our customers. Now moving on to our fourth and final pillar, seamless omni integration. Layered on to everything I just discussed, are enhanced digital capabilities, more compelling membership offering, and a frictionless digital to store experience to customers wherever they choose to engage. I'm happy to report we are on plan with our improvements and in fact, we are starting to implement some of these changes in Q4 of this year. For example, we are transitioning the way we buy media, beginning with better targeting, and bidding strategies, which we expect to drive efficiencies in our marketing spend as we continue to strengthen Petco's reintroduction of our tagline where the pets go. I'm pleased with the progress on the membership program, and we will begin live testing and pilot the program this quarter in a small handful of districts. Our focus on these four pillars will fuel our growth which we still expect to see in 2026. In closing, as you can hear in my voice, this has been a productive quarter at Petco. And I'm pleased with the progress we continue to make on the commitments I outlined at the beginning of the As each quarter passes, we get better at celebrating amazing pet experiences executing our strategies, and delivering on our promises internally, and externally. The initiatives planned for the fourth quarter will advance the Petco transformation and I look forward to sharing updates with you in March. Ahead of the Thanksgiving holiday, I want to personally express my gratitude for our partners, who put pets first every day and boldly reflect who we are and what we stand for. Our Petco Love Foundation, has demonstrated our long standing commitment to saving lives finding loving homes for over 7,000,000 pets to improve the welfare of animals. With that, I'll hand the call over to Sabrina take you through the specifics of our third quarter results and outlook for the remainder of the year. Sabrina? [speaker 1]: Thank you, Joel. Good afternoon, everyone. In the third quarter, PEPCO once again delivered against our commitments while building a stronger foundation from which to grow. As we've discussed all year, strengthening the health of Pepco's economic model, has been our top priority. I'm pleased with our progress as demonstrated in our expanding gross margin, expense leverage, operating margin expansion. Not only in the quarter, but year to date. In line with our outlook, which reflects our decision to move away from unprofitable sales, Net sales were down 3.1% with comp sales down 2.2%. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024, and the additional nine net store closures year to date. We ended the quarter with thirteen eighty nine stores in The US. Gross margin expanded approximately 75 basis points to 38.9%. Similar to the first half, gross margin expansion was primarily driven by a more disciplined approach to average unit retail and average unit cost. Including stronger guardrails and more disciplined processes to effectively manage our pricing and promotional strategies. It's important to note that in this quarter, tariffs began to more meaningfully impact our cost of goods sold. Moving to SG and A. For the quarter, SG and A decreased $32,000,000 below last year and leveraged 97 basis points. As we've discussed previously, our shift in mindset and increase in rigor around expense management is evident in our results. Savings were achieved across the board in especially in g and a areas. Notably, marketing spend was about flat year over year. Our expanded gross margin and expense leverage resulted in operating margin expansion of over a 170 basis points Adjusted EBITDA increased 21% or $17,000,000 to 99,000,000 and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. Moving to the balance sheet and cash flow. Q3 ending inventory was down 10.5% while achieving higher in stocks for our customers. We continue to manage inventory with discipline, which is one of the drivers of our improving cash profile. Free cash flow for the quarter was $61,000,000 and year to date was 71,000,000 Both the quarter and year to date were significant above the prior year. Notably, year to date cash flow from operations has nearly doubled versus the prior year to a 161,000,000. We ended the quarter with a cash balance of $237,000,000 and total liquidity of 733,000,000 including the availability on our undrawn revolver. And now turning to our outlook for the full year. We are once again raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $3.95 and $397,000,000. An increase of roughly 18% year over year at the midpoint. For the full year, given we are entering the last quarter, we are narrowing our range for net sales and now expect net sales to be down between two and a half percent and 2.8%. For the fourth quarter, we expect net sales to be down low single digits versus the prior year as we continue to execute on the initiatives we've outlined. We expect adjusted EBITDA to be between $93 and 95,000,000 It's important to note that the impact of tariffs is sequentially more meaningful in Q4. Additionally, the significant progress we've made year to date against strengthening our economic model and improving our earnings profile has provided us the option to begin selectively investing behind the business where it may make sense as part of our ongoing efforts to set the stage for phase three. A return to profitable sales growth. With regard to other guidance items, for the full year, we expect depreciation, to be about 200,000,000 net interest expense of approximately a 125,000,000 about 20 net store closures and 125,000,000 to 130,000,000 of capital expenditures with a greater focus on ROIC. In closing, as Joel discussed, we're in a period of significant change and I want to extend my deepest appreciation to all of our teams for embracing that change to deliver better outcomes for all of our stakeholders. With that, we welcome your questions. [speaker 0]: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up. We will now pause momentarily to assemble our roster. The first question will come from Simeon Gutman with Morgan Stanley. Please go ahead. [speaker 2]: Hi, guys. Hey, Joel. [speaker 3]: Let me I was intrigued by something you talked about. Some of the wants. Can you talk about can you frame what mix of the business is wants versus needs today? And it's maybe far out there. But what's the vision? And my guess is the wants aren't truly wants. I think it's you know, given your background, there's probably some unique merchandising that's partially wants, but curious how you can frame that and maybe tease it out a little. [speaker 2]: Yeah. Hey. Thanks, Simeon. It's a great question. And yeah, if you think about it in the traditional sense, you know, consumables is traditionally a needs business, and you know, is the overwhelming majority of our business. Even that business, Simeon, I think has some elements to it that can be more of a a wants in in principle. And and what I mean by that, and and I alluded to it in my prepared remarks, we've just had this, you know, set it and forget it mentality for our entire business. And if I just focus on consumables for a second, for example, in 2025, [speaker 1]: we [speaker 2]: our dog food business was largely all surrounded around one big episodic reset in the middle of the year. And we're really gonna change that in '25 And as as our big vendor partners come out with innovation, newness, different types of product, new flavors, cat extensions. We're we're gonna roll that out on on in line with their timing, not our timing. So that's gonna make more of a perception of wants rather than just needs in the sense that somebody walks in and and is a a sense of discovery. We just haven't been good at that in the past, Simeon. So think the whole business has an opportunity to create more of a exploration throughout our store, not just our supplies business, which is traditionally by the way you were thinking. There's an element to it in consumables as well. [speaker 0]: And certainly, when we get on the call in in March, we'll [speaker 2]: we'll go through that in more detail. I cut you off, Simeon. [speaker 3]: No. I cut you off. My my follow-up, it's related. You talked about integrating store functions. You talked about wants versus need. And then there was a little bit of maybe forward investing, I think Sabrina just mentioned. So if you and and by the way, the business itself is getting close to lapping like, whatever tough compares. It seems like it's naturally getting back to positive territory. So what what kinda clicks or what's the priority among the things we heard where the top line start to move, or is it something we haven't heard yet? [speaker 2]: No. I don't think it's something you heard. I I think look, we're gonna approach twenty twenty six from the top line the same way we approach 2025 from the bottom line. In 2024, we came out with the strategies that would fix the bottom line. And then we executed them in 2026. And 2025. We're doing the same thing for top line growth. I outlined four pillars, We backed it up with building blocks, which I talked about many of them today. And then we're gonna execute against those with the same rigor and discipline And so it it's not just to cross your fingers and hope. We've got plans around four pillars with a lot of building blocks for each one of them. And I'm I'm really excited about all four of them. I alluded to some of them that we're already testing here in Q4. But all of them are making traction, and some just take longer to implement than others. But teams are all focused, and we got a good plan. [speaker 3]: Okay. Happy happy Thanksgiving. Take care. Thanks, Simeon. Happy bet. [speaker 0]: Next question will come from Oliver Wintermantel with Evercore ISI. Please go ahead. [speaker 3]: Yeah. Thanks. Joel, what is the realistic [speaker 4]: timeline for comp stabilization? And which categories or customer behaviors would represent the biggest swing factors there? [speaker 2]: Yeah. Look. I'm not gonna get into 2026 today on this call and and the the timing of it. But certainly, what you should expect from me in March is to not only give you guidance for Q1, but we'll give you an outlook on on the full year. But, specifically, I can tell you, all four of the pillars I went through today are getting traction. And, know, so I would expect all four of them to contribute towards comp in in 2026. And then we'll just outline the timing for you on the March call. [speaker 4]: Got it. That makes sense. And then just on the free cash flow side, strong improvements there year to date and in the quarter. But how much of the Q3 working capital improvement is sustainable? What financial or operational levels continue to support the cash generation for next year? Yeah. I mean, I think [speaker 1]: we view cash flow and all of its levers as continuous improvement. We certainly are focused on continuing on the [speaker 5]: path of generate generating strong free cash. The principal lever, of course, Oliver, is net earnings. So we're gonna continue to focus on our bottom line and growing net earnings We'll continue to focus on inventory discipline, We're not done. We've made huge strides this year. and reducing In terms of rationalizing our SKUs our inventory compared to our sales, which is fantastic. But I wouldn't say we're best in class interns yet. We still have a lot of opportunity. We'll be looking at that lever as well as all of our other levers to continue delivering on strong cash generation. [speaker 4]: Excellent. Good luck, happy Thanksgiving. Thank you. [speaker 1]: Thank you. [speaker 0]: Question will come from Michael Lasser with UBS. Please go ahead. [speaker 2]: Can you size the magnitude of the potential investments that you would make and what forms those are gonna come in, whether it's [speaker 5]: labor [speaker 3]: marketing, [speaker 0]: or promotions, And are those [speaker 4]: investments [speaker 6]: necessary as you look to 2026 in order to drive top line growth? [speaker 5]: Well, maybe I'll just start, Michael, with the framework, and then Joel can chime in on how he feels. You know, he's looking at each one. What we've tried to do, and we're really pleased that we banked so much profit improvement through Q3. And this is afforded us as I said, the option and it's only an option to consider investing in areas that we think can drive improvements both in Q4, but also for our future. So everything you mentioned is on our plate of options. Certainly, marketing certainly looking at labor, And, sure, we'll always continue to look at promos to see if we can do them effectively. In a way that brings value to our customer. But also in a way that's very responsible as we continue to manage our margin expansion. [speaker 1]: Joel, do you wanna Yeah. I yeah. Sabrina, I think you [speaker 2]: you nailed that pretty good. And when Michael, I look at the four pillars we outlined, I don't think any of them as it relates to 2026 require any, you know, substantial step change from what we're doing today in terms of you know, cash investment or change in OpEx investment or something. It's it's really you know, you take merchandise. Like, we're selling through our existing merchandise, and we're buying into new. So that's really just a a steady flow change. And you know, really don't see any episodic change in in 2026. From an investment standpoint. From from the runway we're already on today. I I guess the question in the [speaker 6]: and and the critical point is Yeah. Can Petco experience the same magnitude of the improvement in the profitability while reversing what seems like some market share losses this year and beyond that path next year. [speaker 5]: Yeah. If I'm hearing you, Michael, and I and I might want you to repeat the question, but we, for sure, believe that investments are going to be necessary. Our whole focus and what I talked about all year long in terms of the economic model we're pursuing is delivering leverage. On expenses. But as you know, if sales improve, you increase operating expenses and still deliver leverage. So we're we're very aware that we need to make some investments That's why we're talking about in Q4 We may make some of those investments in advance. Of entering the new year because we've been able to bank so much profitability and leverage. And we will measure our success in meeting our goals and expanding margin and delivering expense leverage on a full year basis. That's another thing we always said. We never said every single quarter in the same way. It's on a full year basis. So that's why we've given ourselves the option because we know that the next phase will require investment we are prepared to stand behind that in a responsible way that still delivers on our full year goal to deliver the model. [speaker 6]: Hey, Sabrina. Could I could I just clarify? You know, if we look at what the embedded EBITDA margin is in the fourth quarter versus what Petco's experienced over the last couple of quarters. It looks like the pace of improvement is gonna moderate. Should we think about the magnitude of the potential investment, the option for investing would be the difference between what Petco has achieved over the last couple of quarters and what's implied in in the fourth quarter? Is that how we should think about quantifying that potential investment? [speaker 5]: I think that's a fair framework, Michael. I would add to that as we look to Q4, as I stated, remember, when we think about gross margin, there's more there's more tariff impact. That's just one factor. It's not enormous as we've said all year. It's it's we're pleased that we're in a retail sector that doesn't have mountains of tariff. It is an impact. So that's one factor. The second impact is that investment that we're talking about. And how much we will choose to do and how we'll manage through that in the fourth quarter. So, yes, I think your statement, broadly speaking, is fair. [speaker 6]: Okay. Thank you very much, and good luck with the holiday. [speaker 1]: Thank you. [speaker 0]: Next question will come from Kendall Toscano Bank of America Global Research. [speaker 4]: Please go ahead. [speaker 5]: Thanks for taking my question. Hopefully, you can hear me okay. [speaker 1]: I was just wondering if you could talk more about the impact of tariffs during the quarter I know you mentioned they became more meaningful in 3Q, but maybe not as much as you're expecting for the fourth quarter. But just curious what you saw in terms of COGS impact, if any? And then in maybe some categories where there was tariff impact on price? What did you see in terms of consumer elasticity? Thanks. [speaker 5]: Thanks. Yeah. Thanks, Kendall. Just to go back to our statement, So the first time we saw a tariff impact flow through our p and l, through cost of goods sold in any meaningful way is the third quarter. Because the second quarter had, like, let's call it, de minimis. Amounts of that. We had it on our balance sheet. We had it in inventory buys, but it wasn't flowing through COGS yet. The third quarter is the first quarter of that And my only point was in the fourth quarter, it becomes a bit more meaningful. So it's just a reminder that sequentially, the tariff headwind's a bit more meaningful. But, again, in the broad spectrum of things, it's a very manageable number, which we've managed all year and have been revising guidance upward in the face of it. So you know, I think that hopefully helps frame it up. We we also know that it's mostly in the private label supplies area. As we've said in the past. So, hopefully, that helps frame it up too. Got it. That's helpful. [speaker 1]: And then my other question was just in terms of some self inflicted headwinds in the services segment. As you've deprioritized that program ahead of the planned relaunch. Just curious as you're now getting closer to relaunching that in 2026, and it it sounds like maybe starting to pilot it in the fourth quarter What kind of tailwind would you expect to see on same store sales growth or I guess just service services growth? [speaker 5]: I I think you mean our membership program. That's Yes. That's what I meant. Yeah. That's what's combined with services in the way we report. Services and other. So I probably, Joel, if you wanna start with the membership program and [speaker 2]: Yeah. Because our our our paid membership rolls into there. But, you know, I think the more important thing to take away from that is and and I alluded to it in my prepared remarks that we are on track with our new membership program. And in fact, here in the fourth quarter, we have begun live end to end testing in several markets, and so, we really haven't seen any major glitches. In fact, minor at best. And so that's a really good sign for us. We'll then take that to a few more markets and and do, roll out the new attached to it. And are still on track then for a rollout sometime in 2026 with with the, the rest of the fleet. But membership so far has, really come together nicely. And it it's a really important element to our growth that's gonna begin in 2026. [speaker 5]: Yeah. And since you raised it, Kendall, on the services piece, I think you can see that that continues to be not only a strategically important area for us, but it's also an area of nice growth and continues to be. [speaker 2]: Thank you. [speaker 0]: Next question will come from Kate McShane with Goldman Sachs. Please go ahead. [speaker 1]: We wanted to ask, a little bit more of a higher level [speaker 5]: question, just your view on where you think the industry is now from a digestion standpoint, where you think the industry can grow, in in 2026 if if we do return to growth in '26 for the industry. And just what you may have been seeing out of the competitive set, [speaker 1]: this most recent quarter as, you know, some of these higher tariff costs and and prices have come through? [speaker 2]: Yeah. Thanks, Kate. Look. Overall, the the competitive set really hasn't changed much from the the last quarter. You know, I would say, you know, the what's changed is the consumer has been a little probably a little bit more cautious You know I mean? Obviously, with, you know, tariffs and political tensions and interest rates still high, you know, that's really been you know, bogging down their outlook on the economy a little bit. But as far as the pet industry goes, it it's been pretty stable. You know, flattish in terms of growth. I think the progress we've made on our digital side has really been promising, and and that'll be very important to us as we turn to growth next year. But overall, we're positioned nicely. Our services business is Sabrina just talked about, is already growing, and that is an area of growth in the pet industry. We'll and then we'll layer in you know, the focus we've made and the progress we've made on our our digital improvements. But overall, it's pretty stable. [speaker 5]: Yeah. [speaker 2]: Thanks, Kate. [speaker 0]: Question will come from Chris Bottiglieri with BNP Paribas. Please go ahead. [speaker 4]: Hey. Thanks for taking the question. [speaker 0]: Yeah. The first one I had was just hoping to now the cash [speaker 2]: free cash flow profile has improved. [speaker 6]: How do you think about prioritizing the usage of cash? Is it continued debt pay down? Do you think about reaccelerating the veterinary practices? [speaker 0]: Like, just curious how you think about that. Over the next few years. Yeah. Our first priority would always [speaker 5]: be to invest in our business. To sustain growth going forward. So that's definitely the priority. That said, we go back to our statement that we have a lot of assets on our book already. That really are ramping up now, vet hospitals predominantly the number one on the list, that are already on our books that we are ramping up for better returns. So we don't have to make big capital investments in those. And we, in fact, you'll hear us talk about more in the Q4 call, Chris, We have a set of those that where we're gonna focus on bringing utilization up 2026 as well, without any large capital investments. So I view this as really great news because it provides a nice path for return improvement while not having to invest a lot of capital in it. So, of course, though, we'll be looking at pockets and areas as we move forward, and we finalize what kind of remodel prototype we wanna land on. How we'll start to bring those into our system, But there's no huge big capital spend necessary in the horizon, likely to increase some in '26, but no big enormous dramatic change overall in profile because we have these assets in our books where we're increasing utilization. Now beyond that beyond that priority to first invest in our business, The second, of course, is we are always looking, as I stated, you know, on the first call when I talked to you guys, we want to bring down our leverage on an absolute basis. We also wanna bring down our ratio. We're doing a terrific job with the growth and profitability of bringing down the ratio. So it's quite remarkable. We started the year at over four times debt to EBITDA And if we hit the midpoint of our new guidance, we should be below three and a half times. Net debt to EBITDA. So quite a bit of progress indeed, we'll look to opportunities to even potentially do some opportunistic pay debt pay down. [speaker 4]: Gotcha. That that's really helpful. And then [speaker 0]: your gross margins were, I think, down 20 basis points on the product line. [speaker 6]: Is that primarily that tariff had been referring to? Or [speaker 3]: is it also somehow in is or is, like, is the [speaker 6]: elasticity offsetting the ticket increase, and there's also a headwind on comps? Just curious by [speaker 3]: like, [speaker 0]: tariff headwinds are you referring to there? Where it's manifesting? [speaker 5]: I have our merch margins expanded both in our products and services. [speaker 3]: Sorry. I meant quarter on quarter, not not year on year. [speaker 5]: Oh, quarter on quarter. Sure. Yeah. I would say that is primarily a little bit of tariff headwind coming in. Year on year, though, we are we are up in both products and services. [speaker 2]: Gotcha. [speaker 4]: Okay. [speaker 0]: Thank you. [speaker 1]: Next question will [speaker 0]: come from Steve Forbes with Guggenheim Securities. Please go ahead. [speaker 4]: Good afternoon, Joel, Sabrina. [speaker 0]: Joel, you you spoke about services in stores coming together. And and I guess my my question is is can you help us frame up [speaker 6]: sort of how you guys see that opportunity internally, whether it be how spending per customer sort of evolves as they engage in services, if they're a store only customer or vice versa? [speaker 4]: Like, any way that is sort of [speaker 0]: talk about how [speaker 6]: how, like, the net sales per customer evolves as they broaden their engagement across store? [speaker 2]: Yeah. Look. Look. I I think any you know, great bricks and mortar retailer has to define their moat, has to define what differentiates them from anybody else. And services is definitely one of our moats. Right? It's one of our key elements that, is really hard for any other pet retailer to replicate in the way we [speaker 4]: built out [speaker 2]: grooming, hospitals, vet clinics, dog dog walking, all or dog training. All those elements. And so that's obviously an area there for we've leaned in the most. And we've made incredible progress with our existing assets. You know, utilizations, we've improved. Engagement, we improved. And then what you're getting at is the integration with the center of store with product. And so what what's key to all that, Steve, is I look to 26. Is is layering that in with a membership program that really helps us better understand the profile of each one of our customers how many are using services, how many use services and merchandise, how many are buying, in store and online, and you put all those elements together, it starts to create profiles of different customers. And we we really see honestly, the better we get at services, the the halo effect that has on the overall business just gets stronger. Because it's something that's hard for anyone else to replicate. So service is probably the area that we made the most amount of progress. Pleased with the results we're seeing there. And, you'll continue to see us talk about that and but that gives you a little color on how I see it playing out. Turning into 2026. [speaker 6]: And then maybe if I just do a quick follow-up on that, like, there is there any way to set the baseline here on just sort of you know, what percentage of your customers today actually you know, buy services or or any sort of baseline KPI that we could sort of begin to track as we think about your progression in the business? [speaker 2]: Yeah. Look, I I I think at this point in time, I'm not gonna get into the the specifics on it at that level of detail. Mean, I think the the you know, baseline KPI to you know, track you know, as we we look into the future will be transactions overall. And and then let us manage it at the at the different elements we have, the serve up to the customer. But services will definitely be key component to it, Steve, as we keep growing. [speaker 6]: Thank you. [speaker 3]: Yep. You bet. [speaker 2]: Thank you. [speaker 0]: Last question will come from Zach Fadem with Wells Fargo. Please go ahead. [speaker 3]: Hi. Good afternoon. Is is there a way to quantify the impact of moving away from less profitable sales and and deemphasizing the member program in in Q3? As it seems like [speaker 6]: you expect your Q4 comp to step down a bit more, I [speaker 3]: I'm curious to what extent you're expecting those items to also impact Q4. [speaker 5]: Yeah. I mean, it's I'll I'll just start by it's it's a it's a pretty broad range. Zach, the implied Q4. So, you know, we can land anywhere in that range. Clearly, what we've stated all year very consistently is our primary focus this year was around expanding our margins walking those unprofitable sales and building this very strong foundation upon which to start sales growth. In 2026. But, Joel, I'll let you take it from there if you wanna Yeah. I I think [speaker 2]: Sabrina, I think you nailed it, and I I think I'd add to that. Like, you asked what's the impact? Well, the impact you're seeing quite clearly is you know, we're growing pet EBITDA market share. And so while sales are down, EBITDA is up. So clearly, we I I think we've done a really nice job of identifying which sales are really one time transactions and our empty calorie as I call them versus which customers we wanna grow lifetime value and and be with us for the long term. And so you've seen that play out quarter after quarter for us. As, you know, sales have been down, you know, consistently low single digits. But bottom line has continued to improve. So as each quarter goes by, we get better at identifying those largely or getting them out of our base. And you layer in a membership program. More strategic media buying, aspect, and all that'll start to lead towards improvement in the top line with the bottom line as well. [speaker 6]: Thanks, Joel. And then just to [speaker 3]: level set as we look ahead [speaker 6]: to to 2026. I mean, the expectation is to return to sales growth I'm curious how generally [speaker 3]: you would frame broader category performance in dog and cat food, supplies, services, etcetera. And then how you would layer in the the impact of both your initiatives and then net store opening and closings to kind of get to that [speaker 7]: total sales growth? [speaker 2]: Yeah. Look. I I think it's too early now to to spell that out specifically for 2026. I mean, clearly, if you [speaker 6]: look at what we've [speaker 2]: published, you can see the consumables and you know, supplies are are negative this year, and and we're getting growth in in services. We we expect to return to growth in in consumables and supplies going forward. What I've gotta just outline for you or translate for you is what I laid out today in terms of four pillars. How does that translate into growth at what time and what period next year? But lot what what you guys can't see is all the progress we're making here internally. And then we just gotta put the pieces together for you so you help you think about your model. But, you know, we haven't I think I answered on a few questions before. We're approaching 26. The same way we approach 25. Outline the strategies, and then execute. And, the the team is just getting better at that as every passing quarter goes by. [speaker 5]: Yeah. And, Zach, just to emphasize what Joel's saying, for sure, I think your thinking is in line with ours where you always look at what's you know, your base sales bill then we layer on all the many initiatives which Joel has been outlining. And we'll continue to get more granular as we go 26. But we have all of those building blocks on top of that base, and they layer on throughout the year. So what you can count on is it's a gradual ramp. And then the last thing I'll say as a little bit of a preview is we would expect fewer net closures in 2026 than we had in 2025. And, again, the 2025 expectation is about 20 net store closures. [speaker 7]: Thanks so much for the time. [speaker 2]: Thank Zach. [speaker 0]: This concludes our question and answer session. I would like turn the conference back over to Tina Romani for any closing remarks. [speaker 1]: Perfect. Thanks so much, Joel and Sabrina. Thanks, everyone, for your time. That concludes our call, and we hope everyone a wonderful holiday. [speaker 0]: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. 2026Q3 Conference Call. If you would like to ask a question during the presentation, please press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I'd now like to turn the conference over to Oona McCullough, Executive Director, Investor Relations. Ma'am, you may begin. Oona McCullough: Good afternoon. And welcome to the Urban Outfitters, Inc. Third Quarter Fiscal 2026 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three and nine-month period ending October 31, 2025. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission. For more detailed commentary on our quarterly performance, and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com. I will now turn the call over to Dick Hayne. Dick Hayne: Thank you, Oona, and good afternoon, everyone. The Urban Outfitters, Inc. teams delivered another outstanding quarter. Total revenues grew by 12% and net income increased by 13%, both new third-quarter records. We are especially pleased to report that all brands produced positive comps across all geographies this quarter. This includes the powerful double-digit comps the Urban brand generated in both North America and Europe, and the exceptional growth in subscribers and revenue from the Nuuly brand. The agenda for today's call includes comments from Frank Conforti, our Co-President and COO, who will elaborate on Q3 performance by brand and business segment. After Frank, Tricia Smith, CEO of the Anthropologie Group, will speak to the performance of that brand and their newly launched Maeve concept. Melanie Marein-Efron, our CFO, will then walk you through our outlook for the fourth quarter, and I'll wrap things up with a few closing thoughts before we open the call for your questions. Frank, the floor is all yours. Frank Conforti: Thank you, Dick, and good afternoon, everyone. Today, I'm excited to share our company's third-quarter record results compared to last year, and then I will dive into some detailed notes by brand. Overall, our teams delivered another outstanding quarter, exceeding our plans and setting new sales and profit records. Total Urban Outfitters, Inc. sales grew by over 12%, reaching a Q3 record of $1.5 billion. All our Retail segment brands delivered positive retail segment comps, while four of our five brands posted record third-quarter sales, and Nuuly continued its impressive double-digit revenue growth. Our total Urban Outfitters, Inc. sales growth was partly driven by an 8% increase in the retail segment comp, with digital comps slightly exceeding store comps. Nuuly delivered strong 49% revenue growth driven primarily by an increase of 118,000 average active subscribers compared to the prior year. Additionally, the wholesale segment delivered an 8% increase in revenue driven by growth in the specialty store accounts, which was largely fueled by healthy increases in FP Movement. Next, I will turn your attention to gross profit. Urban Outfitters, Inc. saw a 13% increase in gross profit dollars, reaching a record $563 million. The gross profit rate improved nicely by 31 basis points, rising to 36.8%. Please note that this includes a $2 million impairment charge in the current quarter, which is worth 13 basis points. The improvement in gross margins was primarily driven by lower markdowns at the Urban Outfitters and Free People brands, as well as occupancy leverage driven by strong sales growth across all our brands. These gains more than offset lower initial product margins at all our brands due to increased tariffs versus the prior year. In the quarter, SG&A increased by 14%, deleveraging by 32 basis points. The growth in SG&A dollars was primarily driven by increased marketing spend, which fueled sales and customer growth for all brands. The marketing efforts drove increases in traffic and transactions, both in stores and online, for the total Urban Outfitters, Inc. retail segment. While Nuuly's campaigns resulted in healthy double-digit growth in average active subscribers. Overall, total Urban Outfitters, Inc. operating income rose by over 12% compared to last year, reaching $144 million, while the operating profit rate was consistent with the prior year. Net income saw a 13% increase to a new Q3 record of $116 million or $1.28 per diluted share. Now moving to brand performance, starting with the Free People brand. The team delivered a 9% increase in total revenue. Their sales growth was driven by a 9% increase in Retail segment sales, including a 4% retail segment comp, significant non-comp sales growth, and an 8% increase in wholesale segment revenues. The retail segment comp was driven by positive comps in both the store and digital channels, across all geographies, with an outperformance in accessory product sales. Non-comp sales grew by over 200% driven by new Free People and FP Movement store openings over the past twelve months. The brand is planning to open 43 new stores for the year, including 18 Free People, and 25 FP Movement stores. The brand is also encouraged by the strong results in Europe. While European operations are small relative to the total brand, new store openings continue to perform well, and the region drove a double-digit retail segment comp in the quarter, building on double-digit retail segment comps last year. I know Sheila Harrington and team are excited to capture more of the European market potential in the future. Within the Free People brand, the FP Movement business delivered strong total growth of 18% driven by a 4% Retail segment comp, strong Wholesale segment sales growth of 29%, and robust non-comp growth driven by new store openings. Continued strength in performance-related products is driving healthy new customer acquisition growth. The FP Movement brand saw increases in new, reactivated, and retained customers during the quarter. Based on our current plans, we believe the Free People retail segment could deliver a low to mid-single-digit positive comp in Q4. Free People wholesale revenues increased by 8% during the quarter, driven by sales gains in all geographies, while specialty store accounts led the way versus other accounts. As noted on our last call, as we move through the back half of the year, the wholesale segment faces more difficult year-on-year comparisons versus the prior year. Based on our current plans, we believe the Wholesale segment could deliver mid-single-digit comps in the fourth quarter. Now let's move on to the Urban Outfitters brand. Urban Outfitters recorded a strong 13% global retail segment comp for the third quarter. Congratulations to the team on delivering the first double-digit comp in some time. UO North America recorded a 10% retail segment comp and UO Europe an exceptional 17% retail segment comp. The total global comp was driven by strong store and digital comps with positive traffic in both channels and positive conversion in stores. In North America, the UO team continued their focus on their customer, and delivered a solid comp in both channels for the quarter, building on the strong start to the back-to-school season in Q2. In the third quarter, the business grew nicely across all major categories, anchored in strong regular price sales, new customer growth, and continued success in focused growth categories. Within women's, the denim business continued to be strong, complemented by pants, lounge, sweaters, and accessories. The brand is also encouraged by the progress in the men's apparel category, which delivered double-digit regular price comps in the month of October. In North America, from a marketing perspective, the team is focused on meeting customers in the moments and places that matter most. Whether that is across social channels, digitally, in our stores, or by hosting culturally relevant events. In the third quarter, the brand celebrated back to campus by hosting game day events at college campuses across the country, introducing and welcoming more customers into the brand. The brand also celebrated partnerships with some of Gen Z's most loved brands through On Rotation, a 360-degree brand spotlight, showcasing discovery, product engagement, and curated assortments. These engaging brand marketing events have been successful, driving an increase in unaided awareness and new customer growth. In Europe, the Urban Outfitters brand delivered an outstanding 17% retail segment comp driven by double-digit comp increases in both the store and digital channels. During the quarter, the business achieved positive double-digit comps across all major product categories. With these exceptional results, it is clear the European team is winning market share through amazing product execution, compelling marketing events, and strategies. Moving back to the Urban Outfitters brand globally, we are proud to note that the brand delivered low single-digit operating profit margin in the third quarter. This significant improvement was driven by a remarkable year-on-year profit increase in Europe, followed by a meaningful reduction in operating loss in North America. Based on our current plans, we believe the global Urban Outfitters brand could deliver a high single-digit positive retail segment comp for the fourth quarter. Now turning to the Nuuly brand, which delivered another exceptional quarter. Total Q3 revenue grew by 49%. The impressive growth was primarily driven by an increase of over 40% in average active subscribers, reaching just shy of 400,000 average active subs versus the prior comparable quarter. Nuuly's growth added 3.5 percentage points of revenue growth to total Urban Outfitters, Inc. sales. Our primary focus remains on scaling the Nuuly business and building brand awareness, which we are doing through investments in logistics and strategic marketing. We are pleased to report that our planned logistics expansion in Kansas City, Missouri, including increased storage capacity, and the implementation of new sortation automation, remains on track. Our latest marketing campaign was successful in driving new customers and continues the positive momentum of the brand. Overall, Nuuly's continued strong performance highlights the large growing opportunity for apparel rental in the US, and we believe we are making the appropriate investments to enable Nuuly to continue winning market share. Based on our current plans, we believe Nuuly could deliver healthy double-digit revenue growth in the fourth quarter. Now moving on to tariffs. The macro landscape remains consistent with what we discussed on our last call. We estimate that tariffs negatively impacted our third-quarter gross margin rate by approximately 60 basis points, and we currently believe will have an impact of approximately 75 basis points in the fourth quarter. Despite these headwinds, we still believe we can achieve approximately 100 basis points of gross margin improvement for the full fiscal year 2026. Our teams continue to work diligently on tariff mitigation efforts, including negotiating vendor terms, modifying our countries of origin, adjusting transportation modes, and strategically managing pricing. I want to emphasize that this plan reflects our current knowledge, and there is still a lot of uncertainty in today's environment. This uncertainty, in addition to our ongoing mitigation efforts, makes it challenging to predict the impact of tariffs beyond the fourth quarter. In summary, it was an exceptional quarter. All brands delivered positive retail segment sales comps, wholesale produced healthy revenue gains, and the subscription segment drove double-digit revenue growth. We believe we are on track to deliver record sales and operating profit for the year, including approximately 100 basis points of growth and operating profit margin improvement despite tariff headwinds. We could not be prouder of the teams and their amazing execution. On that note, I will now turn the call over to Tricia Smith, Global CEO of The Anthropologie Group. Tricia Smith: Thank you, Frank, and good afternoon, everyone. In the third quarter, the Anthropologie Group delivered an 8% retail segment comparable sales increase, driving 8% growth in total brand revenue. This achievement marks the nineteenth consecutive quarter of positive comparable sales for the Anthropologie Group. Importantly, we were able to maintain strong double-digit profit rates through improved gross profit margins despite ongoing tariff headwinds. The Retail segment's comparable sales growth was robust, driven by strong comps in both digital and stores across all regions. Category strength remained consistent across apparel, accessories, and weddings, complemented by an acceleration in sales trends within the home category. Turning specifically to apparel, our strength continues to be driven by the brand's multiyear focus on modernizing the assortment and elevating our own brands. These offerings remain our customers' most coveted selections and continue to drive substantial growth. This success is tangible. Own brand penetration achieved a historical high, increasing by over 100 basis points versus last year. We're strategically investing in these unique brands, including Maeve, Celandine, Lyrebird, and Pilcro, which are supported by a strong design team and a distinctive creative point of view. We believe this customer affinity for our own brands positions them for continued growth opportunities. Highlighting the power of our own brands, this quarter saw the launch of Maeve as a stand-alone brand, transitioning it from a beloved in-house label to a dedicated boutique concept. Our first Maeve Boutique opened in Raleigh, North Carolina, and the results have exceeded our expectations with a high double-digit beat of our forecast. This launch has proven accretive to our business in the Raleigh-Durham area, driving increases in total store sales across the region, inclusive of existing Anthropologie stores. Furthermore, digital demand for both Maeve and Anthropologie in the trade area has outpaced brand-wide demand growth since the store opening. Building on this success, our next Maeve boutique is scheduled to open at The Shops at Buckhead in Atlanta, with an additional location to be announced in 2027. Moving now to the Home business, where we saw an acceleration in sales trends during the quarter. Anthropologie Home achieved high single-digit comparable sales, which was in line with total brand comparable sales, driven largely by the strength of our full-price business. Growth was concentrated in home accessories and textiles, and notably, regular price furniture sales turned positive during the quarter. Home accessories, a key point of entry for new customers, delivered double-digit comps and double-digit new customer growth. We're excited about the current trajectory and growth potential of our home business. Our brand-wide growth continues to be fueled by strong positive comparable sales across both digital and retail channels. In our digital channel, we drove double-digit session growth while holding conversion flat. We are continuously investing in our customer digital experience to reduce friction in the online purchase process and drive conversion. In our stores, the focus on service and experience is yielding results. Our in-store styling services grew double digits this quarter, and the high-touch appointment-driven Anthro Weddings business significantly outpaced total brand comp. These strong channel performances validate our strategic investments in both our physical store footprint and our digital capabilities. Building on the success in stores, we're executing a robust plan for new Anthropologie stores in addition to the Maeve boutique launches. Year to date, in FY 2026, we have opened eight new stores in North America and plan to open an additional three before the end of the fiscal year. Internationally, we also have three new stores opening in the UK, with Liverpool and Glasgow opening earlier this month and Manchester opening later this week. Importantly, our new Anthropologie stores are not only exceeding our expectations but are also driving outsized digital demand in their local markets. By the end of fiscal 2026, we will have 250 Anthropologie Group stores globally. Underpinning our growth strategy is exceptional marketing that drives customer acquisition and retention. Our messaging this quarter was anchored by two high-impact campaigns: our 1,000,000,000 impressions and our Anthro Always Fall campaign, a cinematic cross-category story. This approach successfully balances data-led discipline with emotionally resonant storytelling that speaks to new and existing customers. As a result, our total customer count grew high single digits this quarter, and over 30% of new customers have returned to make a second purchase, with our own brands driving the majority of this new customer growth. Looking ahead, we're expecting mid-single-digit comps for Q4. We are committed to our strategy and focused on our North Star of product modernization, customer growth, and leveraging creative, as we enhance our selling environments with exceptional experiences for our customers. I would like to take this moment to thank our incredible teams and global partners. The thoughtful, customer-obsessed way in which you work continues to delight our customers and supports the growth of our business. With that, I will now hand the call over to Melanie Marein-Efron. Melanie Marein-Efron: Thanks, Tricia, and good afternoon, everyone. Let me walk you through how we're thinking about our fourth-quarter financial performance. Based in part on our start of the quarter, we are planning for total company sales to grow in the high single digits for the quarter. In our Retail segment, comp sales could grow mid-single-digit positive, with high single-digit positive retail segment comps at the Urban Outfitters brand, mid-single-digit positive retail segment comps at Anthropologie, and low to mid-single-digit positive retail segment comps at Free People. And Nuuly, the brand could deliver mid-double-digit revenue growth driven by continued subscriber momentum. Finally, our Wholesale segment could produce mid-single-digit growth. Based on our current sales performance and plan, we believe Urban Outfitters, Inc.'s full-year gross profit margins could increase by approximately 100 basis points, with the second half growing by approximately 50 basis points versus last year. Within the remaining second half, fourth-quarter gross profit margins could increase by approximately 25 to 50 basis points as lower product markdowns, particularly at the Urban Outfitters brand, are partially offset by lower initial merchandise margins due to increased tariffs. Our current assumptions on tariffs are based on the announced tariff rates as of November 24, which includes a 50% tariff rate on goods from India. Turning to SG&A, we expect expenses to grow roughly in line with sales for the full year and fourth quarter based on current sales performance and plans. The planned growth in fourth-quarter SG&A is mainly driven by higher marketing spend to support customer and sales growth, along with increased store labor costs related to new store locations. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can adjust up and down depending on how our business is performing. We are currently planning for an effective tax rate of about 23.5% for the fourth quarter and 22.5% for the full year. Now on to inventory. In Q4, we expect inventory could grow at a rate similar to fourth-quarter sales as our teams continue to focus on increasing our product turns. For FY 2026, capital expenditures are planned at approximately $300 million. The FY 2026 capital project spend is broken down as follows: Approximately 45% is related to retail store expansion and support, approximately 35% is related to supporting technology and logistics investments, and the remaining 20% is for home office expansion to support our growing businesses. Lastly, we're planning to open approximately 69 new stores and close approximately 17 this year. Most of our net new store growth will come from the FP Movement, Free People, and Anthropologie. Specifically, we're planning 25 new FP Movement stores, 18 new Free People stores, and 16 new Anthropologie stores. As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. With that, I'll hand it back over to Dick. Dick Hayne: Thanks, Melanie. As you've heard, our teams produced another great performance, with every brand contributing meaningfully to our outstanding results. Robust comparable sales across our brand portfolio demonstrated their power and the rigor of our execution. The Anthropologie, Free People, and FP Movement brands achieved record sales while successfully maintaining double-digit operating profitability. The Urban Outfitters brand posted strong double-digit comparable sales in both geographies, driven by better product, improved marketing, and more full-price customers. As a result, the Urban brand delivered significant profit improvement versus last year. Complementing their retail results, Nuuly, our subscription rental concept, continued its impressive trajectory of strong subscriber and revenue growth while delivering healthy operating profit. During the quarter, customer engagement was lively, with both store traffic and online session growth up sharply. Our customers responded enthusiastically to our compelling product offerings and distinctive brand experiences, driving record third-quarter results. This sustained performance is a direct testament to the strength and resilience of our diversified business model. We have built a strategic model that is sturdy across multiple dimensions. Our diversification by channel, spanning stores, digital, wholesale, and subscription services, and by brand, with a portfolio catering to different customer segments, provides inherent stability. Furthermore, our broad category offering, apparel, accessories, shoes, home, and beauty, ensures that as customer preferences shift, we will remain relevant. This powerful multifaceted approach to diversification gives us high confidence that with smart execution, we can continue to grow our market share regardless of the operating environment. Looking ahead, November traffic and sales remain robust. Our retail segment comp sales are currently running slightly ahead of our stated Q4 plan to deliver mid-single-digit comp growth. We anticipate the holiday season will, as always, be highly competitive and promotional. We have observed a slight shift in consumers' behavior. We believe customers were waiting a bit longer this year to make their purchases until seasonal promotions began. And we successfully met this shift with strong results in our early holiday event. As Frank noted earlier, despite the expected promotional landscape, we believe the power of our model allows us to achieve improved operating margins in Q4 versus the prior year. For now, we are focused on closing the year successfully by delivering another quarter and year of record-setting results and continuing to deliver shareholder value. Finally, my thanks to our entire Urban Outfitters, Inc. family, brands, and Shared Services, for producing another superior quarter. I want to acknowledge the phenomenal job each of our brand leaders, their teams, and our co-presidents, Meg and Frank, have done. I understand the hard work and long hours you all devote to making our brands amongst the best in retail today, and I'm deeply appreciative. Our results are a testament to your effort and your talent. I also thank our partners around the globe for your cooperation as we work together to solve the problems imposed by tariffs. And finally, I thank our shareholders for your ongoing rich support. That concludes our prepared remarks. I now invite your questions. Operator: Then wait for your name to be announced. To withdraw your question, please press 11 again. We ask that you limit yourself to one question only. Our first question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open. Lorraine Hutchinson: Thank you. Good afternoon. I wanted to follow up on the commentary around pricing. I think the words you used last quarter were gently and sparingly. And I wanted to see, a, how much of a customer reaction you've been able to realize from these price increases, and, b, if the expectation was that you would continue to protect opening price points, especially at the Urban brand. Dick Hayne: Hi, Lorraine. I'm gonna ask Tricia to take that question. Tricia Smith: Hi, Lorraine. We are being highly strategic and thoughtful about taking price, and these are definitely not across-the-board price increases. We've taken small price increases where we felt the price-value equation was appropriate and have seen really little to no price resistance where we did so. We also want to stress that we remain committed to maintaining our opening price points and our pricing architecture and protecting those items that our customers count on to have great price value. Next, we're really seeing very little incremental price increases over and above what we've already implemented this fall and holiday. We really don't anticipate price resistance. Our focus remains on protecting the integrity and the value of our product while we manage our cost structure appropriately. Dick Hayne: Yes. And, Lorraine, I want to emphasize that all the brands are protecting their opening price points. And furthermore, as we think ahead, we think that most of the price increases are behind us and that we'll have little need to raise prices next year. Operator: Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open. Adrienne Yih: Great. Thank you so much. And I have to say, I mean, congratulations. Every aspect, every geo, every brand, it's pretty amazing. So congrats to everybody. Dick Hayne: Thanks, Adrienne. Adrienne Yih: You're very welcome. So, Tricia, just on kind of you talked about the own brand penetration. Can you talk about kind of where you are in the journey of own brand, where it could go, and what the global footprint for Anthropologie may look like, Europe versus North America? And then for Frank or Melanie, just on UO, so we have a, I think you said a positive low single-digit segment margin in the quarter. Where does that bring us year to date? And I think earlier, you had said that you didn't think that this year, you could break that profit barrier, right, to become, you know, positive. So, I mean, there's so much opportunity after this. So just a little color on kind of how you think about that for the year. Thank you. Tricia Smith: Hi, Adrienne. Our own brand growth, as I had mentioned in our opening remarks, has really been a source of strength for us as a brand. We're really leveraging the talent and strength of our design teams, our buying team. As I've mentioned, the penetration grew by almost 100 basis points versus last year. And we continue to plan and execute against our own brand growth outpacing that of just our total. We have successfully launched Celandine, Lyrebird, leveraging Daily Practice, and then really proud of the results the team's delivered with our Maeve expansion as a standalone brand and our concept store. So continued growth, we believe it will continue to outpace the total of our brand and expecting that to continue. I would say from a global footprint for our brand, really proud of the team successfully opening two stores in the UK. And the past several weeks and excited about the Manchester opening that will be opening at the end of this week. So we're in a place where I think we'll continue, as we mentioned, to open stores in North America. We'll continue to gauge the results of the stores that we're opening abroad in the UK and see an opportunity for us to continue to do so. I also think it's worth mentioning Pilcro. Yeah. That's definitely Pilcro. Really good season with Pilcro. Yeah. Pilcro's been a brand that has expanded significantly, and I would say several years ago, from a penetration standpoint in denim, and that's grown significantly now as our number one performing denim lifestyle brand for Anthropologie has been significant. Frank Conforti: And this is Frank, Adrienne. Thanks for your question. I just wanted to give an update on Urban. So first and foremost, I just want to say it again. Honestly, a huge congratulations to the entire team on the turn and the overall results. It's just, it's really great to see the progress the teams are making. Delivering such strong sales growth and great profit improvement. Yeah. As you noted, the brand was profitable on a global basis in the third quarter. This was driven by exceptional profit growth in Europe and a healthy reduction in the loss in North America. We're not ready to give a forecast exactly what next year could look like. Our business in Europe is already profitable and certainly was boosted by the extraordinary comp results so far this year. And while North America has delivered a meaningful reduction to their losses, they still have a healthy opportunity to continue progress into next year. And I would say given the size of the opportunity in North America, it is possible that the brand turns to globally to be profitable year on an annual basis, but we'd like to see exactly where this year lands before we commit to exactly what next year will look like. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Matthew Boss with JPMorgan. Your line is open. Matthew Boss: Thanks and congrats on another nice quarter. Dick Hayne: Thanks, Matthew. Matthew Boss: So, Dick, could you speak to drivers of the further acceleration in business you saw during the third quarter, notably at the Urban brand? Maybe elaborate on early holiday selling trends that you mentioned? Just how you see the setup for your brands through holiday? And Frank, so with 100 basis points of operating margin expansion anticipated this year for the company, how best to think about margin drivers or levers beyond this year if we think multiyear? Dick Hayne: Okay. Matthew, the drivers of the business across all the brands were the traffic. And traffic in stores and traffic online. And sales were almost exactly congruent with the increase in traffic. So I think that that's what did it. As we look into holiday, we think that the same thing is occurring. And we believe that the holiday season is likely to be very nice from a sales perspective. But we do expect it to be slightly more promotional than we saw last year. Let's say our customers aren't responding well to the new fashion. They are. And they are particularly responding to their gift-giving favorites. But they're waiting more patiently for anticipated promotions. And the events we've run so far have been very successful promotional events. So judging by the strength of those and the strong back-to-school season, and the surge in customer spending on holiday decorations, I anticipate a very good holiday season. Frank Conforti: And then, Matt, I can touch on operating profit. So, you know, obviously, we're extremely proud of what we produced last year delivering 100 points of improvement, getting to 8.6%. And, based on our current plans, we can deliver approximately 100 points of improvement in fiscal 2026, which would certainly put us very close to our 10% goal. As it relates to next year, I would just say it's a little early for us to commit to a rate. Obviously, as Melanie said, or as we target as a company, we're certainly going to target to keep SG&A at or below sales. But so then that leads to gross profit margins. And I just think there's a ton of uncertainty as to where tariffs are going to shake out given potential deals, Supreme Court rulings, our tariff mitigation efforts are ongoing. We'll have a better picture of this at the close of the year. But the one thing I do want to say is with all of that said around tariff impacts, if you were to ignore that for a minute, where our opportunities could land in gross profit would be driven by continued markdown improvement largely from the Urban Outfitters brand. We still think there's an opportunity to leverage store occupancy as, knock on wood, the brands continue to drive healthy comp sales. And, you know, when you're excluding tariffs, we actually still think there's IMU opportunity, which is great to see at all brands. Operator: Thank you. Please stand by for our next question. Next question comes from the line of Paul Lejuez with Citi. Your line is open. Paul Lejuez: Hey, thanks, guys. You mentioned pressure on IMU a couple of times, also lower markdowns. So just curious maybe you could talk a little bit about out-the-door merch margins. And what you saw by brand? And then second, on Nuuly, I'm curious if you've seen any change in the demographics in terms of age, income, regional, you know, of the new customers that you're attracting into that business versus what you've seen maybe several quarters ago? Thanks. Frank Conforti: Paul, this is Frank. I can take the sort of out-the-door, which was favorable given the markdown reductions for Urban Outfitters, Inc. As we noted, sort of all brands were impacted by the tariffs. And the lion's share of the markdown improvement was driven by Urban Outfitters, but Free People also had a favorable markdown rate in the quarter. And Anthropologie was just slightly up, but also did a really good job at offsetting their IMU and had gross profit gains overall as a brand for the quarter. So all three brands contributed to the within the retail segment to the gross profit gains for the quarter. And then Dave Hayne, I don't know if you want to touch on Nuuly? Dave Hayne: Yes, Paul. Thanks for the question on Nuuly. I would say that largely, we are seeing our customer base remain relatively stable in terms of the curve across age, you know, subscribers, demographic, geography. If anything, I would say we have seen a slight shift, ever so slight, towards a slightly younger subscriber in terms of our new customer acquisition, and we've seen a penetration from a subscriber standpoint, a slightly heavier penetration into the southern region of the country. More so than other geographies, mainly from a new customer standpoint. But those are just slight changes. There has not been a big transition or a big change in the composition of our subscribers. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Mark Altschwager with Baird. Your line is open. Mark Altschwager: Congrats on the strong results. Thank you. I wanted to follow up on gross margins. First, I guess, where was the upside versus your plan for the third quarter? Any surprises there? By brand or on the markdown front? And then just for Q4, you're commenting on expectations for higher promotions over holiday given the shift in behavior. But you are maintaining your guidance for the full year. So just curious what the offsets are there that are allowing you to hold that plan? Thank you. Frank Conforti: Sure, Mark. This is Frank. I can take that. I think the outperformance in the third quarter was largely just top line came in really healthy. So you got some better leverage, as it related to store occupancy, which was great to see with all brands contributing to that. As it relates to the fourth quarter, you hit the nail on the head. We are maintaining our annual plan and expectation to hopes of delivering approximately 100 basis points of gross profit margin improvement. I would like to say, I hope we're being conservative. But we do expect, as Dick noted, the holiday to be promotional. And, you know, if those promotional events are bigger than last year, that could have an impact on margins, and, you know, we're hoping that we're being conservative there. This does not mean, and I just want to be clear about this, that we're planning on more or deeper promotions because we're not. It just means over the past several years, we've seen this concept of highs being high and the highs being higher and the lows being lower as it relates to sales impact, sales events, I should say. So, again, I hope we're being conservative with the level of improvement we're planning, and we're really excited and pleased to hopefully be able to deliver that 100 points on an annual basis. Operator: Thank you. Please stand by for our next question. Next question comes from the line of Alex Straton with Morgan Stanley. Your line is open. Alex Straton: Thanks so much. Congrats on a great quarter. Maybe Frank or Melanie to start, I think you've put a 10% long-term margin target out there, but you'll be very close, if not there this year. So just curious how you think about that longer term and maybe what pushes you beyond it? And then while we have Tricia on the call, I just wanted to take a step back on Anthro. Feels like there's just been a structural change in the growth that that business delivers versus where it was at pre-pandemic. I'm just curious, like, what's changed? And how do you think about the durable growth rate for that business over time? Thanks so much. Frank Conforti: And thank you for the congratulations, Alex. This is Frank. So, as I said, we are still targeting 10% and knock on wood, we're hopeful we could get very, very close to that this year. Honestly, before we set a new goal, I'd like to hit the first goal. And, you know, as you know, I think everyone knows, there's still plenty of opportunity for us to drive improvement. You've got things like the UO turnaround, which is certainly in play right now. That brand, as we said, will still have a healthy opportunity to drive operating dollars and rate gains into next year. You've got Nuuly growing at a really healthy rate, and that gives us opportunity from a profit rate perspective as well. As I mentioned, you know, all the brands delivering positive comps, you've got store occupancy leverage and excluding what's going on with tariffs, which hopefully some of that changes in the future, I think all brands have IMU as well. So there's several levers out there that, you know, I think we can pull and hopefully deliver to exceed. But for right now, we're not setting a new target. I'd like to hit the first target first and hit that 10% and operate at it, and then we'll reset the goal. Tricia Smith: Hi, Alex. I'll speak to Anthropologie. Thank you for the question. You know, our team set out a little over four and a half years ago with really three strategic priorities, but really, I would say first and foremost, it was getting or delivering on our ability to drive full-price sales, which was really focused on newness. A lot of that came from really focusing in our own brands as I had mentioned. But I would say as we've worked on modernizing our product assortment, diversifying the categories that we're able to deliver, and ensuring that we have a broad-based appeal for the multigenerational customer base that we serve, has really been the bigger driver of that. You know, our customer base, as we focused on growth and acquisition, but also retaining our existing customers, has delivered over 50% increase in the last four years in our total customer count. And I think as we leverage that and think about how we execute and we deliver experiences both in stores and our teams have been very, very focused on ensuring that those experiences and the service delivers and exceeds our customer expectations, but also investing, I would say, in our digital capabilities, multiple factors contributing to our ability to be able to deliver improved conversion. And then I would say just lastly, making sure that we really deliver on those exceptional experiences and leverage our team's capabilities of design and creative and buying, we believe that we've really built a sustainable model for growth. Coming out of, I'd say, pre-pandemic that we've been able to deliver on and are proud of our team's ability to execute on those. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is open. Dana Telsey: Thank you. Good afternoon, everyone, and congratulations on the progress. As you think about the product, that's all I'm thinking about. As you think about, Dick, you mentioned it, some of them waiting closer for deals. Any framework for that? Is that across all brands, all demos, all regions? Or anything you're seeing in terms of the promotions that you need to drive? And then it was interesting on Nuuly with the continuing average active subscriber growth over, you know, 42% or whatever, it sounded like on the gross margin commentary, some of them are buying more of the rental product now. Are you seeing that shift? Is it from all ages, all income levels? And how does that impact the margin? Thank you. Dick Hayne: Thanks, Dana. The consumer pausing to wait for promotions, I guess I would chalk it up to intellect. I mean, they know that they know the promotions are coming. As I said to you, we saw a very rapid increase in mid to late October in people putting items in their carts, and that signaled us that this was the beginning of, okay, we know what we want. We know there are promotions coming, so why not wait? And if you think back maybe two or three years ago, when everybody was so worried about, oh, there's not, I guess it's because the transportation was difficult out of the Far East with COVID. And everybody thought, oh, there's not gonna be enough to go around, and people started buying earlier and earlier. I think what we're really seeing is just a reversion to what we saw before COVID. People did wait. And they did partake more in promotions. So I don't think there's any particular magic to it. I don't think it says much about the consumer other than they're smart. Dave, you wanna take the Nuuly? Dave Hayne: Yeah. Frank? Frank Conforti: Yeah. Sure. I'm happy to touch on it. Dana, you're absolutely correct. We did see a higher rate of sales to the customer in this quarter, and that has a lower gross profit than the subscription sales to the customer. There's a lot of ways in that we can sell product to the customer, sort of in the box through Marketplace through their direct website. We're not really seeing anything different from a demographic or major geography perspective as to where those things are coming from. And I think it'll just be variable from one quarter to the next. Operator: Thank you. Our next question comes from the line of Marni Shapiro with The Retail Tracker. Your line is open. Marni Shapiro: Hey, guys. Congrats to everybody. Thank you, Shay. But Shay. Oh my god. And that cardigan with the flowers, that is, like, rich thrift store vibes. So good. So my questions are for you. I hate baseball metaphors. And I understand Europe is on solid ground, but I guess where do you feel like UO is in this recovery process? And could we also just touch on men's? I feel like we glided right past. You had, you know, some sounds like some stabilization and slight improvement in men's. I'm curious if the men's business is a smaller part of Urban's business at this point given it's been a little tougher even than women's. And is it still putting pressure on margins, or is it neutral at this point? Shay Jensen: Hi, Marni. Thank you for the nice comments. You're talking about the Rachel Cardigan. It's one of our biggest and most beloved items, so I'm glad that you love it. Lots of customers do too. I'm really, really proud of that item. So, think your first question, where do we sit in the recovery? First, we recognize that this is a journey. We're incredibly proud of the team, and, you know, I think the team is executing really well on our plan. You know, they are staying acutely focused on the customer in Q3. Really, that was about occasions of getting back to campus. Game day was a big occasion and reentering campus life. From a product perspective, I think, you know, we continue to be, you know, excited about the categories that customers see us as a destination for. That would be denim and lounge and really anchored in our own brands, BDG and Out From Under. In marketing, the team continues to really delight customers, meeting them in places and moments that matter. Some exciting partnerships and activations in the third quarter, whether that was celebrating on rotation with UGG, which is our newest partnership and on rotation experience, or the partnership with Canva. Which was a really exciting proud moment. Our team, you know, drew insights with that 54% of young customers make wish lists for their holiday gift list. And so we partnered with Canva, and had three unique formats that our creative team developed. With 100 products and drop-down menus just from Urban Outfitters. That experience is live today with lots of customers participating in it. It's something that we're really excited about. And from a channel or touchpoint perspective, feeling excited about the progress that teams are making there. Seeing our creative really showing up in our stores, on our digital channels, across social, really evolved to be much more upbeat, really inclusive, and I think representing our product in a really, really delighting way. And we're excited to have opened two new stores representing our new store environment. I think we're hearing great things from our customers. Certainly, the environment is bright. I think more modern and from our perspective, allowing us to ebb and flow with categorical performance. And we're really excited about the early reads we're seeing from a productivity perspective from those two stores as well. Your next question on men's, we are really excited about what we're seeing in men's. You heard us mention that perhaps on the last call. Real proud of the men's team and the progress that they're making. This started with their focus on the customer as well, and they identified an opportunity to really broaden the assortment as they broaden the range of customers that they were serving to. For them, that really meant being more versatile. And focusing on young college guys. These are simple people. But we have an opportunity to really be more versatile. And focus on more outfitting and wardrobing for this customer. So the team had prioritized really redesigning and rebuilding our core items and anchoring in core categories that bottom pants, jeans, and sweats. Go figure, and some of their tops, so fleece programs and woven tops. And that is resonating really well. And so with some new customers in, the business, really proud to see that we are now a destination where they have more to buy from us than ever. Men's is an important part of our business, and I think that we really have an opportunity to differentiate in the marketplace. And be a destination, not just for our own branded product, but be a place where we can have some of the best national and discoverable brands for men. And that's something the team is working on as well. Dick Hayne: Marni, if I may, I'd like to say a word about Urban. As an ex-simple college guy who hasn't gotten much more complex as the years gone by. I want to give Sheila a big shout-out and also both team leaders, Shay in North America and Emma Wiston in Europe. They both delivered outstanding quarters. And her team produced the double-digit comp sales that you've heard about. Strong, very strong double-digit full-price sales. It shows that the turnaround strategy is working very well. In Europe, Emma and her team accomplished something I've really never seen in my many years in this business. They delivered a 17% comp sales gain with single-digit less comp inventory. And very strong positive double-digit full-price sales. So clearly, the momentum for both geographies is strong going into the holidays. And I just want to give my congratulations to all Global Urban brand employees. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Janet Kloppenburg with JJK Research Associates. Your line is open. Janet Kloppenburg: Hi, everybody. Can you hear me? Dick Hayne: Yes. We can. Janet Kloppenburg: I don't have to tell you how excited I am about such a strong quarter. I do want to talk to Shay about Urban. When I look at it, Shay, and I've called the company a long time, it looks like you are working to broaden the assortment and the customer that you're targeting. And I'm wondering if you could talk a little bit about that. And if your pricing strategy has changed and if what they're doing in Europe is similar to what you're doing here. Thank you. Shay Jensen: Hi. Hi. I'll take that first. This is Shay. Yeah. One of the first things that we did was a lot of customer research, and I think that we had identified that we had become unintentionally niche or narrow as it related to our product assortment. We had been focused on a bit of grungy, a bit of a narrow assortment. And I think we recognize an opportunity to be a bit more broad and welcoming in terms of our assortment and listening to our customers. They told us very clearly. We love your denim, and we love your lounge. And we love those two brands, BDG and Out From Under. But we weren't giving our customers enough of those brands and enough of those categories. So that is what we've been focusing on, and the customer has been responding. In like, a lot. And in sales. And, yeah, in sales. And we're gonna keep giving it to them as long as they keep responding. And, Janet, I'm gonna ask Sheila to talk about Europe. Sheila Harrington: Similarities with Europe. So I think the similarities of the consumer focus are very strong between Shay and Emma. Obviously, the customer is slightly different in what they want at any given time, knowing that Emma's touching on Europe, Germany, Netherlands, Spain, etcetera, and the countries that she's touching and just like similarities in North America or New York and the South respond differently to products. I think both leaderships are concentrating on their consumer, and that feels really, really good. There's great collaboration sharing a product between both countries to find the best results for the consumer. Proud of Emma's growth because it's not only just coming from the UK now. There's double-digit growth coming from multiple countries that she's continuing to build on. And will in the foreseeable future as our continued store growth happens in Europe. Operator: Thank you. Standby for our next question. Our next question comes from the line of Jay Sole with UBS. Your line is open. Jay Sole: Great. Thank you so much. I have two questions. First, I'm just curious about your wholesale business. As you look into next year, I'm curious about the kind of orders that you're getting from your wholesale partners given as they might have a different view of what 2026 might look like. Then there's some speculation today that Red Sea shipping lanes might open up. If that does happen, what might that how might that impact your margins next year? Shipping rates go back down to where they were? Thank you. Frank Conforti: Jay, I could take the Red Sea shipping lane. I would just say, you know, obviously, if that happens, the more lanes, the more opportunities, the better the opportunity is for us. But it's a little early for us to speculate exactly what rates are gonna look like and what the impact could be. But, yes, that would be a positive. You know, the supply and demand are good things, and a greater supply of transportation opportunities is a good thing for us. Sheila Harrington: And I'll take the wholesale question. It's an exciting time for wholesale because we're seeing the brand both Free People and FP Movement perform extraordinarily well within our wholesale account base. We do believe that as we continue to react and learn from our customer, from our deep CPG perspective, we have only the opportunity to continue to fuel our wholesale channel with the partners that we built. I think FP Movement had a spectacular quarter at wholesale this year, and we don't necessarily see that slowing down. We see our specialty store business thriving as we specialize our product into the outsourced space, our studio space, and the international opportunity we have with both brands. So we're really excited. Dick Hayne: I believe that finishes the call. I thank you all very much. I wish you a very, very happy Thanksgiving. I know you've got a lot of work to do. There was a backlog of companies reporting today, so I appreciate it. And we will talk to you soon. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Zscaler First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Ashwin Kesireddy, VP IR and Strategic Finance. Good afternoon, everyone. And welcome to the Zscaler First Quarter Fiscal Year 2026 Earnings Conference Call. Ashwin Kesireddy: Good afternoon, everyone. And welcome to the Zscaler First Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO, and Kevin Rubin, CFO. Please note, we have posted our earnings release and a supplemental financial schedule to our investor relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release. I'd like to remind you that today's discussion will contain forward-looking statements, including, but not limited to, the company's anticipated future revenue, annual recurring revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, future hiring decisions, remaining performance obligations, income taxes, earnings per share, our objectives and outlook, our customer response to our products, and our market share and market opportunity. These statements and other comments are not guarantees of future performance but rather are subject to risk and uncertainty, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC, as well as in today's earnings release. I also want to inform you that we'll be attending the following conferences: UBS Global Technology and AI Conference on December 3, Barclays Tech Conference on December 11, and Needham Growth Conference on January 14. Before I turn the call over to Jay, I wanted to share that I recently transitioned to a new role as product manager of AI security at Zscaler. So this will be my last earnings call as the IR leader. It's been a pleasure engaging with all of our shareholders over the last few years. Kim Watkins, who some of you may know from her tenure at Intuit, will be joining Zscaler in early December to lead investor relations and strategic finance. Please join me in welcoming Kim to Zscaler. Now I'll turn the call over to Jay. Jay Chaudhry: Thank you, Ashwin. We had a strong start to our fiscal year. In Q1, annual recurring revenue or ARR growth accelerated to 26% year over year, and RPO growth accelerated to 35%. Combining our strong free cash flow margin of 52%, and revenue growth of 26%, we operated at rule of 78, making us one of the rare companies consistently outperforming the coveted rule of four d metric. We are one of the only five enterprise SaaS companies with over $3 billion in ARR, growing at over 25%. The continued success of our three growth pillars—AI security, zero trust everywhere, and data security everywhere—is driving our strong top-line performance. ARR from these three growth pillars accelerated in the quarter. I'm particularly pleased with our AI security pillar, which grew over 80% year over year and has already exceeded our FY '26 target of $400 million ARR, three quarters earlier than expected. With the strong demand, I expect AI security ARR to exceed half $1 billion by the end of this fiscal year. Diving deeper into our AI security pillar, while enterprises are leveraging AI to drive innovation and accelerate productivity, the proliferation of AI is also making them increasingly susceptible to attacks. One of the largest AI companies recently reported that a bad actor hijacked its AI coding assistant to autonomously perform a large-scale cyber attack against multiple organizations. This incident highlights two important trends. First, threat actors are using AI to dramatically increase the speed, effectiveness, and blast radius of attacks. We have been predicting an increase in this type of automation by AI agents, and we are now seeing it happen. Second, just like users and organizations, AI agents are also becoming the weakest link in their security. It is only a matter of time before millions of AI agents interact with each other across enterprises. Imagine a threat actor hijacking even one of an organization's trusted agents, and thereby accessing critical corporate resources and sensitive information resulting in a serious breach. We have a long history of securing users with our Zero Trust Exchange, which enabled our customers to safely adopt the latest technologies such as mobile, cloud, and SaaS. Over 45% of Fortune 500 companies and nearly 40% of global 2,000 companies have adopted our Zero Trust Exchange and trust Zscaler to secure their businesses. With the rise of consumer GenAI applications, including ChatGPT, Perplexity, and more, security issues related to access control, data loss, and content moderation made enterprises cautious about allowing employees access to these popular apps. We extended our Zero Trust Exchange to provide visibility into thousands of GenAI apps, enabling enterprises to inspect prompts and responses and enforce proper guardrails for safe and secure use of GenAI apps. Several large enterprises adopted our GenAI solution in the quarter, including a G2K technology company, a Fortune 500 communications equipment company, and a large healthcare software provider. As AI adoption moved beyond consumer GenAI apps into building and running enterprise AI applications, we introduced solutions in three key categories to secure that. First, AI asset discovery and posture management. AI applications and agents are being developed and deployed today without full visibility for IT teams to safeguard them. To provide organizations with visibility and control, last year, we introduced an AI asset discovery solution called AISPN. AISPM can detect unauthorized AI applications, prevent over-permissions for AI agents, and strengthen governance for model deployments. In Q1, several customers, including a leading software solution provider, a global 2,000 manufacturer, and a leading insurance company, purchased AISPM from Zscaler. With our recent acquisition of SPLX, we are extending our AI SPM capabilities by unifying discovery of LLMs, workflows, and MCP servers. These capabilities enable customers to meet evolving regulatory requirements for AI to be transparent and explainable, among others. The second key area of innovation is AI red teaming. As part of the AI lifecycle, customers need to regularly test their applications for vulnerabilities. With SPLX, we now deliver AI red teaming to enable automated and continuous testing of AI apps at scale. Our AI red teaming solution integrates with customers' CICD pipelines, making it easy to test for hallucination, bias, behavior drift, and more. Several customers, including a Fortune 150 transportation company and a Fortune 100 service provider, have already deployed AI Red Team. The third area of innovation is AI guardrails. Customers need AI guardrails for inline policy enforcement for acceptable use of AI, for cybersecurity, and for data loss prevention. Inline policy enforcement is one of our key differentiators, which we seamlessly deliver through our Zero Trust Exchange at scale. As we process half a trillion transactions daily, our AI Guard solution leverages the core competency for runtime protection. Zscaler AI Guard sits between the application and LLMs, inspecting prompts and responses inline to enforce customer-defined policies. To share an example, this quarter, a leading consulting firm purchased our AI Guard to secure the use of public AI applications and their private in-house applications such as AI chatbots and AI agents. With our platform capabilities, we are securing over 90 billion AIML transactions per month. As AI and AI agents define the next era of transformation, we are further extending our platform to secure AI agents, agentic workflows, and AI applications. In addition to securing the use of AI, we are leveraging AI to deliver agentic operations, including agentic SecOps and AgenTeq ITOps. In our AgenTic SecOps, we are making great progress towards delivering an AI-powered SOC that simplifies customers' operations and hunts for threats. In August, we acquired Red Canary to combine the agentic technology with our data fabric technology to deliver actionable SOC insights for our customers. This quarter, a Fortune 500 financial services company, a global 2,000 healthcare equipment company, and a global 2,000 energy company, and more purchased our AgenTek SecOps solution. In our agentic IT ops, we are introducing several Zscaler Digital Experience or ZDX innovations to enable faster resolution to application and network performance issues. Other innovations like the ZDX CoPilot continue to resonate with customers and have driven over 80% year-over-year growth in bookings of ZDX Advanced Plus in the last twelve months. I'm very pleased to see continued momentum for our AI security solutions. As I mentioned, we are expecting AI security ARR to surpass half $1 billion by the '26. Turning to our second growth pillar, we continue to see strong momentum in Zero Trust Everywhere, which includes Zero Trust users, Zero Trust branch, and Zero Trust cloud. Three quarters ago, we introduced Zero Trust Everywhere and set a goal to secure 390 enterprises with Zero Trust Everywhere by the '26. I'm delighted to share that we now have over 450 Zero Trust Everywhere enterprises, achieving our goals three quarters ahead of our target date. Our Zero Trust Everywhere customers benefit from reduced cost and complexity by eliminating legacy network and security products. This expanded relationship through Zero Trust Everywhere also creates follow-on demand for data security and AI security. One of the key components of Zero Trust Everywhere is Zero Trust Cloud, which allows customers to eliminate VPNs, north-south and east-west virtual firewalls, ExpressRoute, and Direct Connect networks, resulting in far better cybersecurity. To share a customer example, in an 8-figure TCV win, an existing million-dollar-plus Fortune 500 healthcare customer adopted our Zero Trust Cloud solution, along with ZDX Advanced Plus, data security modules, and more. Zero Trust Cloud secures workload communication across the VPC or virtual private cloud and SAP RISE cloud-based ERP. Without Zero Trust Cloud, the customer would have had to deploy a significant number of north-south and east-west firewalls, resulting in increased cost and many months of delay. This customer told me that in the last fifteen years, they have not been so excited about the solution that not only brought better security but also was easy to deploy and operate. Just like the migration of Microsoft Exchange to Office 365 was a big tailwind to our business a few years ago, I believe the migration of SAP on-prem to SAP Rise will have a similar impact on our business. We continue to see strong interest from customers for Zero Trust Branch, which is another key component of Zero Trust Everywhere. Zero Trust Branch eliminates the need for legacy point solutions at branches, factories, and campuses. To give you an example, in a 7-figure upsell win, a global 2,000 manufacturing customer more than tripled their ARR and became a Zero Trust Everywhere customer by purchasing our Zero Trust Branch, ZDX Advanced Plus, Risk 360, and more. Moving to Data Security Everywhere, we offer a comprehensive data security portfolio with eight modules providing data discovery, data classification, posture management, data loss prevention, and more. Customers are eliminating data security point products in their environment by consolidating data security functionality on our unified platform. To share an example, in a seven-figure new logo ACV win, a large healthcare provider purchased five out of our eight data security modules for their 23,000 users. This enterprise chose Zscaler over a leading CASB vendor due to our integrated platform, which delivers data security across all channels for all types of data. I'm excited to share that our Data Security Everywhere ARR accelerated to approximately $450 million. The growth across our three pillars is powered by our strong go-to-market engine. One of the key initiatives we recently introduced was our Z Flex program, which enables customers to commit to a spend and provide flexibility to swap or activate additional modules without undergoing new procurement cycles. Z Flex is driving meaningful upsells and reduced sales cycle and is consistently exceeding my expectations. Z Flex generated over $175 million in TCV, growing over 70% quarter over quarter. To share a couple of customer examples, an existing large aerospace customer made a multiyear 8-figure TCV commitment under the Z Flex program, increasing the annual spend with us by over 40%. As part of the Flex commitment, the customer added nine new modules, including asset exposure management, identity threat detection, unified vulnerability management, email DLP, and expanded commitment for data security. In a 7-figure upsell win, a Fortune 500 business services provider more than doubled the annual spend with us as they expanded adoption of nine modules under the Z Flex program. In conclusion, our business is benefiting from the strong tailwinds from the combination of zero trust and AI security. The best AI security is built on the foundation of Zero Trust. Our clear leadership in zero trust security combined with our comprehensive AI security offerings positions us well to capture the large and growing AI security market. And with our strong go-to-market engine, we are well positioned to exceed $10 billion in ARR. I would like to turn over the call to Kevin for our financial results. Kevin Rubin: Thank you, Jay, and good afternoon, everyone. We exceeded our growth targets in Q1 and operated at rule of 78 for the quarter. We ended Q1 with over $3.2 billion in ARR, reflecting approximately 26% year-over-year growth. ARR from each of our three growth pillars accelerated in the quarter, including on an organic basis. Q1 revenue was $788 million, growing 20% year over year, 10% sequentially, and exceeding the high end of our guidance. Geographically, the Americas accounted for 58% of revenue, EMEA for 27% of revenue, and APJ for 15% of revenue. Our remaining performance obligation or RPO grew approximately 35% year over year to $5.9 billion, with approximately 47% classified as current RPO. We closed Q1 with 698 customers generating over $1 million in ARR, and 3,754 customers exceeding $100,000 in ARR, demonstrating the strategic role we play in customers' digital transformation journeys. Turning to the rest of our Q1 financial performance, our gross margin was 79.9% as compared to 80.6% last fiscal year Q1. I'd like to remind investors that we are introducing new products that are experiencing strong growth and are optimized for faster go-to-market rather than margins. This will continue to influence our gross margins on a quarterly basis. We plan to optimize new products for margins over time as they scale. Operating expenses increased 11% sequentially and 23% year over year, reaching $458 million. Operating margin was 21.8%, towards the higher end of our long-term range and growing by approximately 40 basis points year over year. Our free cash flow margin for Q1 was 52%, including data center CapEx at 2% of revenue. We ended the quarter with $3.3 billion in cash, cash equivalents, and short-term investments. Next, let me provide our guidance for Q2 and full year fiscal '26. As a reminder, these numbers are all non-GAAP. For the second quarter, we expect revenue in the range of $797 million to $799 million, reflecting year-over-year growth of approximately 23%. Gross margins to be approximately 80%, operating profit in the range of $172 million to $174 million, net other income of approximately $19 million, earnings per share in the range of $0.89 to $0.90, assuming a 21% tax rate and 170 million fully diluted shares. For the full year fiscal 2026, ARR in the range of $3.698 billion to $3.718 billion, reflecting year-over-year growth of 22.7% to 23.3%. We anticipate approximately 47.8% of net new ARR to be recognized in the first half. Revenue in the range of $3.282 billion to $3.301 billion, reflecting year-over-year growth of 22.8% to 23.5%, operating profit in the range of $732 million to $740 million, earnings per share in the range of $3.78 to $3.82, assuming a 21% tax rate and approximately 170.5 million fully diluted shares, and free cash flow margin to be approximately 20% to 26.5%. With a large market opportunity and customers increasingly adopting the broader platform, we will invest aggressively to position us for long-term growth and profitability. Before moving to Q&A, I'd like to thank Ashwin for his significant contributions to IR and strategic finance and wish him well as he transitions to his product role. I'm also excited to welcome Kim to Zscaler. With that, operator, you may now open the call for questions. Thank you. Operator: To withdraw your question, please press 11 again. Please limit yourself to one question. One moment for questions. Our first question comes from Brad Zelnick with Deutsche Bank. You may proceed. Brad Zelnick: On such a strong start to the year and hitting your Zero Trust Everywhere goal three quarters ahead is just amazing. Jay, I wanted to ask about Zero Trust Branch, which continues to hear good things about. It's showing some nice early adoption. As we look ahead, how much more work needs to be done on the product and/or go-to-market fine-tuning to see real acceleration from here? Jay Chaudhry: Thanks, Brad. We have done some amazing work on the technology side to build a Zero Trust Branch where each branch is merely an island with no lateral movement that's generally caused by traditional networking with SD-WAN and MPLS. The product is in great shape. Go-to-market, we put together a specialty team that can engage the right buyers to explain the solutions. The numbers are pretty impressive. I'll joke internally that Zero Trust Branch needs no pipeline generation effort because there's so much demand in the cost. I think we shared some numbers on Zero Trust Branch customers. We have now exceeded over 450 customers. A lot of customers start small, they do the smaller rollout, and then they move on to bigger deals. In my prepared remarks, I gave an example of a global 2,000 manufacturing customer whose ARR more than tripled. I think there are many, many such examples. We got about 4,400 enterprise-class customers. They have only gone to about 10% of them. So I see a big opportunity. I think it's an exciting area for us. And it's part of our Zero Trust Everywhere platform. Brad Zelnick: Thank you so much, Jay. Jay Chaudhry: Thank you. Operator: Thank you. Our next question comes from Saket Kalia with Barclays. You may proceed. Saket Kalia: Okay, great. Hey, guys. Congrats on the strong start to the year. Thanks for taking my questions and congrats, Ashwin. Maybe a little bit of a joint question for you, Jay, and Kevin. You know, the billion dollars in ARR that's coming from the three emerging areas is clearly outgrowing the rest of the business. In fact, I think you said it accelerated. And for good reason. But I was wondering if you could help us think about the other $2 billion in ARR. And maybe specifically, is it fair to think about that other tranche as more of a la carte Zero Trust tools like ZIA and ZPA? And maybe relatedly, how do you think about the growth rate for that $2 billion versus an emerging bucket that's clearly growing faster than the rest of the business? Jay Chaudhry: Yes, it's very true that our three buckets, a billion-dollar ARR, have been growing very well. The remaining $2 billion, yes, a big part of that is the ICPA. It has been going quite well. But the big opportunity for that business is also to emerge into Zero Trust Everywhere. Remember we said that the Zero Trust journey started with users. We're taking it to branches. We're taking it to the cloud and next to IoT OT. While other vendors who tried to claim Zero Trust tried to say we got SASE, they're merely sitting with Zero Trust trying to do for users. And we have expanded the platform to give a lot of opportunities. The core business by itself will grow at a smaller rate than the rest of the overall business. But our goal is really to take every customer to Zero Trust Everywhere. And that's what we are successfully doing. Saket Kalia: Very helpful. Thanks, guys. Jay Chaudhry: Yeah. Thank you. Operator: Our next question comes from Meta Marshall with Morgan Stanley. You may proceed. Meta Marshall: Great. Maybe just wanted to ask a question about Red Canary and just how it's kind of performing towards expectations given that you guys have been looking at a fair amount of churn within your kind of assumption for that business. Just any context around that performance would be helpful. Thanks. Jay Chaudhry: I'll start with broad comments. And Kevin can go deeper. The incubation of Red Canary at Zscaler is going very well. The GNA integration was done right away. Two other main areas were one, engineering and products. We're integrating Red Canary's agentic AI technology with Zscaler platform, doing well. Second is go-to-market. Red Canary's go-to-market team has become a security operations specialist team. It's working with our field sales organization, which is uncovering opportunity. So seeing a vast majority of Zscaler that kind of the pipeline is now coming from Zscaler customers. Kevin Rubin: Yeah. Look. I would just add that Red Canary is trending slightly better than our previous guidance. But keep in mind that, you know, we don't believe that Red Canary's contribution is material to our overall business. So as we go forward, we don't intend to provide specific color on Red Canary. Meta Marshall: Great. Thanks. Thank you. Operator: Our next question comes from Tal Liani with Bank of America. You may proceed. Tal Liani: Hi, guys. This quarter was stronger than actually you we see because if I look at the year-over-year growth in dollars, last year, first of all, 26% almost on a very strong quarter. And second, last year, on a year-over-year basis, you added between $122 million to $130 million every quarter on a year-over-year basis. And this quarter, you're adding $160 million. So that means that the growth is strong. And I'm trying to understand if you can break down on revenue level, not on ARR level, what is driving the strength. I mean, the stock is down, but the trends beneath the surface seem very strong. And I'm trying to understand what is driving it and if you can break it down, even not in numbers, if it's just qualitative to discuss what's happening in the core versus what are the key leading products that are driving this strength. Jay Chaudhry: I'll start with a broad product area. Right? As you know, we built a platform, then we're expanding the platform. The three big pillars of our platform have been Zero Trust Everywhere, AI security, and data security. All three areas are growing very well. They're actually accelerating. And that's our part of the strategy. Our strategy is if every customer starts moving to Zero Trust Everywhere, we become very, very differentiated because no one in the market is even coming close to that. They're all trying to figure out how to solve the user side of it. And the data security, our customers are basically saying, we are tired of seeing point products, so many point products in data security. We are the best platform. AI security is evolving. It's a new area for us. Agentic operations have done well for us. And security of AI products is growing pretty well. So I think they're very pleased with that. Growth we wanted from three key pillars. And it's exceeding our expectations. Kevin, you want to give him more color? Kevin Rubin: Yeah. Thanks for the question, Tal. I mean, I think that's frankly, both the qualitative and the quantitative response, which is we are seeing accelerated growth in our three growth pillars, is contributing, you know, well to the business. I also mentioned in my prepared remarks that we saw organic growth come in at similar levels to what we saw last quarter. So we are seeing very strong performance. And the business did come in better than our internal expectations in the quarter. Tal Liani: Uh-huh. And how is the core business? You have Cisco with the new product, Check Point with the new product, Palo talking about very strong growth. How is the competitive landscape when it comes to the core business? Jay Chaudhry: The competitive landscape hasn't changed a whole lot, if anything else. Our brand has gotten bigger. Most of the large enterprises know us very well. We are very well engaged here. A number of new entrants who have come in the market in the past year or so. Largely some of the firewall companies, we have hardly seen them out there. So the competitive landscape hasn't really changed much to mention. Tal Liani: Got it. Thank you. Jay Chaudhry: Thank you. Operator: Our next question comes from Joseph Gallo with Jefferies. You may proceed. Joseph Gallo: Hey, guys. Thanks for the question. Jay, I think when some look at the recent massive M&A in the space, they're fearful of the implications for underlying cyber growth. In your conversations with customers, how are they thinking about spending in calendar 2026? And what are the priority areas that they have as a part of that? Jay Chaudhry: So customers' priorities for spending? Yes. Just, you know, with the how is the fund cyber growth been? Yep. How do you expect it next year and what the priorities are? Broadly speaking, there's no significant growth in the back environment. IT budgets remain tight. There is pressure on CIOs. There is far less pressure on the cyber side of it. So cyber is under less pressure. We do see scrutiny from our deals, similar to what we shared in the past. But two areas are still of high interest to customers. One is zero trust security because all these breaches happening out there. And second is AI security because everyone is trying to do some level of deployments of AI applications because CIOs feel like if they aren't doing anything in this area, they'll be viewed as laggards. That is also mixed. Some of the customers are seeing better results than others in terms of AI. But as soon as they start thinking about doing AI applications and models, the security becomes a worry for them. So we are going in with two leading messages: Zero Trust Everywhere being one, and AI security being two. So with that, we're able to get the pipeline created. And the second part is to close deals, we must show strong cost takeout. And we can do that as we eliminate a lot of point products. So we are able to do both of those things. That's what's really leading us to deliver these strong results. And also, if I mentioned that, since our brand has become so much stronger, and we've become pretty strategic partners to customers, all these CIO, CSOs meetings I do, it's wonderful to see them. To say, hey. I mean, we moved from company A to company B. And we called your team to help us here as well. So look, we are tracking well. We're excited about what lies ahead for us. Joseph Gallo: Thank you. Operator: Thank you. Our next question comes from Mike Cikos with Needham. You may proceed. Mike Cikos: Great. Thanks for taking the questions here, guys. I just wanted to come back to the SASE market specifically. And, Jay, I know you're probably already cringing at the word SASE, but just there was a lot of security vendors out there last week discussing some success and competitive displacements in the SASE market. Just wanted to get your feedback specifically on what you're seeing as far as trends from a competitive or pricing discipline standpoint. Appreciate it. Thank you. Jay Chaudhry: Look. We demand very strong in when it comes to, I will call, the Zero Trust market. Because the SASE keyword has no meaning. Every vendor claims until to be calling SASE. For example, if you do Zero Trust, you don't do SD-WAN. And most of these SD-WAN vendors can be viewed into the SASE phase. Our expansion in our customer base is because of all the new functionality we are bringing to take Zero Trust Everywhere. Our expansion is happening as we have taken our data security platform and made it much bigger. So we've done so many innovations in so many spaces. So we think in spite of new entrants in the market, I think the market has already kind of sorted out the winners, and we are creating more distance among the number of the vendors. Well, sorry. Among the number of other vendors who are entering the space. So I feel very strong. Our pipeline remains strong. Our win rate remains strong. And you see our results, they're very, very strong. Mike Cikos: Perfect. Thank you. Operator: Our next question comes from Brian Essex with JPMorgan. You may proceed. Brian Essex: Hi, good afternoon. Thank you for taking the question. I guess, Kevin, for you, you know, just I understand that you don't want to break out Red Canary, but can you give us a sense for organic net new ARR in the quarter? And then maybe one for Jay. With the acquisition of Red Canary and what you've done with Avalor and now SPLX, love to get your sense of, do you have any sense of how you might align with the threat intelligence market and value you might be able to add given the data visibility, potential for incremental add in terms of the quality of data that you might be ingesting on the platform and ability to provide better visibility to customers on the threat intelligence side? Kevin Rubin: Of course. Thanks for the question. I'll go ahead and start. As I had previously mentioned, organic growth in Q1 was consistent compared to Q4. And again, as I said, we're very pleased that the organic business came in better than our internal expectations. Jay Chaudhry: So on the second part, we talked about two acquisitions we have had. Avalor has become our data fabric, which can ingest data from the Zscaler platform and some of the third parties to really create what we call entity relationships. And, you know, AI is only as good as data, so we're able to do some very harmful threat detection intelligence that couldn't be done otherwise. So that's the foundation of the platform. The reason for us to get into AI-powered setups is the strength of our data. Avalor gave that stuff. We have the data. Red Canary gave us a gigantic AI technology on top of it. So using some of these smart agents, we can do security operations. What security analysts need to do, so the amount of information we are getting, the meaningful intent we're getting is unbelievable. I was talking to the CSO of a Fortune 100 company recently. He said, I have a sizable security operation team, very sophisticated operations. But your solution, in this case, they're taking advantage of Red Canary working with us. It is finding things, a few things every month that we aren't able to find. That's amazing. Incremental value for them. We think this is only going to get better as our solution evolves. Your second point of the SPLX, that's accelerating our completion of solution for AI security. The market has so many point product solutions in AI security out there. And customers tell me, one, I don't want to deal with 10 vendors, number one. Number two, I don't want to share my data with a startup that started ten months ago to share with them. So they're looking for a platform. We have built a number of AI security platforms internally. For example, GenAI Security, AI Guard, AI Discovery, and SPLX brought red teaming technology to us. So it had made our portfolio pretty complete. So Zero Trust Everywhere in a very great shape. Agentic operations evolving nicely and AI security operations growing very nicely. We feel very comfortable with the portfolio built. Brian Essex: Got it. Helpful. Thank you. Operator: Our next question comes from Shrenik Kothari with R. W. Baird. Yeah. Thanks for taking my question. Shrenik Kothari: So, Jay, on the AI security tracking, $100 million, and you mentioned traction across all the modules, AI Guard, SPM, with teaming. Just can you help us unpack where there's more traction, what's currently driving in terms of use cases, are most deployments as at visibility governance via SPM, or are you seeing CSOs truly prioritizing all the runtime AI with AI Guard as well? And then I have a quick follow-up. Jay Chaudhry: Yeah. This is a very good question. About two years ago, two plus years ago, when ChatGPT came on the scene, the number one thing customers wanted to do was visibility into GenAI solutions or, sorry, applications that users are going to go to. Since we are sitting in the traffic path, very quickly we built our first product, GenAI Security. That's being used by quite a large number of these customers. Next, we launched AI asset discovery and posture management. Tons of interest because everything starts by understanding AI assets you have. Third, last summer, early summer, we launched AI Guardrails. When customers are building their internal AI applications and models, they want to use guardrails to make sure that models are protected and only the right people with the right kind of prompts can easily access them. That's an early stage, but it's growing nicely. The pipeline is growing very well. And the fourth thing we brought to the market came through SPLX acquisition. That's core red teaming technology. And as applications are being built, customers want to make sure they don't have liabilities. And we aren't stopping there. The fifth is extending our platform to enchanting exchange so we can have the right agent-to-agent to agent-to-application communication. All that is proceeding well. So I think we are very well positioned. We will keep on investing in these innovations. But we balance our investments with our operating margins. Shrenik Kothari: Very helpful, Jay. Just Kevin, a quick follow-up on your comment around these modules ramping, as Jay was saying, how are you thinking about the investment horizon overall and as you're scaling these compute-rich products, AI Guard, and how to think about the margins here? Kevin Rubin: Yes. Since the models and things they're using are really on them. On a fairly well-confined set of data, we haven't seen any massive change in gross margins. If these things change over time, I'm sure we'll let you guys know. And maybe just to continue on that thread. You know, look, for Q1, we're pleased with the margin profile. We're comfortable with the Q2 guide. And then as we look into the back half of the year, you will notice that there's margin expansion in the guide in the back half. We are orientated to growth, but you know that we're also very mindful of the financial model and operating margin. Shrenik Kothari: Thank you. Operator: Our next question comes from Roger Boyd with UBS. You may proceed. Roger Boyd: Great. Thanks for taking the questions. Jay, I just wanted to go back to Zero Trust Gateway. And I wonder if you could talk a little bit more about the demand you're seeing there. Is that product getting pulled along with increasing AI infrastructure? Some of the firewall vendors have talked about growth in software firewalls in this capacity. And how are you thinking about customer buying around this approach over kind of that approach of deploying virtual firewalls? Thanks. Jay Chaudhry: Sure. As you know, customers have traditionally used firewalls everywhere. We replaced a lot of them when it comes to user protection. And work on branch and cloud is pretty simple. When traditionally people would go to the cloud and build cloud workload, they would do left-hand shift. They have left-hand shifted, not so far, also the problem has VMs. They're lift and shifted east-side firewalls to the cloud as VM as well. We go in and say, you don't really need a lot of these firewalls everywhere. Zero Trust Cloud is almost like Zero Trust for Internet access, zero trust workload to work on communication. All the firewalls go away. Customers do not need to work with all these IP addresses and ACLs. The cloud gateway simply makes it even easier to deploy our solution. In the past, they had to deploy a piece of software we call Cloud Connector as a traffic cop. Now, we have a cloud gateway that's deployed and managed by Zscaler. With a simple config change that says, point traffic to Zscaler cloud gateway. And we enforce policies, and we do everything that needs to be done. Deployment that would have taken a few hours now can be done in under ten minutes. That's the kind of innovation we're bringing to make it easier for customers to move away from legacy firewalls and embrace Zero Trust cloud workload communication. Roger Boyd: Thank you. Operator: Our next question comes from Eric Heath with KeyBanc. You may proceed. Eric Heath: Hey, great. Thanks for taking the question. Maybe to come back to Zero Trust Everywhere just given how strong and successful it's been thus far. But I'm curious to hear how you're thinking about this going forward. I mean, is the outperformance relative to your expectations because the book of firewall business up for refresh maybe was bigger or earlier than you anticipated or do you look at the pipeline and see an even bigger opportunity of displacements looking into calendar '26? Thanks. Jay Chaudhry: Overall, our customers are looking for saving money and making it easier for them to operate and deploy these solutions. And along with that, making sure they have better cyber protection. The number one reason for customers' interest in the Zero Trust Branch is to eliminate the lateral movement which leads to all kinds of ransomware attacks. Number one. Number two, when we go in and say, by the way, it's also costing a lot more because we can eliminate multiple products in a branch. Not just firewall, but SD-WAN. Often, they got these DHCP gateways. They often got east-west firewalls. They got NAT convenience kind of stuff. All of that goes away. So cost goes down. Operational stuff goes down. That's a driver. That refresh may help, but most of the time, the deals are not waiting for Zscaler to say refresh is coming. As we present the story to our customers, they kind of say, wow. This makes sense. There's a lot of ROI to it. Get started. So tremendous interest, strong pipeline, and we've only done about 450 customers so far. There are millions of branches left out there for us to pursue. Eric Heath: Thank you. Operator: Our next question comes from Fatima Boolani with Citi. You may proceed. Fatima Boolani: Good afternoon. Thank you so much for taking my questions. Jay, I wanted to go back to a very specific remark. In your script earlier in the call. Just with respect to the migration of SAP from on-prem to SAP Rise being an opportunity that would be tantamount to the success and the tailwinds that you saw from Microsoft Exchange going to Microsoft March. And so I wanted to take the opportunity to have you unpack some of that in terms of how will that manifest in your business across the product lines today? And then specifically, you know, with the portfolio that is significantly larger today than you had when this the initial Microsoft platform migration was happening. Where do you expect to see sort of the I'll frame it as option value in some of your newer products that frankly didn't exist? In the last sort of precedent example. Jay Chaudhry: Sure. You know, the customers moved to Office March several years ago because Office moved to the cloud or Exchange moved to the cloud. But SAP has taken a long time. It's a far more complex application. But now SAP is pushing for deployment of what they call SAP RISE in the cloud and telling customers that you got to move, and they're giving some incentives as well. So if you do the old way using the legacy firewall technology and network, you move SAP RISE to the cloud, then you really then deploy all these express routes and direct connects for connectivity. And then you've got firewalls and all the stuff you deploy to access those applications, the VPN type approach. We go in and say none of that stuff is needed. No special access routes and direct connects needed. You can access SAP RISE applications with Zscaler directly over the Internet as you access Office 365 applications. It's a clean, simple, elegant architecture. So it gives us two opportunities for us. Number one, some of the cloud zero to cloud technology to make sure we got protection and communication for SAP application, SAP RISE itself. Second, for users to access SAP, with better and faster experience. Those are the two areas of growth for us. And it helps a customer deploy and get the application running faster. And it reduces cost and gets great user experience. Fatima Boolani: Thank you. Operator: Our next question comes from Gray Powell with BTIG. You may proceed. Gray Powell: Great. Thanks for taking the question. Yes, it's really interesting this quarter. I mean, I look at the numbers, and overall, everything looks good. I do think there's some confusion on just organic ARR. So I guess here's my question. You highlighted $175 million in Flex bookings this quarter. Compares to RPO bookings at about $940 million. So basically, Flex is now 20% of the mix. It almost doubled versus last quarter. Where do you see that going longer term? And then as Flex becomes a bigger component of bookings, does that give you higher visibility on future period ARR because there's just inherently an installed ramp in those contracts as customers grow out? Kevin Rubin: Yeah. Great. So I'll start and Jay can add anything that he may want to share. Look. I appreciate you raising Z Flex. It is a program that has gotten a lot of interest and traction from our customer base. To your point, we did see bookings grow over 70% sequentially. And it effectively allows customers to commit to spend. We typically see that as a more commitment than they would have made on an a la carte basis. It allows them to easily deploy additional modules without having to go through the friction of a negotiation procurement process. And then it provides them with the flexibility to swap in and out of modules as business dynamics for those customers change. And so it gives them confidence that they can make more meaningful commitments to us and generally over longer periods of time. It doesn't have, necessarily a different impact to ARR than any other type of transaction. But to your point, it does give us greater visibility over the long term. Because they are longer contracts. We do understand the nature of those commitments and how they play out in the future. And I would say, it's frankly a win-win for both the customer, and the flexibility it offers, and us in terms of the visibility going forward. So it is a very powerful tool that has gotten, you know, pretty significant interest from customers. Jay Chaudhry: Yeah. I would say our business has performed very well on all metrics. They are on cash flow, all areas. So we're very pleased with it. Operator: Thank you. Our next question comes from Joshua Tilton with Wolfe Research. You may proceed. Joshua Tilton: Hey, guys. Thanks for sneaking me in, and congrats to Ashwin. Just one for me, and apologize if this was addressed already bouncing back forth between a few calls. But, did your assumption for what Red Canary contribute to the full year ARR change at all? And if not, is it fair to assume you raised ARR by for the full year is how much you outperformed organically in the first quarter? Kevin Rubin: Yes. Thank you for the call. I did make a comment earlier. We are seeing Red Canary trend slightly better than our previous guidance. But, as a reminder, we don't believe that Red Canary's contributions to our overall business are material. So we're not going to be making color commentary with respect to Red Canary going forward. With respect to the outperformance, I mean, we did pass that through the full year guide. But I think to further clarify, you said that before. Organic growth in Q1 for us was consistent as compared to Q4. Very pleased with it. It beat our internal expectations. Joshua Tilton: Thank you. Operator: Our next question comes from Jonathan Rukaver with Cantor. You may proceed. Jonathan Rukaver: Yes. Hi. Good afternoon. Jay, I'm curious to hear your thoughts on the synergies you see between Red Canary and the, you know, the data security portfolio. It would seem that you know, you have opportunities around remediation, a possible governance layer, for DSP and DLP. Can you just provide an update on that integration strategy? And maybe just a little bit of color on how you see that driving differentiation relative to you know, all the other vendors that are targeting data security capabilities related to AI. Jay Chaudhry: Yes. Very, very good question. I would mention three points there that set us apart from many others. Number one, we have built a full portfolio of data security. There's no such thing as data security, but AI only. Data is lost in many ways. So number one, the strongest portfolio is helping us. Number two, AI is helping us doing better data classification. Which is important because better classification means better detection. Number three, the other point you made, it was a Red Canary synergy. That is the following. We are able to get all the signals from Zero Trust Exchange to our data fabric platform where we are able to potentially look for any potential threats or breaches or any of the stuff that's happened. And if they're able to do that very quickly, we can do a closed-loop feedback sent to a Zero Trust Exchange if you need to walk some kind of data loss that's happening out there. Today, data loss happens. Signals are found. Days or weeks later. This closed-loop system between our agentic operations and inline function is a clear, clear differentiator for us that should set us apart from many other vendors whether they're SASE vendors, or they are AI security vendors. Operator: Thank you. And our last question comes from Matt Hedberg with RBC. You may proceed. Matt Hedberg: Great. Thanks for taking my questions, guys. Congrats on the results, really. I wanted to follow-up on, I think it was Gray's question on Z Flex. It really does show up in checks. And I think, Kevin, you mentioned reducing friction. Additional consolidation opportunities. I realize it's difficult, but is there a way to think about what that average Z Flex upsell looks like? And then maybe just a little bit more color on how do you think about the pipeline of Z Flex deals for the rest of fiscal year? Thanks, guys. Jay Chaudhry: So first of all, Z Flex was done to give our customers flexibility. It evolved from the traditional ramp deals we had done in the past when we go after a lot of customers. They can deploy it overnight. And if they bought lots of modules, they wanted some ability to say, give me some RAM because I won't be working on it. We have been doing RAM deals for quite some time, but this creates a formal program around it. The second thing it's created for us is the ability to swap modules so they don't have to keep on testing various modules for a long time and delaying the deal. So we believe that the deal ability to close deals has gotten better. And three, the ability to do larger deals has gotten better because now they know that they can swap deals, modules, so they can go for a bigger deal. All these things are happening. I'm not sure we have quantified exactly how much impact it is happening. But we are seeing good results of it. So we are pleased with the performance. Kevin, you want to add anything? Kevin Rubin: The only thing I would, again, I guess, express is you see growth in customers moving into Zero Trust Everywhere, which you see adoption of data security everywhere and AI security, a lot of that momentum and the facilitation will come from programs like Z Flex that will make it easier for customers to adopt these technologies. And so, for us, we think it's just a stimulus to allow customers to more easily and friction-free adopt more of our technology. Operator: Thank you. I would now like to turn the call back over to Jay Chaudhry for any closing remarks. Jay Chaudhry: Well, thank you for your time. We look forward to seeing you at one of us or some of the investor conferences. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Welcome to Workday's Third Quarter Fiscal Year 2026 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the call. During the Q&A, please limit your questions to one. I will now hand it over to Justin Allen Furby, Vice President of Investor Relations. Please go ahead. Justin Allen Furby: Thank you, operator. Welcome to Workday's third quarter fiscal 2026 earnings conference call. On the call, we have Carl Eschenbach, our CEO, Zane Rowe, our CFO, and Garrett Katzmeyer, our President, Product and Technology. Following prepared remarks, we will take questions. Our press release was issued after the close of the market and is posted on our website where this call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this call, particularly our guidance, are based on the information we have as of today and include forward-looking statements regarding our financial results, applications, customer demand, operations, and other matters. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our fiscal 2025 annual report on Form 10-Ks for additional information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Workday's performance. Non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release, in our investor presentation, and on the Investor Relations page of our website. The webcast replay of the call will be available for the next ninety days on our company website under the Investor Relations link. Additionally, the prepared remarks of this call and our quarterly investor presentation will be posted on our Investor Relations website following this call. Our 2026 quiet period begins on January 15, 2026. Unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal 2025. With that, I will hand the call over to Carl. Carl Eschenbach: Thank you, Justin, and thank you all for joining us today. I'm pleased to report that Workday delivered solid Q3 results, with 15% subscription revenue growth and a 28% non-GAAP operating margin. Our teams executed well, and our value proposition is clearly resonating with organizations around the world. I've been on the road a lot lately, meeting with our customers and prospects, and they're all saying the same thing. They see the potential of AI, but they're stuck with disconnected systems, bad data, and closed platforms. That's where Workday gives them the ultimate advantage. By unifying HR and finance on one intelligent platform, we deliver business-ready AI that helps organizations adapt quickly, make better decisions, and deliver outcomes that truly matter. Now let's turn to our customer highlights for the quarter. In Q3, we continued to grow across industries, segments, and geographies. In HCM, we added new customers, including Sunnybrook Health Sciences Center, Fuji Electric, and the Magnum Ice Cream Company. Core financials also performed well, driving strong full suite adoption. In fact, half of all net new global deals in Q3 included both HR and finance, with key wins such as Arden Health, Kelly Services, and Specialized. We also expanded with customers such as CommonSpirit Health, Levi Strauss, and Novartis, and consistent with recent quarters, our customers' headcount levels continue to grow modestly. And our momentum isn't just from large enterprises. Workday Go is helping us drive strong new customer growth and continued ACV momentum in the medium enterprise. Just last week, we announced a major expansion of Workday Go, including global payroll, an expanded partner network, and a new AI deployment agent that can cut implementation time by up to 25%. Customers of all sizes and industries tell us that an investment in Workday is an investment in their AI strategy. More than 75% of our core customers are using Workday Illuminate AI, driving well over 1 billion AI actions on the Workday platform this year alone. And adoption keeps growing. More than three-quarters of net new deals and 35% of customer expansions included one or more AI products. Among the standouts, Eversort delivered another record quarter, and XtendPro grew net new ACV by more than 50% year over year. Altogether, our AI products added more than one and a half points of ARR growth this quarter. That doesn't include Paradox, which we closed in Q3 and is already off to a strong start. And with the rollout of flex credits early next year, we're making it even easier for our customers to adopt our AI and platform innovation. Our customer footprint spans every major industry. Tech and media and financial services, two of our billion-dollar industries, were standout performers in the quarter. And in Q3, healthcare became our sixth industry to exceed $1 billion in ARR with strategic wins like Arden Health, Ascendiant, and Northeast Georgia Medical Center. One of my favorites this quarter was a major win back at a large US health insurer. They were a long-time Workday customer that moved to a competitor several years ago and quickly regretted it. Now they're back with Workday and choosing our full suite with a ten-year commitment. Our public sector momentum was also strong in Q3, and despite the weeks-long government shutdown, engagement across federal agencies remained high. The Department of Energy's successful go-live in Q3 is a great example. They're the first cabinet-level agency to bring their core HR systems into our FedRAMP authorized cloud. We're also nearing completion of the first phase of our work with the DIA. This opens up an important long-term opportunity both with the agency and across the intelligence community and Department of War. In SLED, we welcome new customers including the County Of San Luis Obispo, the city of Concord, and Cleveland State University. And we expanded with Cornell University, which added both core financials and student. While we had a number of successes across our Fed, SLED, and healthcare teams, we also saw some isolated impacts within institutions that rely heavily on federal grants, primarily in higher ed. However, when they are ready to move forward, our win rates are very strong, and we're excited by the long-term opportunity ahead. Across all of these industries, we're delivering innovation that's changing how work gets done. And the market is taking notice. Gartner just named Workday a leader in three magic quadrants, including cloud ERP for service-centric enterprises, cloud HCM suite for 1,000-plus employee enterprises, and the first-ever MQ for Cloud ERP Finance, giving us the highest placement for both ability to execute and completeness of vision. If you joined us at Workday Rising, you saw how our organic innovation is only accelerating. We introduced new Illuminate agents that tackle some of the toughest challenges at work, from performance reviews and workforce planning to financial close. These purpose-built agents are powered by our unmatched HR and financial data and context, which is what makes them highly accurate, actionable, and trusted. And now we have more than 150 customers, including Target, Accenture, and Netflix, using our agent and agent system of record in early access. At the same time, we're opening up our platform so customers and partners can create their own AI-powered apps and agents with Workday build. And with Workday Data Cloud, along with our partners, including Databricks, Salesforce, Snowflake, and now Google Cloud, customers can unlock even more insight and value from their Workday data. We're also accelerating our innovation through strategic acquisition. We just closed our acquisition of Sana, an AI-native platform with an incredible team. They're going to help us completely reimagine our user experience for the age of AI. Our vision is very simple and straightforward. Make Workday the new front door to work by bringing together enterprise knowledge, AI agents, and all the HR and finance processes our customers run every day. This will make it easier than ever to find the answers, take action, and learn right in Workday. Customer feedback on this vision has been absolutely incredible. And Sana Learn brings hyper-personalized skill development and AI-generated content creation to Workday Learning. I can't wait for our customers to get their hands on it. We're not stopping there. Last week, we announced the intent to acquire Pipedream, a low-code integration platform for AI agents with more than 3,000 prebuilt connectors to the world's most widely used business applications like Asana, Jira, and Slack. When you combine that reach with Workday's trusted data, deep business context, and the capabilities from Sana and Flowise, our agents move from surfacing insights to truly getting work done. So, hopefully, you're seeing a theme here. While other vendors confuse the market with thousands of overlapping, general-purpose agents, we're focused on what we do best. And that is building powerful agents for HR and finance that deliver real ROI and measurable business value. Turning to international, we delivered solid performance across EMEA, APAC, and Japan in Q3. We just wrapped up our largest EMEA rising yet. There, we announced the new Workday EU sovereign cloud, which will let customers run our AI-powered HR and finance solutions entirely within the EU, keeping their data local, secure, and fully controlled. Also in Q3, we established a new AI center of excellence in Dublin, which is one of our major R&D hubs, and we announced a new office in Dubai. A few of the great wins we had across EMEA in Q3 included Bayer, ING Bank, and Tandem Bank. APAC also had a strong quarter with wins at Genesis Energy, DBS Bank, and MGM Grand Paradise. And we continued to build on our success in Japan with new and expanded relationships with Pioneer Corporation, Hoshino Resorts, and iSci. Our partners continue to play a critical role in our success. Once again in Q3, more than 20% of our net new ACV was sourced from partners, a testament to the strength of our ecosystem. In Q3, we brought on new Workday wellness partners, including Chime, Spring Health, and Strata, to expand the value we deliver to our joint customers. We also expanded our partnership with Microsoft to help joint customers securely manage their people and agents across both of our platforms. We're living in a new era of work, powered by AI and built on trust. And Workday is made for this moment. The momentum in our business and the energy I'm seeing across our customer community gives me a ton of confidence in what's ahead. A huge thank you to our global workmates, our customers, and our partners for helping us deliver another solid quarter. As we head into Q4, we're focused on finishing strong and setting ourselves up for an even more impactful FY '27. With that, I'll turn it over to Zane. Zane Rowe: Thanks, Carl. And thank you to everyone for joining today's call. Our Q3 results were driven by continued progress across several key growth initiatives as we accelerate innovation throughout the platform and bring exciting AI solutions to market. Turning to results. Subscription revenue in the third quarter was $2.244 billion, up 15%. Professional services revenue was $188 million, resulting in total revenue of $2.432 billion, growth of 13%. US revenue in Q3 totaled $1.825 billion, up 12%. International revenue totaled $607 million, up 13%. Twelve-month subscription revenue backlog, or CRPO, was $8.21 billion at the end of Q3, increasing 17.6%. We closed the Paradox acquisition in the quarter, which added over a point of CRPO growth and was not included in our backlog guidance. Excluding Paradox, CRPO came in slightly above the high end of our outlook. Total subscription revenue backlog at the end of the quarter was $25.96 billion, up 17%, and gross revenue retention rates remained healthy at 97%. Non-GAAP operating income for the third quarter was $692 million, representing a non-GAAP operating margin of 28.5%. We remain focused on making targeted investments to support long-term growth. This includes increasing our AI talent, organically and inorganically, entering new markets such as The Middle East and India, and investing in the medium enterprise. While we make these investments, we're also continuing to drive efficiencies as we scale the business globally. Q3 operating cash flow was $588 million, growth of 45%. In line with our expectations. As we discussed at our recent financial analyst day, we intend to accelerate the pace of our buyback. We made good progress in Q3, repurchasing $803 million of our shares during the quarter and $1.4 billion year to date. We plan to repurchase an additional $3.6 billion through the end of FY 2027, leading to $5 billion in total repurchases. As of October 31, we had $4.4 billion remaining under our current authorization. We ended the quarter with $6.8 billion in cash and marketable securities. Our headcount as of October 31 stood at 20,588 workmates around the globe, including roughly 600 workmates from the Paradox acquisition. Now turning to guidance. For Q4, we expect subscription revenue of $2.355 billion, growth of 15%, which includes revenue from the Sana acquisition and the expected delivery on the first phase of the DIA contract. We expect FY '26 subscription revenue of $8.828 billion, growth of 14%. Our Q4 subscription revenue guidance is consistent with our view from last quarter, excluding the expected contribution from Sana. While we did see some impact in Fed and SLED tied to fiscal funding, this was offset by strong execution across the portfolio, including the Paradox acquisition. We expect CRPO to increase between 15-16% in Q4. This includes approximately 0.25 of expected growth from the Sana acquisition, or about $20 million. And over a point of impact from tenants, which we begin to lap in Q1. For Q4, we expect professional services revenue of $168 million and for the full year, we expect it to be $715 million. We are executing well against our efficiency goals and expect a non-GAAP operating margin of at least 28.5% for Q4 and approximately 29% for the full year. We're optimistic about the AI-driven growth investments we are making and have ample capacity to continue to invest while we drive further efficiencies consistent with the framework from our Financial Analyst Day. We expect GAAP operating margins to be approximately nineteen and twenty-one points lower than our Q4 and full-year FY 2026 non-GAAP operating margins, respectively. The FY 2026 non-GAAP tax rate is expected to be 19%. We are increasing our FY 2026 operating cash flow outlook to $2.9 billion and we continue to expect capital expenditures of approximately $200 million, resulting in free cash flow of $2.7 billion, growth of 23%. Looking beyond this year, as we shared at our recent financial analyst day, we are targeting a subscription revenue CAGR of 12% to 15% through FY '28, along with continued margin expansion on both a GAAP and non-GAAP basis. For FY 2027 specifically, we continue to expect subscription revenue growth of approximately 13%, also consistent with the view we shared in September at our Analyst Day. We are confident in this growth rate based on the momentum we see across the business as reflected in our Q3 performance as well as our Q4 CRPO guidance. We are optimistic about our growth initiatives and our recent acquisitions and look forward to updating you with formal guidance for FY 2027 next quarter. We currently expect our Q1 FY 2027 subscription revenue growth to be approximately 14% year over year and flat sequentially, reflecting typical seasonality from Q4 as well as the expected revenue from DIA in Q4, which doesn't extend into Q1. We believe that the completion of this first phase sets us up for a larger opportunity with the DIA and the broader defense and intelligence communities. We remain on track and confident in our ability to achieve the financial framework we laid out at our Analyst Day back in September, including subscription revenue growth, non-GAAP margins, and stock-based compensation. In closing, I'd like to thank our workmates, customers, and partners around the globe that helped deliver this quarter's results. We enter Q4 well-positioned to close the year with strength and remain focused on our long-term opportunity of driving durable growth while expanding operating margins. With that, I'll turn it back over to the operator to begin Q&A. Operator: Thank you. We'll now begin conducting our question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. First question is from Mark Murphy with JPMorgan. Mark Murphy: Thank you very much. And I'll add my congrats on a very nice performance. Carl, we're hearing some feedback that the venture-backed vibe creating startups have started seeing a slowdown or at least that some of them have or elevated churn. And it's happening because companies are finding it's pretty difficult to operationalize them and put them into production. I'm wondering if you're seeing any signs of some of that novelty wearing off for those third-party, vibe coating products. And if so, do you see any accelerated adoption of Workday Extend where you know, presumably, they'd have all the security and all the other infrastructure is already in place. Carl Eschenbach: Yeah. Hi, Mark. Thanks for the question. And before I answer, I just wanted to say the following. Q3, Mark, was another solid quarter for Workday, reflecting in the strength. And as I always like to say, the diversity and durability of our business. Our customers are seeing clear ROI from Workday. And they're engaging more than ever. And we had more than 1 billion AI actions year to date, and it's only growing faster and faster. We feel really good the momentum of the business as we head into Q4 and into FY 2027. And I'm truly grateful for all the work both our partners and our workmates have done to get us to this point in the year. It's been a really good year for us so far. And Mark, really appreciate your question. It's similar to what Kash asked last quarter. When he talked about all of this potential disruption coming from these AI startups to more mature and larger SaaS companies like Workday. And at the time, I said I thought it was a completely overblown narrative. And I thought it was flat out wrong. And quite frankly, fast forwarding ninety days, think that's playing out exactly like, we thought it would. When I spend time with CXOs around the world that both customers and prospects they talk about three things that's hindering or slowing down enterprise adoption of AI. It is data quality, it's data integrity, and it's security. And by the way, none of these are an issue for Workday. As you know, we have one of the largest and cleanest and most highly curated datasets for HR and finance in the No questions asked. And we have the security compliance and controls in place because today, we onboard a large portion of the world's work and we can apply those same process and procedures to your workforce of the future, both human and digital. And when we spend time with our customers, while maybe they're enamored with these point solutions, they're ultimately coming back to the vendors they trust, who have been in their infrastructure for a long time, has that data set, and drives real business outcomes. The narrative we've been hearing the last couple of quarters is changing, and it's coming back to those who are highly penetrated in the enterprise already providing value, and are deeply trusted by our customers. So I agree with what you're seeing. Seeing it. We're hearing it, and it's reflected in customers continuing to bet on Workday for their future. Mark Murphy: Thank you so much. Operator: Our next question is from Kirk Materne with Evercore ISI. Kirk Materne: Yes. Thanks very much and congrats on the solid quarter. Carl, the other narrative that often comes up these days is clients see, you know, a big customer laying off people. And and I know you guys commented that your customers are are growing, you know, headcount slowly right now. You know, what are the mechanisms that you guys have of a customer? Were to have to lay out people to be able to keep growing ACV with them? Obviously, cross sell, upsell, are there discounts that go away? I just can you explain that a little bit? Because I think people believe there's sort of linear relationship between a number of on a per seat basis and I realized it's probably a little bit more complicated that especially at the high end of your business. Carl Eschenbach: Thanks, Kirk. I appreciate the question. And, yeah, in my prepared remarks, I once again want to articulate and share that on a net basis, the headcount of our customer base is up year over year. So while there are some layoffs out there, we're still growing headcount across our customer base. And what we're doing, you said it, we are selling back into our base. And we're focused not on just seats, but actually revenue per seat. And what we have now more than ever is we have a whole bunch of new solutions both organically innovative solutions and solutions that we got through acquisition that we're selling back into our customer base, whether it's Eversort, whether it's HiredScore, now it's Sana, now it's Paradox, now it's Flowwise, We have so much more to sell back into our customer base and that drives strength for us and offsets any potential impact we might see from headcount reductions in our customers. Also, our customers do do true ups with us both annually on their headcount. And we do have floors and minimums that the customer can bring their headcount down. And that gives us some protection. But overall, we're still seeing growth in headcount year over year. And we're selling just a lot more back into our customer base because they're betting on our platform. And they're using us as a consolidation platform across all of their point solution to drive a better total cost of ownership. Zane Rowe: Hey, Kirk. I just add, if you if you look at the aggregate, it is a net positive, but it's not a significant amount of our growth. So there are lots of elements, as Karl alluded to. That go into that growth number, and this is just one of them. Kirk Materne: Great. Thanks. Thanks, guys. Operator: Our next question is from Keith Weiss with Morgan Stanley. Keith Weiss: Excellent. Thank you guys for taking the question and congratulations on the solid quarter. I wanted to ask about some of the early success you guys are seeing with your AI solutions. Karl, I think on the call, said a point and a half of growth. In ARR already coming, from those AI solutions. Can you give us any rules of thumb that you're starting to see that could help us maybe model this out a little bit in terms of what type of uplift do you see on a typical deal or for a typical customer when they're buying the AI solutions or how broad is this? Like, what percentage of your customer base has already bought into the solutions, and how far do we have to go? Just something to help us extrapolate that early success into what this might look like in a year from now or two years from now. Garrett Katzmeyer: Yeah. Thanks for the question, Keith. And we gave some of these statistics at FAD just ninety days ago. That's why we called out again this quarter. Our AI solutions are adding a point and a half of growth to our ARR. And we're also trying to give you some color specifically on the strength of our AI solution. So for example, 5% of our new sales included in AI solution. 35% of our sales back to our customer base includes AI. We're seeing really good traction, and we're seeing really good early indications of demand from some of our acquired companies like Sana and Paradox. So overall, our AI momentum is as strong, if not stronger than ever, and it's being reflected in how our customers are buying our product. Both at time of new sales as well as our ability to sell back into our customer base. So I couldn't be more excited about where we're at Things like Eversort are had a record quarter We're seeing an acceleration in growth in Eversort. In XtendPro, we call that out, it once again grew 50% year over year. And then when we sell back into our customers, for example, when we sell something like a hired score recruiting agent, it's a significant uptick over what we would sell our standard recruiting, SKU for. Keith Weiss: Got it. Any any sense on how much of an uplift it is versus the standard? Garrett Katzmeyer: Yeah. On on for example, on hired score, for every dollar of recruiting we sell, we sell about $2.50 of hired score on top of it. Keith Weiss: Okay. That's super helpful. Thank you, guys. Operator: Our next question is from Michael Turrin with Wells Fargo. Michael Turrin: Hey, great. Thanks. I appreciate you asking the or appreciate you taking the question. And my congrats on the results as well. I guess just a a two parter for me. I I guess first, just I wanted to zoom in on some of the early feedback around Paradox and Asana, just what you're hearing from customers coming out of Rising and and if that can help the Workday business model continue to evolve towards just some of the questions around AI and Adjenta capabilities. That you're offering alongside the the Flex Credit program. And then Zane, maybe just coming out of Rising, an update on how you're thinking about the trade offs between growth and margin given some of the recent additions in the product portfolio and some of that feedback there as well? Thank you. Carl Eschenbach: Yeah. So maybe I'll start, then I'll kick it over to both Garrett and Zane specifically to follow-up on the questions. So first, as you know, we've closed the Paradox acquisition in October. And within two weeks, we were already off and selling it, and it had a small in the quarter, a few million dollars over a two week period. Just by our sales force going out and selling that into the market. I will tell you coming out of rising EMEA, the demand and excitement for Paradox in being a Workday product and selling on our paper was very, very strong. On 4,000 customers that have worked day learning today. And then, obviously, we're gonna refresh our UI UX leveraging the Sana platform going forward. So the early indications specifically on these two recent acquired companies is as strong as anything we seen when we acquire a company. And maybe, Gary, you can talk specifically about Sana because that one is off the charts, right now from a demand and from an excitement from our customers. Garrett Katzmeyer: Yeah. And as Carlos said, we are seeing tremendous interest around the three main of SANNA. One, as Carlos said, it's the leading AI learning platform So very natural for us to bring this to our customers. Of which we have a very scaled base of Workday learning customers, which are using Sana and are excited about Sana as a learning AI experience platform on top of that. Very natural, very immediate interest. And secondly, what Carlos mentioned, Sana is also now being developed into the leading UI experience for Workday. So you can think about a complete conversational experience around the Workday platform Workday being the innovation leader and our customers are tremendously excited about the massive simplification that brings to them. And if you imagine every employee having access to HR, and finance AI at scale, what that means in cost production, On the other side, you can see what drives that interest. And thirdly, you know, Sana goes much more beyond that, and I would recommend you look at the big picture with also PipeDream adding 3,000 connectors to the Sana platform. Which now allows our customers to take SANA knowledge management, actions in Workday, and the actions that Pipedream adds to really drive enterprise wide AI transformation with that model. And we see very strong customer interest across all of those three vectors. Zane Rowe: Hey, Michael. This is Zane. I'll just add, as you can hear between Carl and Garrett, we're thrilled with the early success that we're seeing from both Paradox and Sana. So as it relates to our financial framework, I'd say no change at all. We continue to invest in AI. Both organically and inorganically and are pleased with the investments we're making there. And at the same time recognizing the efficiencies and scale that we're driving across the business. So we're still driving that within the framework and very pleased with the progress we're making there. Thanks very much. Operator: Our next question is from Brent Thill with Jefferies. Brent Thill: Thanks. Just with with Paradox, I I know that SAP and other ERP installed bases are using that. Is your vision that you can sell this anywhere that you're gonna be agnostic to whatever platform is running in the back? How are you thinking about that from a go to market perspective? Carl Eschenbach: Yes. Thanks, Brett. Are super excited about the go to market capabilities we have around Paradox. Number one, we can sell it back into our customers right, as a an attachment to our already strong recruiting platform, including something like HiredScore. Now we have Paradox. So we have the industry leading AI recruiting platform out there today. At the same time, this is now a new product that is a land only product for our Salesforce who can now go and sell Paradox not only on top of Workday or back into our installed base, but also into our competitors' environment. In fact, a a significant portion of their existing customers aren't Workday today. And we're gonna continue to leverage that go to market model so it gives us another land product without someone having to decide completely on Workday, HR, or finance. They can go just with Paradox. And I've seen that come up multiple times just in the first sixty days of us having this great asset. Brent Thill: Okay. Zane, real quick. Just on CRPO, is there anything to consider in the guide, that you're maybe highlighting as a headwind, tailwind, any change to how you're thinking about that in terms of how we should we should think about modeling it? Zane Rowe: No. I mean, I think it's it's fairly clean, Brent. I mean, obviously, we feel good about what we saw in the third quarter. I mentioned that Paradox was over a point of that. We feel very confident. I mean, as always, CRPO the number of factors, both the net new business as well as renewal activity and just the volume that you get in any particular quarter. So we think we've got great strength heading into the fourth quarter. We've got terrific coverage on our expected subscription growth heading into next year, which I alluded to, as you think about even between the fourth quarter and the first quarter. So no, we feel good about the CRPO growth as well as the coverage. So net net, we feel good even on the sequential basis. I did call out how much of that was sawn as well. Which is a very small impact on revenue for the fourth quarter. Operator: Great. Thanks. Our next question is from Karl Keirstead with UBS. Karl Keirstead: Thank you, Haysayne. Maybe we can just continue that conversation. If if we try to take your 4q CRPO 15 to 16 and normalize it by deducting maybe maybe some of the the onetime stuff. So just just so I've got the thinking right. Maybe a point year over year from the tenant contracts maybe a point year over year from Paradox and a quarter from Sana. So maybe 2.25 points, from, more unusual stuff to to back out to get to more normalized. Is that roughly the right math? Zane Rowe: Yes, Carl. I mean, there are lots of things you can sort of move around within that c o p o growth. I mean, I think you've got it sort of generally in line. But again, there are other variables within the timing on renewal activity and things like that. One other call out I'll make if you're trying to understand sort of those components between the organic and the inorganic component in the fourth quarter, is, let's say, that both Sona and Paradox contribute roughly one point points to our Q4 subscription revenue growth. So just to help you contextualize that, I mean, I mentioned, my prepared remarks, absent Sana, we believe our Q4 was consistent with our view just a quarter ago. So we feel great about the activity there. But that helps you understand sort of the components of Q4 and the CRP CRC CRP growth. Karl Keirstead: Okay. Thanks. And maybe just in the spirit of a follow-up on 4Q, this time on the sub revs. It sounds like it's embedding a view of reaching those DIA go live milestones. I'm assuming that given that there's just two months left in the fiscal year, you Carl are feeling pretty good about that. Obviously, the shutdown, I suspect, didn't help. But can you just maybe express confidence level in hitting those DIA go lives? Thanks. Zane Rowe: Yes, it's a great call out. We're highly confident. Just give you a sense of size on that one, it's roughly $15 million in the fourth quarter. We feel great about the progress we've been making all year We're tracking it very closely, and it's embedded in our forecast in for fourth for the fourth quarter. Carl Eschenbach: Got Yes, Carl, we're tracking really well towards the contract requirements that give us that $15 million in Q4, and we're already talking talking to them about an expansion of taking that platform to the next level, which opens up a whole bunch of different opportunities across a broader Department of Defense or Department of War We're really excited about the momentum we're seeing with the federal government in this DIA project or the first favor phase of it is really opening us up to a great opportunity going forward. And as I said, we're already negotiating a follow on to take that platform to the next level. With further security requirements they're asking us for. Karl Keirstead: That's great news. Thank you both. Thanks, Carl. Operator: Our next question is from Brad Sills with Bank of America. Brad Sills: Great. Thank you so much. It's clear from all the announcements and what we saw out of conference, was, you know, that you're you're you're really going for with AI, that Sana acquisition, you know, Paradox, you know, more recently PipeDream, that partnership with Microsoft Microsoft. I mean, how how should we read that? Should we think of this as kind a year where you're building the foundation for AI and agents and that 1.5%, you know, points of growth, coming from AI, you know, goes materially higher perhaps in fiscal twenty eight, or is this more of a '27 event just given where you are with all the great innovation that you're kinda bringing together and and the time it might take for that to kind of sink into the sales cycle and pipelines? Thank you. Garrett Katzmeyer: Yeah. So, I think, first of all, Fastus is a continuation. As Carlos said, we have 1,400,000,000 AI already in production in the Workday platform today. So we have been doing this at Workday extremely successfully, and now we are just taking the next steps in leading AI technology to help our customers, you know, become truly AI driven enterprises. And specifically, the vectors of our innovation is myth paradox and in a bigger picture frontline fully bringing AI automation to the entire hiring journey, you put that together with our recruiting agent, Paradox as a candidate engagement agent in connection with each other. It basically builds the AI driven talent suite they're doing with Sana is we're acquiring leading knowledge management in a leading agent orchestrator to be the AI experience layer across Workday. So very important when we think about AI adoption that our conviction is AI is gonna be the new UI. And that all of the legacy vendors who are not having leading experiences are gonna get relegated through that. And thirdly, what you mentioned about Pipedream. Right? Our ambition and our cut customers' requirements are actually taking us much broader than Workday is in finance and HR, and really looking for enterprise wide orchestration. We think about it as an an enterprise AI fabric. That we are creating through Pipedream with Sana as the experience layer on top built on top of Workday's business process platform. Carl Eschenbach: Yeah. Brad, the only color I'd add there is clearly we're going all in on AI, and it's for the following reason. We're uniquely positioned versus everyone else out there today. We have the data, Right? We have the context of the data, and we're built in the business workflow. And our customers are saying time and time again, they no longer want to even evaluate point AI solutions. They wanna do it on the back of a trusted platform. Therefore, we go and we get something like Paradox. We get PipeDream. We get Sana. Last year, Eversort. Before that, we get HiredScore. And it's not just our customers who are saying they believe in our platform. It's partners To your point, we're partnering with Microsoft. So as they start to build agents, they see the most secure, reliable, and trusted way to onboard their agents is through Workday in our agent system of record because no one has more experience in onboarding employees than Workday. And now we're taking to the digital worker as well. Brad Sills: Great to hear. Thank you so much. Bye. Operator: Our next question is from Brad Zelnick with Deutsche Bank. Brad Zelnick: Great. Thank you so much, Brad. Following Brad, Congrats guys on a good quarter, and thanks for taking the question. My question is about Workday Go, where we continue to hear really good things. Particularly in ME and emerging enterprise. It was interesting to see it soon to be more broadly available. Perhaps looking at AI from a different angle, is there anything different Workday needs to deliver from an AI product perspective for the down market customer versus large enterprise? Thanks. Carl Eschenbach: Yeah, let me have Garrett take that and then I'll talk more about work day go and the big announcement we had at Rising EMEA last week. Garrett Katzmeyer: Yeah. And specifically, the AI side, and, Brett, you know, that two things to consider. Right? One is that also, medium sized companies wanna benefit from the best AI. So, course, you know, they're gonna get the full power of Workday's AI agents. Also, they delivered in Workday Go. That's the first part. Very important. And secondly, we are specifically innovating around Workday Go with specific AR models. Think about the whole configuration, administration, management of the setup complexity, we are working and announced a new deployment agent, which already is slashed deployment time and complexity down by a significant degree. It's a key investment theme for us. And, you know, just connecting it back to the broader partner network, you know, specifically before they go to new managed services like payroll, We are working on payroll AI, that is securely being connected into our ASR with our partners that are providing these services to also drive, you know, payroll automation, payroll simplification, benefits across the Workday Go global partner network. And that's specifically being created all from that angle to make the mid market customer run at the scale of Workday, but with unmatched simplicity. Carl Eschenbach: Yeah. And, Brad, you know, we announced, you know, Workday Go as I call it, 2.o last week at EMEA Rising. And I will tell you to Garrett's point, the feedback was unbelievable with three key components to it. We now offer global payroll if a customer wants it. By the way, if they don't wanna use a managed global payroll service from Workday, they can bring their own payroll. We have a partner network that's gonna help us take, you know, Workday Go, to the market around the world and resell it on our behalf. And then we have that AI deployment agent Also included in Workday Go is a payroll agent. To help people simplify how they're managing their payroll activity across the enterprise. Work they go, I will tell you, is on fire. People are excited about it, and people are leaning into Workday down market as we aggressively go attack that market. Segment around the world. Brad Zelnick: No, we really hear it's working well. Thank you so much for taking the question. Operator: Thank you, Brad. Our next question is from Alex Zukin with Wolfe Research. Alex Zukin: Hey, guys. Thanks for taking the question. Maybe just a quick two parter, Karl. First for you, when you think about, the commentary for next year, it's great to hear about the kind of reiterating the confidence and the growth rate of 13%. But since Analyst Day, is there anything that maybe you've seen that gives you even more confidence when you're talking with customers around things like budgets or their demand environments as we head 2026 or propensity to maybe allocate more from the AI budget specifically to Workday? That you could kinda comment on that gives you that confidence? Carl Eschenbach: Yeah. Thanks, Alex, for the question. As Zane said in his prepared remarks, you know, we feel really good about our midterm guide that we laid out for next year. And we think the approximate 13% guide on subscription revenue next year is solid. That being said, we feel really good about all the acquired companies and the momentum we're seeing early on with them as well as the organic innovation that we have coming out of our super strong product and technology organization. We haven't even talked about it, but we're also entering new markets like we've done the last couple of years in the federal market here in The US. We're taking that to the public sector around the world. We announced entrance into The Middle East And next week, we have a strong team led by Rob, our president of customer operations going and launching our efforts in India. So we're really excited about all the growth vectors that we have going into next year as well as all the momentum we have around our AI solutions, both organic solutions and these inorganic solutions that we're getting through M and A. Alex Zukin: Perfect. And then maybe just, Zane, as a follow-up, if if we think about next year's guide, that 13 and the acquisitions that you've made over the last couple of months, a, kind of how much do we think kind of comes from from inorganic, there? And then the pace of M and A are we kind of through like should we think about this pace continuing at at kinda current course and speed of these exciting technology tuck ins? Is or or have know, do you need to digest the ones that you've made here over the course of the next few week months? Quarters? Zane Rowe: Sure. Yeah. Look, I'll start with, you know, as we think about the acquired revenue, I mean, off, as you know and as you can see here, when we acquire companies, they quickly become part of the broader portfolio. If you look at the acquired revenue, I'd say it probably contributes approximately a point into next year. But as you can there's a lot more that we're doing around it and the whole portfolio benefits. So it's more there's significant synergy if you want to think about it more broadly. But on the acquired revenue, I'd call it sort of roughly a point heading into next year. And then we have a high bar on M and A. And as we've talked about, all along, I mean, we've kept consistent in thinking about the technology, the culture, the people and how they integrate either whether it's through adjacencies or tuck ins or for different reasons. So I'd say no change in how we think about that, and no change in in how incorporate that inorganic growth. Alex Zukin: Perfect. Thank you, guys. Operator: You. Our next question is from Raimo Lenschow with Barclays. Raimo Lenschow: Perfect. Thanks for squeezing me in. International is a big kind of driver for you. And you mentioned a little bit of that. But, like, if I look at the growth rates, this month, much difference between U. S. And international. Can you talk a little bit of what you saw in the quarter? And maybe there was more on the the pipeline build, etcetera? Thank you. Carl Eschenbach: Yeah. Thanks, Raimo. I hope you're well. So, yeah, we were really pleased with our international performance. And when I say international performance, it's across the three major, you know, regions that we describe as international. Europe, APAC, and Japan. All three of those markets had a really good quarter for us. We've historically been talking about our performance in Europe when we talked about our international results But this quarter, we're talking about it in the context of Europe. APAC and Japan because all three delivered solid results in the quarter. I think that's driven by two things. Number one, on the product side, we continue to internationalize and localize our product to serve all of these markets. Number two, we're leveraging a strong network of partners out there around the world to enter these markets. And the third is we continue to great talent to lead our Workday efforts around the world. The international market had great results. And we expect that momentum to continue as we see customers more and more lean into Workday for their platform of choice across HR and finance. Raimo Lenschow: Yep. Perfect. Thank you. Operator: Thank you. Our last question is from Kash Rangan with Goldman Sachs. Kash Rangan: Last question and it's my last birthday earnings call as well. So fitting. So congrats on the Q3 results, Carl and Zane. I want it's clear that you guys have seen a bit of quite a bit of AI momentum. And I agree with you that AI disruption risk seems to be a little overstated. But I think we can look at the numbers and say that AI, there's some tangible content your backlog, twelve month twelve month backlog growth rate. Although it did include some acquisitions, it did do a little better. Right? These acquisitions too. The anniversary of they are growing very nicely. That should lead to an actual acceleration of the organic growth here as well. But that effect conceptually we put your thinking hand off thinking hat on. Sorry. That was the flu. A little too discombinative. If you were to rebuild a company on an AI native stack, an HCM company, AI native stack today, what would that functionality be able to do? That is what would that thing exactly able to do that could be disruptive that you can do as a Workday customer with the tools that Workday is providing, be it organically or through these accounts. Combinations of acquisition. Thank you so much. Carl Eschenbach: Hi, Kash. Thanks for the question. And let me say thank you. Going all the way back to our founders, David and Neil, and all of our workmates over the last, you know, twenty years, we want to thank you for your continued coverage of Workday. I know this is your last call with us, and I just wanted to say thank you. And Neil said hello. And he also wanted to send his regards as well as do I and everyone else. You been a great analyst for us, and we really appreciate your support over the years. We all hope you enjoy your next phase of life, which you're telling us is retirement. I hope that's the case and you really do go out and spend some quality time with your amazing wife and family. With that, I'll hand it over to my friend Garrett to talk about how he would build a new HCM or finance around AI going forward. Garrett Katzmeyer: Yeah. Hey, Kash. Thank you for ending on such a beautiful question. So, let's start in a look at the core principles of building AI systems at scale. Right? And that's just look at what it really is. The first thing that you need is a vast set of data basically describes the domain. The domain of finance, the domain of HR, and you need a vast set of data that basically codifies how the data is being used. Right? That is ingredient number one. You know, if you look at AI at scale, it's about learning and using patterns. So you need to have that global database Secondly, data represents. So you need to have you need to have strong semantics and clarity about what both a data model that defines what data element represents what entity in the business, What do they relate on? And what are the rules for these business entities? Because data is not created equal Right? They have integrity. They have meaning. They have purpose. And you need to have a business process system, which now basically tells you how to activate this data in a way so it can drive towards a business outcome. Even more so, you need to have clarity on what that business outcome is. Those are, you know, the basics of building a successful AI solution. Now take a look at Workday. We are the only scale SaaS vendor born in the cloud with a consolidated dataset. Our 50 to 75,000,000 users that we have contribute to a uniform data model, which is completely clean. We have all of the process data in a formal business process description codifying 70,000 core business process pes, which are instantiated across all of our customers and thousands of variations. We have ample data of, you know, usage and how these processes are being used in the business. And most importantly, the domain knowledge to specify what are the target outcomes to drive. So if you were to build a system, that is built for enterprise AI at scale, it would look like Workday. And what we are doing right now specifically is that we are opening up our core and basically integrate reasoning models and AI systems to automate these processes We lay Osana on top to lead the experience AI innovation on top of that. If you look at all of that in aggregate, you know, it truly is the AI stack for the enterprise of the future. Kash Rangan: Amazing. I wish you well in achieving all these and dreams in the future. Thank you so much. Till then. Bye now. Operator: Thank you. This concludes our question and answer session. Ladies and gentlemen, thank you for your participation on today's conference. I'll now turn it over to Mr. Eschenbach for final comments. Carl Eschenbach: Thank you, operator, and thank you again for all of you who joined us today. Thank you for those who will continue to look into Workday and watch our results and provide guidance and input everyone out there in the market. For those celebrating, I wanna wish all of you a happy Thanksgiving. I'll close by once again my deep appreciation to all of our workmates, our customers, and partners for their continued commitment to Workday. We'll see you all next quarter. If not before. And, again, for those celebrating, happy Thanksgiving. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Good day, everyone, and welcome to the Fourth Quarter 2025 HP Inc. Earnings Conference Call. My name is Regina, and I will be your conference moderator for today's call. At this time, all participants will be in listen-only mode. We will be facilitating a question and answer session toward the end of the conference. Should you need assistance during the call, please signal the conference specialist. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Alok Juhyol, Head of Investor Relations. Please go ahead. Alok Juhyol: Good afternoon, everyone, and welcome to HP's Fourth Quarter 2025 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer, and Karen Parkhill, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our investor relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our business as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. In addition, unless otherwise noted, references to HP channel inventory refer to tier one channel inventory, and market share references are based on calendar quarter information. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I will now turn the call over to Enrique. Thank you, Alok, and a special welcome to your first earnings call. Enrique Lores: And thank you to everyone for joining today's call. Today, we will cover our Q4 performance and 2025 full-year results. We will also highlight the opportunities ahead of us, expectations for fiscal year 2026, and how we are continuing to advance our company strategy. I want to begin by saying how proud I am of the progress we have made across our priorities, especially as we have navigated a challenging external landscape. We have driven sequential profit improvement the last two quarters, demonstrating our ability to quickly respond to the challenging trade environment we began to face in Q2. We also invested in our supply chain, making it more resilient to mitigate future risks, which is core to the future-ready plan we laid out three years ago. Our performance, both for the quarter and the full year, underscores the strength of our strategy, the power of our portfolio, and the tenacity of our team. Let's start our Q4 results. I am pleased to report that HP delivered its sixth consecutive quarter of revenue growth, up 4% year over year, largely driven by personal systems gains in commercial and consumer. In print, the market remained soft, but we delivered revenue in line with our expectations. Collectively, key growth areas grew double-digit year over year and delivered gross margin above our core business. Non-GAAP EPS came above the midpoint of our guidance. We continue to execute our future of work strategy. We are accelerating innovation with AI-powered devices that harness AI at the edge and create better together experiences across our portfolio. We are also empowering CIOs with the tools they need to drive transformation, and we are leveraging the power of customer data to deliver meaningful insights. These priorities guide our innovation. For example, we introduced a new edge class device, the AI station powered by NVIDIA, which can run up to 200 billion parameter models. It brings highly performant AI compute to the data instead of moving this data to the cloud for processing. We also launched innovations that boost productivity, such as the industry's first 49-inch ultra-wide monitor that integrates AI noise reduction. And focusing on solutions, we are making printing smarter and more intuitive with new AI-driven printing and scanning features. These enhancements make printing easier by cleaning web and email layouts, reducing unnecessary pages. They also streamline everyday tasks, improving scan quality, and auto-generating file names. Our Workforce Experience Platform now uses telemetry from 48 million endpoints to manage 2.4 million connected devices and already remediate more than 12 million IT issues every month. With its new integration with Microsoft Security Covalent, we are bringing generative AI directly into IT management for faster, smarter responses to critical issues. Inside HP, we are adopting our AI-powered innovations first, leading as a customer zero. For example, by deploying AIPCs with curated applications, we are equipping teams to deliver better results with their productivity app 16%. Now, I will take a closer look at the performance of each business unit. In Personal Systems, revenue grew 8% year over year, above our expectations. We drove worldwide PC market share gains, particularly in high-value categories, including commercial and consumer premium and workstations. With 40% of the installed base still on Windows 10 at the end of Q4, the Windows 11 refresh will remain a tailwind for the PC market into 2026. And demand for AIPCs continues to accelerate, now representing more than 30% of our shipments this quarter. In our key growth areas for Personal Systems, strong performance in data science workstations contributed to double-digit revenue growth in Advanced Compute Solutions. In print, revenue declined 4%, reflecting market softness and delayed purchasing decisions across all regions. Print units declined year over year but improved sequentially. We maintained our number one share in print. Supply revenue performed as expected, and we gained share. Looking closer at print key growth areas, consumer subscriptions delivered double-digit revenue growth and is just under $1 billion in annual revenue. We continue to see strong adoption of our all-in plan offering, with subscribers up double digits sequentially. Momentum continued in Industrial Graphics, which exceeded $1.8 billion in annual revenue, driven by the ninth consecutive quarter of year-over-year growth. We also saw double-digit growth in 3D, driven by applications in drone and robotics manufacturing. In Workhorse Solutions, double-digit growth was accompanied by key wins in industries such as energy, technology, and services. We added 10 new customers from the world's 200 largest companies, a testament to the strength of our sales team. Turning to our full-year performance, revenue grew by 3%, returning to growth. Our key growth areas collectively grew double-digit year over year and represented over a third of our revenue for the year. Personal systems revenue grew 6%, driven by commercial strength. Print revenue declined 4% as market weakness persisted, and we prioritized placement of profitable units. Supplies revenue declined 2% in constant currency, and we gained share. Operating profits declined as trade-related costs during the year took a few quarters to be absorbed. Aligned to our commitments, we executed with discipline in a challenging environment, driving a double-digit operating profit increase from the first half to the second. This reflects our ability to act decisively and accelerate supply chain transformation. HP continues to evolve, highlighted by recent leadership transitions that underscore our focus on combining the best internal and external talent to drive our long-term strategy. I am excited to welcome Kate and Patel as head of personnel systems, Manoj Lilanivas as Head of HP Solutions, and Prakash Arun Kundrum as Chief Strategy and Transformation Officer to our leadership team. Each brings the right capabilities, experiences, and a proven track record of driving innovation and delivering results. I also want to thank Alex Cho and Dave Scholl for their many contributions to HP. Their leadership has been instrumental in strengthening our business. Now, let me address the trend of rising memory costs and its implication for our business. Memory costs are currently 15% to 18% of the cost of a typical PC. And while an increase was expected, its rate has accelerated in the last few weeks. Our portfolio is less sensitive to the commodities market than it was during the last memory cycle. Over a third of the peers' gross profit comes from services and peripherals. We expect to mitigate the impact of these cost headwinds in the first half of our fiscal year with our inventory on hand and a set of actions across our portfolio and basket of commodities. For the second half of the year, we expect Personal Systems margins to be impacted. Therefore, we are taking a prudent approach to our guide while implementing aggressive actions to mitigate this. They include qualifying lower-cost suppliers and redesigning the portfolio for reduced memory configurations, accelerating our AI-enabled transformation to drive further cost savings, and raising prices in close partnerships with our channel and direct customers. From a supply perspective, we are in a good position due to our strong relationships and long-term contracts with key suppliers. Moving to fiscal year 2026, our plan is built on four pillars. First, in personal systems, we expect the revenue market to be up low single-digit with Windows 11 refresh, AIPCs, and pricing as catalysts. We also expect to see a positive impact from the growth of premium devices, including workstations, and an increase of attach rate from services and preference. Our goal is to perform better than the market. Second, in print, we expect to grow slightly faster than industry projections of low single-digit market decline. We intend to take share by doubling down on big tanks. We are increasing our marketing investments, driving new product and solution introductions, and expanding globally our successful all-in subscription offering. We also intend to grow share in office with new products and solutions designed for SMB and enterprise customers, reinforcing HP's leadership, manageability, security, and AI. And we intend to strengthen our leadership in 3D printing and further build on the momentum from labels and packaging to maintain our lead in industrial printing. Third, in workforce solutions, we are focused on growing recovering revenue by expanding our software, security, and services businesses. We are also scaling our workforce experience platform in key verticals, building on the strong momentum generated in fiscal 2025. Fourth, driving an improved cost structure remains a top priority. We have demonstrated our ability to execute major transformations as part of our future-ready program, over-delivering on our initial expectations. And as we look ahead, we see a significant opportunity to embed AI into HP, to accelerate product innovation, improve customer satisfaction, and boost productivity. We have launched a company-wide program led by an executive reporting directly to me, and we have a line of sight to drive approximately $1 billion of gross run rate savings over three years across product development, customer service and support, and many of our operational processes. These will result in workforce reductions of 4,000 to 6,000 people over the next years. These are some of the most difficult decisions we need to make, and we are committed to treating our colleagues with care and respect. We are planning to hold our Investor Day on April 23, where we will share the full plan on how AI is transforming HP. We remain confident in our ability to lead the future of work through technology. With a clear strategy and disciplined execution, we are focused on driving long-term value while managing short-term headwinds. I will now turn it over to Karen. Karen Parkhill: Thank you, Enrique, and good afternoon, everyone. We are pleased with our results in Q4, delivering another quarter of solid performance to close out the fiscal year. Our teams executed well, driving better-than-expected top-line growth fueled by continued momentum in Personal Systems and in our key growth areas. We delivered operating margins within our expected ranges for both businesses and non-GAAP EPS slightly above the midpoint of our guidance range, underscoring our ability to meet or exceed our financial commitments. We are also proud of the results we delivered with our multi-year future-ready cost plan. We surpassed our original $1.4 billion savings target, ultimately delivering $2.2 billion in cumulative gross annualized savings. And on $1.2 billion of restructuring spend, we delivered a savings to charge ratio of almost 1.8 times, well above our initially projected ratio of 1.4 times. On the quarter, we delivered revenue growth of 4% year over year, both nominally and in constant currency. In constant currency, EMEA grew 6% and APJ was up 9% on strong personal systems performance. Americas revenue was flat in constant currency, reflecting demand softness in North America, particularly in commercial. Our gross margin at 20.2% was impacted by a higher mix from personal systems and increased trade-related costs, which we partly offset with pricing actions and cost reduction. Contributions from our future-ready cost program and continued strong expense management drove operating expenses down as a percent of revenue year over year. These efforts also enabled our investment in key strategic and go-to-market initiatives aligned with our future of work strategy. All in, our non-GAAP operating margin was 8%, down year over year, but improving almost one point sequentially, in line with our expectations. And our non-GAAP diluted net earnings per share was $0.93, representing a sequential increase of 24%. Now let's turn to segment performance. We delivered better-than-expected top-line growth in personal systems, with revenue up 8% on increased ASPs and 7% unit growth. We outperformed the market in both consumer and commercial and continued to shift mix toward premium categories while maintaining disciplined pricing to help mitigate cost increases. Key growth areas performed well, including in AIPCs, where we doubled revenue year over year. In commercial, we drove revenue and units up 7% on continued momentum from Win 11 refresh and AIPC adoption. We also delivered strong performance in consumer, growing revenue 10% on 8% unit growth. We drove higher ASPs and share gains in consumer premium, in line with our strategy to rebalance our portfolio to a more profitable mix. And with holiday seasonality in consumer, we delivered revenue and unit growth of 17% sequentially. As we had signaled, the actions we started earlier in the year to leverage supply chain flexibility, reduce costs, and maintain pricing discipline, gain traction in the 5.8% in Q4, in line with our guidance. In print, our results reflect a pricing environment that remains competitive despite higher industry costs and continued market softness globally, as customers delay printer hardware refresh decisions. Against this backdrop, we continue to focus on profitable long-term unit placement, increasing lifetime value per customer, and cost reduction actions. We also drove solid growth in key growth areas in the quarter. Looking at the details, print revenue declined 4% on lower supplies volume and market-driven hardware declines in both consumer and commercial. Consumer revenue was down 9% year over year and commercial revenue down 4%, as higher ASPs were offset by lower volumes. Supplies performed as expected, down 3% year over year in constant currency. We continue to drive market share gains with favorable pricing that partially offset installed base and usage headwinds. For the year, supplies revenue declined 2% in constant currency, in line with our long-term range. And we delivered operating margin of 18.9%, in line with our guidance and at the top end of our range. Now let me move to cash flow and capital allocation. We generated $1.6 billion in cash from operations and roughly $1.5 billion in free cash flow on the strength of the sequential growth in Personal Systems. Free cash flow for the fiscal year was $2.9 billion, consistent with our outlook. And we improved our cash conversion cycle quarter over quarter, driving days payable up through higher manufacturing activity. On capital allocation, we remain committed to returning approximately 100% of our free cash flow to shareholders, as long as our gross leverage remains below two times and there aren't better return opportunities. In Q4, we returned close to $800 million to shareholders through both dividends and share repurchase, and returned more than $1.9 billion for the fiscal year. While we finished the quarter slightly above our target leverage ratio, we increased our cash balances, reserving sufficient funds to pay down 2026 debt maturities, which enabled us to buy back shares in the quarter. And if needed, as we move through the year, we can operate with higher cash balances in fiscal 2026 to further reduce leverage with maturities in fiscal 2027. Our Q4 and FY 2025 results reflect strong execution against challenging trade dynamics, with continued sequential improvement as promised in the back half of the year. Looking ahead, our guidance reflects the increasing inflationary pressures predicted for memory costs, which we expect at this point to have an impact as we move into the back half of our fiscal year. That said, we have a proven track record of managing challenges, and this one will be no different. We are prudently including these pressures in our outlook, yet we remain confident in the strength of our organization and partnership we've built with our suppliers to deliver the best possible outcome for our shareholders. We are also continuing to invest in driving transformation within the company, and we see a significant opportunity ahead to embed AI almost all that we do, to improve productivity, accelerate innovation, and improve customer experiences. As Enrique said, we have already made excellent progress in identifying key focus areas that are expected to generate approximately $1 billion in gross run rate savings by the end of our fiscal year 2028. And we expect approximately $300 million of those savings to be achieved by 2026. We estimate associated restructuring charges of around $650 million over the three-year period, which include roughly $250 million in charges to be incurred in FY 2026. We continue to identify additional opportunities as part of this initiative, and we'll share those with you at our upcoming Investor Day. Now turning to our segment outlook for FY 2026. In Personal Systems, we are aligned with industry experts projecting the PC unit TAM to decline in units, but the revenue TAM to grow low single-digit. Against that backdrop, we expect to gain share in premium categories, including AIPCs, workstations, and new device categories, and increase our attach of higher-margin offerings, all leading to revenue share gains. And we anticipate revenue to be stronger in the second half of the year, driven by normal seasonality and pricing as needed against rising costs. On operating margin, we expect the PSOP rate to stay in the 5% to 6% range in the first half of the year. And as Enrique said, we are already taking decisive steps to manage commodity inflation. However, with higher memory cost increases impacting our back half, we estimate our OP rate for the full year could be at the low end of our long-term 5% to 7% range. In print, we anticipate a low single-digit decrease in the hardware market in 2026, with growth in big tank and industrial markets offset by declines in traditional hardware. We expect to outperform the market as we execute our plans to gain share in Big Tank and higher-value office categories through new products and solutions, and to expand our subscription business and deliver continued growth in industrial. We also anticipate supplies revenue to be down low single digits in constant currency, within our long-term guidance range, with favorable pricing and continued share gains. And we expect print revenue by quarter to be generally in line with historical seasonality. We expect print operating margins for the year to be in the upper half of our 16% to 19% range, while we continue to focus on profitable unit placement and disciplined cost management. Beyond the segments, we expect corporate other and OI and E to be roughly flat year over year. And as is typical, we expect corporate other expense to be more heavily weighted in Q1 due to the timing of our stock compensation expense. With all of this, and including an estimated 30¢ impact from projected memory cost increases net of mitigations, we expect FY 2026 non-GAAP diluted net earnings per share to be in the range of $2.9 to $3.2 and FY 2026 GAAP diluted net earnings per share to be in the range of $2.47 to $2.77. For Q1, expect non-GAAP diluted net earnings per share to be in the range of $0.73 to $0.81 and first quarter GAAP diluted net earnings per share to be in the range of $0.58 to $0.66. On FY '26 free cash flow, we expect to deliver between $2.8 billion to $3 billion. As typical, we expect the second half to be stronger than the first, consistent with our earnings, and recognizing that our first quarter is typically lower given the timing of our incentive comp payment. Before closing, over the past year since joining HP, I have had the opportunity to not only learn and understand our businesses more deeply, but also reflect on key drivers of growth and value ahead. Across both print and personal systems, we have a relatively small but growing base of services, subscriptions, software, and products as a service that are contractual in nature. And as we look to the future, we intend to drive greater growth in this important base of higher-margin, more stable recurring revenue. So expect us to highlight this even more for you as we continue to focus on strengthening our company and increasing the value we offer to our investors. Lastly, we are pleased to announce today that we are raising our quarterly dividend to $0.30 per share. This is the tenth consecutive annual increase since our separation in 2015 and reflects the confidence we and our board have in our long-term outlook ahead. With that, I would like to hand it back to the operator and open the call for your questions. Operator: Thank you. We will now begin the question and answer session. We'll take our first question from the line of Wamsi Mohan from BofA. Please go ahead. Wamsi Mohan: Yes. Thank you so much. Guess to start, your free cash flow guide for next year is flat year on year despite the margin pressures you alluded to from increased memory pricing. What are some of the elements offsetting these headwinds in cash flows? And does the $2.9 billion in free cash flow include any cash restructuring charges? And I have a follow-up. Karen Parkhill: Yes. Thanks, Wamsi, for your question. We obviously remain focused on driving value to our shareholders through strong free cash flow. And like we're doing with our earnings guide, we're taking a prudent approach to our expectations there, particularly the recently projected increase in memory cost. So at this point, we expect our free cash flow to be relatively flat, as you said, with slightly lower earnings, and that's offset by improvements in working capital, primarily due to the favorable cash conversion cycle we have with the expectation of our growing PS business. We also expect CapEx and restructuring costs to be down slightly year over year. And I would just say on free cash flow, as always, if we can do better, we will. Enrique Lores: And yes, it includes the restructuring funds for the restructuring activities. Karen Parkhill: Yes. And we expect for the year the restructuring cost to be roughly $250 million. Wamsi Mohan: Okay. Okay. Great. And then maybe Enrique, like, we've seen plenty of memory cycles in the past. This one, you know, is fairly unprecedented in rate and pace of change. I'm just wondering, as you think about the various strategies you're going to deploy to navigate this, how do you think about price elasticity in a somewhat weaker consumer market? How do you think about despeccing and any other sort of strategies that HP could deploy in terms of being able to raise price without sort of impacting the demand elasticity, if that's at all possible? Like what are some of the things that you're looking at executing to limit this impact to what you quantified about $0.30 or so? Thank you. Enrique Lores: Thank you. So as you said, this is not the first time we go through a situation like that. So the team has plenty of experience handling these situations. I think the first thing that helps us in this situation is our scale. And by using our scale, we have today a good supply position, thanks to the long-term agreements and the relationships we have with many suppliers. And we are using that also to qualify additional suppliers to mitigate this even further. We also can use the breadth of our portfolio to make sure that customers get the right configuration and to de-scale in those cases where it's possible to balance company profitability with experience from customers. Something unique that we have this time is something that I have been mentioning before, which is the workforce experience platform. This is a tool that we deploy to our commercial customers that allows CIOs to monitor the performance of individual users. And by using telemetry data that we have been capturing over time, we can make recommendations for what is the optimum configuration per customer. But this will help us significantly for those customers that when we deploy the tool, to make sure that they get the right solution and the right memory configuration. And then what we have seen in the past in these situations from a demand perspective, are usually the more low-end categories, those that are impacted. And by managing our portfolio and shifting demand to the areas where we think we will have more products available and better configurations, is an important way for us to manage that. And then finally, of course, pricing will be another tool to mitigate the impact, and we will use this as soon as we can, given the contracts and the different relationships that we have. Operator: Our next question will come from the line of David Voith with UBS. Please go ahead. Brian Luke: Hey guys, thanks for taking the question. This is Brian Luke on for David. Just on the topic of higher memory prices, you talked about a number of actions you could take. Staying on the topic of pricing, now would you consider price increases across the entire portfolio, or would you consider them more tactical in nature? And would you be able to quantify any price increases you'd be considering going forward? And then I have a follow-up. Thank you. Enrique Lores: Yeah. I would say we are gonna be looking at it case by case, country by country, category by category. But the impact on memory cost is significant. I would say it's gonna happen across the board, but more selectively or higher or lower depending on the specific situation. Brian Luke: Got it. That's helpful. And then in regards to the Windows 11 refresh, talked about us being roughly 60% of the way through, according to our checks, that's roughly in line, and you expect it to be a tailwind going forward in fiscal year 2026. Do you expect it to be a tailwind for longer than that time period? And would you expect, you know, tariff considerations to be having an impact going forward? Thank you. Enrique Lores: Yes. So usually, right, we estimate that about 60% of the installed base have moved to Windows 11. We have seen the conversion happening faster in the enterprise space and also in North America. The biggest opportunity now is going to be in SMB, and in Europe and in Asia. This is very consistent with previous processes. In terms of the tailwind, if you think about what has been the conversion during the last quarter, it has been about 10 points, but this can give you a prediction of for how long we think this is going to last. For sure, for the first half of the year, but probably beyond that. Karen Parkhill: We also have the catalyst of AIPCs being a continued uptick as we look ahead to we had about 30% or more than 30% of our shipments being AIPCs in the fourth quarter. We expect that to be higher next year, 40% to 50%. Operator: Our next question will come from the line of Amit Daryanani with Evercore ISI. Please go ahead. Irvin Liu: Hi. Thank you for the question. This is Irvin Liu dialing in for Amit. I wanted to understand the rationale behind the company cost savings initiative that was announced today. Since you recently completed the you already recently completed the Future Ready program. Was this new initiative more of a response to higher memory cost? Or should we view this as kind of a broader cost savings program in nature? Enrique Lores: Yes. We I actually started to talk about this in the last earnings call, so this was way before the memory cycle started. And this is really driven by the opportunity that we think AI is going to bring us to accelerate product development, improve customer satisfaction, and also boost productivity. Two years ago, we started to do some pilots on how AI could help us to drive these things. And during the last two quarters, we have been shifting from pilots to specific initiatives in areas where we can have significant impact. What we have learned is that we need to start from redesigning the process. And once the process once we know how the process could be redone, using AI, using agentic AI can really have a very significant impact. And this is why we think that really over the next few years, this can have a very significant impact across areas I mentioned before, faster product development, customer satisfaction, and also productivity. And we have quantified productivity around $1 billion over the next three years. And this is really what we have deployed now and what we are working with the teams to deliver on. Operator: Our next question will come from the line of Samik Chatterjee from JPMorgan. Please go ahead. Joseph Cardoso: Hey, good afternoon. Thanks for the question. This is Joe Cardoso on for Samik. Maybe just wanted to follow-up on kind of the PC PS momentum or PC momentum you're you're thinking about or seeing going into 2026. I was curious if you could just flush out the conviction here, particularly as we're cycling past the bulk of the Win 11 refresh. I know, Antonio, you talked about, you know, 60% or 50% plus of the installed base moved over, and so there's some, header there to continue. But interestingly enough, when you guys talked about the forecast for next year, it seemed like pricing was a bigger contributor for the next year relative to this year. Where I think units were bigger. So I'm just curious, like, where you guys are seeing that dynamic play out and what's kind of the conviction behind it? Then I have a follow-up. Thank you. Enrique Lores: Yes. So the conviction comes from the same drivers that we have seen driving demand during the last few quarters. We have an aged installed base of PCs that need to be refreshed. Of all the PCs that were bought four, five years ago, we have the opportunity driven by the change to Windows 11, and we have seen that tailwind helping us during the last quarters. As you said, the conversion has been done to 60% of the installed base. So we have still close to 40% of the installed base to be converted, especially in SMB and especially outside of North America, and this will be a tailwind now for several quarters. And we also see the opportunity to continue to improve the mix of AIPCs that has exceeded expectations that we had for the year. So all these will be positive drivers. On top of that, our strategy is going to continue to be focused on premium categories as it has been during the last few quarters where we have made very significant progress both in commercial customers, consumer customers, and workstations. We also have an opportunity to continue to drive attach of peripherals, attach of services, all these kind of will help us to drive revenue growth faster than unit growth in 2026. Joseph Cardoso: Got it. And then maybe follow-up for Karen. So just curious, if you could share any thoughts on how you're thinking about seasonality for next year. Seems like a lot of moving pieces with the company cycling past the tariffs of this year, maybe the bulk of the Windows 11 refresh this year. And then kind of entering a dynamic memory pricing environment just to kind of name a few of the things that are going on, obviously. Anything we should keep on top of mind relative to maybe first half second half dynamics relative to revenues? I know you talked about the margin implications as kind of cycle past some of the inventory that you built on the memory side, but any other moving pieces we should think about as we're thinking about our models for next year? Karen Parkhill: Thanks, Joe. Happy to talk about that. So I did mention that we anticipate our revenue to be stronger in the second half of the year. And that's really just driven by normal seasonality as well as pricing as needed against the tariffs and the rising costs. When I say when you when you look at our margins, we expect our print operating margins to be in line with seasonality where we see Q3 typically lower seasonally than the rest. And on PS, as we talked about, we expect our PS operating profit rate to stay in the 5% to 6% range in the first half of the year. But then with higher memory cost increases in our back half, we expect we said we expected our full year rate to be at the low end of our long-term 5% to 7% range. So given that, we could see Q3 and Q4 temporarily below that 5% range. But as you know, we're working to minimize that and ultimately mitigate the full impact. So if we can do better, we will. When you think about it from an EPS perspective, we typically have EPS, more stronger in the back half. But with the impact of memory in the back half of this year, you can think about EPS being more evenly weighted through the year. Hopefully, that helps. Enrique Lores: And maybe let me add a couple of comments on the memory side. As we said in our prepared remarks, we expect a major impact of the memory cost increases to impact the second half of the year. In fact, almost no impact in the first half given the inventories on hand that we have. I think it's important to have in mind that we are one of the first companies that are guiding for the full year. And the impact we really see on the second half, we don't see it in the first half. Operator: Our next question will come from the line of Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good afternoon. Thanks for the question. I was wondering, and Enrique, if you could just expand a little bit about the comment around the growing base of services, subscriptions, and software that are more contractual in nature. You know, was that a comment more about, you know, workforce solutions or print subscriptions? You know, appreciate the highlight. Just if you could expand on anything that you're thinking about in the future, that would be helpful and how you would work to grow that type of business. Thank you. Enrique Lores: Yes. It's coming across the board. So we have seen very solid growth, for example, in the consumer subscriptions side of instant ink and on in. We mentioned that business is approaching $1 billion, which is really a significant milestone for these types of businesses. We have also seen very solid growth in the workforce solutions space, in PCs. In PCs as a Service, that has driven very significant growth during 2025 and that we expect to continue to see in 2026. And also our software businesses are having very strong performance. And I will let Karen make a few comments. Karen Parkhill: Yeah. I would just add that we're excited to drive even greater growth and value in the future with revenue that is less cyclical and more stable and higher margins. It's really an important focus for us at the company, and it means that as we innovate products and develop new business models around them, we'll be focused on driving more recurring revenue. And when we think about doing our capital allocation too, this is gonna be a priority focus for us. But I would say it's not something that's gonna change, you know, rapidly overnight. We see this as an important gradual transition, and we'll just continue to highlight it for investors. Michael Ng: Great. Thank you. And if I could just follow-up around the headwind from memory of $0.3 on EPS net of mitigations. What do you think gross impact is? And what's your confidence level on the mitigations? Could it be better or worse? And then just as a quick follow-up, are you also seeing similar kind of tightness on PCV and kind of inflation related to that? Thank you. Enrique Lores: Sure. So let me start on the quantification. We have here enough numbers that you can calculate. We have shared that the cost of memory is between 15-18% of PCs, but from there, you can calculate the gross impact that you will see is significantly bigger than the $0.3 that we are quantifying. And we have fairly high confidence in the actions that we have put in place. In fact, we mentioned that we have been conservative in the guide for the full year. And that based on the actions I described before, if we can do better, we will be better. But given that we are guiding the full year, and we expect to see the majority of the impact in the second half, we thought it was important to be prudent at this point. In terms of other components, when we this is the area where we see the biggest impact, memories, and storage. The rest of the space, are confident, and we don't see any shortages at this point. And as I said before, even in the memory and storage space, we are in a good position from a supply perspective given the relationships and the contracts we have with our suppliers. Operator: Our next question will come from the line of Assia Merchant with Citigroup. Please go ahead. Mike Cadiz: Hi, good afternoon. This is Mike Cadiz on behalf of Assia Merchant at Citi. So my question is on AI PC penetration. So, despite you hitting the 25 to 30% penetration excuse me, penetration ahead of schedule, how do you think that tariffs and now the elevated commodity costs have affected the expected trajectory towards the 50% in the coming years that you that you telegraphed? Enrique Lores: So we continue to be very optimistic about the penetration of AI PCs. And as I mentioned before, as we will be prioritizing premium categories, into as we will actually, we will be working on the memory situation next year. The penetration of AIPCs as I said before, is above 30% today at the end of the quarter. Easily driven by the additional value this is being compared to the installed base and the fact that our customers want to be ready as soon as applications start taking advantage of other capabilities of these products. Last quarter, I mentioned the work that we are doing with software companies to leverage those, and this work has continued, and we have continued to make progress. With the announcements that Microsoft made last week on the consumer side, the ability to manage PCs with voice, think are going to be exciting very exciting for our consumers. They have improved the tools that they have for other companies to take advantage of GPUs and NPUs in the devices. We have made progress with other software companies like Adobe in leveraging those assets. With more local vendors like Rakuten or in Japan to take their models and the systems that they have in the cloud and bring them today, an announcement we made a few weeks ago. And we have also worked with smaller companies that drive very specific value example, in helping sales teams to be more efficient, or in helping product managers to present better. All these are really helping to drive adoption. And something very we think very relevant is as we have deployed these solutions internally in HP, with not only the PCs, but with a curated set of applications, we have seen up to 17% of productivity improvement. And this is a very important value proposition for us. But also for our customers. Mike Cadiz: Thank you for that. And then as my follow-up, for both PC and print, would you mind talking about the customer and market reception to the pricing actions that you've taken whether or not it's different between consumer and commercial and how you perhaps balance that with maintaining margins and share as well? Thank you. Enrique Lores: Sure. The majority of I mean, if I look at print, we have done price actions both in the consumer and commercial space. In the commercial space, probably because our most of our competitors are Japanese, and they continue to have a very significant help from yen. We didn't see these changes happening across the board. And this is why we lost Sam's share in Q4. It didn't happen in consumer. It didn't have any supplies where we grew our share, especially supplies where we grow our share. And in the PC space, our price increases have been smaller because the impact of tariffs so far has been smaller. And therefore, we haven't seen a strong reaction one way or another. Prices had grown year on year quarter on quarter but less than what we have seen in other spaces. Karen Parkhill: And even with this pricing environment, you're seeing us have strong revenue performance. Both last quarter and for the full year. We expect that to continue. Operator: Our next question will come from the line of Eric Woodring with Morgan Stanley. Please go ahead. Maya Newman: Hi, thank you. This is Maya Newman on for Eric Woodring. You know, maybe just to start to build on some of your comments regarding your mitigation tactics for the memory cycle and your supplier relationships. Could you quantify how many weeks of memory inventory you have on hand? And you know, are suppliers willing to sign long-term agreements? And kind of just overall, where do you believe HP is most differentiated within the supply chain or has the greatest competitive differentiation versus peers to weather this memory cycle? Thank you. And then I have a follow-up. Enrique Lores: Sure. I'm not gonna share the specifics of the weeks of inventory we had. But I said before that given the inventory we have today, we are fairly well in a fairly good situation for the first half of the year. So this helps you to understand that it's not gonna have a short-term impact. In terms of long-term agreements, have long-term agreements with our key suppliers. And the scale, the depth of our relationships are key assets when we go through situations like this. As you know also, after COVID, we made a lot of work to improve our operational processes within the supply chain. Both in terms of supply-demand matching in terms of forecasting, and they will be very useful now as we need to go through this situation. It's not only about getting the memory, it's also about getting other supplies that will work with memory like processors, and it's about aligning demand to that. We did a lot of work during the last quarters of COVID to improve that. And the team is very experienced now in how to manage this situation. Maya Newman: Got it. Thank you very much. And then last question for me. If we take a step back and think about your overarching strategy and print, how should we think about it going forward? I understand we'll probably get more details at the analyst day, but it's obviously a secularly declining business. But you're also seeing yeah, operating income decline in print as well on a dollar basis. I know a lot of actions around pricing, big ink, toner subscriptions, the graphics market, are meant to protect. Is this a business where we should expect operating income growth? And if so, how do we get there on a sustainable basis? Enrique Lores: Yeah. We said we will talk a little more about this in our Investor Day in a few months. But the strategy that we have been executing during the last years is not changing. Our goal continues to be to capture more value per customer and reduce the number of unprofitable customers, which we have been doing during the last year. Our shift or our doubling down on big ink is a consequence of that strategy as well. We see a big opportunity to grow profitable units in that space. While at the same time continue to accelerate and continue to drive the transition into subscriptions in this space. And we have been making very good progress both on the supply side and now also integrating printers in our all-in program. In the office space, we see an opportunity to grow our share in profitable units, and the new portfolio that we will be launching during 2026 and the work that we continue to do in cost will help us to achieve that goal. And then finally, on the industrial space, both especially in the graphic side, it's a business that has been growing during the last nine quarters, and we expect it to continue to grow during 2026. Operator: Our final question will come from the line of Mark Newman with Bernstein. Please go ahead. Mark, you might be on mute. Mark Newman: Apologies. Apologies. Thanks for taking my question. Yes, yes, just following up a bit on the memory price environment. Thanks very much for the clarity on the $0.30 impact. Just curious though, you mentioned that's mostly on the back half. So presumably, it's if you think if you just do the math, 30¢ on $3 or so annual earnings. So your impact is more than 10% on the back half. Considering, of course, you can pass through a lot of that with pricing, it seems like that it should be less given you have quite a few months to correct pricing. So just wondering if anything I'm thinking about wrong there. This seems like it may be conservative from you on the 30¢, but let me let me know if I'm thinking about that wrong. And I also wanted to ask does it have an impact on mix? Given how significant memory prices have moved? I mean, cut specs change average specs of what you what you sell change, could that also impact the AI PC dynamic considering the AI PCs typically have higher specs? Thanks very much. Karen Parkhill: Yes. Thanks for the question, Mark. And let me just talk about the $0.30 in the guide. You know, I would just say we remain focused on taking a prudent approach to our guidance. And particularly as we start a new year, we're setting our guidance at a level that we have a high confidence in meeting and hopefully exceeding. You know, I would say we're taking that same prudent approach this year with the rising cost of memory, but we've already been implementing actions to mitigate. And I would note that we have a proven track record of managing challenges like this, and we are confident in the strength of our organizations and the partnerships that we've built to deliver the best possible outcomes. So while we have included that 30¢ in the guide, if we can do better, we certainly will. And your math is roughly right. Enrique Lores: And then finally, in terms of configurations, as I said before, we are gonna be prioritizing those units where we see more margin for the company. And what we have seen in other cases is where volumes are more impacted as more in the entry space, whereas customers are usually more sensitive to price. And as Karen said before, we decided to take a conservative approach. We are guiding now the full year. We think the impact will be mostly on the second half. We are taking a lot of actions to mitigate that impact. But given how fast things have unfolded during the last few weeks, at this stage, again, we thought it was better to be prudent. Operator: And that will conclude our question and answer session. I'll turn the call back over to Enrique for any closing comments. Enrique Lores: Perfect. And thank you, everybody, for joining today's call. We remain confident in our ability to lead the future of work through technology, and I'm really proud of the progress we have made across our priorities. We finished 2025 strong, growing profit from the first half to the second. In 2026, we intend to grow faster than the market. We have a significant opportunity to embed AI in everything we do and transform the company. The memory headwinds that we have been talking about today, while material, are also temporary. And we're taking action, and we have managed, as we said also, such challenges before, and we have a lot of experience on how to handle that. So with a clear strategy and disciplined execution, we are focused on driving long-term value while managing these headwinds. Again, thank you for joining today. And for those of you in the U.S., we wish you a very happy Thanksgiving holiday. Thank you. Operator: This concludes today's call. Thank you all for joining. You may now disconnect.