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Operator: Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. I will now hand the conference call over to Vince Anzalone, Vice President of Investor Relations for Arrowhead Pharmaceuticals. Please go ahead, Vince. Vincent Anzalone: Thank you, Andrew. Good afternoon, and thank you for joining us today to discuss Arrowhead Pharmaceuticals' results for its 2025 fiscal year ended September 30, 2025. With us today from management are President and CEO, Dr. Christopher Anzalone, who will provide an overview; Bruce Given, outgoing Chief Medical Scientist, who will provide an overview of the Rodemplo FDA approval; Andy Davis, Senior Vice President and Head of the Global Cardiometabolic Franchise, who will provide an update on commercialization activities; Dr. James Hamilton, Chief Medical Officer and Head of R&D, who will discuss our development programs; and Dan Appel, Chief Financial Officer, who will review the financials. Following management's prepared remarks, we will open up the call to questions. Before we begin, I would like to remind you that comments made during today's call contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are forward-looking statements and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q. I'd now like to turn the call over to Christopher Anzalone, President and CEO of the company. Christopher Anzalone: Thanks, Vince. Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to announce that this will be Bruce Given's final earnings call. He's been a valuable member of the Arrowhead Pharmaceuticals team for almost fifteen years. He will continue to help Arrowhead Pharmaceuticals as a trusted adviser, but now that Rodemplo has received its first FDA approval, he will be stepping back from day-to-day operational responsibilities and, hopefully, he can finally enjoy his time in retirement. Or his re-retirement, which is probably more accurate. His contributions to Arrowhead Pharmaceuticals' success, both current and future, have been critical, and we owe him a heartfelt thank you. Later in the call, you will hear from Bruce, who will discuss the Rodemplo FDA approval when he came back to Arrowhead Pharmaceuticals and out of retirement to help us get across the finish line. Bruce leaves us in a strong position with a very strong group of leaders across the organization. As you all know, James Hamilton has already assumed much of Bruce's prior responsibilities as Chief Medical Officer and Head of R&D. So thank you again, Bruce, for getting us to today. Thank you, James, for taking us into the next chapter for Arrowhead Pharmaceuticals. Let's now turn to our business and what progress we've made during the recent period. This has been a very busy and enormously productive last few months. The most impactful change is the FDA approval of Rodemplo. On November 18, we announced that the FDA approved Rodemplo, indicated as an adjunct to diet to reduce triglycerides in adults with familial chylomicronemia syndrome or FCS. FCS is a severe, rare disease with an estimated 6,500 people in the United States living with genetic or clinical FCS characterized by triglyceride levels that can be ten to 100 times higher than normal, leading to a substantially higher risk of developing acute recurrent, potentially fatal pancreatitis. This is Arrowhead Pharmaceuticals' first FDA-approved medicine, marking a major milestone for the company as it transitions into a commercial stage. Rodemplo is the first and only FDA-approved siRNA medicine for people living with FCS and can be self-administered at home with a simple subcutaneous injection once every three months. Rodemplo is the first and only FDA-approved medicine to be backed by adequate well-controlled studies that include patients with genetically diagnosed and clinically diagnosed FCS. After many months of preparation, our commercial team was able to hit the ground running, and I'm happy to report that we have the drug in the channel a mere week after approval. We also launched Reliant Rodemplo, a patient support program providing support services and resources for patients at each stage of the treatment journey with Rodemplo, including financial assistance options for eligible patients. In addition, we also announced the one Rodemplo pricing model that creates one consistent price across current and potential future indications. This is important. We are committed to sustainable innovation. This requires rational drug pricing according to the value a medicine offers to patients and healthcare systems. It also means that we will not ask different patients to pay different amounts for the same drug based solely on what disease they've been diagnosed with. Rodemplo is a pancreatitis drug, and when we think about pricing, we look to those patient populations who are at greatest risk of acute TG-related pancreatitis. The patients we are serving now are also those at greatest risk of pancreatitis, people with FCS. This includes those with a defined set of mutations as well as those who share the same level of chylomicronemia symptoms but with more heterogeneous and often less well-characterized genetic backgrounds, who we refer to as clinically defined or phenotypic FCS. The broader patient population would substantially increase the risk of acute pancreatitis for those with persistent chylomicronemia, meaning fasting triglycerides greater than 880 milligrams per deciliter. We believe there are approximately 750,000 of these patients in the US, and while they often have less day-to-day symptoms than FCS patients, they are clearly at high risk for acute pancreatitis. The one Rodemplo pricing model has these patients in mind, and the $60,000 annual WAC price is designed to provide real value to patients and healthcare systems in this population. Our Shasta 3 and Shasta 4 Phase III studies are designed to support an sNDA for this population, and while those studies are ongoing and we are actively serving the FCS population, we will have time to help payers properly appreciate Rodemplo's value, and payers will have time to plan and budget for its possible eventual adoption and regulatory review and approval. Outside of Rodemplo, we have also made good progress with two other pipeline programs in the cardiometabolic space. Zidaziran, aerodimer PA. Let's start with zodasiran. During the recent period, we dosed the first subject in the Yosemite Phase III clinical trial of zidaziran, our clinical candidate being developed as a potential treatment for homozygous familial hypercholesterolemia, or HoFH. HoFH is a rare genetic condition that leads to severely elevated LDL cholesterol and early-onset cardiovascular disease. Yosemite will enroll approximately sixty subjects over the age of 12 who will be randomized to receive four doses once every three months of two hundred milligrams of zidaziran or placebo. The primary endpoint is the percent change from baseline to month twelve in fasting LDL-C. The Phase II data in this patient population were encouraging, and we hope to have this study fully enrolled in 2026, complete the study in 2027, and if successful, enable an NDA filing by the end of 2027 and launch in 2028. The next new pipeline program in cardiometabolic is Aerodimer PA. During the last quarter, we filed a request for regulatory clearance to initiate a Phase III clinical trial of Aerodimer PA, being developed as a potential treatment for atherosclerotic cardiovascular disease or ASCVD, due to mixed hyperlipidemia, in which both LDL cholesterol and triglycerides are elevated. This is a very large population without proper treatment options. We believe there are approximately twenty million people in the US with mixed hyperlipidemia. Aerodimer PA is a dual-function RNAi therapeutic designed to silence the expression of the PCSK9 and APOC3 genes in the liver, designed to reduce both LDL-C and TGs. This represents an important step forward for the RNAi field as we believe it is the first clinical candidate to target two genes simultaneously in one molecule and an important step forward for preventative cardiology as both LDL and TGs have epidemiologic support as being important drivers of ASCVD risk. Both these programs fit well strategically with our growing commercial focus on the cardiometabolic space and on the physicians that treat these patients. Also during the quarter, we expanded our clinical pipeline in CNS. We filed a CTA to initiate a Phase III clinical trial of ARO MAPT as a potential treatment for tauopathies, including Alzheimer's disease. ARO MAPT is Arrowhead Pharmaceuticals' first therapy to utilize a new proprietary delivery system, which in preclinical studies has achieved blood-brain barrier penetration and deep knockdown of target genes across the CNS, including deep brain regions, after subcutaneous injections. Nonclinical evaluations in monkeys with subcutaneous administration of ARO MAPT using clinically translatable doses have shown better than 75% knockdown of the tissue level of MAPT mRNA in CNS. Importantly, monkey tissue level knockdown has translated into CSF tau protein reductions with a duration of effect supportive of either monthly or quarterly subcutaneous dosing. This is an exciting program, and we look forward to initiating the study shortly. We also continue to make good progress on our first two obesity programs. ARO I and HBE, and ARO AP7. Together, we have randomized one hundred and ninety-two patients, all with a BMI greater than thirty. Because we started ARO I and HBE earlier, it is about two quarters further into the Phase I study than ARO AP7. Our plan has been to share early data at the end of the year, but due to travel schedules and the holidays, this will push a couple of weeks later into the early part of 2026. We also expect to have more fulsome data toward the end of 2026. We also made important progress in business development. First, as we announced yesterday, we earned a $200 million milestone payment from Sarepta following a drug safety committee review and subsequent authorization to dose escalate, and achievement of the second prespecified patient enrollment target for ARO DM1. This follows a $100 million milestone earned previously when Arrowhead Pharmaceuticals reached the first of two prespecified enrollment targets and subsequent authorization to dose escalate in a Phase I/II clinical study of ARO DM1. This partnership continues to be productive, and we look forward to continued progress. In addition to progress on the constructive partnership, we announced a new global licensing collaboration agreement with Novartis for Arrow SNCA, Arrowhead Pharmaceuticals' preclinical stage siRNA therapy against alpha-synuclein for the treatment of Parkinson's disease. The collaboration includes a limited number of additional targets outside our pipeline that will utilize Arrowhead Pharmaceuticals' proprietary TRiM platform. Arrowhead Pharmaceuticals received a $200 million upfront payment from Novartis and is also eligible to receive development, regulatory, and sales milestone payments of up to $2 billion. Arrowhead Pharmaceuticals is further eligible to receive tiered royalties on commercial sales up to low double digits. As I mentioned before, the recent approval of Rodemplo is clearly the most important recent development. Arrowhead Pharmaceuticals has been busy across the pipeline and in business developments during the recent period. Business development and licensing are critical to our business model, and we are pleased to have these two significant deals closed this year. With that overview, I'd now like to turn the call over to Bruce Given. Bruce Given: Thanks, Chris. Good afternoon, everyone. I'm happy to give my final update to Arrowhead Pharmaceuticals shareholders at such an important time and with Arrowhead Pharmaceuticals in such a position of strength. We have built something truly unique and powerful at Arrowhead Pharmaceuticals, and with the first FDA approval behind us, it feels like the right time for me to step back and retire. So let's review some of the key parts of the recent FDA approval that we announced last week. Mostly, I'll discuss the label and information contained in the packaged insert. Rodemplo is approved as an adjunct to diet to reduce triglycerides in adults with FCS. The recommended dose of Rodemplo is twenty-five milligrams, and it can be self-administered at home by subcutaneous injection once every three months. Rodemplo has no contraindications, warnings, or precautions. The most common adverse reactions include hyperglycemia, headache, nausea, and injection site reactions. The FDA submission was supported by clinical data from the Phase III PALISADE study in patients with both genetic FCS and those with the same clinical manifestations of the disease but without solely a genetic cause, referred to as clinically diagnosed FCS. The blinded portion of the trial compared a year of therapy with Rodemplo or placebo dosed every three months and tested two doses of Rodemplo versus placebo. The primary endpoint was the change in median triglycerides at month ten. There were also multiplicity-controlled secondary endpoints, all of which were statistically significant, including notably the occurrence of acute pancreatitis, for which the twenty-five and fifty-milligram doses were combined for comparison to placebo as called for in the analysis plan. Rodemplo achieved deep and durable reductions in median triglycerides as early as one month when the first measurement was taken. Overall, these reductions were around eighty percent from baseline, and reductions largely maintained median triglyceride levels below the usual guideline-directed threshold of five hundred milligrams per deciliter throughout the year of treatment. Five hundred milligrams per deciliter is the recognized threshold where the risk of pancreatitis increases relative to a normal population. Importantly, patients with genetic FCS versus clinical FCS showed similar reductions from baseline. We see the clinical FCS population as having the same high unmet need as the genetic FCS group, and as such, we think it is crucial to have shown that both patient populations showed similar large reductions from baseline triglycerides with Rodemplo therapy. Rodemplo is also labeled as having reduced the rate of adjudicated pancreatitis events versus placebo, a very welcome finding for FCS patients and their caregivers and an important validation that reductions in triglycerides can, in fact, lead to reductions in pancreatitis. Let me close by saying that it's gratifying to have been a part of Arrowhead Pharmaceuticals from the early days of our siRNA developments and part of the Rodemplo program at its inception and again over the last several years. And more importantly, it's exciting to hear the enthusiasm about this new medicine from patients, caregivers, and physicians. I'd also like to wish all of you an enjoyable Thanksgiving holiday. I'll now turn the call over to Andy Davis. Andy Davis: Thank you, Bruce. It's been exactly one week since the launch of Rodemplo, and the early feedback we've received from healthcare professionals, patient societies, and payers has been very encouraging. We hear lots of enthusiasm about the differentiating attributes of Rodemplo, which generally fall into five value pillars, some of which the team has touched on briefly already. First, the reduction in triglycerides is both significant and sustained. In PALISADE, Rodemplo reduced triglycerides by an unprecedented minus 80% from baseline as early as month one and maintained this marked reduction with minimal variation throughout the full twelve-month treatment period. This compared to a minus 17% reduction in the pooled placebo group. With Rodemplo, patients now have real hope, many for the first time, of achieving triglyceride levels below guideline-directed risk thresholds associated with acute pancreatitis, such as five hundred milligrams per deciliter. In PALISADE, fifty percent of patients at the twenty-five milligram dose achieved TG levels below five hundred milligrams per deciliter, with approximately seventy-five percent achieving levels below eight hundred and eighty milligrams per deciliter at month ten. Second, the numerical incidence of acute pancreatitis in patients treated with Rodemplo was lower compared with placebo. As we all know, this is the outcome of most importance for healthcare professionals, patients, and payers. Third, Rodemplo demonstrated favorable safety and tolerability. Importantly, the US-approved package insert contains no contraindications, no warnings, and no precautions associated with the use of Rodemplo. Fourth, Rodemplo can be self-administered at home with a simple subcutaneous injection once every three months, just four injections per year. Physicians tell us this infrequent dosing schedule is likely to reduce the treatment burden on physicians, patients, and caregivers. And fifth, early feedback on the one Rodemplo pricing model has been positive. As Chris highlighted, this model creates one consistent price of $60,000 per patient per year across current and potential future indications such as severe hypertriglyceridemia. Again, this means that we will not ask different patients to pay different amounts for the same drug based solely on what disease they have. We have been in important discussions with payers, and early signs for market access are encouraging. As a reminder, we believe there are an estimated 6,500 people in the US living with genetic or clinical FCS, and the prescriber base comprises specialist physicians such as lipidologists, endocrinologists, preventive cardiologists, and internal medicine physicians with a focus on lipid disorders. These specialists often operate within multidisciplinary teams that may include gastroenterologists, advanced practice providers, and specialized dietitians. At launch, we are targeting approximately 5,000 healthcare professionals through personal engagement. And finally, our Reliant Rodemplo patient support program is operational and designed to make every step of the journey easier. This program is designed to assist patients and physicians with insurance verification, financial assistance options, a first dose starter kit, and supplemental injection training. We launched just one week ago, but our care coordinators are already actively processing Rodemplo start forms, conducting patient welcome calls, and engaging payers to obtain approvals. And as Chris stated, we're happy to announce that we already have the drug available in the channel ahead of schedule. I will now turn the call over to James Hamilton to discuss the broader R&D portfolio. James Hamilton: Thank you, Andy. I'd like to give a quick review of the status of our late-stage Phase III studies and also describe the design of a couple of our early-stage programs. Let's start with the suite of Phase III studies of Rodemplo designed to potentially support a supplemental NDA filing to expand the label beyond genetic and clinical FCS. Shasta 3 and Shasta 4 are Phase III studies designed to compare reductions in triglycerides with twenty-five milligrams of Rodemplo compared with placebo over twelve months of treatment. Between the two studies, we enrolled approximately 750 patients. In addition, the MIRROR III study enrolled approximately 1,400 patients. This study in patients with mixed hyperlipidemia is designed to supplement the safety database we file the sNDA for Rodemplo in severe hypertriglyceridemia. We are not planning to seek approval in the mixed hyperlipidemia patient population. We completed enrollment in the global Shasta 3 and Shasta 4 as well as MIRROR III Phase III clinical studies in June 2025. We anticipate completing the primary portions of these studies in mid-2026 with top-line data expected in the second half of 2026. If successful, we plan to make submissions before the end of 2026 for regulatory review and potential approval. The SHTG program also features a study named Shasta 5 to directly assess the ability of Rodemplo to reduce the risk of acute pancreatitis as the primary endpoint in SHTG patients at high risk of acute pancreatitis. We are currently enrolling patients in that study. Of note, we will also be assessing pancreatitis risk reduction in Shasta 3 and Shasta 4 as a key secondary endpoint, but Shasta 5 is the first event-driven study to assess acute pancreatitis as the primary endpoint. I would also like to provide an update on our obesity programs ARO Inhibit E and ARO ALK7. Both of these programs target the known active impact that is involved in signaling to adipocytes to store fat. ARO Inhibit E inhibits one of the ligands in the pathway, and ARO ALK7 inhibits the receptor on the adipocyte that these ligands bind. So essentially, we are trying to reduce the message sent to store fat and the way the message is received at the end of the service. ARO Inhibit E started enrolling patients in December 2024, and ARO ALK7 initiated in May 2025. Both programs are currently in Phase I/IIa, first-in-human dose-escalating studies to evaluate safety, tolerability, pharmacokinetics, and pharmacodynamics. Both programs include Part one, designed to assess single and multiple doses as monotherapy, and Part two designed to assess multiple doses in combination with other therapies. As ARO Inhibit E started about two quarters earlier, we have more mature data in that study. The study is nearly fully enrolled, and we are on schedule and currently planning to share initial data from this program around the middle of 2026. This is a rather robust first-in-man study that is collecting multiple measures of drug activity and pathway activity, and we are eager to share initial findings. We were originally planning on sharing the first data around the end of the year, but due to the holidays and travel, January worked best for all schedules. For ARO ALK7, we intend to provide a brief snapshot of early safety and target engagement results from that study. Both targets have strong genetic validation, and both programs have yielded promising results in preclinical studies. So it will be interesting to see similarities and differences in patient response in the clinical trials. I will now turn the call over to Dan Appel. Dan Appel: Thank you, James, and good afternoon, everyone. I'll provide a brief outline of our financial results. As we reported today, our net loss for fiscal year 2025 was $2 million for a loss of $0.01 per share, based on 133.8 million fully diluted weighted average shares outstanding. This near breakeven result compares with a net loss of approximately $599 million for a loss of $5 per share based on 119.8 million fully diluted weighted average shares outstanding in fiscal year 2024. Revenue for fiscal year 2025 totaled $829 million and was driven entirely by our license and collaboration agreements with Sarepta, Sanofi, and GSK. Of the $829 million, roughly $697 million pertain to the Sarepta arrangement. Of that $697 million, $587 million relates to the ongoing recognition of initial surrender consideration, $94 million relates to the achievement of the first EM-one milestone, and $16 million relates to the reimbursement of incurred collaboration program costs. Additionally, the license to Sanofi for Greater China rights to Rodemplo added $130 million to our fiscal 2025 revenue. And lastly, to round things out, we recorded $2.6 million earlier in the year related to a milestone payment under the GSK HBV agreement. Turning to expenses, total operating expenses for fiscal year 2025 were approximately $731 million compared to $605 million for fiscal 2024, an increase of $126 million. The year-over-year increase was driven by $101 million of higher R&D expenses and $25 million of higher SG&A, both of which I will explain in brief. The key drivers of research and development spend included costs to run our clinical trials, our clinical manufacturing costs, as well as expenses related to active programs in the preclinical stage. 2025 R&D costs were heavily impacted by our Phase III clinical trials for Rodemplo and SHTG. It's worth noting that in fiscal year 2025, nearly two-thirds of our clinical trial spend can be attributed to the late-stage development of Rodemplo and SHTG. As we have mentioned, the SHTG registration studies are now fully enrolled, and we expect data to read out next year. Accordingly, the majority of remaining Phase III registration clinical trial costs are expected to occur over the next twelve months. Our SG&A costs increased by $25 million year-over-year, driven primarily by our preparations for the commercialization of Rodemplo. All of us here at Arrowhead Pharmaceuticals are enormously proud of the capabilities we have built to commercialize Rodemplo, not only in our commercial functions but also across regulatory, supply chain, order to cash, and indeed across all of our enabling support functions. Turning now to cash flow, net cash provided by operating activities during fiscal year 2025 was $180 million, compared with net cash used in operating activities of $463 million in the prior year, for a net positive change year-over-year of $643 million. This increase in cash from operating activities is driven by cash received from licensing and collaboration agreements, partially offset by the aforementioned increase in R&D and SG&A costs. Turning to the balance sheet, our cash and investments, including available-for-sale securities, totaled $919 million as of September 30, 2025, compared to $681 million as of September 30, 2024. The increase in our cash and investments was primarily related to our licensing and collaboration agreements with Sarepta, Sanofi, and GSK, partly offset by our ongoing cash burn. Our common shares outstanding as of the end of the quarter were 135.7 million, down 2.4 million from the prior quarter due mainly to the repurchase of shares from Sarepta. I'll use this opportunity to reiterate two developments that are subsequent to the fiscal year and leading up to today, which were financially meaningful for Arrowhead Pharmaceuticals and our balance sheet. Firstly, as Chris mentioned earlier on the call, we announced a licensing and collaboration agreement with Novartis for ARO SMTA, Arrowhead Pharmaceuticals' preclinical stage siRNA targeting alpha-synuclein for the treatment of synucleinopathies, such as Parkinson's disease. Novartis will also be eligible to select a limited number of additional collaboration targets outside of Arrowhead Pharmaceuticals' current pipeline to be developed using our proprietary TRiM platform. The closing occurred last month, and we have already received $200 million in the bank as an upfront payment. As a reminder, we are also eligible to receive up to $2 billion in future milestone payments from Novartis, as well as royalties on commercial sales. Secondly, just yesterday, we announced we earned our second development milestone under the Sarepta collaboration agreement for ARO DM1. As Chris mentioned, this triggered a $200 million obligation from Sarepta that will be recorded in 2026, and we expect to receive the cash in January of 2026. This is, of course, additional to the $100 million earned for the first ARO DM1 milestone in fiscal quarter four of 2025. Finally, we are not providing detailed financial guidance at this time for the coming fiscal year, beyond reiterating that, while we view the launch of Rodemplo as a truly transformational event for the company, we do not anticipate that the commercial sales of Rodemplo will have a substantial impact on our financial statements in fiscal year 2026. We also believe our cash runway, even in the absence of any further capital from new deals or other sources, and all the while funding a broad ambitious set of commercial clinical programs, to be sufficient to extend into fiscal year 2028. With that, I will now turn the call back to Chris. Christopher Anzalone: Thanks, Dan. Arrowhead Pharmaceuticals has been working to bring important medicines to patients in need for over fifteen years. As Bruce mentioned, it's very gratifying to see Rodemplo approved by the FDA and the overwhelmingly encouraging feedback we received from the FCS community. But Rodemplo is just one part of a large pipeline we've created to help potentially millions of patients in a diverse set of disease areas. We spent years building the TRiM platform to enable us to bring RNAi where it is needed. We are now able to address seven different cell types and have current clinical programs in five of these. Further, we will meet our twenty in twenty-five goal whereby we will have 20 individual drug candidates in clinical trials by the end of this year. Our partnering has been helpful but judicious, with approximately half of our clinical pipeline wholly owned and half partnered. We have late-stage studies ongoing, again, both independently and with partners, that may potentially lead to multiple new commercial launches over the next few years. In addition, we have a strong financial position that enables us to properly invest in our growth today and in the future. We believe we now have everything we need to be in the next class of large and ultimately profitable biotech companies. Thanks for joining us today, and I would now like to open the call to your questions. Operator? Operator: Thank you. 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. And we ask that you please limit yourself to one question. One moment, please. Our first question comes from the line of Luca Issy with RBC Capital Markets. Luca Issy: Bruce, congrats on your re-retirement, I should say. So all the best in the next chapter. And then maybe if I can stick with you, can you just maybe talk about what's the plan to show in terms of acute pancreatitis for Rodemplo? Are you confident just the three and four in Q3 2026 can actually hit acute pancreatitis? Or is the base case scenario, those two trials, are maybe underpowered to show benefit and you actually need Shasta five to actually hit on acute pancreatitis given the positive death population is enriched for history of acute pancreatitis. The only reason why I'm asking is it looks like you doubled the size of the n, I should say, in the Shasta five trial according to clinicaltrials.gov. As of Monday last week. So, again, any call there, much appreciated. Thanks so much. Bruce Given: Well, I sure will. And, you know, thank you for your kind regards. Shasta three and four were powered on the basis of triglyceride reduction, which is the primary endpoint. So, you know, we did not specifically power Shasta three and four for pancreatitis. However, it was on our mind, and as was also done in the core studies, you know, there is the intent and by design, the capability to pool both Shasta three and four for evaluating versus, you know, placebo on reduction of pancreatitis. And, of course, we only have one dose of Rodemplo, instead of two doses, you know, two different doses like we had, for instance, in the Phase II program. So, you know, there's, I would say, reasonably good power for, you know, for seeing a difference in acute pancreatitis. But we're not dependent on it because we've designed Shasta five specifically to, obviously, be able to have a primary endpoint of acute pancreatitis. We did change the design of it in Shasta five recently to make it a more generalizable population in patients with persistent chylomicronemia and a history of pancreatitis. The original design was a much more enriched population, but it would have actually been less representative than, you know, the duly designed trial. So it's not so much a matter that we've been powered so much as we, you know, broadened the power of the patient population to be more inclusive of the high-risk population in SHTG. So, you know, we certainly we oftentimes refer to it as a belts and suspenders approach. You know, there's a, you know, obviously, a decent chance that we will show statistical significance in the Shasta three and four programs, but we're not entirely dependent on that because of Shasta five, which is a, you know, study. The first of its kind specifically designed to demonstrate a benefit versus placebo in acute pancreatitis. Luca Issy: Got it. Thanks so much. Congrats again. Operator: Thank you. One moment, please. Our next question comes from the line of Prakhar Agrawal with Cantor Fitzgerald. Prakhar Agrawal: Hi. Thank you for taking my questions and congrats on the quarter as well as the update throughout the quarter. Maybe on the obesity side, I had a couple of questions. So on ARO Inhibit E for the update early next year, if you can just provide more details on how much data will be disclosed, especially on the MAD side. And how much follow-up will you have on ARO Inhibit E for both monotherapy and combo cohorts? And also the same question on ARO ALK7. What cohorts will be disclosed and will there be any weight loss data at all from ARO ALK7 early in the year? Thank you so much. James Hamilton: Yeah. Sure, Prakhar. This is James. I can cover that. So for ARO Inhibit E, it's a little bit ahead, as Chris mentioned, probably by a couple of quarters. So the study is nearly fully enrolled. We have a good amount of data in both the SAD and MAD healthy volunteer or obese healthy volunteer cohorts. So we'll have biomarker data, MRI data, and as well as safety in those cohorts. And then the combo cohorts are almost fully enrolled. I think we're waiting on a few more diabetic patients to enroll in the highest dose combo cohorts and should have probably not through the end of the study, but ample post-dose follow-up in both the diabetic and the nondiabetic cohorts from ARO Inhibit E. And then ARO ALK7 will be a little bit more limited, focused mostly on monotherapy safety and knockdown data, knockdown of the target for that study. Christopher Anzalone: Yeah. And keep in mind here that we want to present data that are interpretable, and we're not going to have all cohorts. We're not going to have all patient data in all cohorts even if they're fully enrolled. We don't get data in real-time necessarily. So you'll have probably two bites of the apple, maybe three bites, but certainly two bites of the apple. You know, our goal here is this first round of data is to give you an idea about how these are going. And then, you know, the fuller story should come out once we have the more wholesome datasets in later 2026. Prakhar Agrawal: Got it. Thank you so much. Operator: You're welcome. Thank you. Our next question comes from the line of Maury Raycroft with Jefferies. Maury Raycroft: Hi, thanks for taking my question and congrats on the progress and best wishes, Bruce, in retirement. I was gonna ask a follow-up to Luca's question earlier. We're expecting to see the patient baseline profile for your SHTG pivotal next week. What are your estimates on AP events to accrual based on your patient's baseline characteristics? And also your change in plans to broaden the AP adjudication criteria. Bruce Given: You know, Maury, I think it's a little bit hard to answer just because we have adapted our protocols now to go ahead and adapt the modified Atlanta criteria, you know, since those have been accepted by both FDA and EMA, and here in the US, at least payers. And this is really gonna be our first experience with using that particular scale, which makes it a little hard to estimate exactly how many events we will have. So it's hard to say. What you will see next week is you will see the percentage of patients that had a history of pancreatitis that were enrolled in the study. And, you know, based on that, you know, that, I think you'll see that, you know, there's a good chance that we'll have, you know, the necessary number of events. But I'm a little bit uncomfortable trying to give any real prediction when we're using a scale that we haven't used before. Maury Raycroft: Understood. That's helpful. Thanks for taking my question. Operator: Thank you. And our next question comes from the line of Jason Gerberry with Bank of America. Gina: Hi. This is Gina on for Jason. Congrats on all the progress this quarter, and thank you so much for taking part in the question. Just a couple from us. I guess, first on your ARO MAPT program, maybe just discuss which aspects of the drug are maybe differentiated from A and J's recently failed anti-tau antibody and what kind of still gives you the confidence in the target after the failure. And then based on your current cash position and the progress that you've made on these partner milestone triggers, do you have any updates on your visibility on launching a CVOT study? Is that more tied to seeing how the FCS and central SHTG launches are progressing? And then can you just remind us of any potential milestone triggers from the Sarepta programs that you're expecting in 2026? Thank you so much. Christopher Anzalone: Alright. I count three questions. James, want to take the first one? James Hamilton: Sure. Yeah. I'll take the first one on the MAPT program. So the J and J antibody, the monoclonal as well as other monoclonals, are, you know, IV administrated monoclonal antibodies. Probably a small fraction of those molecules cross the blood-brain barrier and then are primarily focused on binding to that extracellular tau. So tau that's been released from damaged cells or has been secreted and that can propagate and bind to tau that's outside of the cell. Our approach is very different. We use a targeting ligand to facilitate delivery of the siRNA across the blood-brain barrier into the neuron to silence the expression of tau. So we're sort of turning off the faucet for all of the expression and preventing the neurofibrillary tangles to form in the first place. We should get that over time to be able to reduce the level of intracellular tau and extracellular tau, whereas the monoclonal antibodies are really just able to get the extracellular tau. So that's the key differentiator. Christopher Anzalone: And on the other two questions, I'll answer the last one first. Sarepta milestones. So we are eligible to receive the first of $550 million annuities in February. So we expect that over the next several months. That's correct. February. Right, Dan? Dan Appel: Yes. Correct. Christopher Anzalone: On the visibility on the CVOT. So that CVOT, as you know, is for the dimer. That's a big opportunity for us. And so we are moving as quickly as we can to that CVOT. We'll have a good idea, I think, this summer if we have a drug. You know, we'll know PCSK9 knockdown. We'll know APOC3 knockdown. We'll know LDL decreases. We'll know triglyceride decreases. And so given what those data look like, I think, again, as early as this summer, I think we'll know if we have something that really could be an important treatment for these mixed hyperlipidemia patients. Should that be successful? Should that look good? We are not waiting on anything, you know, to start those studies other than finishing this Phase I/II. Our plan is to be able to roll directly into pivotal studies after these Phase I/II studies. Again, should they all go well and there's nothing gating there other than the data looking good. We also are hoping to have parallel pivotal studies, you know, one that will be a CVOT and then one that will be looking at simply lowering LDL, you know, over the course of the year. As you know, that has been an approval endpoint in the past for PCSK9 inhibitors. And we think that could be a good way to get to market very quickly and, frankly, help us to pay for the CVOT. So that's our plan now. We'll have a much better idea about how quickly we can move in the summertime once we start to see data. We're really looking forward to seeing those data. Gina: Thank you. Operator: Thank you. And our next question comes from the line of Edward Tenthoff with Piper Sandler. Edward Tenthoff: Great. Thank you very much. And Bruce, wishing you all the best, and James, wishing you all the best of luck. It really is a super exciting time for the company. I wanted to get a sense just with respect to upcoming data readouts next year, specifically asking, do you think you'll have your first look from the Aerodimer PA next year? And what other datasets beyond the obesity data in the first half should we be thinking about? Christopher Anzalone: Thanks, Ted. We have a bunch of, I think, potentially very interesting data readouts throughout 2026. As you mentioned, obesity will be the first. You know, as I mentioned, we should have two bites of an apple or thereabouts, and we'll have our first early dataset, you know, in January. And then as the data mature in both those programs, say towards, you know, the end of the second quarter or something around then, we'll have a much larger dataset. We think those are important. In the summertime, we expect to have dimer data. I think those are extraordinarily important. You know, the idea that we might have a drug candidate that can simultaneously lower LDL and triglycerides to treat twenty million or so people in the United States with mixed hyperlipidemia is a very exciting opportunity. And, again, we'll I think we'll know if we have something that could really fit there in the summertime. Also in the summertime, I think we'll have our first bit of ARO MAPT data. And we'll be looking for tau levels in the CSF. That also would be extraordinarily exciting. We could be sitting on one of the most exciting potential Alzheimer's drugs in the clinic. And, hopefully, we'll be derisking the entire blood-brain barrier platform that can enable us to treat a variety of CNS diseases. So that's an important readout. Of course, also in the third quarter or so, we expect to have the readout for Shasta three and four. You know, that are designed to enable the sNDA by the end of the year. And then, of course, at the end of the year, we expect to file our sNDA. So look, there will be other things happening during the year, but, you know, those to me feel like the primary ones. And, of course, we'll be in the market. You'll be in the market, and, you know, we will be really looking forward to seeing the adoption curve that Rodemplo is gonna have. Edward Tenthoff: Great. Any update on ARO RAGE just to be comprehensive? Thank you. Christopher Anzalone: Yeah. Thank you. Yes. So as you know, Ted, the data so far for ARO RAGE have been enticing. You know, we've seen that we can knock down RAGE deeply, both looking at circulating biomarkers as well as valve. You know, that's super interesting. Where we've struggled is looking for biomarkers to show potential clinical benefit. And so rather than running directly into a large asthma or COPD Phase II, we were hoping to have a baby step to see some evidence of that. So we have started a challenge study. Don't expect to have data in '26, maybe at the very end of '26, but we've just started that. And so my hope is that that will show us that knocking down RAGE is an important thing. Look, it's been an undruggable target for some time, and now we can drug it. So now let's see what that does for us. I think at the end of that, we can then ask ourselves, do we want to build out a pulmonary franchise or do we want to partner that? And I think a positive challenge study readout would allow us to partner that under attractive terms. Edward Tenthoff: Great. Well, guys, congrats on all the great progress. I'm really excited to see the Rodemplo launch. It's a great job. Christopher Anzalone: Thank you, Ted. Operator: Thank you. Our next question comes from the line of Mani Foroohar with Leerink Partners. Mani Foroohar: Yes. Thanks for taking the question. Congrats on the progress in the first product launch. And best wishes also to Bruce on his re-retirement. So something tells me you're gonna pop up again soon. I don't think you're done with us. Apropos of the question, can I want to follow-up on sort of broader pipeline? I know Ted touched on new ARO RAGE study, etcetera. How do we think about Aerodimer application in terms of pursuing CVOT, the right target for that technology? And where are the right places for you to put that to work? Now that you've got sort of a very different place in terms of your balance sheet? Bruce Given: I'm happy to take that. You know, obviously, we're excited about the Rodemplo and APOC3 inhibition generally for, you know, patients with severe hypertriglyceridemia. You know, that's been a very, very poorly treated population, you know, for a long time. You know, the LDL side of the equation, on the other hand, has been really a different story. And other than HoFH, you know, there's a pretty good number of tools in the tool chest for dealing with LDL. You know, the patients on that LDL side of the equation, patients with heterozygous familial hypercholesterolemia, which is, you know, a pretty good-sized population, for instance. But the twenty-some million patients in the US alone that have mixed hyperlipidemia has been an interesting population. You know, we could address the LDL part, but we've done really a terrible job historically of being able to address the triglyceride piece of that. And, you know, the post hoc analyses that have been done of CVOT have shown that for the same LDL reduction, you can really rank order the risk, you know, that patients have by how high their triglycerides are. And, of course, the Mendelian randomization data has also said that triglycerides are an independent predictor of events and mortality in that mixed hyperlipidemia population is huge. It's a very big population. So, you know, there's never really been a very good way of addressing, you know, both sides of the problem in mixed hyperlipidemia, both the LDL and the triglycerides. And here we're talking about a drug that could potentially do it with a single, you know, say, injection, you know, get both their LDL and their triglycerides, probably on top of the statins. I think you're gonna always have a statin there if the patients could tolerate it. But you could have a daily statin and a quarterly dimer injection, and that's and potentially, you know, treat, you know, that twenty million patients, you know, to low-risk levels of LDL and triglycerides. That would be, you know, quite an amazing opportunity, I think, from a marketing perspective. Compared to what you can do today, which is you can probably get the LDL taken care of today, but you probably can't do much at all, you know, worthwhile in the triglycerides. So this is what makes this, you know, to us, such an interesting proposition. Christopher Anzalone: Yeah. As you know, Mani, what we used to former strategy was to make Rodemplo, you know, a three-step drug. Step one is FCS. Step two is SHTG. Step three after a CVOT would be this, you know, would be to be part of a treatment in mixed hyperlipidemia. Once we were able to perfect, at least in animals, the dimer platform, it didn't make any sense any longer. You know, we like the idea of keeping Rodemplo as a pure play pancreatitis drug. Full stop. And now I think we'll have a tool to more completely treat that mixed hyperlipidemia population should this dimer translate well from animals to humans. Mani Foroohar: That's helpful. And as a follow-up, when you think about potential dimer applications, etcetera, how are you thinking about the data next year from Horizon and how and potential applications of combining what hopefully will be a validated APOC3 target with other approaches to their risk-elevating elements of the lipid profile? James Hamilton: Yeah. Sure. So of course, our siRNA is targeting LPA is partnered with Amgen. So we would have to work with them on, you know, any kind of dimer applications. But there are other applications beyond, of course, the PCSK9, APOC3. I mean, we're looking at other dimers in the CV space, both targeting the hepatocytes and extrahepatic cell types. So this is probably not the only dimer that you'll see out of Arrowhead Pharmaceuticals. Mani Foroohar: Alright. Thanks, guys. That's really helpful, and congrats again. Operator: Thank you. And our next question comes from the line of Patrick Trucchio with H.C. Wainwright. Patrick Trucchio: Congrats on all the progress. I have a few follow-up questions. Just the first is just regarding, I'm wondering if the FDA has provided clarity on what level of pancreatitis evidence would be required for a future pancreatitis risk reduction claim, particularly in the high-risk SHTG patient population. And separately, wondering if there's been discussions around a potential pediatric pathway just given that FCS presents in childhood? And then just on the MAPT program, I'm wondering what level of CSF tau knockdown or biomarker response would you consider clear clinical proof of concept in humans just given I think you have greater than seventy-five percent knockdown in the NHP data? Bruce Given: So the first one is less level of AP that we think the FDA is required to have it on the label. Yeah. You know, we have not discussed with the FDA specifically what it would take to get a claim per se. I'm not sure we've really felt that was necessary. I mean, I think physicians, you know, have no real question about the relationship of triglycerides to pancreatitis risk, especially now that it's been proven. And payers haven't seemed to be concerned about that either, at least in the US. So I'm not sure, you know, what the value of a claim would be. And, of course, at this point, it's untested, you know, whether the agency, you know, would consider providing that, you know, that claim. I don't know that we've really thought of it as being necessary, Patrick, to be clear. In FCS. Patrick, is your question on SHTG or FCS? Patrick Trucchio: It's around actually the high-risk SHTG patient population. Bruce Given: Yeah. But the answer is the same, I think. You know, we at least have not approached asking them, you know, when they give a claim, what it would take to get that claim. It's very possible that what they would require is something, you know, like Shasta five. But, you know, the Shasta five was really designed primarily, you know, on the possibility that the payers in countries outside the US might require a dedicated outcome study. So it was more payer-focused than it was regulatory-focused. And, you know, we know, we really were not committed one way or the other about whether it'd be submitted to regulators asking for a label change. We were more interested really in protecting the possibility that there would be payers outside of the US that would require, you know, a specific proof of concept in a dedicated study. So we really haven't raised this with regulators, you know, anywhere on a global basis at this point. James Hamilton: In terms of what we're looking for based on the data, as you mentioned, at the tissue level, we were seeing seventy-five percent plus reductions. And similar reductions in the CSF in monkeys. I mean, we typically translate well from cynos into the clinic into humans. And I think based on some of the other data out there with the intrathecal intrathecally administered ASO, and they were able to achieve CSF reductions of about 50% to 60% and those CSF reductions corresponded to improvements in tau PET signals. So, you know, I think that's probably where we're aiming for in our clinical study is at least 50% to 60% reduction in the CSF. That's what others have shown that seems to have translated into a meaningful tau PET signal. Patrick Trucchio: Great. Thanks so much. Operator: Thank you. Your next question comes from the line of Andrea Newkirk with Goldman Sachs. Andrea Newkirk: Good afternoon. Thanks for taking the question. Maybe one more on the Rodemplo launch. Recognize it's only been about a week since the approval. But now that you have launched, just curious if you'd be willing to comment on your expectations for the cadence of the initial launch here in FCS and how you think it may be similar or different from that of the Triglyceride launch, particularly in the context of the significant pricing differential that you have? Thank you so much. Andy Davis: Happy to take that, Andrea. This is Andy. So we do have very high ambitions for the Rodemplo launch. Expected to be the best in class. And as you know, there are a number of reasons why we believe that to be the case. Largely around the attributes of Rodemplo that we do believe make it a special molecule in this category. We talked about obviously the significant and sustained TG reduction. We've talked about the reduced incidence of acute pancreatitis. But even more importantly, we hear a lot of positive feedback around the safety and tolerability profile. So no contraindications, no warnings, and no precautions. And we do have a lot of physicians and patients who are enthusiastic about the once every three-month dosing regimen. So with those product attributes, we have very high ambitions for the launch of Rodemplo in FCS specifically. Operator: Thank you. And our next question comes from the line of Mike Ulz with Morgan Stanley. Mike Ulz: Good afternoon. Thanks for taking the question, and congratulations on all the progress as well. Maybe just a follow-up on the Shasta three and four studies. You mentioned adopting the modified Atlanta criteria. Just curious now that you've seen some more detail around the core studies, are you considering any sort of, you know, adjustments or fine-tuning to your studies going forward? Thanks. Bruce Given: Other than adapting the ATLANTIC criteria, I think we're, you know, feeling pretty good about the design and, you know, it was negotiated with the FDA. I don't think we saw anything in core that, you know, would cause us to, you know, see a need to change anything else. There's nothing that comes to mind. You know, James, would you see it any differently? You don't look closely at this too. James Hamilton: Yeah. I agree. It didn't inspire any changes in the protocol. So, yeah. Mike Ulz: Great. Thank you. Operator: Thank you. Our next question comes from the line of Madison Elsadi with B. Riley. Madison Elsadi: Good afternoon. Thanks for taking our question. I wanted to ask about your neuromuscular franchise. Just given your integrin-targeted delivery mechanism, which, you know, one could assume may be safer and perhaps more targeted than a TFR-mediated approach. Should we expect DMPK knockdown and splice correction data comparable to kind of the pure benchmark levels? And, relatedly, wondering what dose do you anticipate observing really optimal biomarker activity? I believe previously, you said that even a low dose may be active. Thanks. James Hamilton: Sure. Yeah. I think most of that will defer to Sarepta. Probably can't comment on the dose where we'd expect to see maximum knockdown. We don't know that yet. And so I would, you know, want to venture a guess there yet. In terms of the knockdown, I mean, I think that is probably a goal is to have something that looks at least similar to or equivalent to what others have shown for DMPK knockdown and splice correction with this platform. Madison Elsadi: Got it. And then, if I may, are there any bile cells associated with hitting a certain threshold or are the milestones largely related to regulatory progression? James Hamilton: Yeah. Based only on regulatory and commercial, there are no sort of activity-based or PD-based milestones. Madison Elsadi: Got it. Got it. Thanks. Operator: Thank you. And our last question comes from the line of Joseph Tome with TD Cowen. Joseph Tome: Hi there. Good afternoon. Thank you for taking my question. Just another quick one on the dimer. Just curious based on your work in SHTG, what proportion of patients are already on an anti-PCSK9 treatment? Is this, you know, an under-treated population on both sides? And then can you give us an indication in terms of the triglyceride and LDL cutoffs that you're looking in patients enrolled into the early dimer study? Thank you. James Hamilton: Sure. Yeah. I think based on the work that we've done, I mean, a lot of those patients may be on a statin, probably less so on fibrates and very few of them on PCSK9 inhibitors. Actually, they're not that commonly used in that population. In terms of the cutoffs and the inclusion criteria, so we allow patients in that study with mixed hyperlipidemia or triglycerides up to 880. So it's a pretty high threshold. And they have to have either that non-HDL of a 100 or an LDL greater than 70 to get into the study. So they have to have true mixed hyperlipidemia, both high triglycerides and high non-HDL or LDL cholesterol. Joseph Tome: Thank you. I'll now hand the call back over to President and CEO, Chris Anzalone, for any closing remarks. Christopher Anzalone: Thanks very much for joining us today. Again, thank you to Bruce, you know, for all he has brought to the company. He is re-retiring. He is not going to be gone, however, and I do trust that he will still be around and helping us out going forward. So, again, thanks to Bruce and thanks to James for continued and ongoing leadership. Again, thank you all for joining us today, and I hope you have a pleasant Thanksgiving holiday. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Good morning, everyone, and thank you for joining us today for Caledonia Investments Plc Half Year Results Presentation. [Operator Instructions] Please note that this call is being live streamed to a webcast for a wider audience and will be recorded. I would now like to hand over to Mat Masters, Chief Executive Officer, to open the presentation. Please go ahead. Mat Masters: Hello. I'm Mat Masters, CEO of Caledonia Investments, and welcome to our results presentation for our half year to 30th September 2025. You will also hear from Tom Leader, who leads our private capital strategy; and Rob Memmott, our Chief Financial Officer. Before we go through these results, a short reminder about Caledonia. We are long-term stewards of our shareholders' capital, including the Cayzer family who have entrusted us with theirs for generations. Looking after multigenerational capital shapes everything we do. We need to make returns, but do so whilst limiting the risk of losing capital. We target absolute returns of inflation plus 3% to 6%, and this influences the level of risk we're prepared to take. Over time, our approach to investing has delivered results at the top end of this target range at 9.8% per annum, outperforming inflation by 6.5% per annum, and we have consistently increased our dividend for over half a century. Our approach to investing is straightforward. We invest in high-quality businesses and hold them for the long term. Our maximum time well invested captures the essence of our approach perfectly. Our in-house investment team is fully aligned with shareholders. We do not manage anyone else's money, and there is no fundraising. Performance is measured against NAV per share over time and rewarded in Caledonia shares. So our incentives are directly tied to long-term value creation. Our investment strategy is perfectly encapsulated by time well invested. We use our strong balance sheet, long-term approach and in-house investment team to underpin our focus on long-term results and be robust during downturns and in fact, aim to use these to our advantage. We're organized across 3 main strategies, providing access to private and public companies across different sectors and geographies. We're looking for the same 3 key ingredients, which are attractive markets to operate in, resilient businesses with strong fundamentals and return characteristics and that are well managed and aligned with shareholders. The strategies have together generated Caledonia's overall performance, which is shown in the chart. Over 5 and 10 years, we have delivered at or beyond the top end of our targets and across all periods, both NAV per share total return and share price total return have kept ahead of inflation, which is our core aim. In the last 3 years, share price total return has been stronger than NAV per share total return as the discount has reduced from 37% to 33%. Moving on to the highlights for the half year. We're pleased to report another positive performance with NAV total return of 4.4% and total shareholder return of 8.5%. This was driven by strong public companies and private capital performance, partially offset by funds and including the impact of the pound strengthening against the dollar, reducing NAV by approximately 2%. Today, we are announcing our interim dividend of 3.68p per share, which reflects the change in dividend payment profile to 50% of the prior year's annual total dividend. This dividend will be paid on 8th of January 2026. Moving on to public companies. This comprises 2 portfolios, each taking a concentrated approach to making long-term investments in high-quality companies. We're looking for high-quality, durable businesses, which we think have got great futures ahead of them. We aim to buy well and hold for the long term. The overall public company strategy delivered 9.9%, driven by a capital portfolio and within that, primarily Oracle, Microsoft and Alibaba who are benefiting from continuing demand for cloud-based services, including AI. We initiated a new position in Charles Schwab, the U.S.-listed brokerage business that we've been tracking since 2017. We like Schwab because of its massive scale with just over $10 trillion in client assets and market-leading focus on driving down costs for its clients. Its track record speaks for itself with annualized total shareholder return of 17% since it listed in 1987. It's well managed with good continuity of leadership with the eponymous Charles Schwab still on the board. We deployed GBP 35 million, mostly on 7th of April, shortly after President Trump's Liberation Day, which was followed by a downturn in the equity markets and presented the lowest price that Schwab and the market traded in the last year. This derisked our point of entry and is a good demonstration of our time well invested approach. We purposely set ourselves up to buy shares in wonderful companies when they become more attractively priced. On the same theme, Oracle delivered a standout performance for us, and we were able to realize gains, selling 3/4 of the value of our holding at the start of the period as its share price doubled and its risk characteristics changed. We first invested in Oracle in 2014 when it was rated as legacy tech and judged late to the cloud and as a service. We look closer and saw a business with a good market position in an attractive market, excellent business fundamentals with high levels of recurring revenue and plans to increase this and excellent returns metrics, run by a management team that was certainly aligned with shareholders and very well proven. Our analysis helped us establish that long-term ownership was very likely to be rewarded. And as you can see from the chart, Oracle took a little while to get going, but we could see that they were doing what great long-term businesses do, which is accept some short-term pain as they invested in a comprehensive move to the cloud and as-a-service offering, whilst using their low rating to undertake a massive share buyback with them buying back $120 billion of their shares and the share count reduced by 38%. As their transition to the cloud and as a service became better understood by the market, share price performance improved. And more recently, Oracle's cloud offering and incumbent position in corporate and governmental data places them very well for AI, and this has driven the doubling of its share price during the first half of our year. Our overall investment performance from only Oracle has been good with GBP 35 million invested, delivering GBP 101 million in cash returns through top slicing and dividends with the position worth GBP 89 million at the end of the period, so 5.4x our money. I will now hand over to Tom to talk about private capital. Tom Leader: Thank you, Mat. Today, I'll walk you through our performance, portfolio highlights and recent developments, focusing on how we continue to support private companies in creating enduring value. As a reminder, Caledonia Private Capital is focused on making direct investments, usually on a majority basis into high-quality mid-market U.K.-centric businesses. Our model is built on permanent capital, genuine partnership, a patient long-term perspective with moderate use of leverage. Unlike private equity firms whose funds have limited life spans, restricting the time when investments must be made, grown and sold, we have no time limitations on our investments. We can build genuine partnerships with strong management teams and help them create enduring value without the constraints of short-term capital. Our current portfolio has a net asset value of GBP 907 million, invested across 8 companies and represents approximately 30% of the NAV of Caledonia as a whole. For the half year, we delivered a total return of 7.7%. This result was primarily driven by the agreed sale of our minority stake in Stonehage Fleming to Corient Wealth, on which we exchanged contracts in September, along with continued good operating performance from AIR-serv. I will cover Stonehage Fleming in a bit more detail on the next slide. But clearly, the sale, when it completes, will deliver an excellent result for Caledonia. AIR-serv was another strong performer, valued at GBP 193 million as at 30th of September. In the half year, it delivered an 11% return, driven by strong revenue and profit growth. The business paid Caledonia a dividend of GBP 24.5 million in the period. The other companies in the portfolio continue to make progress in executing their value creation plans. Looking at our long-term performance, Private capital has delivered annualized returns of 8.5% over 3 years, 20.7% over 5 years and 12.5% over 10 years, all versus our 14% target. Stonehage Fleming is a full-service multifamily office, helping discerning clients address the challenges of creating and preserving wealth. It is focused on the ultra-high net worth market, which is the fastest-growing segment of the wealth market. The firm's clients have entrusted it with the management, fiduciary oversight and administration of assets in excess of USD 175 billion. Stonehage Fleming provides its services from 20 offices in 14 geographies. With an initial investment of approximately GBP 90 million in July 2019, we acquired a minority stake alongside Giuseppe Ciucci and the other founder partners. The management were not looking for a conventional private equity investor, but instead for a capital provider, which shared their long-term perspective and multigenerational approach to preserving and growing capital. Together, we restructured the balance sheet and the shareholder base of the group to position it for the next phase of growth. Over the following 6 years, we have worked in close partnership with the leadership team to deliver upon our original investment thesis, which entailed, first, streamlining the governance structure by financing and supporting succession management; second, investing in technology, which improved margins and allowed Stonehage Fleming to internalize services that were previously outsourced; third, enhancing business development, which delivered strong organic growth; and fourth, completing 4 strategic acquisitions, which have expanded the firm's geographic reach and diversified its product and service offering. The business has been a consistent performer, a true compounder. Strong cash generation and disciplined reinvestment have driven returns steadily upward through our ownership. This investment is a hallmark example of our unique approach, long-term partnership-driven and unconstrained by fixed fund life and has delivered exceptional value for all stakeholders. We expect the deal to close in mid-2026, subject to the required regulatory consents at which point it should deliver cash proceeds of approximately GBP 288 million, representing including dividends received along the way, a 3.2x multiple on cost of investment. As of 30th September, Stonehage Fleming was valued in the portfolio at GBP 259.7 million, net of approximately 10% discount to reflect the transaction execution risk and the time value of money. The bubble chart here illustrates for all our major realizations since 2012 on the X-axis, the realized IRR and on the Y-axis, the NAV uplift at exit compared to the carrying value 12 months prior to exit. For Stonehage Fleming, the expected exit proceeds of GBP 288 million represent a 30% uplift to its carrying value as at the 31st of March 2025. This result is comparable with a 37% uplift relative to the carrying value when we sold 7iM in January 2024. Overall, across the portfolio, we have a strong track record of realizations. Since 2012, we've generated GBP 1.4 billion in proceeds, returning around GBP 700 million in net cash to Caledonia. Our realized investments have delivered a 17% IRR and a 2x multiple on cost, which, given the low appetite for and use of leverage, compares very favorably with the returns delivered by U.K. mid-market private equity. Let me finish by saying we continue to deliver strong and consistent returns, underpinned by our disciplined approach and the strength of our partnerships. The success of Stonehage Fleming exemplifies the power of our permanent capital model, enabling us to back exceptional businesses and management teams, support their long-term growth and realize substantial value for our shareholders. Thank you, and I'll now hand over to Rob. Rob Memmott: Thank you, Tom. Our funds pool has been running for more than 15 years. The opportunity is significant. These funds tend not to market in Europe, meaning that we are often the only European investor, a real differentiator. The pool NAV of GBP 884 million is a diverse portfolio invested in some 82 funds by 46 managers and in more than 600 underlying businesses. 64% of the NAV is focused on the North America lower mid-market buyouts. The funds are typically the first institutional investment into relatively small often owner-managed businesses. The playbook is to transform the companies by strengthening the management team, improving operational efficiency, growing sales by product and geography, both organically and through bolt-on acquisitions. These improved companies with greater scale provide feedstock to mid-market private equity. It's a very pure form of capitalism. Of the North American companies, 2/3 are providing services with the balance having very little exposure to international trade flows. 36% of the pool NAV is invested in Asian buyout, growth and venture. The buyout assets are focused on domestic consumption and supply chains, fueled by the aging population, growing middle class and tech adoption. The venture and growth funds are invested in government supported new technologies and health. Whilst there is very limited exposure to the direct impact of trade tariffs, as expected, economic uncertainty has reduced investment and realization activity in the short term. The pool has delivered solid returns of 13.3% over 5- and 10-year periods. Performance over the 6 months reflects the continuation of trends experienced for the last 3 years. During that period, the North American pool delivered local currency returns of 8.9%, driven by the trading performance of the underlying companies. In Asia, the companies are making progress. However, the continued reduction in capital market flows has impacted on fundraising and exits suppressing our returns. Overall, the pool NAV grew by 4.3% in local currency, but reduced by 1.8% in sterling. Our capital commitments are GBP 394 million, 75% of which is to North America. GBP 52 million was invested in the 6-month period and $55 million of new commitments were made to 2 North American managers. Looking at the cash flows in a bit more detail. The chart shows the realization and investment activity over recent 6-month periods. As I mentioned earlier and as expected, economic uncertainty has reduced investment activity in the last 6 months, which can be seen on the graph. The pie chart details the weighted average life of the primary portfolio. For North America, the weighted average life is 4.3 years. For Asia, it's 5.5 years. We expect a longer hold period in Asia given that the assets are weighted towards venture growth and fund of fund investments. And so to the numbers. During the 6-month period, our NAV total return was 4.4%, growing our NAV to just over GBP 3 billion, of which GBP 2.9 billion is invested in a diversified portfolio of listed and privately held companies and funds that have got global reach. Cash on balance sheet was GBP 105 million. This, combined with our undrawn revolving credit facility of GBP 325 million, enables us to act quickly to invest in companies and funds that we find attractive. This was demonstrated in April when we deployed approximately GBP 50 million into the public company strategy, taking advantage of opportunities provided by the market volatility around Liberation Day. We have reprofiled the interim dividend such that it is 50% of the prior year total. This equates to 3.68p, which will be paid to shareholders on the 8th of January 2026. And now to my beloved waterfall chart. This chart shows the movement in NAV over the period. We started the year at GBP 2.9 billion. The portfolio return of GBP 145 million includes the negative impact of foreign exchange. We then deduct management expenses of GBP 17 million. There is then the cash returned to shareholders, GBP 14 million allocated to share buybacks and GBP 28 million for the final dividend from the prior year. That results in a closing NAV of just over GBP 3 billion. Our OCR is 87 basis points, slightly up on the prior year, reflecting some investment in our teams. I expect this to increase slightly over the next 12 months, taking account of full year effects. 54% of our assets are domiciled in U.S. dollars and 37% in sterling. Movements in the sterling-dollar exchange rate will, therefore, impact our in-period results. In the last 6 months, we suffered an FX loss of GBP 59 million, reducing our NAV by approximately 2%. We have a robust balance sheet with no structural leverage. Walking you through the cash movements, we started the year with GBP 151 million, and net GBP 27 million has been invested. The investment income from our assets was GBP 47 million, higher than in previous periods as it includes the GBP 25 million dividend from AIR-serv. We have consumed GBP 24 million in the cash cost of management expenses and working capital. And next, there is the payment of the prior year final dividend, GBP 28 million and GBP 14 million allocated to share buybacks, resulting in a closing cash position of GBP 105 million. This, combined with our undrawn revolving credit facility of GBP 325 million means that we have liquidity of GBP 430 million. Of the revolving credit facility, GBP 150 million has just under 4 years remaining duration and GBP 175 million just under 2 years. We expect to complete the sale of Stonehage Fleming in Q2 2026 once all the regulatory approvals are obtained. GBP 251 million will be received on completion with 2 further amounts of GBP 18 million being due 6 and 12 months following. These amounts will come back on to the balance sheet. We feel no pressure to invest, and we will continue to appraise investment opportunities on their merits and as they arise. The discount at the end of the period was 33%. We believe this fundamentally undervalues the quality of the portfolio, our track record and prospects. We are taking actions over the things that we can control, including share buybacks, which remain an attractive investment for us. We have a prudent capital allocation policy to investments, our dividend and when appropriate, share buybacks. During the 6 months, we allocated GBP 14 million to share buybacks, increasing the total since March '24 to GBP 78 million, delivering a 7.44p NAV per share accretion. We continue to evolve our IR and communications to ensure that the Caledonia investment proposition is understood and rated. We held capital market spotlight events in January and June, focused on private capital and public companies. If you've not had the opportunity, I would encourage you to visit the website and watch the presentations. They provide a great insight into how the pools operate, what differentiates us and how we add value. When you visit the website, you will see that this has been significantly improved with new content. A date for your diaries, the 27th of January 2026, we will be holding the third spotlight session focused on the funds pool. We believe Caledonia is a great home for long-term investors. Following shareholder approval, we have completed the 10 for 1 share split. In addition, we have rebalanced the profile of the dividend, increasing the interim to 50% of the prior year total rather than the historic rate of approximately 25%. These measures will improve visibility of income, make payments more balanced, and I expect will improve accessibility for all shareholders. I'll now pass back to Mat. Mat Masters: Thanks, Rob. We're pleased with our 6-month performance, which supports our track record of delivering NAV total return of 9.8% per annum over the last 10 years, which is at the top end of our target range. Across both public and private markets, our portfolio is high quality, diversified and deliberately positioned to withstand short-term market volatility while compounding value over time. And none of this would be possible without our strong balance sheet, exceptional team fully aligned with shareholders and focused on long-term value creation. Thank you very much for joining us today, and we will now take questions. Operator: [Operator Instructions] Our first question comes from Iain Scouller with Stifel. Iain Scouller: I just wanted to ask about the valuation of Stonehage. I think in the statement, you're saying it's at a 5% discount to the expected proceeds. But in the presentation, you're talking about a 10% discount. So I just wondering if you could clarify that. Tom Leader: Certainly, the total discount relative to the expected proceeds is approximately 10%, comprising 2 separate adjustments: one, approximately 5% discount for execution risk and a 5% discount for the time value of money. The total discount relative to the expected proceeds is 10%. Iain Scouller: Okay. And when do you expect to receive the proceeds? Tom Leader: We expect to receive the proceeds on completion of all the regulatory approvals. But there are, in fact, slightly more than 20 regulatory approvals required in multiple jurisdictions. That process will take several months. So we expect the deal to complete towards the back end of the first half of calendar 2026. Operator: Our next question comes from Anthony Leatham with Peel Hunt. Anthony Leatham: A couple of questions, if I may. You were particularly active kind of April, that liberation day volatility on the public company side. How are you feeling about the environment and the positioning of the portfolio today? And then I had a couple of questions on the private equity side. Maybe a comment on the maturity profile of the funds portfolio. And then we're hearing from private equity trusts and managers that realization activity is actually improving. And I didn't know whether you had seen the same trend within your holdings. Mat Masters: Anthony, thanks for the question. Mat here. So yes, we did. So following President Trump's what's been Liberation Day sort of announcements and things, the stock markets sold off. And we added -- very pleased to add Charles Schwab to the portfolio. And that is absolutely sort of the playbook when we sort of invest in the quoted markets is to keep our powder dry until opportunities present themselves. And we also topped up other holdings in the wake of that, and that's all thus far performed very well for us. The portfolio is a long-term portfolio. We try not to judge precisely where it is on any particular day, but we do feel as we risk manage the portfolio as we go forward, we obviously talk about the fact that we to Oracle as that went up in value and loss rating went up, we did that across the whole portfolio. So we feel good about the medium and long-term prospects of the portfolio. Obviously, impossible to predict what share prices do on a day-to-day basis, I'm sure you'll appreciate. Maybe Rob could tackle the funds questions. Rob Memmott: Yes. Thanks, Anthony. Just in terms of the fund’s activity, as we mentioned in the presentation, the level of realization and investment activity in the last 6 months has reduced quite significantly. And what we're seeing is that start to increase the weighted average life of the portfolio compared to where we were a year ago. In terms of recent activity in the market, certainly, there is sort of noise of increased activity taking place. We're yet to see that sort of flow through into sort of real pound notes coming back through to us. And certainly, from a sort of planning and thinking about sort of liquidity, we're sort of still quite cautious in terms of the speed of that recovery getting back up to the norms, which I guess we were experiencing in the prior financial year. Operator: [Operator Instructions] There are no further questions on the webinar. I will now hand over to [Beck Hughes] to read out the written questions. Please go ahead. Unknown Executive: So the first question is about Oracle. What is your view and future prospects for your Oracle holding? And have you sold any more since the period end? Mat Masters: Thanks for the question. Mat here again. So we think Oracle has a fantastic future ahead of it. Most of its current trading is still sort of legacy type business. And what's really happened is its forward order book, it's grown a lot and a lot of that is sort of AI related. So actually, that's reflecting the opportunity expanding ahead of it. So we're quite excited about the future for Oracle. Nevertheless, the rating has changed materially during the period. And so we do sort of respond to that. And so we have also the size of the position during the we talked about the money we've had it over the course of our investment period. But over the year -- over the half year rather, we've taken GBP 54 million of it. So we have trimmed the holding according to the change in risk -- really around rating risk with it. We remain pretty excited about its medium and long-term future. Unknown Executive: A question on Stonehage. Are the proceeds contingent on anything or just deferred? And what are the most attractive areas for new investment? Tom Leader: So dealing with the Stonehage completion mechanism first. As I alluded to earlier, completion is conditional on reg approval in multiple jurisdictions. That will crystallize payment of the bulk of the proceeds, just over GBP 250 million. There is a deferred element, which is payable in 2 tranches 6 and 12 months post completion. Those deferred proceeds are interest-bearing, and they are subject to adjustment depending on the finalization of a closing balance sheet audit, which includes a true-up mechanism. So that could go either up or down, positive or negative against the estimated closing balance sheet just prior to closing. So there is bound to be a small difference between the 2, but we do not expect it to be material. In terms of the second part of the question, future opportunities, we scan somewhere between 300 and 350 new opportunities a year across a very broad range of sectors. Our historic strengths have been in financial services and business services and technology-driven industrial businesses. And there is a regular flow of opportunities in all of those sectors. But I would add that it is a difficult market in which to deploy capital. Good quality assets are still transacting at very high prices, and less good quality assets are either taking longer to sell or not selling at all. So we will remain selective and we have the liquidity to finance new acquisitions if and when we can find the right opportunity. Unknown Executive: Thanks, Tom. A question around discount. What plans do you have to reduce the very large discount now the buyback may have marginal benefits, but does not seem to benefit? And why have you only bought back GBP 13 million worth of stock given the discount is just over 30% and you have a lot of liquidity. Rob Memmott: Yes. Thank you, Beck. So as you rightly point out, the discount of around 33%, we certainly feel undervalues the value of the portfolio, our track record and our prospects. I guess the buybacks, we sort of see those as an investment opportunity for us. We don't see that -- we don't have a discount control mechanism. The things that we are doing to influence the discount are the things that we can control, which is continue to invest in a good quality, high-quality portfolio, make sure that we communicate with as large an investor base as possible to make sure that we -- the proposition is properly understood and rated. And then there are some smaller sort of tactical things that we've done around the share split, rebalancing the dividend payment to make sure that the shares are as attractive to a broader investor base as possible. Unknown Executive: Another question here about hedging. You mentioned return in sterling is diminished by your U.S. dollar weakness. Do you hedge? Rob Memmott: And the answer to that is that we do not hedge. We're a long-term investor. And if you like, the short-term volatility coming from exchange rates, we sort of understand those and sort of monitor them, but it is about sort of long-term sort of value sort of creation. And generally, if you sort of hedge the balance sheet position, you pay a premium in order to end up in the same place. So we don't hedge unless there are specific cash flows that we would do so for. And I think that the weighting of the portfolio is more dollar denominated reflects the fact that the size and the quality of the companies which we're investing in, a lot of those are based in North America or headquartered in North America. Unknown Executive: Another question here on special dividend. In the past, there was a loose policy of providing a special dividend every 3 years or so. Is this policy still operative? Mat Masters: So we have -- thanks for the question. We have a track record of occasionally paying special dividends. I don't think we've ever sort of announced a policy about when we would do it. And we've not made any announcement about paying a special dividend. So that is the case at the moment. Unknown Executive: Another question here about equity market valuations. What do you think of them. Mat Masters: Well, thanks for the question. So equity market valuations vary around the globe, and there'll be one market up and one market not quite so far up. And actually, it's a really difficult question to address and actually respond to in your portfolio. And so what we do is to try and keep it very simple. We invest in good quality companies and hold them for the longer term and try not to worry too much about what's going in the macro and make sure we invest in things where we don't have to worry too much about the macro. Okay. Well, we have gone through the questions now, and we're very grateful for everyone joining us on the call today and for the questions, and we look forward to connecting with you next time. Operator: Thank you for joining today's call. We are no longer live. Have a nice day.
Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the DICK'S Sporting Goods, Inc. Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Simply press star followed by the number one on your telephone keypad. If you'd like to withdraw that question, again, press star one. Thank you. I would now like to turn the conference over to Nate Gilch, Investor Relations. Nate, please go ahead. Nate Gilch: Good morning, everyone. And thanks for joining us to discuss our third quarter 2025 results. On today's call will be Ed Stack, our Executive Chairman, Lauren Hobart, our President and Chief Executive Officer, and Navdeep Gupta, our Chief Financial Officer. A playback of today's call will be archived in our Investor Relations website located at investors.dicks.com for approximately twelve months. As a reminder, we will be making forward-looking statements that are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and our quarterly report on Form 10-Q for the first fiscal quarter, as well as cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find the reconciliation of our non-GAAP financial measures referenced in today's call. And finally, a couple of admin items. First, a quick note on our comparable sales reporting. Foot Locker will be included in our comp base beginning in Q4 of next year, which will mark the start of their fourteenth full month of operations post-acquisition. As such, all reported comp sales for this quarter and for the upcoming year pertain to the DICK'S business only. Second, I want to provide clarity on certain terminology we'll use throughout today's call and going forward. First, when we refer to the DICK'S business, we mean our existing DICK'S Sporting Goods operations, including the DICK'S Sporting Goods, Golf Galaxy, Going Going Gone, and Public Lands banners, as well as GameChanger. Earnings per diluted share results for the DICK'S business exclude the dilutive effect of the 9,600,000 shares issued as part of the Foot Locker acquisition. Second, Foot Locker business refers to our newly acquired operations including the Foot Locker, Kids Foot Locker, Champ Sports, WSS, and Atmos banners. And finally, for future scheduling purposes, we are tentatively planning to publish our fourth quarter 2025 earnings results on March 10, 2026. With that, I now turn the call over to Ed. Ed Stack: Thanks, Nate. Good morning, everyone. Thanks for joining us today. This is an important call. It's our first earnings call as a combined company with Foot Locker. We have a lot to share. There's a lot of detail and a lot of numbers. We want to make it clear we're doing all that our shareholders would expect us to do to make the Foot Locker business accretive in 2026. And I have to tell you, as the largest shareholder, I couldn't be more excited about the progress we're making and the opportunities ahead. As announced earlier this morning, we delivered another great quarter with comps of 5.7% for the DICK'S business, and we continue to operate from a position of strength. Our momentum in the DICK'S business remains strong, as we execute against the key priorities that have fueled our success: a differentiated on-trend product assortment and an industry-leading omnichannel athlete experience. This is the flywheel of our success as a company. It's driving consistent growth and performance. Now I will discuss the tremendous opportunity we see with Foot Locker. Completing this acquisition on September 8 marks a bold and transformative moment for DICK'S. Together, we're building a global platform that is at the intersection of sport and culture, one that we believe will redefine sports retailing. This powerful combination will allow us to serve a broader consumer base, deepen our partnerships with the world's leading sports brands, and significantly expand our total addressable market. When we announced this acquisition, we knew that business was going to need work. Let me be candid. Foot Locker strayed from retail 101 and did not execute the fundamentals. Post-COVID, Foot Locker did not react quickly enough as its largest brand pivoted toward a direct-to-consumer model, leaving Foot Locker with the wrong inventory—too much of what didn't sell and not enough of what did sell. Consequently, as we enter this transitional phase, the Foot Locker business, as expected, comped negatively with pro forma comp sales for the full third quarter declining 4.7%, including a 10.2% decline internationally. Now after looking even deeper under the hood as the owners of Foot Locker, our conviction that we can turn this business around has only grown. We will bring our operational excellence, our supplier relationships, and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. Today, we're even more excited about the long-term value we believe this acquisition will deliver to our shareholders. We're committed to investing in Foot Locker's business to return it to profitable growth. We've assembled a world-class management team to lead the Foot Locker business, and I'm personally excited to guide this next chapter. As previously announced, Anne Freeman, a longtime former Nike executive, is now serving as Foot Locker North America president. Anne brings deep industry expertise and leadership experience, and she is supported by a high-caliber team of senior leaders—a combination of key executives from Foot Locker, all of whom are well respected by the stripers, blue shirts, and our brand partners, experienced leaders from DICK'S, and talent from other world-class companies. This team was handpicked to return Foot Locker to its rightful place in our industry, and we're already moving quickly in North America to build momentum. In addition, we're thrilled to have just announced that Matthew Barnes, former CEO of Aldi, will be joining our team next month as president of the Foot Locker International business. Matthew has nearly three decades of experience in global retail and a track record of transforming brands. We look forward to working to stabilize and ultimately accelerate that business with targeted turnaround strategies to meet the evolving needs of consumers globally. There's a lot happening to position the business for the short term and build for the long term. Our first priority is clear. We need to clean out the garage of underperforming assets. This means clearing out unproductive inventory, closing underperforming stores, and rightsizing assets that don't align with our go-forward vision for the Foot Locker business. This is the groundwork for the transformation. We began this work shortly after the closing on September 8. We have identified an initial number of underperforming assets around the globe, including inventory that needs to be marked down and liquidated, along with the preliminary number of stores that need to be impaired or closed. We initiated certain pricing actions in late Q3 and we'll be more aggressive in Q4 to clean up unproductive inventory. Our intent is to get the vast majority of the inventory charges behind us by the end of the year so we can start 2026 fresh and position Foot Locker for an inflection point during the back-to-school season in 2026. As a result, we expect Q4 margin rate for the Foot Locker business to be down between 1,000 to 1,500 basis points with pro forma Q4 comp sales being down mid- to high single digits. We believe this aggressive purging of underperforming assets is what needs to be done to return Foot Locker to its rightful position as a key leader in this industry. Navdeep will share more details in his remarks about the charges we anticipate as part of this important cleanup effort. Importantly, we've met with all of our key vendor partners and they are fully aligned with our vision and are eager to support a thriving, growing Foot Locker. They indicated they are committed to investing alongside us to reignite the Foot Locker business. We're moving with urgency and have already kicked off an 11-store pilot to begin testing changes in product and the in-store presentation. It's early, but we're encouraged by what we're seeing and learning. Looking ahead, we expect back-to-school next year to be an inflection point as our new strategies, assortments, and processes align to drive meaningful progress in the Foot Locker business. All supported by the work we're doing now by cleaning out the garage to position Foot Locker for future success. With these actions, we continue to expect Foot Locker to be accretive to our EPS in fiscal 2026, excluding one-time costs. What amplifies our confidence is the talented people we found inside the Foot Locker business. Over the past two months, we spent time in Foot Locker stores, offices, and distribution centers. Our teammates' passion is real, especially among the stripers and blue shirts along with the rest of the team members. They love sneakers, they're hungry for leadership, and they want to get back to playing offense. That energy is validating our excitement and building focus for what's ahead. In closing, at DICK'S, we've built a business that leads our industry in performance, innovation, and customer loyalty. DICK'S has generated consistent growth and strong margins, with a relentless focus on delivering shareholder value. While we're just getting started on Foot Locker's transformation, our deep expertise and our track record of growth and success fuel our conviction that we can turn this business around and we are confident that Foot Locker will reemerge as a stronger, more resilient, and more dynamic business. We will do this with the same grit, vision, and execution that got DICK'S to where it is today. Before turning it to Lauren, I want to take a moment to thank our more than 100,000 teammates across all of our banners for their passion and commitment during this exciting chapter for our company and wish everyone a happy Thanksgiving. With that, I'll turn it over to Lauren to share more on the continued momentum across the DICK'S business. Lauren Hobart: Thank you, Ed, and good morning, everyone. We're very pleased with our strong third quarter results for the DICK'S business, which continue to demonstrate the strength of our operating model and our team's disciplined execution. We are entirely focused on delivering on our strategies and sustaining our strong momentum. As always, our performance is powered by our compelling omni-athlete experience, differentiated product assortment, best-in-class teammate experience, and our ability to create deep engagement with the DICK'S brand. Today, we are raising our full-year outlook for the DICK'S business. This updated guidance reflects our strong Q3 results and the ongoing confidence we have in our business, grounded in our team's execution of the four strategic pillars I just mentioned. We now expect comp sales growth of 3.5% to 4% for the year and EPS to be in the range of $14.25 to $14.55 for the DICK'S business. Now moving to our third quarter results for the DICK'S business. Our Q3 comps increased 5.7% with growth in average ticket and transactions. These strong comps were on top of a 4.3% increase last year and a 1.9% increase in 2023, as we continue to gain market share. Our gross margin expanded 27 basis points in line with our expectations, and we delivered non-GAAP EPS of $2.78 for the DICK'S business, up from $2.75 in the prior year's quarter. As we continue to execute through our strategic pillars, we're seeing strong momentum across the three growth areas for the DICK'S business that we are focused on for 2025. First, we're incredibly proud of the progress we're making in repositioning our real estate and store portfolio. In Q3, we opened 13 new House of Sport locations, the most we've ever opened in a single quarter, bringing our year-to-date total to 16 openings. This achievement reflects the outstanding work of our team, whose focus and execution made this ambitious rollout a reality. We now have 35 House of Sport locations nationwide, a major milestone in the growth of this transformative concept. We also opened six new Fieldhouse locations in Q3 and opened another just last week, completing our 15 planned openings for the year and bringing us to a total of 42 Fieldhouse locations across the US. These innovative formats are delivering powerful results, deepening engagement with our athletes, brand partners, and landlords, and laying the foundation for long-term profitable growth for the DICK'S business. The second of our three major focus areas is driving growth across key categories. Our unparalleled access to top-tier products from both national and emerging brand partners continues to fuel athlete demand and excitement, driving strong growth across the DICK'S business. At the same time, our vertical brands are resonating incredibly well with our athletes, further contributing to this momentum. For Q3, this growth came from having more athletes purchase from us with more frequent purchases and more spending each trip. We feel great about the product pipeline from our brand partners, and our inventory is well-positioned to meet athlete demand this holiday season. I also want to highlight our ongoing expansion into trading cards and collectibles. In partnership with Fanatics, we've launched the Collector's Clubhouse in 20 House of Sport locations, with plans to include it in every new location going forward. These spaces feature trading cards, autograph memorabilia, and more, and the athlete response has exceeded our expectations. It's a unique and fast-growing category that's a great fit to everything we do, and we're very excited about the opportunity ahead. And our third major focus area, our multibillion-dollar highly profitable e-commerce business continues to stand out as a growth driver, once again growing faster than the DICK'S business overall. I'd like to highlight three examples of ways we're building strength in e-commerce. First, we're really leaning into our app experience, including app-exclusive reservations that are establishing us as a leader in launch culture across many key categories. Second, we're continuing to invest in capabilities to deliver more personalized experiences, content, product recommendations, and search results. An example of this is how we're targeting NFL fans with personalized creative messaging and product recommendations for their favorite team. Third, for the holiday season, we're making it easier than ever to find the perfect gift with a new capability for athletes to build and share their wish list with family and friends. Lastly, as part of our broader digital strategy, we're harnessing the power of our athlete data and continue to be enthusiastic about the long-term growth opportunities we see with GameChanger and the DICK'S Media Network. Our GameChanger platform keeps expanding with new features, partnerships, and content that enriches the whole youth sports experience and reinforces our leadership in the multibillion-dollar youth sports tech ecosystem. A great example is our new game insights feature, which gives coaches fast, actionable takeaways after every game, further elevating the value we provide to athletes, coaches, and families. We're also seeing great momentum with our DICK'S Media Network, which is deepening engagement with consumers and key brand partners while expanding across new ad platforms. In addition to our collection of owned and our full spectrum of off-site channels, we're ramping up our in-store capabilities like our interactive digital experiences and programmable spaces that are driving impactful brand activations in our House of Sport locations. In closing, we're very pleased with our strong third quarter results and remain highly confident in our long-term strategies to drive sustained sales and profit growth for the DICK'S business. We believe the power of our omnichannel athlete experience and our compelling differentiated product offering will resonate with our athletes this holiday season, supported by our fantastic holiday brand campaign, which launched a few weeks ago. I'd like to thank all of our teammates for their hard work and commitment and for their focus on delivering great experiences for our athletes throughout the season. And, also, a warm welcome to all stripers, blue shirts, and team members from the Foot Locker business. We're excited to have you as part of the DICK'S family and to achieve great things together. I share Ed's excitement about how we will bring our operational excellence, our supplier relationships, and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. With that, I'll turn it over to Navdeep to share more detail on our financial results and 2025 outlook. Navdeep, over to you. Navdeep Gupta: Thank you, Lauren, and good morning, everyone. Before I begin my review of our third quarter results, I would like to take a moment to provide important context for Foot Locker's performance included in our consolidated financial results. As noted in this morning's release, our acquisition of Foot Locker closed on September 8. As a result, our third quarter consolidated financials do not include the peak back-to-school selling season in August for the Foot Locker business. They reflect just eight weeks of post-acquisition results in September and October, historically an unprofitable time period for the Foot Locker business. Let's now move to a brief review of our third quarter results for the consolidated company, including continued strong performance for the DICK'S business. Consolidated net sales increased 36.3% to $4.17 billion, driven by an approximate $931 million sales contribution from a partial quarter of owning the Foot Locker business and a 5.7% comp increase for the DICK'S business as we continue to gain market share. On a two-year and a three-year stack basis, comps for the DICK'S business increased 10% and 11.9%, respectively. These strong comps were driven by a 4.4% increase in average ticket and a 1.3% increase in transactions. We also saw broad-based strength across our three primary categories of footwear, apparel, and hardlines. As Nate said, Foot Locker will be included in the comp base beginning in Q4 of next year, which is when they will commence their fourteenth full month of operation following the closing of the acquisition. For reference, pro forma comp sales for the Foot Locker business in Q3 in its entirety decreased 4.7%, with the comparable sales in North America decreasing by 2.6% and the comparable sales in Foot Locker International decreasing by 10.2%, primarily driven by softness in Europe. Consolidated gross profit for the quarter was $1.38 billion or 33.13% of net sales, down 264 basis points from last year. For the DICK'S business, gross margin increased by 27 basis points and was in line with our expectations. Notably, the year-over-year decline in consolidated gross was driven entirely by the mix impact from the lower gross margin Foot Locker business. On a non-GAAP basis, consolidated SG&A expenses increased 40.8% or $320.9 million to $1.11 billion and deleveraged 84 basis points compared to last year's non-GAAP results. $259.9 million of this consolidated increase was driven by the Foot Locker business. For the DICK'S business, expense dollars increased by 7.7% and deleveraged 45 basis points, which was in line with our expectation and driven by strategic investments digitally, in-store, and in marketing to better position the DICK'S business over the long term. Consolidated preopening expenses were $30.6 million, an increase of $13.8 million compared to the prior year. As Lauren mentioned, this supported the opening of 13 new House of Sport locations in Q3, our highest numbers opened in a single quarter to date, plus another six Fieldhouse locations we opened in the quarter. Consolidated non-GAAP operating income was $242.2 million or 5.81% of net sales, compared to $289.5 million or 9.47% of net sales last year. For the DICK'S business, non-GAAP operating income was $288.6 million or 8.92% of net sales. This year's consolidated results included a $46.3 million operating loss in the quarter from the Foot Locker business, which was primarily driven by the gross margin decline. We initiated certain pricing actions in late Q3. Importantly, since the acquisition of Foot Locker closed on September 8, these results exclude a profitable back-to-school season for the Foot Locker business in August and through Labor Day. For reference, pro forma non-GAAP operating income for the Foot Locker business in Q3 in its entirety was approximately $6.8 million. On a non-GAAP basis, other income comprised primarily of interest income was $12.7 million, down $7.8 million from the prior year. This decline was from lower cash on hand and a lower interest rate environment. Consolidated non-GAAP EBT was $239.9 million or 5.76% of net sales, including the Foot Locker business. This compares to an EBT of $297.1 million or 9.7% of net sales in Q3 of last year. Moving down the P&L, consolidated non-GAAP income tax expense was $59.4 million or a rate of 24.7%. While the income for the DICK'S business was taxed at a low 20% rate, the combined company was subject to a higher tax rate primarily driven by the Foot Locker's EMEA business, where a full valuation allowance remains in place. In total, we delivered a consolidated non-GAAP earnings per diluted share of $2.07 for the quarter. These results included non-GAAP earnings per diluted share of $2.78 for the DICK'S business based on a share count of 81.2 million, which excludes the dilutive effect of the shares issued in connection with the acquisition of Foot Locker. This is up from the earnings per diluted share of $2.75 last year. The DICK'S business results were partially offset by the effects of the partial quarter contribution from the Foot Locker business, which include a 52¢ negative impact from Foot Locker operations, including the gross margin decline as well as the higher tax rate, a 19¢ negative impact from the increased share count, which was up 5.9 million prorated for the eight weeks of the Foot Locker ownership. On a GAAP basis, our earnings per diluted shares were 86¢. This includes the noncash gains from our nonoperating Foot Locker stock, as well as $141.9 million of pretax Foot Locker acquisition-related costs. For additional details on this, you can refer to the non-GAAP reconciliation table of our press release that we issued this morning. Now turning to our balance sheet. We ended Q3 with approximately $821 million of cash and cash equivalents and no borrowings on our $2 billion unsecured credit facility. Our quarter-end inventory levels increased 51% compared to Q3 of last year. Excluding the Foot Locker business, inventory levels for the DICK'S business increased 2% compared to Q3 of last year. We believe the inventory in the DICK'S business is well-positioned to continue fueling our sales momentum. For reference, on a pro forma basis, inventory levels for the Foot Locker business increased approximately 5% as compared to the same period last year. And as I've mentioned, the work is underway to clear out the unproductive inventory at the Foot Locker business. Turning to our third quarter capital allocation, net capital expenditures were $218 million, which included $201 million for the DICK'S business and $17 million for the Foot Locker business. We also paid $109 million in quarterly dividends. Before I move to our outlook, I want to address a few key expectations surrounding the Foot Locker acquisition. First, as Ed discussed, our immediate priority is to clean out the garage of unproductive assets as we look to optimize the inventory assortment and store portfolio for the Foot Locker business. We expect these actions, along with other merger and integration costs, to result in a future pretax charge of between $500 million and $750 million. Importantly, these future pretax charges are excluded from today's outlook. Second, we remain confident in achieving the previously announced $100 million to $125 million in cost synergies over the medium term, primarily from procurement and direct sourcing efficiencies. Third, as Ed said, we continue to expect the acquisition to be accretive to EPS in fiscal 2026, excluding one-time costs. Now moving to our outlook for 2025. Today, we are providing an updated outlook that is specific to the DICK'S business and does not include the Foot Locker business, which we will address separately. We are taking this approach to ensure comparability of our performance across the quarters and to provide ongoing visibility into the DICK'S business. This outlook also excludes the investment gains as well as the merger and integration costs related to the Foot Locker acquisition. As Lauren said, we are raising our expectation for comp sales and EPS for the DICK'S business. Our updated guidance reflects our strong Q3 performance and includes the expected impact from all tariffs currently in effect. This outlook balances our confidence in the outcomes we are driving through our strategic initiatives and our operational strength against the ongoing dynamic macroeconomic environment. We now expect full-year comp sales growth for the DICK'S business in the range of 3.5% to 4% compared to our prior growth expectation of 2% to 3.5%. Total sales for the DICK'S business are expected to be in the range of $13.95 billion to $14 billion compared to our prior expectation of $13.75 billion to $13.95 billion. Driven by the quality of our assortment, we continue to expect to drive gross margin expansion for the full year. We anticipate this expansion will be offset by SG&A deleverage as we are making strategic investments digitally, in-store, and in marketing to better position ourselves over the long term. We still expect operating margins to be approximately 11.1% at the midpoint. At the high end of the expectations, we continue to expect to drive approximately 10 basis points of operating margin expansion. We now expect EPS for the DICK'S business in the range of $14.25 to $14.55 compared to a prior expectation of $13.90 to $14.50. Our earnings guidance for the DICK'S business is based on approximately 81 million average diluted shares outstanding and excludes the dilutive impact of the 9.6 million shares issued in connection with the acquisition. This outlook for the DICK'S business also assumes an effective tax rate of approximately 24% compared to our prior expectation of approximately 25%. We continue to expect net capital expenditures of approximately $1 billion for the full year for the DICK'S business. Turning now to the Foot Locker business. We want to provide some perspective on our expectations for the fourth quarter. As Ed discussed, our priority is to position Foot Locker for a fresh start in 2026 and reset the business for long-term success. This includes taking strategic actions to address unproductive assets, including the optimization of inventory and the closure of underperforming stores. As a result of our actions to optimize Foot Locker's inventory, we expect Q4 gross margins for the Foot Locker business will be down between 1,000 to 1,500 basis points as compared to Foot Locker's reported results in the same period last year, with the pro forma comp sales being down mid- to high single digits. Excluding the one-time costs associated with our actions to address unproductive assets, we expect Q4 operating income for the Foot Locker business to be slightly negative. Looking ahead, we expect next year's back-to-school season to be an inflection point to drive meaningful progress in the Foot Locker business. As a reminder, we continue to expect the Foot Locker acquisition to be accretive to our EPS in fiscal 2026, excluding the one-time cost. Before we wrap up, I want to provide a couple of consolidated company assumptions to provide clarity for your models. For the fourth quarter, we expect approximately 91 million average diluted shares outstanding, which includes the dilutive impact of the 9.6 million shares issued in connection with the Foot Locker acquisition. We also anticipate a consolidated company effective tax rate of approximately 29% for Q4, impacted by the expected Foot Locker losses in EMEA where no corresponding tax benefit is anticipated. As Ed and Lauren said at the top of the call, we are proud that we continue to operate from a position of strength with robust momentum in the DICK'S business and a significant effort underway to return the Foot Locker business to growth. We are doing all that our shareholders would expect to make the Foot Locker business accretive in 2026. We could not be more excited about our future together. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods, Inc. Operator, you may now open the line for questions. Operator: Thank you. We will now begin the question and answer session. Withdraw that question, again, star one. And as a reminder, please limit yourself to one question and one follow-up. Any additional questions, please re-queue. And your first question comes from the line of Robbie Ohmes with Bank of America. Please go ahead. Robbie Ohmes: Good morning. Hi, Ed and Lauren. My first question is I know we're going to be talking a lot about Foot Locker today, but on the 5.7% comp, etcetera, and you raised guidance. But just how are you driving that? And how are you guys thinking about your confidence going into the holiday here? Lauren Hobart: Thanks, Robbie. We are so proud of the team for a 5.7% comp. And importantly, we are comping strong comps, so a two-year stack of 10%. And as you know, it's been several quarters, seven quarters in a row, where we've had an over 4% comp. That really speaks to the fact that our long-term strategies are working. And I would point to the differentiated product assortment that we've been able to bring in, everything from newness from our strategic partners to emerging brands, our vertical brands, consumers, athletes are really resonating with the products that we are providing. And at the same time, our entire team is fully focused on delivering an engaging athlete experience. So that's in our stores. That's our digital environment. We are really focused on excelling and getting people the product that will give them the confidence, the excitement to do their absolute best. So our strategies are working. If you look at Q3, one of the great things we saw was that we had growth across all of our key categories. When you think of back to school, you think of back to sport, you think of footwear and apparel and team sports. We knocked it out of the park with those categories. But also golf and as well as our licensed business and our trading card business really doing well. So as I flip to the holiday, all of those themes are the reasons why we are so excited and confident as we look to Q4 and that we just raised our guidance. We've got an incredible product assortment for athletes. The consumer is fully focused on sport, and we are right sitting at the middle of the intersection of sport and culture. Robbie Ohmes: That's really helpful. And then just my follow-up, just on Foot Locker, what kind of assumptions did you make about Foot Locker's cleanup of inventory in the fourth quarter having on DICK'S Sporting Goods? And also, how many stores are you guys planning to close, and what would the timing be there? Ed Stack: Thanks, Robbie. As we take a look at closings, we're still addressing that. We've got some stores that we think we're going to close. Also looking to address just the upside that we think we have in these stores and many really need to be closed and how many can we make more profitable. So we'll give you some more guidance on that at the end of our fourth quarter call. Navdeep Gupta: Robbie, let me quickly add on to the cleanup of the inventory in the fourth quarter. So what Ed said in his prepared remarks as well as what I said, that we expect the gross margins in the Foot Locker business in the fourth quarter to be down between 1,000 to 1,500 basis points. As you can imagine, that is primarily driven by us quickly addressing the unproductive inventory that is in the system right now and have the room available to bring the excitement assortment that positions the business really well for 2026. Robbie Ohmes: Thank you. Operator: Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead. Simeon Gutman: Hey, good morning team. My first question on Foot Locker, so it looks like the business may have been a bit softer than the Street was expecting in Q3, and you're anticipating a slightly negative operating income in Q4. Yet you're expecting the acquisition to be accretive to EPS in '26. Can you walk through the building blocks to achieve it? And then what gives you confidence? Ed Stack: Sure. Thanks, Simeon. I can't tell you really couldn't be more excited about Foot Locker and the opportunity of Foot Locker. But there's some work that needs to be done to get it ready for '26 and for it to be accretive to our business. So one of the things that we're doing, and we gave the Foot Locker team kind of a visual that we need to clean out the garage. So we're cleaning out the garage. We're cleaning out old unproductive inventory, we're going to be impairing underperforming assets. And from a confidence standpoint, those are all part of the building blocks that we need to put together to be ready for 2026. I have tremendous confidence in this management team that we've assembled in North America as we talked about. It's being led by Anne Freeman, a longtime Nike executive that we've got a tremendous amount of respect for. The brands have a tremendous amount of respect for her. We just announced today that Matthew Barnes is going to run our international business. And he's a Brit, and we think that it truly needs to be run by a European. We're making some real changes on how we are approaching the international business, which we think is going to be very positive. And one of the things we love about Foot Locker and one of the reasons we bought it when we went out and did our due diligence before is the men and women in the stores, the stripers and the blue shirts. These young men and women, they love sneakers. They love Foot Locker. They love to be around this product. And they're really our secret weapon as we go forward. And the other thing that gives us a tremendous amount of confidence is we've talked with every brand, and every brand has a renewed interest in being supportive to Foot Locker, and they've all talked that they want a stable and growing Foot Locker. And to be honest with you, it's great for our business. It's also great for the brand's business. And we've got complete alignment with the brands. And we are confident that in 2026, we do put all these building blocks together. We're confident that Foot Locker will be accretive to our earnings in 2026. Simeon Gutman: So my follow-up, I guess, I'll make it two parts. First, just to that point on '26 accretion, that's Foot Locker standalone, including Synergy. That's not, let's say, DICK'S Sporting Goods electing to buy stock back. That's Foot Locker math adding to DICK'S earnings base. That's part one of the follow-up. And then part two, you know, you don't tell us what your footwear gross margin is inside of core DICK'S, but if you look at Foot Locker, they've been on a steady decline for the last several years, and a lot of it does track with one of your major suppliers' proliferation of product. Is it feasible once you're done with your cleanup that you can get gross margins at parity with DICK'S Sporting Goods, or is there something about the mix and the selection that you can't get it quite to that level? Meaning, how much quick repair could there be once you clean up the assortment? Ed Stack: Well, we're not going to guide right now, and we'll give you some more guidance at the end of Q4. But we're not going to give you we're not going to tell you where it's going to be compared to DICK'S Sporting Goods. But we do know that it can be meaningfully different than it is right now. There's a huge opportunity. One of the reasons it struggled is they haven't had access to some of the key product, haven't had allocation of some of the product. There's a number of stores that are out of stock in product that they don't have. I was just in a store in New York yesterday, as a matter of fact, and talking to the gentleman who runs the store. He said, we're a great running store. We just got Nike's running construct in last week. When you take a look at some things like that, there's just a huge opportunity. That product is being sold at full price. So, yeah, we're really confident that there'll be a meaningful increase in their gross margin. And we'll give you some more color on that at the end of the fourth quarter. Simeon Gutman: And then I don't know, Ed. Sorry. It was that follow-up to the accretion comment if you can comment any more on that, whether that included buyback or that's just core Foot Locker? Ed Stack: That's core Foot Locker. That's not to say we might not, you know, as we've said, we've been opportunistic based on what happens with the stock. We may buy back some stock, but we think from a core Foot Locker standpoint, it can be accretive to our earnings in 2026. Simeon Gutman: Okay. Happy holidays. Thanks. Good luck. Ed Stack: Thanks. You too. Operator: Your next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead. Kate McShane: Hi, good morning. Thanks for taking our question. We were curious about how you're going to manage the markdowns at Foot Locker. I guess the concern is that if you do discount aggressively in the fourth quarter, do you think you'll be in a position where you can go back to full price selling and the customer be ready for that as new product comes into the store? Our second question on the discounting is, do you feel like the market is going to be heavy with discounts now in Q4? And how much do you expect that to impact the market and DICK'S own footwear sales? Ed Stack: Sure. Thanks, Kate. I don't really think that that's going to be an issue with these markdowns and then going back to full price because the product that we're marking down is older product that hasn't sold, product that's been sitting around for a while. So when we get the new fresh product, we're confident we'll sell that at full price. And the consumer out there is looking for new fresh product that is innovative in the marketplace. That's what Foot Locker, for the most part, doesn't have right now. And we'll be bringing that product in as we get into '26. From a discounting standpoint, right now and who knows, things could change. But right now, we don't think that the discounting is going to be meaningfully different than it was last year. We do feel that we've got, as Lauren said in her remarks, we've got different and innovative product, more premium product that you'll see, product that's not as fully distributed in the marketplace. We don't see that promotional activity impacting our business a whole lot. Kate McShane: Thank you. Operator: Next question comes from the line of Adrienne Yih with Barclays. Please go ahead. Adrienne Yih: Great. Thank you very much. It's great to see the continued momentum at the DICK'S brand. I guess Lauren and Ed, obviously, I'm going to ask a question about Foot Locker. Is this a case of kind of just historically underperforming operations? And with some closures and inventory management, that you can control the controllables to kind of turn the business, or are there more infrastructure investments in some longer-tailed structural things about the business? Secondarily, are there banners within Foot Locker that no longer perhaps make sense? If you could talk about that. Then finally, my follow-up is on inventory. 1,000 to 1,500 basis points is quite a bit. Is there a write-off reserve within that? And is it just the depth of the promo, or are you using third-party channels? Just trying to understand the magnitude of that and the quickness of trying to get through that in the next couple of months. Thank you very much. Ed Stack: Wow. That's a lot. That's a lot, Adrienne. Let me start. Adrienne Yih: That was a one. Thank you. Ed Stack: That's okay. So the idea of this is historically underperforming operations. I think that's a big part of this. So Foot Locker really didn't know. They kind of got away from retail 101 of trying to have the right product in the right store and having those. I think turning this around, we don't think there's going to be some capital, and we're going to invest in the stores. But we've just done an 11-store test, and it was pretty capital light. And what we really did is we took the inventory, most of the inventory out of the store, and we relaid out the wall. And one of the things that, you know, the DICK'S team is really good at, and we're bringing that expertise to Foot Locker, is from a merchandising standpoint and how those visual merchandising really can help drive store. We took the inventory out of the store and we redid the walls. And no real infrastructure back in there. But if you had walked into a Foot Locker store and still walk into a lot of Foot Locker stores other than these 11, look at the wall, it's kind of merely a run-on sentence of shoes. And what we've done is we've taken and tried to segment it and show the consumer what's important in the stores. And we've got this 11-store test, and now it's only 11 stores. But the results have been we're pretty enthusiastic about the results. So we think that we can definitely turn this around. As far as the inventory being down 1,000 to 1,500 basis points, we are going to take markdowns to get this out of the store of older underperforming SKUs. And we do expect the end of the year, there will be a program that we will sell some of this off to a jobber and just clean out what's left from the inventory and be able to get a fresh start in 2026. Yep. So that's why we're moving as quickly as we can to get a fresh start in 2026. Yep. Lauren Hobart: I want to just add to what Ed is saying from my perspective. If you look at the core challenges that we're facing with the business, it really is, as you said, it's underperforming operations, it's inventory management, core retail 101. And one of the things that's been so amazing to see is the team is coming together, and Ed is spending a ton of time with them. Is that the core expertise in DICK'S, be it merchandising and the balance of art and science or the visual presentation, you can hear in his remarks just talking about that. The fact that our, you know, we are a marketing-driven company and that we believe in brand, and so those plans are being worked on for next year. And the brand relationships, there's just a heavy operational focus. All of those things are being transferred by, you know, osmosis, coaching, mentorship, all of that. And that's what gives us the confidence that we are moving in the right direction. Adrienne Yih: Okay. And just to be very crystal clear, the markdowns of the inventory are on lifestyle and will have kind of no competitive impact with the performance, you know, premium performance at DICK'S. So there's no crossover there. Ed Stack: The product that we're marking down is not key product at DICK'S Sporting Goods. It's older product that, quite frankly, and with the visual we used with the Foot Locker team, and it is kind of caught on globally as we just got to clean out the garage. We got to clean out all the inventory that's kind of in the corner that's not selling. That we need to have out of our system. Adrienne Yih: Fantastic. A 100% sense. Good luck. Ed Stack: Thank you. Operator: Your next question comes from the line of Michael Lasser with UBS. Please go ahead. Michael Lasser: Good morning. Thank you so much for taking my question. The first one is relatively straightforward. The expectation that Foot Locker will be accretive next year is based on the $14.25 to $14.55 for this year. Is that correct? And how dependent is the accretion expectation on inflecting the sales that you would anticipate by back to school for next year? Navdeep Gupta: Michael, thanks for that question. Yeah. Let me clarify on and exactly like you said, yes. The basis is on the $14.25 to $14.55 as the basis for 2025 results. And the dependency, I think, so starts with what Ed said about the building blocks. It starts out with cleaning out the garage, positioning the inventory, and having that excitement assortment and the newness that is resonating so well at DICK'S Sporting Goods with the gross margin expansion and the merch margin expansion that you are seeing. Gonna be the first and foremost priority as we look to the building blocks for how can this business be accretive. And keep in mind, you know, we talked about as part of the cleaning out of the garage that there are other unproductive assets. We are looking into the store portfolio where there are some unprofitable stores. But the opportunity we are looking at is not only deciding if the store should be closed, but actually the opportunity is the reverse to say if those stores had access to the right product, and the right innovation and the newness, can those stores be turned around and made profitable? We are looking into that. We are absolutely looking into some of the unproductive assets. That won't be part of the core business going forward. To your point, it starts with sales and margin. And in addition to that, we'll look into cleaning up under the garage to position the business for profitable growth into 2026, especially from the back-to-school season of next year. Michael Lasser: Got you. And my follow-up question is, one of the key debates on the combined enterprise story right now is how do you ring-fence the core DICK'S business in order to ensure that the integration of Foot Locker does not become a distraction to slow the momentum of the core business. It does look like in the fourth quarter, you are anticipating a significant slowdown guiding to a flat to slightly positive comp for the core business. So, a, what is fostering that expectation? And, b, given you have owned this business for a matter of months now, give us a sense of how you anticipate that they won't be it won't become a distraction such as the core business can accelerate into next year and drive some growth on top of the accretion that you're anticipating for Foot Locker? Sorry. There was a lot of words in that question. Lauren Hobart: I got it. Thank you, Michael. One of the absolute prerequisites for us to do this acquisition is exactly what you're saying. We needed to ring-fence the DICK'S team, and DICK'S needs to stay completely focused on driving our growth and our strategic priorities. And that is exactly what we are doing. I mean, eight, ten weeks in now, I'm even more confident that that is how we're doing it. Set up the team at Foot Locker. Ed is very much spending time over there. The DICK'S team is fully focused on the DICK'S priorities. And we're going to continue to just keep the teams sharing learnings, but not, not remotely working, you know, not distracting each other from what their core priorities are. When we look at Q4, you mentioned the deceleration. I want to be really clear about this. We just came off of a 5.7% comp, and we're up against a 6.4% comp last year. So the fact that you see our comp slightly moderating in Q4, we actually just raised the comp and the high end of our previous guidance now is the low end of our guidance. So we are really bullish on the holiday. We are just balancing that with an appropriate level of caution as we always do. We don't ever guide to the best possible outcome, but we are pumped and ready to go on the DICK'S side for Q4. Michael Lasser: Thank you very much, and good luck. Lauren Hobart: Thank you. Operator: Your next question comes from the line of Mike Baker with D.A. Davidson. Please go ahead. Mike Baker: Great. Couple to start on. First, a little bit more detail on that 11-store test. Maybe any initial results or pop in sales in and, I mean, is it just simple as relaying a back wall, or there's got to be more to what you're doing? So if you could address that, please. Ed Stack: Sure. So we're not going to lay out kind of the results. As I said, they're early, but we're really very, very encouraged on them. And it's not just as simple as laying out the wall as kind of taking some of the older product out of those stores. Put in some newer, fresher product that we were able to get our hands on. And one of the things we've also done is we're bringing the apparel business back to Foot Locker. They had really kind of walked away from the apparel business. And if you walk into these stores, you can see the apparel in there, and the apparel is selling really quite well too. So we think that there's an increase from a footwear standpoint, from an apparel standpoint going forward. And, you know, we'll more than likely give you a little bit more color on this test at the end of the fourth quarter as we give guidance going into 2026. But there's a lot of just basic retail 101 that if Foot Locker gets back to that or when Foot Locker gets back to it, will have a meaningful impact on their business. Mike Baker: Great. Fair enough. One more follow-up. If I could, you're talking about a fresh start and getting everything cleared by the end of the fourth quarter, but back to school is the inflection point, not to, you know, put too much pressure on you or try to accelerate it, but why not spring as an example as the inflection point? Why should the first half not be as strong? Ed Stack: I think that's a really good question. And the main reason for that is our merchandising philosophy and how we're buying the product. We didn't buy that. It was bought by the previous management team, and we think that there's some going to talk to the brands about trying to plug some holes. But the third quarter or the back-to-school time frame is the first time we will have had complete control over the assortment going forward. Mike Baker: Perfect sense. Thank you for that answer. Ed Stack: Sure. Operator: Your next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead. Julie Wasserman: Hi. This is Julie Wasserman on for Chris. Just following up with DICK'S ability to affect inventory orders for Foot Locker. So just confirming that you're saying that you won't be able to fully affect it until the start of the third quarter, but are you able to have any sort of impact even if it's lighter in the first half? And just specifically on the percent of spring ordered, since the acquisition, how much of that have you been able to order? Thus far, and how do you see that flowing into the fall? Ed Stack: We can have some impact on Q1 and Q2 probably. Hopefully, a little bit more on Q2 than Q1. We're working through that and working with the brands, and they are being as helpful as they can to try to get product to us that we need. But it's really going to be in that third quarter that you'll see the big difference that our team will have fully bought that product and merchandise that product. Julie Wasserman: That makes sense. And our follow-up question was just on gross margin with the third quarter. Just more broadly, if you could speak to what's going on there. In terms of promotional environment for is all for Cortex, promotional environment. Tariff costs, and the other inputs we discussed last quarter, like the GameChanger business. Navdeep Gupta: Yeah. So we reported today at 27 basis points in our gross margin. Keep in mind that that 27 basis points of gross margin expansion is on top of a 70 basis points of expansion that we saw. In terms of the promotionality within the quarter, the promotionality, as you can imagine, the overall marketplace continues to remain dynamic. We participated in select promotions, which we always do during the important back-to-school season. Tariff impact was within that quarter, our results as well within the merchandising margin. But keep in mind, we still delivered a merchandising margin expansion of five basis points on top of almost about a 60 basis points of impact, a positive impact last year. And there was a slight unfavorable impact from the mix, like Lauren talked about. The license business performed really well, which is a fantastic growth opportunity, but has a slightly lower margin. So that we had a little bit of an unfavorable impact from the mix as well. And just to kind of round out that answer, I would say that if you look at it, we have guided that we expect our gross margin to expand on a full-year basis. We expect gross margin to expand in our on the back half as well as within the fourth quarter. So overall, we feel great about the capability, the work that the GameChanger team is doing, and the DICK'S Media Network. Those ingredients continue to remain in place that drive our confidence in the gross margin expansion for this year and into the future. Julie Wasserman: Thank you. Operator: Your next question comes from the line of Paul Lejuez with Citi. Please go ahead. Paul Lejuez: Hey, guys. Can you talk about the $500 to $750 million in charges that might be coming? How much of that is cash versus just write-off? And how many stores are actually being reviewed when you think about that range of $500 to $750 and any split that you can share in US, international, or a banner? Navdeep Gupta: Yeah, Paul. We'll share much more of the detailed assumptions. You can imagine, we are ten weeks into this acquisition. And like I said before, we are balancing the evaluation that we are doing with the opportunity that we see in terms of driving growth and profitability expansion on a store basis. So on stores, we'll share much more of the detailed plans during our Q4 call. In terms of the makeup of this $500 to $750, I would say there are three main buckets. The first and foremost, as Ed talked about, is the unproductive inventory, which makes up quite a decent chunk of that that we will be addressing. The vast majority of that will be addressed here in Q4. That does include some of the poor store portfolio evaluation. And then we are looking deeper into the assets that we have in place, some of the technology assets, some of the legacy contracts, that we will evaluate as part of the fourth quarter and clean that also up to position the business and the profitability of the business for 2026. In terms of the cash versus noncash, I would say it would be a combination of both things. You know, inventory definitely would be cash, but if there are some existing assets on the balance sheet that we'll be cleaning up, those will obviously be noncash. So we'll share more detailed assumptions behind all of this during our fourth quarter call. Paul Lejuez: Thanks. And then just on the synergy number, the $100 to $125 million, how much of that are you assuming you can capture in FY26 to get to those accretion numbers? And I'm curious if you're thinking you might be actually playing for a bigger number than that $100 to $125 longer term. Navdeep Gupta: Yeah. Well, the $100 to $125 million, I would say we have a lot of work that has already been done. What we are working through, as you can imagine, is just conversations with the brands, conversations with the non-merchandising vendors, and those conversations are happening right now. So to allow a better line of sight, call it, twelve weeks from now, part of the fourth quarter. And in terms of looking for additional opportunity, you know us, we'll continue to focus on driving the top line and the bottom line results for the collective business now. Absolutely, that's a focus within the organization. Paul Lejuez: Thank you so much. Operator: Your next question comes from the line of Christina Fernandez with Telsey Advisory Group. Please go ahead. Christina Fernandez: Good morning. I wanted to ask a question on the vision for the merchandising and Foot Locker. That business historically was heavy on basketball, sneaker culture, and kids. So as you look at where there can be improvement, do you see that mix materially changing on the apparel side? Are you looking to lean more into private label, or do you also see national brands playing a big role in their apparel expansion? Ed Stack: Yeah. Foot Locker has always been steeped in basketball culture, and basketball will still be a very important part of that. The basketball construct that we see in the product coming forward from a basketball standpoint, we are really enthusiastic about across a couple of brands. And the apparel business, we do see the apparel business—the national brands is where they had kind of stepped away from. And leaned into their private brands, which we think the private brands certainly have a place there. But we feel that the national brands will have a meaningful increase in the apparel business in Foot Locker, which will help drive the AURs, and we think it'll be very profitable. Christina Fernandez: And then my second question is on Foot Locker also having been on a pretty significant remodel and refresh program. Have you continued with those Foot Locker reimagine stores, or have you paused that program? And looking to make changes in that real estate strategy that they had been on. Ed Stack: I think the Foot Locker reimagined stores have been an interesting test. As we've kind of gone through there, there's parts of the reimagined store that are very good and other parts that need to be rethought. And we're in the process of rethinking those right now. So as an example, what they characterize as the Kick It Club and the drop zone when you first walk into a Foot Locker store in the middle of the store, we're going to take that out, reimagine that, give better sight lines to the balance of the store. And repurpose some of that place, which that area of the store, which was not very productive at all. It was more of a social place and turned that into the apparel presentation more space and really focusing on an apparel standpoint, which we think will drive the sales even better than they are. Operator: We have time for one more question, and that question comes from the line of Steve Forbes with Guggenheim. Please go ahead. Steve Forbes: Morning, Ed, Lauren, Navdeep. Ed, I was curious maybe to just explore, like, any demographic differences we should be aware of as we think about the performance spread between the two businesses? Yeah. I think one of the thoughts out there is maybe more exposure to lower income, but I'd be curious maybe just hearing you summarize how we should think about the demographic exposure and how that sort of impacts your merchandising plans on a go-forward basis here? Ed Stack: Well, we'll merchandise Foot Locker for Foot Locker, which is going to be a bit more basketball-inspired, a bit more trend-inspired, definitely more urban than the DICK'S business. The DICK'S business will be more sport-led along with the lifestyle product. We think DICK'S is really kind of at the center of sport and culture. And it's a more suburban concept. With that being said, all categories of consumer, if you will, are looking for product that is new, innovative, and different than what's out there in the marketplace right now. And Foot Locker didn't have that new and innovative product. As we get into 2026, we'll start to have more of that product. And by the third quarter, I think we'll be fully invested in that newer, innovative product that the consumer across all income levels is looking for. Steve Forbes: And then just a quick follow-up for Navdeep. Maybe just so we're all on the same page here. There's a slightly negative adjusted EBIT for Foot Locker on a pro forma basis, is that that compares to the $118 million last year? I just I guess, confirm that. And then is there any way to sort of think through how you sort of view, you know, like a normalized 4Q or how you would speak to just where that LTM adjusted EBITDA profile is for the business relative to the $395 million that's in the presentation? Navdeep Gupta: Yeah. So the comparison, you're right. It's comparing to a normalized on a non-GAAP basis, the results that the Foot Locker posted in the fourth quarter of last year. And keep in mind the connection point between the 1,000 or the 1,500 basis points of the margin decline versus the slightly negative operating income expectation for Foot Locker is the part of the cleanup of the garage inventory, and that's the piece that we have threaded between the two numbers and the estimates that we gave out for the Foot Locker business. Steve Forbes: Thank you. Operator: And that concludes the question and answer session. I will now turn the conference back over to Lauren Hobart, President and Chief Executive Officer, for closing comments. Lauren Hobart: Okay. Well, thank you all for your interest in the DICK'S story. We will see you next quarter. Have a wonderful Thanksgiving, and a huge thank you to our entire teams of over 100,000 people around the globe. Thank you. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Ambarella's Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we will open up the call for questions. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's call is being recorded. I would now like to hand the call over to your speaker, Luisa Hardy, Vice President, Corporate Development. Please go ahead. Luisa Hardy: Thank you, Victor. Good afternoon, and thank you for joining our third quarter fiscal year 2026 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, and John Young, CFO. The primary purpose of today's call is to provide you with information regarding the results for our third quarter fiscal year 2026. The discussions today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are based on currently available information and are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risks that could affect our financial results, are more fully described in the documents we file with the SEC. Before starting the call, we hope to see you at one of the following investor events that we have scheduled during the fourth quarter. In December, we will be at the UBS Global Technology and AI Conference in Scottsdale, and in December at Nasdaq's London Conference. On January 6, from 4 to 5:30 PM at our CES location, we will be hosting a technology and product briefing. In January, we will be hosting more than a dozen sell-side analysts tours of our CES demonstrations, again at our CES location in Las Vegas. On January 17, at the Needham Conference in New York. Access to our third quarter fiscal year 2026 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the Investor Relations page of our website. The content of today's call, as well as the materials posted on our website, are Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business update for the quarter. John will review the financial results, and then we will be available for your questions. Fermi? Fermi Wang: Thank you, Luisa. Good afternoon, and thank you for joining our call today. Before we proceed, I want to let you know that last call, our co-founder and CTO, will be stepping down from the board of directors to become our chief technology adviser. He will continue to oversee our technology direction and development but without management responsibilities, and with user time commitments. Les and I have worked closely since 1994 across four companies. I am grateful that Les will continue as my close partner for over thirty-one years and beyond. He is truly the best I could wish for. I am happy he will have more time to pursue his passions, but I will definitely miss our daily conversations on various topics. Turning to our fiscal third quarter, we are reporting another strong quarter with both revenue and non-GAAP EPS exceeding expectations. We achieved record quarterly revenue of $108.5 million, slightly above the high end of our guidance range. Edge AI, which we define as a product that integrates one of our proprietary deep learning AI accelerators, was about 80% of our total revenue, representing our sixth consecutive quarter of record Edge AI revenue. We have increased our fiscal 2026 revenue guidance, which projects an all-time fiscal year total revenue record for Ambarella. With the strength in our average selling price and the breadth of demand, we are raising our fiscal 2026 revenue growth guidance to a range of 36% to 38%, or approximately $390 million at midpoint. This compares with our prior estimate provided on August 28 for 31% to 35% year-over-year growth, or approximately $379 million at midpoint. These results are very encouraging, but I am even more excited about the Edge AI activity ahead of us. There are three key factors behind our enthusiasm and our strong commitment to Edge AI. First, the breadth of applications demanding Edge AI technology in our product is expanding. Second, the AI performance requirement for our product roadmap is expected to continue to rise, driving robust new product cycles. Third, our ASP has been increasing, and in the long run, we continue to see an excellent opportunity to capture more value per design. I will elaborate on those points. First, AI at the edge is becoming more prevalent, driving an increasing breadth of applications in both enterprise and consumer-driven parts. Our Edge AI business started in enterprise security, followed by automotive safety, smart home, and telematics. More recently, the portable video market, which includes action cameras, panorama cameras, and body-worn cameras. Looking ahead, high-value shipments into the aerial drone market are expected to commence this quarter, representing just the beginning of our realization of the large robotic market opportunity. There is also strong interest from existing and new customers in our Edge infrastructure part and roadmaps, and we are committed to developing this incremental opportunity. In addition, ADAS and the vehicle economy remain large markets that can leverage our technology to a very high degree. Second, we see a large opportunity to execute at the edge with increasingly complex AI technologies currently implemented at the core of the network or in the data center. The challenge and our opportunity is that the solutions used in the network are often not suitable for the edge. With edge performance requirements rising, in each market, low power consumption, real-time processing, privacy, security, small form factors, thermal, network bandwidth efficiency, and lower price points are critical. At Ambarella, we continue to invest heavily in our proprietary Edge AI SoC technology and products to support these unique and increasing AI requirements. For example, our 10-nanometer CV2 family supports CNN networks, and our 5-nanometer embedding our third-generation AI processors is scaling our customers into more complex CNN and generative AI applications simultaneously. Third, we see an excellent opportunity to continue to increase our ASP. The shift from CPU workload to high-level over-accelerated computing or AI is well underway. The adoption of increasingly complex data center technology for the edge is another driver. Finally, the extension of our roadmap to other edge endpoints and into the edge infrastructure and auto economy is also expected, in particular, to boost our ASP. For example, our SoC branded ASP in Q3 was up about 20% year-over-year, and as our third-generation AI SoCs and other new products become a more material portion of our revenue, we anticipate further increases in the value we earn per design wins. I will now describe some of the representative customer engagements that reflect the factors I just described. In the enterprise security market, we are very pleased to share a significant milestone with our customer, Sparsh, who became India's first security camera manufacturer to receive STQC certification for its complete range. At the heart of the collaboration is our CV28. This gives us a tremendous start to accelerate our adoption in a rapidly growing "Made in India" market. Infinity, spun out of Bosch, announced their Autodome 7100i moving PTZ camera with built-in AI analytics and Ultra HD image based on CV72. They have also announced their diamond thermal security camera is based on CV22. It runs their CNN models to detect and classify objects accurately up to 2,000 feet. WCADA announced their upcoming CV75-based AM64 Access Station Pro, which enables secure physical access with AI facial recognition, touchless face unlock alongside traditional badge and mobile access methods. The company also launched a new CR63E remote security camera that leverages the power efficiency of our CV75. They also expect the CV72-based multi-sensor security camera product line, including CH53, CH63, and CY63. Motorola has developed their additional Halo 4 smart sensor on our CV25, which is an all-in-one environmental monitoring and security device that is designed for areas where cameras are restricted to detect events like smoke, fire, and audio anomalies. In the robotic and smart home market, one of our customers, Whiskers, announced the Litter-Robot 5 Pro, their first model with facial recognition and 4K night vision clip AI-powered camera based on CV28. We are seeing great momentum in our portable video market with Arash, who released two models this quarter. The X4 AIR, at just $165, is a new lightest compact 8K 360 action camera based on CV5. It is the first in a range to support 8K 30 frames per second active HDR. Arash also launched the latest version of their body-worn camera, Go Ultra, based on CV52. It captures 4K 60 frames per second video and a 50-megapixel photo with improved performance in low-light environments. In our automotive safety, ADAS, and telematics business, I would like to share some key customer wins during the quarter. Zika, a unit of GD, has evolved their in-cabin DVR system CV28 for the NIO ES8 full-size luxury model. Xiaopeng expands their global market presence. They have built all their driver management systems for all their export models on CV28. Solara, a global leader of vehicle lifecycle management, announced their new AI-powered smart camera, October, based on our CV22. In a first for Solara, the ASR5 is powered by AI plus human input intelligence, a revolutionary approach in fleet analytics that combines AI-based analysis with human oversight to improve safety, efficiency, and operations. From these representative customer engagements I just described, the strength of our current product portfolio is clearly represented. With every example from the 10-nanometer CV2 family and seven examples from our 5-nanometer generation, these products, all available today, offer customers a wide variety of options ranging from CNN to transformer network processing, one to many sensor input support, multiple sensing modalities, all at a wide range of price points. Our new product roadmap will expand this portfolio further. In addition to our comprehensive and expanding AI SoC portfolio, another important distinguishing characteristic of our portfolio is the advanced technology we offer to customers at the edge. For example, 5-nanometer-based products represent more than 45% of our total Q3 revenue, with products based on more advanced nodes in development. In summary, the first three quarters of fiscal 2026 are steps in the right direction with strong revenue growth, new product execution, profitability, and with our cumulative year-to-date free cash flow almost 14.8%. We continue to have a large edge serviceable available market over $12.9 billion by fiscal year 2031. In the early innings, we recognize the TAM market is still developing, and to successfully address this large set, we remain highly committed to our R&D investment that enables us to build upon our existing leadership position. I hope to see you on January 6 at our CES 2026 product and technology briefing, which will give you a chance to learn about new technologies and products and meet a full set of our management team. With that, John will now discuss the Q3 results and the Q4 outlook. John Young: Thanks, Fermi. I'll now review the financial highlights for the 2026 ending October 31, 2025. I will also provide a financial outlook for our 2026 ending January 31, 2026. I'll be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation and acquisition-related expenses adjusted for the impact of taxes. For fiscal Q3, revenue was $108.5 million, above the high end of our guidance range of $100 to $108 million, up 13.5% from the prior quarter and up 31.2% year-over-year. Sequentially, automotive revenue increased in the low single digits, and IoT increased in the mid-teens, with IoT growth led by the adoption of Edge AI in enterprise security and portable video applications. Non-GAAP gross margin for fiscal Q3 was 60.9%, slightly above the midpoint of our prior guidance range of 60% to 61.5%. Due to product mix, non-GAAP operating expense in Q3 was $55.3 million, slightly below the midpoint of our prior guidance range of $54 million to $57 million. Q3 net interest and other income was $2.1 million. Q3 non-GAAP tax provision was $900,000. We reported a non-GAAP net profit of $11.9 million or $0.27 per diluted share in Q3. Now I will turn to our balance sheet and cash flow. Fiscal Q3 cash and marketable securities reached $295.3 million, increasing $34.1 million from the prior quarter and $68.8 million from the same quarter a year ago. Increased cash and marketable securities primarily from operating cash flow associated with increased revenue. Receivables days sales outstanding decreased from forty-one days in the prior quarter to thirty-six days. And days of inventory decreased from eighty-five to seventy-six days. Operating cash inflow was $34.3 million for the quarter. Capital expenditures for tangible and intangible assets were $2.9 million for the quarter. Free cash flow was $31.4 million. We had one logistics company representing 10% or more of our revenue. WT Microelectronics, a fulfillment partner in Taiwan, that ships to multiple customers in Asia, came in at 70.2% of revenue for the third quarter. I will now discuss the outlook for the 2026. The breadth of our Edge AI business is expanding. Together with strong unit volume and average selling prices, as a result, in Q4, we forecast revenue in the range of $97 million to $103 million, or $100 million at the midpoint. With a higher percentage of revenue coming from our high-volume customers. Sequentially, due to seasonality, we expect a mid to high single-digit decline in both our automotive and IoT businesses. We expect fiscal Q4 non-GAAP gross margin to be in the range of 59% to 60.5%. We expect non-GAAP OpEx in the fourth quarter to be in the range of $55 million to $58 million, with the increase compared to Q3 driven primarily by employee-related and CES expenses. We estimate net interest and other income to be approximately $2 million, our non-GAAP tax expense to be approximately $600,000, and our diluted share count to be approximately 44.5 million shares. Thank you for joining our call today. And with that, I'll turn the call over to the operator for questions. Operator: Thank you. And at this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Limit yourself to one question and one follow-up in the interest of time. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Tore Svanberg from Stifel. Your line is open. Tore Svanberg: Yes. Thank you, and congrats on another record quarter. As my first question, when we think about that, let's call it, 36% to 38% growth for fiscal 2026, how much of that is unit versus ASP because, you know, obviously, you know, Edge AI now is becoming a pretty high percentage, but even within Edge AI, obviously, you have ASP increases. So just trying to understand how much of the growth has been driven by ASP versus units. Fermi Wang: Right. So I think both of them contribute to our growth. I will say I don't have the exact number. If I have to guess, it's probably half and half. I think our unit growth definitely continues to contribute from the Edge AI side. But ASP growth is also significant, as we talked about in the script. So I think that both of them contribute to our end results. Tore Svanberg: Yeah. Thank you, Fermi. That's very helpful. And as my follow-up, you talked about the portable video market. Could you just add some more color there? I mean, it sounds like you have some new design wins. These are obviously AI-based drones. But, just you know, I know you've been in that market for a while, and, obviously, that market sort of faded. And now it seems to be coming back. So how should we just think about that market driving growth for Ambarella going forward? Thank you. Fermi Wang: Right. You talked about portable and multiple different product lines there. I want to be a little bit more specific. In fact, we talk about action sports cameras that you said we have been here for many years. And the new category is panorama cameras that Arash is famous for. And also, we talk about drones, which are also part of the portable video. But in addition to that, our wearable cameras, web cameras, video conferencing products, all of them are part of the portable device because that's where our customers are focusing on. So overall, that's an area that is providing a big portion of our growth this year. And we believe that this market is going to continue to grow. And in fact, I have to say that I'm a little surprised by the size of the market that has grown over the year. But definitely, the momentum is there. Our job is trying to not only secure our market share but hopefully grow some market share in the future. Luisa Hardy: Hey, Tore. It's Luisa. Just technically, we call it portable video and other. So there's a lot of things in there, as Fermi said. Tore Svanberg: Yeah. Thank you for that. Congrats again. Fermi Wang: Thank you. Operator: Thank you. One moment for our next question. Our next question will come from the line of Ross Seymore from Deutsche Bank. Your line is open. Ross Seymore: Hi, guys. Thanks for asking a couple of questions, and congrats to Les. I guess, first, you talked about the breadth of your business in the Edge IoT side of things or Edge AI, IoT, whatever you guys are calling it now. Can you just talk a little bit about the consumer versus kind of the enterprise side? Now, I guess where I'm going is the portable side is great. But we've seen volatility around any sort of consumer applications in years past. Cycles past. I just wondered how you're managing that in this instance. Luisa Hardy: Hey, Ross. It's Luisa. The split is roughly fifty-fifty, 50% kind of enterprise CapEx driven and 50% consumer. And then within that 50% that's consumer, you've got some kind of consumer durable things like, say, smart home cameras that get replaced every five or six years. But then you also have consumer discretionary, which I think is some of the more volatile things you were referring to. So it's pretty evenly split at the highest level between the CapEx driven markets and the consumer, but different types of consumer spending. Ross Seymore: And I guess one for John. How are we thinking about gross margin as we look into next year? Just conceptually what the pluses and minuses would be? I know you have the long-term target of the 59% to 62%. You're a little closer to the lower end of that in your fourth-quarter guide. But just running through any of the puts and takes would be helpful. John Young: Yeah, Ross. Thanks. So as you said, our long-term model is 59 to 62. And as we said in our Q4 guide, the composition of gross margin really depends on the contribution of, like, our high-cost customers. So, you know, whatever the gross margin is from quarter to quarter, that's at least in the near term, that's a primary driver. Ross Seymore: Great. Thank you. John Young: Yep. Operator: Thank you. One moment for our next question. Our next question comes from the line of Joe Moore from Morgan Stanley. Your line is open. Joe Moore: Yeah. Great. Thank you. I also wanted to ask about that gross margin target. And I guess just as you've kind of refocused the business around a lot of exciting opportunities, you know, is there any chance to really fully participate in some of the consumer markets that you might accept lower gross margin in exchange for growth? And then I guess you've talked a lot on this call about average selling price sort of what's driving that focus, you know, as ASP versus, you know, kind of gross profit dollar per device, things like that? John Young: Yeah. Thanks. So, you know, as far as the ASP goes, that is primarily a function of the technology and features that come with these more advanced technology tape-outs that we're doing and products that we're developing on our roadmap. As far as the gross margin goes, you know, like I said, 59 to 62. I think as far as consumer, on a case-by-case basis, depending on the volume that we see, the opportunities that we see, we're not opposed to gross margins that are maybe not strictly within the 59 to 62% range. But the goal at the corporate level is to, over the long term, stay in that range. Joe Moore: Great. Thank you for that. Then I guess, you know, yeah, there's a lot of enthusiasm for drones, which is a market that you've kind of been in in the past. Can you talk about, you know, what are the new elements of that market that probably, you know, might drive you to a higher content over time? You know? And what is it sort of think about delivery drones and industrial drones and things like that? Is that a pretty big category for you down the road? Fermi Wang: Right. So first of all, we were big in the past, as you said, but we were stopped in that market because of the geopolitical situation, not because of our technology solutions. And this time we came back because we continue to believe a few things. First of all, there was a dominant player, but in the US, the market is wide open at this point for everybody to fight in that capacity. So with our video technology, particularly our panorama camera that we help our customers to build, is well suited for this space. So first of all, the driver for us is to continue to provide the best video solution in the drone market. But more importantly, I think moving forward, all the drones are going to be autonomous in the future. We can't talk, say, today's drone is level two. And level three, level four drones are coming and probably going to drive faster than autonomous driving cars. And we believe that to have a level three drone, it will require a really powerful chip in addition to the video processing, and that's really played to our strength also. Our investment in autonomous driving directly applies here. So from the technology point of view, the video processing plus AI is the key driver. But as you said, today, the biggest market opportunity for us is consumer for video capture, but moving forward, we start seeing opportunities on the commercial side, which is going to continue to drive growth. So we are excited that, first of all, we have technology that we think is differentiated in this market, but more importantly, the service market for us is growing fast. So that's the two reasons that we feel excited about this market. Joe Moore: Okay. Thank you. Operator: Thank you. One moment. Our next question will come from the line of Christopher Rolland from Susquehanna. Your line is open. Christopher Rolland: Hey, guys. Thanks for the question and congrats on the results. I guess my first question is around an update perhaps for the infrastructure opportunity and the N1655? Fermi Wang: Yeah. So first of all, we announced our first design wins last quarter. And after that, we continue to see very strong design win activity and interest from different types of customers. In fact, in the last few months, we see customers who want to use video-centric products and also customers who want to use N1655 for non-video-centric products. So we are seeing a wide range of opportunities. And we are also continuing to see our chance to not only build up but also bring new designs in the near future. So we are totally committed to this market with N1655 and a new roadmap that we will talk about in the near future. Christopher Rolland: Thank you, Fermi. And perhaps if there are any updates on two other opportunities, I guess the first would be the home security market with, you know, AI feature integration. And then the second would be any kind of design activity, I know it's further out, but around humanoid robots. I think that would be interesting as well. Fermi Wang: Right. So first of all, for the home security, I think we do have design wins with our CV75 that we haven't announced yet, but definitely is in design. However, I think this is a market that's price-sensitive. So I think the progress or the movement towards this chain AI type of home security camera based on the camera solution, not the cloud solution. We really focus on just edge AI for this market. So with that, I think that market is not developing as fast as we expect, but we do have design wins. We hope we can talk about them sometime next year. From the humanoid robot perspective, I think this is a long-term market that we definitely want to participate in. However, I think it will take time to get to a humanoid robot. I think there are multiple steps for robotic from today's situation to the humanoid robot. And I think, like I said, even drones, if you treat the drone like a robotic application, there's a level two to level five. I think humanoid robots are level five of drones for different applications. But there are intermediate steps we need to go through, and we definitely have design wins and also design activities in those steps that will lead us into the humanoid. I just want to be more specific. We're offering two types of solutions to the robotics today. One is for people only interested in the video technology. So they want to have a really powerful AI that not only can see the object but also can do object detection based on CNN networks. We have that kind of solution based on our CV2 family or CV72, CV75 solutions. So that's one product line we're providing. The other product line we're providing to the robots is really a brain. Right? So our N1655 type of solution can be a central processor for any type of robotic out layer. So I think we're offering these two solutions. It will take time to develop a central domain control, like an autonomous driving car, that kind of solution will be required to do a humanoid solution in the future. Christopher Rolland: Excellent. Thanks so much. Operator: One moment for our next question. Our next question will come from the line of Suji Desilva from Roth Capital. Your line is open. Suji Desilva: Don, Les, best of luck with the step of your transition here. So, maybe in the Edge AI market, looking ahead, calendar '26 perhaps, which of the two or three segments would you describe as the highest kind of growth opportunity for you? Is it drones or other areas? Any color there would be helpful. Thanks. Fermi Wang: I think drones definitely, what you call out, are going to be a growth area for us. And I also believe that even for the edge endpoints, we continue to see multiple opportunities coming up with different types of products. For example, wearable cameras, we talked about this for many years. But right now, we are excited because wearable cameras are not only for policemen anymore. We start seeing that go to totally even for commercial use devices. So that's just another example that the technology becomes ready in a low power and also AI on the camera. All of that enables a new application for wearable cameras. That's another really high growth area that we're seeing, and it's not only what I'm saying that if you follow our customers, you'll see that our customers are saying similar things. So those edge endpoints, families, are the first area for us. But I also want to bring your attention to the edge infrastructure. We'll talk about it last quarter. I think although that not immediately, you're going to see high revenue growth, but I think long term, that will be a very important market for us. And we'll definitely cover insight into our plan, our thoughts on edge infrastructure at CES and give you more. Suji Desilva: Okay. Great. Then for me, in one specific question on drones, do you have any visibility in your pipeline beyond consumer commercial perhaps into any government programs? Or is that going to be a separate part of the market handling that versus you guys? Fermi Wang: You bet the old customer fact, it's not really us. It's all cost. All cost. Right. Right. No. I think all the customers have a desire to serve multiple different market segments. But most of them, most of our common customers, are focusing on consumer commercial, and I don't think that algorithm usage is a real focus for most of our customers yet. Suji Desilva: Okay. Great. Thanks, Fermi. Operator: Thank you. One moment for our next question. Our next question will come from the line of Martin Yang from OpCo. Your line is open. Martin Yang: Hi. Thank you for taking my question. First question on IoT, especially with growing customers like Arash, could you maybe comment on this customer's growth and its relative contribution to your overall ASP and margins? Fermi Wang: Right. So first of all, Arash is, I think, the largest customer in our top 10 list, and they're ramping roughly doubled from last year to this year. But, you know, they are using multiple chips, and if selling to multiple OEMs, it's hard for us to track exactly their revenue contribution. But we have no doubt they are the largest customer right now. Martin Yang: Thank you. Another question on drones. So when you're referring to next year's product, are those drones using your image processing capabilities, or do you expect them to deploy AI functions that relate to autonomous flying capabilities? Fermi Wang: Both. I think that, like I said, there are two types of solutions we're offering. Some of them are using just video plus AI to apply CNN-type networks for simpler AI functions. But there will definitely be customers using our AI for flying to avoid objects, to determine the flying path. So both of them. Martin Yang: Got it. Thank you, Fermi. That's it for me. Operator: Thank you. And our next one moment for our next question. Our next question will come from the line of Quinn Bolton from Needham and Company. Your line is open. Quinn Bolton: Hey, guys. I know the focus has sort of shifted to Edge AI in the future, Edge infrastructure. But in the past, you gave us sort of an automotive funnel. You haven't provided that. So just wondering how should we be thinking about how are you guys approaching the automotive market? Do you still see opportunities in Level 2 plus, or are you kind of deemphasizing some of the automotive applications? Fermi Wang: Alright. Thank you for that question because we did not decommit from that market. In fact, we continue to focus on the market. We are engaging multiple OEM tier ones at this point for autonomous driving level two, level two plus, some even level three. So from the engineering activity and business development activity point of view, we are all in on this market. Definitely, from the funnel of this discussion point of view, I said last quarter, we will provide a funnel discussion in the next quarter release. But the one modification I will do, we are stopping using probability-weighted metrics. We are going to give you just direct opportunities we're looking at. So that will be the one change we're going to offer, but we will definitely provide more guidance on how we look at this market. Quinn Bolton: Got it. Thanks for that, Fermi. And then I guess for John, just you mentioned that it sounds like the mix towards high-volume customers is pushing the gross margin down to the lower half of your long-term range. Can you give us just beyond January? Do you think that mix continues to be pretty heavy with higher volume customers? Or do you see this as sort of a temporary shift just for January and it normalizes beyond that? John Young: Thanks, Quinn. Yeah. At this point, we don't want to give a guide with regard beyond Q4. But I think, you know, that commentary with regard to Q4 is, you know, will continue to be relevant going forward. The ratio of high-volume customers to the total revenue for the quarter. Quinn Bolton: Sorry, John, cut out there a little bit. Did you say that the mix would stay pretty similar beyond January? John Young: No. What I tried to say was that, you know, we don't want to make any guide beyond Q4. But that the commentary about Q4 with high, you know, the ratio of high-volume customers to the total revenue, that dynamic will continue to be a factor going forward. So to the extent that the high-volume folks are a higher percentage of the revenue, that will, you know, have its impact. Quinn Bolton: Got it. Okay. Thank you. Operator: Thank you. And once again, that's star 11 for any questions, star 11. One moment for the next. We have a follow-up question for Tore Svanberg from Stifel. Your line is open. Tore Svanberg: Yes. Thank you. John, just a follow-up for you. So, you know, this year, you guys demonstrated some pretty good operating leverage. I'm just thinking, as we look at fiscal 2027 and OpEx growth, obviously, you're not giving a growth target per se, but we should assume that OpEx would grow at a slower pace than revenue growth for fiscal 2027? John Young: Thanks, Tore. Yeah. We're not giving a guide at this point, but I think, you know, what we have said in the past, kind of as you articulated, is that long-term, we expect to create operating leverage by having revenue and obviously gross profit outpace the increase in OpEx on a non-GAAP basis. Tore Svanberg: Great. Thank you. Operator: Thank you. One moment for our next question. Our next question will come from the line of Kevin Cassidy from Rosenblatt. Your line is open. Kevin Cassidy: Yes. Thanks for taking my question, and congratulations to Les for a legendary career. You know, again, I am interested in that, but I want to know how much of your software and development that you've been able to work on with the automobiles for L2 to L4. Can you apply, you know, is it a relatively easy market for you to transition into, or are there other software or other issues that would happen in robotics that isn't in automotive? Fermi Wang: You know, I think, Kevin, you point out that it's really a great direction because, you know, like I continue to say, autonomous driving is just a special kind of robot. And so is a drone. And in fact, if you look at the details of functions inside an autonomous driving car, you know, level three drone and also robots. IDN is really a bunch of sensor fusion. And you make a decision on your environment, then you decide money. That you control. Either a car, drone, or some mobile robots moving around performance. From that point of view, a lot of hours have a commonality. In fact, a lot of software, if you want to do all the sensor fusion side with the perception, there's a huge among all the robotic applications. So in fact, we definitely believe that a lot of our investment both on hardware and software side for autonomous driving will directly apply to all the future phone and other robotic applications that we're talking about. Kevin Cassidy: Okay. Great. Thanks. Operator: Thank you. One moment for our next question. Our next question will come from the line of Ross Seymore from Deutsche Bank. Your line is open. Ross Seymore: Hi, guys. Thanks for asking. A couple of follow-ups. On the consumer percentage being about half of your IoT business, what was that mix last fiscal year, a year ago? Luisa Hardy: I don't have that figure for you, but I would say the dominant part of our mix was enterprise. CapEx driven markets. Ross Seymore: Got it. Thanks, Luisa. And I guess the follow-up to that is if the consumer business does sound like it has increased, does that change the seasonality of your company? I know kind of the first and the fourth quarters tend to be relatively speaking the weakest sequentials, and then the mid-two quarters are the largest. Does that change at all either directionally or kind of magnitude just because consumer is a bigger portion than it used to be? Fermi Wang: Yeah. Go ahead. You know the question. Yes. That's a very good point. And the answer is yes. And I would look at, you know, the next question is what's normal. And, really, the last three, four, five years hasn't been very normal. So I'd look at the last ten years because those first five years and the ten years, over that, did have more consumer like you're asking about. So I'd look at the average ten-year period rather than just the last two or three years, which really weren't normal. Ross Seymore: And then maybe one last follow-up. How do we think about taxes, either dollars or percentages, next year and the year after? I know it kind of goes between the dollars and percentages, and the former might be more applicable. But just an idea of how we should think about that. John Young: Yeah. Thanks, Ross. So we tend to think about it from a dollar's perspective as opposed to a rate based on the way the company is structured and where the profits are located and various jurisdictions internationally. So I would expect, well, if the dollars will increase, but it won't be, you know, they'll increase with revenue. But it won't be a significant change to the story. I think on a full-year basis, if you look at the rate on a non-GAAP basis, that'll give you some indication to be able to model going forward, I would say. Ross Seymore: Thank you. Operator: Thank you. That's all the time we have for the question and answer session. I would now like to turn it back over to Dr. Fermi Wang for any closing remarks. Fermi Wang: Thank you, and thank you all for joining our call today. And I hope to see some of you during our January event at CES. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Dominic Blakemore: Good morning, and welcome to our full year results. 2025 was another great year for Compass. We delivered strong organic growth and margin progress with profit up nearly 12%. Cash conversion was also very good as we generated $2 billion of free cash flow for the first time. Net new business, the cornerstone of our growth was 4.5%, underpinned by strong new business wins and client retention of over 96%. This was the fourth consecutive year we've delivered net new growth within our 4% to 5% target range. This performance, together with a significant market opportunity, reinforces confidence in the sustainability of our growth algorithm and our ability to deliver long-term compounding shareholder returns. I'll talk more about this later. But before I do, first over to Petros to give you more details on the financials. Petros Parras: Thanks, Dominic. Good morning, everyone. We've made good progress across all our key metrics as we delivered profit growth ahead of revenue growth. Importantly, free cash flow was also strong, growing faster than profit. Let's start by looking at revenue growth. Net new business continues to be in the middle of our 4% to 5% target range with pricing and volume growth consistent with the first half of the year. With our disposal program now complete, acquisitions are contributing to growth. Operating profit increased nearly 12% to over $3.3 billion. Interest was $315 million, reflecting higher debt due to acquisitions. For fiscal year '26, we expect an interest charge of around $350 million, reflecting the purchase of Vermaat, subject to regulatory approval. As anticipated, our effective tax rate was 25.5%, and this is expected to be the rate in 2026. Importantly, earnings per share were up by just over 11% in constant currency. And turning to cash, CapEx was 3.3% of revenue. Consistent with our guidance, we expect CapEx to be around 3.5% of revenue this year. Working capital improved in the second half, in line with our normal seasonal profile and was broadly neutral for the year. We expect a similar profile in 2026. As a result of our strong cash management, free cash flow conversion improved to 88%. Turning to the regions. In North America, organic revenue increased by over 9%. Operating profit was up nearly 11%, reflecting margin progress. In International, organic revenue growth was nearly 8%. Operating margin was up 20 basis points to 6.1% as the region benefited from overhead leverage, resulting in strong profit growth of nearly 13%. Group organic revenue growth was nearly 9%, with the fourth quarter particularly strong as we benefited from increased catering and hospitality events across certain sectors. Excluding these one-off factors, our underlying Q4 growth was around 8%. We expect this to moderate further in 2026, reflecting a lower inflation. Group margin increased to 7.3% in the second half of 2025 with our unit margin now fully recovered. Looking forward, we are confident of further margin progress whilst balancing growth and investment. We see opportunities to improve margin in both regions and to leverage group overhead. We expect to continue to make incremental gains in North America as we continue to improve productivity across our MAP framework and better utilizing tech and data. In International, as you are aware, we've invested in sales and retention to drive higher net new business growth. We expect faster margin progress in this region as we leverage these investments and benefit from M&A synergies. Dominic will talk about this later. Turning to the balance sheet. Net debt-to-EBITDA was 1.4x. As you are aware, last year, we acquired high-quality businesses, including Dupont and 4Service to capitalize on attractive growth opportunities through further subsectorization. This year, we expect to complete Vermaat along with other bolt-on deals. As a result, leverage is likely to be above our target range in 2026, peaking at the half year. However, our capital allocation model remains unchanged, and we expect to deleverage in 2027 as the business grows and we deliver the M&A synergies. With our disposal program now complete, M&A is contributing to profit. Including Vermaat, we expect acquisitions to add around 2% to profit growth in 2026. Now turning to fiscal year '26 guidance. We expect operating profit growth of around 10% on a constant currency basis, driven by organic revenue growth around 7%, around 2% profit growth from M&A and ongoing margin improvement. Now back to Dominic. Dominic Blakemore: Thanks, Petros. As you've seen, the business continues to perform well and is in great shape. We're often asked, what's the secret to our success and continued market outperformance. There are 2 key factors. First, we have a unique sectorized business model, which is decentralized with many of our brands still led by the original founder owner entrepreneurs. This model, which was strengthened through M&A over many decades, is incredibly difficult to replicate. And second, we combine the advantages of this localized approach with the benefits of scale, particularly in food procurement and technology. In short, we combine the best of both worlds. We operate in a hugely attractive market with a significant runway for growth, which is continuing to expand. We're investing organically and in M&A to provide us with additional capabilities to accelerate sub-sectorization. For food services alone, our addressable market is worth around $360 billion, of which we have less than 15% market share. And in addition, we see further growth opportunities in targeted high-value support services, where we estimate the market could be worth at least $800 billion. It's worth remembering we're already one of the world's leading support services businesses, generating more than $6 billion of revenue. The business and industry segment of the food services market is worth around $130 billion on its own. You may think as the most outsourced sector, it would have one of the lowest growth rates. In fact, the opposite is true. This year, B&I is our best-performing sector with organic revenue up 11% and the highest net new business growth. We continue to invest in this hugely innovative and dynamic sector, increasing our addressable market by entering new subsectors or through flexible offers such as vending. Our experience in B&I bodes really well for the rest of the group. Our volumes are benefiting from increased participation in our restaurants as we deliver an even more attractive food proposition. The advantages of our business model mean we can provide a high-quality offer at a superior value compared to the high street. As a reminder, we typically don't pay many of the expenses that retailers do as we operate on client premises. We also leverage our procurement scale and have more menu flexibility, allowing us to change ingredients more easily to help mitigate inflation. Our clients also recognize the importance of food and often subsidize our offer. They are hosting more events on site and increasingly use food as a cultural glue and a key enabler for networking and team collaboration. Acquisitions enhance our capabilities and accelerate subsectorization. Targets are usually sourced locally and have been known to us for several years. We look for exceptional businesses with entrepreneurial teams and attractive returns. And the businesses we acquire benefit from continued autonomy under our decentralized model. We provide them with access to Foodbuy as well as global best practice sharing. Having completed many acquisitions over the years, we've established a proven track record of successful M&A. In vending and micro markets, we've been operating a rollout strategy of many small bolt-on deals in North America. Together with strong organic growth, Canteen has now grown revenues to over $4 billion. These acquisitions are hugely value accretive to Compass with returns typically above our cost of capital from year 1. We're also investing in GPOs and recently acquired Regency Purchasing in the U.K. As well as scale, we've benefited from their technology and systems, helping build out sectorization. Regency volumes have doubled since we bought the business with double-digit ROCE in year 2. And most recently, we acquired 4Service in the Nordics, accelerating access to the multi-tenant building subsector in particular. Integration is ahead of schedule, delivering high single-digit growth with financials ahead of our investment case. We've also recently agreed to acquire Vermaat, subject to regulatory approval, a truly exceptional premium food services provider with a market-leading presence in the Netherlands. Vermaat will further improve our ability to deliver tailored on-site concepts and innovative retail solutions as well as providing us with outstanding talent. Once approved, we expect Vermaat to be margin and EPS accretive to Compass in our first full year of ownership. As Petros said earlier, over recent years, we've invested in technology and data to support our sales processes, procurement functions and to drive operational efficiencies. We think of it as benefiting both growth and margin as well as automating some daily tasks for our colleagues. For example, we're optimizing every stage of the sales funnel by using improved processes and data. We now have more visibility of future gross new wins by more accurately tracking the size of the pipeline, our probability and win rates. We've increased the use of automation tools for bid writing to improve their quality and to reduce preparation time. Tech and data are also transforming the client and consumer experience. We have a strong competitive advantage in this space, having invested in digital for many years with around 1,600 people now working in this area alone. With hubs in the U.S., U.K., France and India, we share innovations and best practice across our businesses, leveraging our breadth and our scale. We're using AI to improve our customer proposition using proprietary analytical tools to optimize our product mix and pricing. This helps us to better match our offer to changing customer demand as well as benchmarking pricing in our sites with the local high street. And finally, when it comes to our frontline colleagues, we're increasingly using AI to automate day-to-day tasks such as recruitment. In the U.S., we streamlined our hiring process and reduced the number of recruiters. In Japan, we've implemented an AI chatbot for our frontline colleagues, which answers any queries they may have in seconds, delivering impressive productivity gains. In summary, 2025 has been another strong year for Compass as we continue to deliver on our growth algorithm. We expect to sustain this performance in the long term, delivering high single-digit profit growth with the building blocks being mid- to high single-digit organic revenue growth, ongoing margin progress and contributions from bolt-on M&A now that our disposal program is complete. For 2026, profit growth is expected to be even higher at around 10% as we benefit from the Vermaat acquisition. Now over to Q&A. The operator will share instructions on how to ask questions. [Operator Instructions] Operator, over to you. Operator: [Operator Instructions] Our first question comes from Jamie Rollo from Morgan Stanley. Jamie Rollo: Three questions, please. First of all, could you talk a bit about what drove that very strong fourth quarter for organic sales, about 9%. I think you said 1% was from sort of one-offs. Maybe talk a bit about what those were. I think we saw a similar thing a year ago and even the year before that, the sort of one-off benefits to keep happening. But also the 7% guidance looks quite conservative even in the context of an underlying sort of plus 8% exit rate. So how should we think about the sort of cadence of organic sales through the year? Secondly, again, it's a question on the guidance, but on the margin side, so 1% profit growth from underlying margins, about 7 basis points, again, looks a little bit conservative. I think for that alone adds about 5 basis points to the group because it's double-digit margin. So could you talk about the upside to margins? And also, how should we think about that 200 basis points gap between North America and International sort of closing, if at all? And then finally, you've given us sort of lots of the AI benefits to the business and your clients on Slide 24. Could you talk a bit about how you might mitigate against sort of the impact of job losses driven by AI on sort of office meal demand in general, please? Dominic Blakemore: Jamie, thanks for your questions. Let me hand over to Petros for the first 2 questions on run rate and margin guidance, then I'll pick up on the AI point. Petros Parras: We feel our Q4 underlying rate is about 8%, as you said. We had particularly strong volumes in B&I, Education and Sports & Leisure that we're pleased with. Some of this, we believe it's a onetime in nature. And practically, we have taken this in our guidance for '26. If you think about what has changed as we move to '26 versus '25, it's to do with inflation. We're seeing inflation slowing down a fraction faster than what we thought last year, end of the last year. Spot rate and inflation about 4% blended. We believe it's going to be close to 3%. And we mitigate part of this for our clients. So when you consider our guidance for next year, it assumes a lower rate of inflation within the 7%. It assumes a 4% to 5% corridor in a fifth consecutive year of delivering our strategy and a net positive contribution for volume. When it goes to margin, I think you give us too much credit of being able to forecast 7 basis points or 10 basis points on a going-forward basis. I think our approach there is profit has to grow faster than revenue, call it the 10 basis points on average. What is interesting is our unit profit margin has exceeded what used to be pre-COVID, which gives us sound financials within the units in operations. We benefited from overhead leverage, and we expect to make consistent margin progression going forward. We do not see a ceiling to it. You will continue to see international business to grow faster with some group overhead leverage and some marginal gains in North America. I'll take a pause, and I'll pass to Dominic. Dominic Blakemore: Very good. Thank you, Petros. Jamie, when it comes to AI, I think in summary, we see it as a net positive for the business. As you rightly say, we shared some examples today of where we're deploying data and AI within the business, most specifically around our growth processes where we think we can get better outcomes on the pipeline build, the preparation for meetings and the conversion into growth. So we're very, very excited about what we're seeing there. We're also very targeted around purchasing and the value we can derive from our purchasing processes and the efficiencies we can introduce for our frontline teams to enable them to dedicate more of their time to their consumer and their clients. When it comes more specifically to the question you raised around net employment numbers, I mean, first of all, just a reminder, B&I is our fastest-growing sector as a group and also both within North America and international. Over 50% of that growth is coming from first-time outsourcing, which is very exciting. And as you've heard Petros say, we had strong volumes in quarter 4 within B&I. So we think our B&I sector is in rude health right now. When it comes to AI, look, we're seeing new clients emerge, particularly on the West Coast, where we've got a number of smaller start-ups, which we are serving through our commissaries and SME type offer. We're seeing some of those scale into significant clients, and we're excited by that. When we talk to our clients in the technology sector, they're very focused on talent retention and attraction, particularly as they seek to get the right capabilities to be best placed with AI. And I think we have a very important role to play there in them helping address that. And then lastly, we're seeing new subsectors emerge like data centers. So with regard to data centers, there's an opportunity for remote feeding through the construction phase. And then once in operation, there's an opportunity for us to provide on-site services, either in the form of restaurants and cafeterias or micro markets. And of course, there's a whole range of different FM services that we're well placed to provide to them in an environment where those services are very highly valued. So right now, we are seeing it as an opportunity, both in terms of what it's bringing to our business and the opportunity it's providing within our client estate. Operator: We now take our next question from Kate Xiao from Bank of America. Kate Xiao: My first question is also on AI. I guess thanks for explaining all of the benefits. I guess, any way you could help us quantify the positive impact on the business, either on the revenue enhancement side or cost savings? Any kind of examples or quantification you could give there would be really helpful. And then my second question is on your secured new business, $3.8 billion. That's up 11% year-on-year, which is very, very encouraging. I guess, could you elaborate a little bit on this number? I think the definition is the new business wins over the past 12 months. So would some of the business already be in the FY '25 revenue number already? Or is it mostly the pipeline for FY '26 growth? Dominic Blakemore: Thank you, Kate, and welcome. I think this is your first call with us. When it comes to quantifying AI, look, we don't think we're in a place to do that right now. I think like many things we see, we see puts and takes that drive volumes and new business opportunity. At the moment, on the sort of volumes and new business side, as you heard me say, we think it's a net positive. And then with regard to the savings that we're generating within the business, I think what we're seeing most of all is an opportunity for greater effectiveness and the ability to redeploy our people's time on more value-creating opportunities. We're certainly seeing that within sales. And what would I say, maybe we're generating 15% to 20% time efficiency, which can be redirected into more value-creating preparation for meetings and bid preparation, for example. So that's really how we're thinking about it. It's how do we redeploy effort and time into the bigger opportunities. And then specifically on the new business ARO, yes, $3.8 billion. We're super pleased. We need to continue to grow that relentlessly year in, year out. Our pipelines look very attractive. More importantly, almost than the gross new business wins, our pipelines are growing at the rate we need to see them grow. You've seen us speak today to the increase in the market that has come by way of some of the acquisitions we've made, which opens the total addressable market up for us. So we've now got a market which is over $360 billion. That's what's really exciting. The more we can target sectors and subsectors of opportunity where our operating model is best placed to win, then the more sustainable we believe the growth is. As you heard Petros say, we're super excited that this is 4 years now reported within 4% to 5%. We're well placed to see another year of growth within the 4% to 5%. And our objective is to continue to build our TAM and our processes deploying AI such that we can sustain those growth rates and those retention rates over the long term and deliver within the growth algorithm that we've shared with you. As you rightly say, some of that business will have deployed in financial '25 and will be rolling into '26 on an annualized basis. Some of it will be yet to deploy in '26. And the odd contract would have been one which will deploy in future years as we've also witnessed in the past where we've got some business that comes online. So the correlation between new business won and the in the year benefit within that 4% to 5% range is rolling. But we're really pleased that we've delivered that 11% increase year-on-year, which gives us every confidence that we can sustain the 4% to 5% as the business scales and the absolute numbers get bigger. Operator: And our next question comes from Simon LeChipre from Jefferies. Simon LeChipre: Three as well, if I may. First of all, on the $3.8 billion new business wins, I'm not sure you mentioned the mix of FTO within this number. I think it was 48% by Q3. So keen to get an update on this. Secondly, on net new, just wondering if net new was also within the 4% to 5% range for the international region. And lastly, I mean, in the U.S., you mentioned some opportunities in data centers. But more broadly, do you believe you could benefit from different investment plan going on like the Infrastructure investments, CHIPS Act and so on. Just wondering if it's something relevant for you. Dominic Blakemore: Thank you, Simon. Yes, let me pick up on your third question, and then I'll hand the first 2 to Petros. Absolutely, we're super excited by investment in new -- all new forms of technology, and we see those as opportunities for us. So I obviously referenced data centers, but yes, semiconductor manufacturer where it's been onshore in particular, is presenting opportunities for us. We're seeing data centers all around the world as an area of opportunity for us. And particularly where we see the build of new energy technology, those present opportunities for us. So there are -- as we've always witnessed, there are new sectors and subsectors of business and industry that emerge at pace and scale. And we believe that we've got a range of offers that can play into those, which means we've always got what the client is looking for. What's really important is that we're spotting these trends. We're moving quickly, and we are building an offer that is compelling for the client in their needs. Petros? Petros Parras: On the $3.8 billion Dom referenced, it's growing 11%. FTO around 45%, which is very pleasing to see. If you go back to pre-COVID, it was about 1/3 of our source of new business wins, continues to be elevated, which plays back to the complexities of the clients and our ability to serve and solve some of the challenges. I would say it's broad-based and represents a fair share of our sectors. And as Dom referenced, particularly with B&I continue to have great momentum within this $3.8 billion. When it goes to net new international, let's take a step back here. And if you look at from 2019 all the way back, international was nearly flat. We have 4 years of consistent good growth. We have 4 years of elevated net new for this part of the business. And the most pleasing thing for us is retention. You look at retention, we used to be in the low 90s. We are mid-90s sustainably. We would like to do better as we move forward in international business. We have opportunities. If you look in North American business, retention, some of our international business, the more sectorized we become, the more GPOs we deploy the Compass full toolkit, we should be in a position to drive marginal gains in international business. But we recognized consistent and good growth, and we're working towards sustaining this good growth in international part of the business. Dominic Blakemore: Yes. I mean I would probably just add to that. If there's anything that pleases me most about the business, it's the performance of the international region. We've seen an acceleration in our net new and improvement in our retention. As Jamie pointed out earlier, there's still a couple of points difference between the margins of North America and International. We see an opportunity to close that gap over time. We think the North America margin will continue to nudge forward. We see an opportunity for the international margin to grow faster as we make margin-accretive acquisitions, as we move toward GPOs in each of the individual international geographies, we see a good opportunity on margin there. There's still a delta in retention between North America and international. We think we can close that gap too as we deploy our processes, and we're seeing consistent improvement. What's most important, though, is the sustainability and consistency of that. And we're starting to build a bit of a track record, as Petros said, over the last few years, and we need to sustain that going forward, and we're confident we can. Having said all of that, I'd also just like to remind us that the North America performance was extremely strong last year, and we're incredibly proud of that. We think that we have every reason to believe that, that's sustainable, too. Operator: And our next question will come from Jaafar Mestari from BNP Paribas. Jaafar Mestari: I have 3 questions, if that's okay. Firstly, because you've provided this all-in guidance, which includes M&A and Vermaat, just a couple of questions on this. One, what timing of the Vermaat consolidation have you assumed in the guidance? And two, how should we look at the $350 million net finance cost guidance in this context? Is it $300 million run rate until the Vermaat consolidation and then it's $350 million as you pay for it? Or does the financing that you have in place mean that it's $350 million regardless of the exact timing of the deal closing? And then more fundamentally, one of your competitors has announced they would be investing in sales force -- in their sales headcount in at least one large U.S. vertical because they signed so little. Another one of your competitors paid their sales team $25 million extra bonus because they signed so much this year. How do you keep and motivate your hunters? You've talked about the founders involvement. Could you give us some more color on the sales teams themselves who bring in $3.8 billion? How many are they? What sort of background? What sort of support do they have, how they run and how they paid? Dominic Blakemore: I'll speak to the question on our sales resource, and then I'll hand over to Petros for the first 2 questions around Vermaat. Look, I think the first thing to say is the consistency of our track record. You've seen us deliver the new business growth now globally across North America and international, as I said, over 4 years. We've got great line of sight of the fifth year. More importantly, we've been doing that in North America for certainly the 13 years I've been with the group and probably over 20 years. So there is a consistency to our process and execution that I think is critical to the strength of our performance. We've got longevity and tenure in many of the people who work with us. Our organization, as we talk about often, is designed around sectors and subsectors. So we have dedicated sellers for each of the offers that we provide to our clients. We have dedicated sellers who are focused on the first-time outsourcing opportunity. Often that's a longer sell. And so we are incentivizing them over multiyear rather than individual year's performances. I won't speak to the independent -- the individual reward structures, but we have processes that have worked for us repeatedly. Our pipeline looks out 1 and 3 years, and we're excited by that. When you speak about the different competitive pressures, again, having been around this business for a while now, I've seen the competitive pressures ebb and flow. I see no real difference today to that which we've experienced previously. I think it's really important that we keep doing what we're doing. And that starts with expanding the TAM so that we've got ever more opportunity, being relentlessly focused on what the pipelines look like 1, 2, 3 years out, being relentlessly focused on our retention and how we secure and preempt to minimize the retention risk. We've seen a consistent improvement in retention. We put that down to our SAG processes, our non-SAG processes, which we're getting more dedicated to all of the time. And actually, the use of data around consumer NPS and our client feedback on an anonymized basis is allowing us to make even better decisions around that. So we just remain relentlessly focused on doing what we're doing on sharing our best practices and scaling our teams. We're always adding sellers into the business to ensure we can continue to grow at scale. But what I come back to is how important it is to continue to expand the TAM to give us the marketplace to grow into. And again, elevating the conversation, we have a 15% global market share in an industry that's still 50% self-op. There's huge runway for all of us to grow into. Petros Parras: On Vermaat, just to remind everyone, it's still subject to regulatory clearance. We have taken an assumption on contribution as of the first quarter of '26. We have line of sight we are in the final stint of this being closed, and we remain very excited to welcome the Vermaat team within the Compass Group family. When it goes to the interest expense for next year, about $350 million. This assumes Vermaat including the numbers and a bit of [ in-field ] M&A that we'll continue to invest in the business as we move forward. Jaafar Mestari: So just to be clear, it's going to be $350 million regardless of that timing? Petros Parras: Yes. Jaafar Mestari: Can I have a short follow-up on this, please? What's your assessment of the EPS accretion of the deal? You said positive for this year because you're presumably closing it late in the year, but you immediately have that higher finance costs. It doesn't look like we can justify even a decimal upside to consensus EPS. But if we annualize this on the full year, what sort of accretion do you think this deal if everything happened at the same time, interest costs and consolidation, please? Petros Parras: I think in Dominic's script, I think we say it's going to be accretive on EPS and a full year of ownership. You have to appreciate depending on when this deal is going to close, there is a different contribution of profit vis-a-vis the interest cost, will be accretive to growth as it closes. And importantly, with the synergy cases as we go in delivering good growth and some synergies on the cost lines, we should be able to drive further EPS accretion on a year 2 and year 3 basis. Operator: Our next question will come from Leo Carrington from Citigroup. Leo Carrington: If I could ask 3 as well, please. Firstly, on the North America H2 margins, which were flat despite the organic growth. Is there anything to call out as weighing on the margins this year, possibly the $440 million of M&A spend -- anything there would be useful. Secondly, I do appreciate the focus of yours is on B&I today. But in health care, your U.S. peer on a big multisite contract. Is this part of an acceleration in outsourcing in North America healthcare segment that you can also see or something of a one-off? And then lastly, I was interested in the Slide 29 showing the guidance evolution pre post pandemic. What exactly do you attribute the improvement, the increase in like-for-like volume growth to that you expect to see? Dominic Blakemore: Okay. Thank you, Leo. Why don't I take your second and third question and then Petros can speak to North American margins. Look, first of all, yes, I mean, the health care sector remains incredibly exciting for us. It's one of the sectors with the most significant first-time outsourcing opportunity, both in North America and international. We are seeing contracts come out on a multisite, multiservice basis, which are first-time outsourcing opportunities. So whether we would call that an acceleration or it's the normal trend, I think we'll determine as we go. But there are some very exciting opportunities in the sector, and that's been the case both in North America and international. And I could say the same for higher ed as well. So look, our sectors remain vibrant. We see lots of opportunities, not just in B&I, but across all of the sectors and really informs our sort of confidence today in sustaining our net new growth algorithm and the ever-expanding TAM. And then when it comes to like-for-like volume growth, look, I think there's quite a few puts and takes that we could pull apart, whether it's sort of return to office over time and so forth. But I think the biggest single trend to me is the one that we sort of called out in the slides today. And that is, I think, the greater appreciation of the value that we offer relative to the high street. I'm very confident that the quality of what we offer is on a par. I think we've got some exceptional consumer offers now within our estate, but we're providing that to our consumers at a very, very significant discount to the high street. And through this period of elevated pricing, that delta has become ever more. We talked about why that is. Obviously, it's the fact that we typically aren't paying utilities on site. But I think our scale of purchasing is just so much greater than the high street competitor set. That provides advantage and our menu flexibility is so much greater. And I think therein lies a huge opportunity to create value for our consumer. That combined with the opportunity or the case where many of our clients are partially or fully subsidizing the offer. I think that's meant that we are capturing more people on our estate and they're having more daypart occasions with us. And I really do believe that, that is what is behind our successful volume growth. And I think you can see that in a number of our sectors. And then when you think more about where you've got the type of consumer that would be within the sort of Sports & Leisure, the event sector, I think we've got even better at retailing, understanding per capita spend, consumer trends. We've got data analytics businesses that are helping us drive an understanding of those. And we're working very closely with our clients because the clients see it such an important part of their hospitality performance to be able to drive that. And hence, we benefit from that, too. I think you see that in the Q4 volumes, where we have a positive calendar of events, we're also performing positively on volumes. Petros Parras: On North America, we're really pleased on what the business has achieved. If you really step back and you look at North America operating margin is fully recovered to pre-COVID. Within '25, there was noticeable margin progress as this business grows. I want to remind you, business is 65% bigger to pre-COVID and enjoying this elevated growth and still delivering margin progress is quite remarkable for our teams, I think. On a going-forward basis, we will expect still to do some marginal gains as we grow, more of an overhead leverage. And we remain positive on the trajectory of this business. If you're referring to the half 2 versus half 1, we made progress versus both halves of last year. And as we came to a fully normalized world on recovering the margin, there is some seasonality in there. North America has always been stronger margin in the first half to second half. Dominic Blakemore: Yes. I would add on margins as a group, I probably feel as confident as I've ever been that we will see steady, consistent incremental margin progress in North America and International. Why is that? Just remind ourselves of the portfolio work we did where we exited a number of the more volatile markets. I think we've got much more consistent business now. We've got a much more sustainable foundation and base, and I think we can grow from that consistently from here. So that's what's informing our confidence both in North America and International that we should see consistent, steady margin progression. Operator: Our next question will come from Estelle Weingrod from JPMorgan. Estelle Weingrod: I've got a first question on North America. You talked about the very good performance of B&I. Can you give us an update on other segments, in particular, higher education? Any indication on the full terms enrollment numbers? And the second question on Europe. Can you provide a bit more granularity on the underlying momentum? You mentioned B&I and Sports & Leisure. Can you be more specific perhaps on a country basis or at least any country you call out underpinning this solid momentum? And have you noticed or have you witnessed any signs of a softer macro in some countries in Europe, like in France impacting volumes? Dominic Blakemore: Petros, do you want to take the North American higher-ed question, and I'll speak to Europe. Petros Parras: So North America, as Dominic referenced, very strong B&I, low double-digit growth, broad-based across all subsectors. If you look in the rest of the sectors, we're in the high single-digit growth territory, which is quite pleasing. It's what we call broad-based growth. And actually, if you look at our sector footprint, we expect to be this way as we are fully sectorized and we're winning good businesses within every sector. When it comes to education, I think enrollments came in good, in line with our expectations, continues to have some good momentum in the education business as we move to the fiscal year '26 year. Dominic Blakemore: And with regard to Europe, yes, I mean, actually, Estelle, you spoke to it. We are 2/3 of B&I business in Europe. So for us to grow, we need to be seeing positive growth in B&I, which is the case. We've got a very exciting pipeline. We've won some really nice opportunities in the Nordic region, in France, in Germany, we continue to perform extremely well in Spain and in Turkey. So we've got a strong portfolio of countries that are all growing together. Importantly, and going back to the earlier conversation, what's really stepped up has been our retention performance in Europe. Again, if we compare it to the years that Petros described when we were sort of flatlining for growth, the real difference there is that 3 percentage point improvement in our retention rates, which we believe are sustainable. We've got very rigorous retention processes that we've trained out and we're managing through the region, and that gives us good confidence in momentum. We've got a very exciting pipeline for Europe. And I think the other feature is, for example, we've launched our Levy Sports & Leisure brand into Europe, and we're managing that across all of our international markets now actually. And we're seeing good momentum as we start to win our first accounts. Obviously, we talked about not in Europe, but the Australian Tennis Open, which was won last year. But also we're seeing our first ones in the sports areas in Europe, which is exciting. And then lastly, obviously, the acquisitions we've made 4Service in the Nordics and others are starting to give us access to new subsectors within B&I, which gives us even increased confidence on sustaining those growth rates in Europe. So look, we think that it's an ever-improving performance that we can expect in Europe, and we'll continue to nudge up within our net new growth range of 4% to 5%. On the macro point, sorry, at this point, we aren't seeing any degradation on our volumes from the macro, but we remain watchful. And look, I know there's some concern out there about are we likely to enter any recessionary conditions across the piece. I think a reminder, first of all, we're not seeing it. And then secondly, we do believe that the resiliency of this business can demonstrate itself in those times. First of all, our clients look for value and cost savings. And whenever there's been a tighter macro, we've seen an acceleration in first-time outsourcing and also in rebidding of contracts for more value. And I think we're very, very well placed there. And then secondly, if the consumer is looking for value in tougher times, then I think everything I said about what's driving the volume performance will stand us in incredibly good stead. So look, I think we feel well placed whatever may be ahead of us. Operator: The next question will come from Ivar Billfalk-Kellyfrom UBS. Ivar Billfalk-Kelly: You've mentioned FM a couple of times in passing on the calls, where it usually feels like we go several quarters without it being mentioned at all. Can this be an indication that it's a bigger focus going forward? And can you talk about the relative margin contribution of FM services compared to the traditional food service and the outlook for growth? Secondly, you're investing in M&A and GPOs in the U.K. You still don't have much in the way of GPOs in the rest of Europe. What would realistic time lines be for rollout of GPOs in your Continental European operations? And what's actually needed for them to be successful? And thirdly, on the health care in North America, as I understand, a lot of the U.S. health groups already have their own GPOs. And since GPOs are a key element of your offering, what is your relative positioning compared to your peers, given I understand the GPOs in health care actually like you to use them rather than your own procurement. Any comments there would be helpful. Dominic Blakemore: Thank you for those questions. Actually, really interesting and thoughtful. First of all, FM, yes, look, we're predominantly a food services group, 85% of our business is food. But look, that 15% that we deliver support services across a spectrum of different services in FM is $6 billion. That makes us the fifth or sixth biggest support services company globally. We also operate support services with great capability in many markets. We've quietly got on with that. It's been growth neutral. So it's been growing at par with our food service business and actually is also margin neutral, so on a par with our food services business. So it's a good business for us. Where we sell it alongside our food as a multiservice offer or an integrated offer, it can be very sticky with clients. Typically, we've seen it in the defense sector, the remote sector, the health care sector and increasingly within the education sector. Within B&I, it's often sold separately rather than as an integrated offer. But look, we think it's an attractive market that in a number of countries, we are well placed for. We quantified the market today within our slides $800 billion. It's very fragmented. So there's a long runway for opportunity for growth. We're clearly not prioritizing that over our food service business, but we will consistently execute. And we really just wanted to remind everyone today of the scale of that business and the capabilities that we offer. And that I think if you're very selective in the services you provide and where you work with clients, then it can be an attractive adjacency to food. On the M&A for GPOs, you're absolutely right. We've been building out our U.K. Foodbuy business very successfully over time. We gave some great examples today, particularly Regency. Our U.S. Foodbuy business continues to be incredibly accretive for us and an important part of our portfolio. We have a Foodbuy business in Canada, Australia and the U.K. We already operate GPOs today in some of our European markets. So we operate them in the Scandinavian area within Belgium. We haven't yet built those out in some of the other bigger individual countries. It is an area of focus for us. You asked what is the sort of recipe for success. Actually, when we take a step back, what enabled both the U.S. and the U.K. to build credible and scale Foodbuy offer was first acquiring the capabilities of a GPO and then bringing the Compass volumes into that GPO to get aggregate scale and then to franchise the capabilities and the services alongside the scale into the third-party market so that we can grow disproportionately with our own estate, our acquisitions and the third-party growth. And we think that really is the sort of the recipe for success in other markets, and it's one that you should expect to see us pursue over time. And then finally, with regard to the North American health care GPOs. Yes, we partner with many health care GPOs that operate for themselves across their own health care estate. Remember, they're typically buying pharmaceuticals, equipment, linen and other nonfood categories where they've got significant scale, actually bringing their food volumes into our significant food buying volumes can yield even more value for them. So we think there's a really interesting and exciting way to partner with the North American health care GPOs to give them more value and bring more volume into our model. Operator: We have time for one final question today. Neil Tyler from Rothschild. Neil Tyler: Just a couple of quick follow-ups actually to previous questions. Firstly, just touching on the last question around FM support services. In your prepared remarks, I may have misheard, but I think you mentioned that you would consider adding to those services through M&A. I just wanted to make sure I understood that correctly in isolated instances, obviously, but if you could clarify there. And then secondly, Dominic, going back to the point or the focus you put on the expanded addressable market, the additional sort of $40 billion or so. Can you just talk a little bit more about where that's come from? You mentioned it's come through the acquired expertise over the last 12 months or so. And are there opportunities to continue to replicate what's happened over the last 12 months through further M&A? Dominic Blakemore: Yes. Thank you, Neil. Look, on the first point, I think we'll consider tuck-in bolt-ons wherever appropriate within our portfolio to ensure that we've got the right offer for our clients and that we can continue to either defend our estate or to grow the TAM. And that would apply within bolt-ons within FM and Support Services as necessary. Separately, your question on the TAM, yes, I think it's been a really positive feature and one of the driving reasons for the M&A that we've done over recent years. If you think about 4Service, it's given us access to the multi-tenant market where previously we would seek to win business through our clients, we now partner with the real estate owners as they construct new facilities, which are multi-tenanted and multiservice. It's an exciting segment that we weren't previously as exposed to and didn't necessarily have the capabilities for. It's a trend in the Northern European countries, and it gives us the capabilities that we can build into other European markets. I think that's a great example. We've done a number of micro market acquisitions in the U.K. to build a canteen type micro market offer in the U.K. That comes first with technology and then by building a regional presence such that we can offer our clients national coverage with a technology-enabled solution. That's opened up the micro market and vending subsector in the U.K. to us where we previously didn't have the capability or range of services to deliver that, that's something that we feel we can replicate in other international countries, given the learnings that we've had in the U.S. and Canada, in particular. The HOFMANN acquisition gave us access through a high-quality frozen offer into SMEs where we can deliver in at a lesser scale, a consistently high-quality offer that can be frozen and used over time. That's an exciting part of the market that we previously didn't necessarily access. And with Vermaat, although not yet closed, they have an exciting joint program, which is a sort of technology-enabled delivered in solution, which, again, we can leverage and learn from. So I think all of the M&A, we talk about giving ourselves access to capability, both in terms of the business model and offer, but also the people running the businesses. And I think those are great examples of that and where we'll focus as we go forward. Operator: With this, I'd like to hand the call back over to Dominic Blakemore for closing remarks. Over to you, sir. Dominic Blakemore: I mean just quick to say thank you all for joining us today, and we look forward to hosting you with the first quarter results in February next year. In the meantime, wishing those of you a happy Thanksgiving or happy Christmas holidays. Operator: 6 Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
Operator: Hello, ladies and gentlemen. Thank you for standing by for NIO Inc. Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Rui Chen, head of investor relations and corporate finance of the company. Please go ahead, Rui. Rui Chen: Good morning, and good evening, everyone. Welcome to NIO's Third Quarter 2025 Earnings Conference Call. The company's financial and operating results posted on the company's IR website were published in the press release earlier today. On today's call, we have William Li, Founder, Chairman of the Board, and Chief Executive Officer, and Stanley Qu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of The US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the US Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and this conference call may include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, William Li. William, please go ahead. William Li: Hello, everyone, and thank you for joining NIO's 2025 Q3 earnings call. In Q3 2025, the company delivered 87,071 smart EVs, representing a year-over-year growth of 40.8%. During the quarter, we launched two large zero battery electric SUVs, the Omo L90 and the new Omo ES8. Both models have received strong recommendations from users for their comprehensive competitiveness and continue to see solid demand. In the meantime, Firefly continued to see steady market growth and meeting more diverse needs by covering a broader range of price segments. The new Envo and the Firefly brands are able to drive significant growth in deliveries. In October, the company delivered 40,397 smart EVs, up 92.6% year-over-year, marking three consecutive months of record-high delivery. For Q4, we expect total deliveries to be in the range of 120,000 to 125,000, a year-over-year increase of 60.1% to 72%, achieving a new quarterly high. On the financial front, thanks to the ongoing cost optimization, in Q3, the vehicle gross margin improved to 14.7%, and the gross margin of other sales was 7.8%, resulting in an overall gross margin of 13.9%, the highest in nearly three years. This reflects the company's strengthened product and service profitability. Operational efficiency in R&D, sales, and general administration continued to improve. Non-GAAP operating loss was narrowed by 30% quarter over quarter. In Q3, the company's operating cash flow and free cash flow both turned positive. NIO remains committed to the battery electric vehicle roadmap featuring chargeable, swappable, and upgradable batteries. Leveraging the company's full-stack R&D capabilities in 12 key tech areas, the third brands are able to precisely meet users' needs across multiple market segments. The competitiveness of our new products under all their brands has been well received. The new brand recently introduced three color themes for the ET9 Horizon edition. The Horizon edition is a special collection reserved for NIO's most prominent flagship models. The distinctive design, advanced technology, executive excellence, and exclusive services make the ET9 Horizon edition a standout in the market. The all-new ES8, an all-around tech flagship SUV, was launched and started delivery at NIO Day in September. Leveraging the unrivaled space and driving experiences made possible by all-electric technology, the all-new ES8 has remained a top seller in the premium large zero SUV segment, surpassing 10,000 deliveries within just 41 days, the fastest for a price above 400,000 RMB. In November, the ES6, another all-around SUV in NIO's lineup, celebrated its 300,000 unit delivery milestone, topping the sales chart of China's fabs model twice over 300,000 RMB. Within the Amo brand, the L90 delivered over 33,000 units in three months since its launch in late July, leading the large battery electric SUV segment for three consecutive months. The L60 also delivered strong performance, maintaining a top two position in the battery electric SUV segment with MSRP above 200,000 RMB during the first March. With exceptional products, experiences, and word-of-mouth, the Amo brand increasingly becomes the preferred choice for families. Since delivery began, Firefly has led the high-end small EV market in sales volume, establishing itself as a benchmark in the market. With creative launches of special editions, it continues to strengthen its appeal among users who value quality and individuality. This dynamic small car is already making its way into the global market and will expand into more countries and regions across Europe and Asia. In smart driving, the new world model, NWM, is the first world model that not only understands and predicts the real world but also operates with a closed-loop training system. Actually, the industry trend is increasingly toward a work model roadmap. Next, we will gradually roll out upgrades on NWM for vehicles equipped with NIO's NX90 31 and Amelia's O ring X smart driving chips, further enhancing urban and highway NOP plus, parking, and smart safety performance. The upgrade will also enable execution of open set command. For the on-road smart driving, the Coconut 210 scheduled for release at year-end will upgrade its model-based end-to-end solution for urban and highway NOA, as well as parking, delivering a more seamless driving experience. Our self and service network currently includes 172 NIO houses, 395 NIO spaces, 422 Amo stores, as well as 405 service centers, and 70 delivery centers. Our global charging and swapping network now operates 3,641 power swap stations, providing users with more than 92 million swaps. Besides, NIO has built over 27,000 power chargers and destination chargers. On September 17, NIO completed a total of $1.16 billion in equity financing on both the US and Hong Kong stock exchanges, further strengthening its balance sheet and providing ample resources for its long-term commitment to R&D and user services. On November 23, the 2025 NIO Cup Formula Student Electric China successfully concluded in course A. NIO has been supporting this competition since 2015, helping cultivate tens of thousands of young professionals for the industry. Today also marks the company's eleventh anniversary. Over the past eleven years, we have remained committed to in-house R&D in core smart EV technologies, continued investing in charging and swapping infrastructure, built a multi-brand sales and service system, and created a vibrant community for over 900,000 users to share joy and grow together. These advantages have been increasingly recognized by our users. This year, our new products across three brands have performed strongly in their respective market segments, marking the beginning of a new phase of rapid growth. At the same time, through the cell business unit mechanism, we have comprehensively optimized our organization and enhanced operational efficiency, consistently improving our business rooted deep and growing beyond. Looking ahead, we will continue to provide more competitive technology products and services to deliver better user experience and greater user value. As the company evolves into a user enterprise, leading in technology and experience, we aim to shape a sustainable and brighter future with more users. Thank you for your support. With that, I will now turn the call over to Stanley for Q3 financial details. Over to you, Stanley. Stanley Qu: Thank you, William. Let's now review our key financial results. For 2025, average total revenues reached 21.8 billion RMB, increased 60.7% year over year and 14.7% quarter over quarter. Vehicle sales were 19.2 billion RMB, up 15% year over year and 19% quarter over quarter. The year-over-year growth was mainly due to higher deliveries, partially offset by lower average selling price from product mix changes. The quarter-over-quarter increase was mainly from higher deliveries. Other sales were 6.226 billion RMB, up 31.2% year over year and down 9.8% quarter over quarter. Year-over-year growth was driven by increased sales of used cars, technical R&D services, and sales of car accessories, and after-sales vehicle services. While the quarter-over-quarter decrease was mainly due to the decrease in revenues from used cars technical R&D services, partially offset by the increase in parts accessories, and after-sales vehicle services and provision of power solutions. Looking at margin, vehicle margin was 14.7%, compared with 13.1% in Q3 last year and 10.3% last quarter. The year-over-year and the quarter-over-quarter increase were mainly due to the decreased material cost per unit primarily driven by our comprehensive cost reduction efforts. Overall, gross margin was 13.9%, versus 10.7% in Q3 last year, and 10% last quarter. The year-over-year increase mainly reflected higher vehicle margin and better profitability in sales of parts, accessories, and after-sales vehicle services, driven by cost reduction and efficiency improvements. The quarter-over-quarter increase was mainly attributable to higher vehicle margin. Turning to OpEx, R&D expenses were 2.4 billion RMB, decreased 28% year over year and 20.5% quarter over quarter. The decrease year over year and quarter over quarter were mainly driven by lower personnel costs in R&D functions due to organizational optimization and decreased design and development costs from different development stages. SG&A expenses were 4.2 billion RMB, up 1.8% year over year and 5.5% quarter over quarter. Year over year, SG&A expenses stayed stable. The quarter-over-quarter increase was mainly driven by the increase in sales and marketing activities associated with new product launches. Loss from operations was 3.5 billion RMB, down 32.8% year over year and 28.3% quarter over quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted loss from operations was 2.83 billion RMB, representing a decrease of 39.5% year over year and 31.3% quarter over quarter. Net loss was 3.5 billion RMB, showing a decrease of 31.2% year over year and a decrease of 30.3% quarter over quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted net loss was 2.7 billion RMB, representing a decrease of 38% year over year and 33.7% quarter over quarter. Furthermore, we generated positive operating cash flow and positive free cash flow this quarter, together with the $1.16 billion US dollar equity offering in September. We ended the quarter with 36.7 billion RMB in total cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits, laying a solid foundation for our future growth. That wraps up our prepared remarks. For more information and the details of our unaudited third quarter 2025 financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our Q&A session. Operator? Operator: Thank you. If you wish to ask a question, please press 1 on your phone and wait for your name to be announced. If you wish to cancel your request, please press 2. If you are on a speakerphone, please pick up the handset to ask a question. For the benefit of all the participants on today's call, please limit yourself to two questions. And if you have additional questions, you can reenter the queue. Our first question comes from the line of Tim Hsiao from Morgan Stanley. Please go ahead. Tim Hsiao: Hi. Thanks for taking my question. This is Tim from Morgan Stanley. So I have two questions. The first question is about a breakeven target because we noticed that NIO's updated fourth quarter delivery guidance of 120,000 to 125,000 came in around 20% lower than our previous target of 150,000. Just wondering if there was a volume shortfall adversely affecting the company's breakeven target for the fourth quarter. And considering the sub-seasonal demand and positive uncertainty, when could the company achieve the previous monthly ROE of 50,000? That's my first question. William Li: Thank you for the question. Actually, for the company, we still have the confidence in achieving quarterly breakeven in Q4, and this is still our financial target towards the end of the year. But in the meantime, we did see the impact coming from the phase-out and the termination of the trade-in and replacement subsidies since October. But this is actually the challenge faced by the entire industry. In that case, in Q4 for the entire industry, we may not see the year-end sales spike that we normally expect towards the end of the year. As you are closely tracking the market and all the numbers, probably you have also foreseen that potential change towards the end of the year. And in the meantime, as next year, the purchase tax exemptions on the new energy vehicles will be further reduced for the new products like the ES8 with order backlog that will continue towards the next year. Car companies, including NIO, provide the guarantee for the purchasing tax exemptions to users waiting up for their cars next year. Yet no car company is going to provide the guarantee for the trade-in and replacement subsidy. In that case, the overall market demand has been affected because of the cancellation of the trade-in subsidy. Especially for our company, our Amo L60 and L90 are majorly affected by this cancellation as they are also relatively low price segment and are more sensitive to such changes. Yet we still have confidence in achieving the Q4 breakeven target. This is mainly because we do see a strong demand for our high-margin products like the all-new ES8. We still have ample order backlog and also new order intake for that product. So overall speaking, the order intake on the Amo has been affected because of the cancellation of the trade-in subsidy, yet the overall impact on the gross profit is limited. In that case, we do have the confidence for the financial targets. In the meantime, in terms of the vehicle gross margin, in Q3, we have achieved the vehicle gross margin of 14.7%, better than we expected. In the meantime, we are also working with our supply chain partners on the continuous cost reduction and also commercial negotiation efforts towards Q4. With that, we foresee the vehicle gross margin in Q4 to be around 18%. And for the ES8 in Q4, we also expect significant growth in sales and the delivery volume with a very lucrative margin of over 20%, then the overall gross profit for the entire company will be significantly improved from Q3. In the meantime, we also see good financial performance of our non-car sales business, and we also expect such momentum to continue into Q4. So we see improvements both in the sales revenue contributed by the non-vehicle business as well as the gross margin improvement of that part. With that, the gross profit, the vehicle gross profit, or the non-vehicle gross profit will also see improvement from Q3 to Q4. And in terms of the expense and also cost control, since this year, we've been taking a series of actions in improving our operational efficiency and our expenses utilization. And we already see some good results from the Q3 financials. And we will also continue such effort in Q4 in improving the sales SG&A expenses as well as the R&D expenses and their efficiency. Especially in Q4, we don't expect any major or high-profile marketing or campaigns. In that case, we will be controlling our expenses in Q4 with our SG&A as well as the R&D. So to sum up, our sales volume was affected by the phase-out of the trade-in and replacement subsidy, yet the gross profit is not majorly affected. In the meantime, we will continue our efforts in improving the efficiency and utilization of our investment and expenses. In that case, we expect also improved business results from Q4 and also have the confidence in achieving the quarterly breakeven target. Tim Hsiao: Thank you, William, for all the details. My second question is about our volume targets, together with the new model schedule. Because I think back to previous quarters, the management mentions that we target, like, 50,000 monthly run rate in the fourth quarter. So if we are not going to achieve that, when can we achieve 50,000 monthly sales? And considering all the macro uncertainties, will NIO need to consider moving up the launch schedule of the new models to the first quarter or earlier to bolster the sales momentum into next year? That's my second question. Thank you. William Li: Thank you for the question. As also previously mentioned in my remark, the guidance we provide for Q4 is 120,000 to 125,000 units. In terms of the adjustment on the guidance, as also explained, it's mainly because of the impact on the phase-out of the trade-in and replacement subsidy. With that, we will not be able to see the year-end sales spike driven by the seasonality towards the end of the year, especially this will affect the sales of our cars that have already experienced their new car hype stage. But this is also the challenge faced by the entire industry. Based on our current product lineup and also launch cadence, we do expect that sometime next year, in the 50,000 monthly delivery. This is based on the consideration that we will be launching three large models next year and also based on the continuous improvement in our cell capacity and also our sales and marketing efficiency. So we do see the opportunity of achieving more than 50,000 units per month somewhere in the first half of next year. And in the meantime, we will also not just randomly change our new car launch cadence or plan simply because of short-term or temporary policy changes or impact. We will still keep our original launch cadence, that is to launch two new models in Q2 next year and one new model in Q3 next year. Tim Hsiao: Thanks. Thank you, William and Stanley. Looking forward to the first breakeven quarter and more to come. Operator: Thank you. Your next question comes from Paul Gong with UBS. Please go ahead. Paul Gong: Hi, William. Thanks for taking my question. My first question is regarding the 2026 outlook. Given there would be 5% of the purchase tax being levied on the EVs, how shall we think about the company's preparation for such a policy change? Or shall we compensate for the customers for this amount and adjust it along the supply chain and internal cost control? Or do we expect to let the consumers take the majority of the ads? This is my first question. William Li: Thank you for the question. As next year, the purchasing tax on the new energy vehicles will be halved. Actually, the impact on us is less major in comparison to other new energy vehicle models and also companies. As 80-90% of our users choose to buy the car while subscribing to the battery. In that case, the price of the battery is excluded from the tax base. In that case, our tax exemption is still more advantageous than other companies and also non-swappable models. And in the meantime, for the popular products like the Allian ES8 with very long waiting time for the deliveries and pickup, we are also the first car company to announce the purchasing tax guarantee for our users who have to pick up their cars next year. We have made this purchasing tax guarantee already at the launch of the ES8. For other products and models, as their waiting time is not as long as on the ES8, so far, we don't have the guarantee policy for other models. As for the specific measures that we are going to take in the face of the purchasing tax changes next year, well, it highly depends on the dynamics of the market, the landscape of the competition, and also the practices of other peers. So we will keep flexibility in our measures and also policies. But currently, we don't have a very specific plan. And in the meantime, we also see that the entire industry, including the public and users, are gradually digesting the phase-out of the purchasing tax policies on the new energy vehicles. Especially right now, if we look at the smart EV industry in China, it is now less policy-driven. As the actual user experience and also the cost advantage of battery electric vehicles are more evident and also becoming more attractive to the users. In the first ten months of this year, the sales volume growth of the app actually increased significantly. This also gave us the confidence in continuing such momentum. So there will be an impact from the purchasing tax phase-out, but it will be very limited. Paul Gong: My second question is regarding the expense control. And we have already seen quite some cost reduction, especially from the R&D in Q3. And per your guidance, Q4 should see further efficiency improvement there. Heading to 2026, shall we expect the lower cost structure on the expense side to stay as a constant and new normal? Shall we expect, like, low 2 billion something for the R&D per quarter? Around 4 billion or even lower than 4 billion on the SG&A per quarter? William Li: Thank you for the question. As mentioned, in Q3, our R&D expenses are around 2 billion RMB on a non-GAAP basis. And also for Q4 and the next year, we expect our quarterly R&D expenses to be flat, also around 2 billion per quarter. And so far, we don't have any plan to dial back on the R&D expenses. But in the meantime, we will focus more on improving the efficiency of our R&D activities, especially leveraging our self-business unit mechanism. We will make full use of the output of this 2 billion R&D investment every quarter inside the company for the project initiation and approval. We have established the ROI evaluation mechanism. We also have the closed loop with the project review and also improvement. By continuing such efforts, we believe that at RMB 2 billion per quarter in R&D, we will be maintaining our existing product development as well as the key technology development without compromising on the competitiveness of the entire company. And in terms of the SG&A expenses and its percentage to the sales revenue, as in Q4, based on the sales volume guidance, we have lowered our volume from 50,000 units per month. In that case, originally, our target is to achieve a 10% ratio between SG&A and the sales revenue, and now it's around 12%. And in Q4, we will also be keeping that level, but this is against the overall background of achieving the quarterly breakeven in Q4. And in terms of the absolute amount, that's around 4 billion per quarter, as you mentioned. And next year, we will focus on improving our efficiency in sales and also overall activities. Overall, we believe that 10% between SG&A to the total sales revenue should be a winnable target for us to achieve. Paul Gong: Thank you, William and Stanley. Looking forward to more efficient operation going forward. Operator: Thank you. Your next question comes from Nick Lai with JPMorgan. Please go ahead. Nick Lai: Yes. This is Nick from JPMorgan. Thank you for taking my question. The first question is actually regarding the possibility into 2026. Based on William's comment earlier, now from the second quarter of next year, we have three new models and monthly sales reaching 50,000 units. And William also mentioned that this expense ratio of expense should be compared. So with all these comments, is it fair to say that the second quarter of 2025 breakeven and then next year, for the full year or at least the second half of next year, likely, you know, profitability should also be very strong? That's my first question. How should we think about profitability in 2026? William Li: Thank you for the question. Actually, for the full year, our business target is to achieve profit for the full year 2026 on a non-GAAP basis. And we do see confidence in achieving this profitability target for next year. Non-GAAP, as we basically look at this from both market trend as well as the relative competitiveness of our product and services. Here are some insights into the trend over the past one year or so. We will be really looking at the penetration rate of the battery electric vehicle in the premium segment and also most specifically in the large railroad SUV market. In Q3, the sales volume of the fab increased by 26% quarter over quarter, while for RIV and TEAHIVE, the sales volume only increased by 127%. Well, actually decreased by 127% quarter over quarter. And if we look at the entire new energy vehicle market, the penetration rate has reached 55% in Q3, and this is majorly powered by the growth in the battery electric vehicle. And in the first three quarters, the sales volume of the bypass increased by 33%, while for rib, it's only 3%. And more specifically in October, the BAV sales volume increased by 13% while for the rib, it decreased by 13%. So this is also showing how well received and adopted the BAV model is. And more specifically, on the premium segment, price above 300,000 RMB, this is where our new brand and our products are in. For the past, it's still at a relatively low penetration rate, but we do see a trend of improving that penetration. This also gives a huge opportunity for enlarging our penetration and market share in that segment. For this year, especially, we see the trend where the premium battery electric vehicle products are more and more received by the users. We have already seen the awareness and also the appetite for such products. And, also, this has powered the increase in the penetration rate of this product. For the full year last year, the penetration rate of the battery electric vehicle in the premium segment was only 12%. But in 318%, and in the first three quarters, the penetration rate of the fab has increased by 33%. Yet for the range-extended vehicle, it actually decreased by 10%. And more specifically, for the large railroad SUV segment, the sales volume of the bus took the first place for the first time in September, and it continued such momentum in October. In October, we see the total volume of the fab registration was around 39,000 units. Well, for RIB, that was only 24,000 units. Regarding the sales volume and also for next year, as for the OA L90 and also the new OA ES8 next year, we will still continue the bus around these two new products relatively new to the market. Plus, we are going to introduce another three new large models. So we will be having five new large models available to the market next year from the new and Amo brand. And if we look at the mid to large and also the large SUV segments where our new models will be targeting, in Q3, the sales volume of fab models increased by 140%. Well, for WIP, it's only 19%. But as mentioned, the overall penetration rate of a bath among the premium largest vehicle models, it's still relatively low, which means that we do have huge opportunities and potential in this segment. So overall speaking, our product launch cadence is in line with the market shift and also the trend, especially considering our large models are also competitive in both products as well as the charging and swapping experience. And, also, for these five large models, they will also contribute the major sales volume among all of our products. As they are high-margin products, they will also contribute more significantly to the vehicle gross margin. With that, next year, we expect the vehicle gross margin to be around 20%. That is the further improvement on top of our existing gross margin for Q3 and also outlook for Q4. But, also, this result will be dependent also on the continuous cost optimization efforts together with our supply chain partners. And in terms of the expenses, as we rolled out this cell business unit mechanism, we have tightened our control over expenses. We already see some good results and we will continue such efforts next year in controlling the R&D and also SG&A expenses. And also, for our large vehicle models, based on its strong market performance and demand, it already proves that with the right product definition and also with our unique advantages in battery swap, we do can capture a decent market share in that segment. And in the meantime, we also see a positive trend and also huge potential for the battery electric vehicles to take up a higher market share and also penetration among large models and also premium models. And also, thirdly, we have confidence in achieving the product gross margin of 20% plus our continuous efforts on the cost and expenses control. With all that combined, we think that achieving a full year profitability on a non-GAAP basis for the year of 2026 is a reasonable target for the team. Nick Lai: Clear and certainly, I think, an exciting outcome for next year. My second question is more about the choice between in-house chain against media. Can you remind us what is our long-term strategy between insourcing and outsourcing? What are the pros and cons between these two strategies? William Li: Thank you for the question. Our NX1931 is the first smart driving chip made also with a five-nanometer process, and its tape-out mass production application on the car and also full-stack operations were all earlier than the competitors of similar performance in the industry. We also see how this in-house developed chip is contributing to both performance improvement as well as the cost structure optimization. So for the long term, we will continue our investments and also efforts in the chip-related technologies. And in the meantime, maybe you have also noticed that with media, we have announced a partnership where we are going to share our chip solution and the technologies with more industry players, both from the automotive as well as from the non-automotive industry, as we do see a good potential of applying this high computing power resonant chip on different types of devices, for example, on robots. So we will work with our tech partners together to explore more use cases and also application scenarios of our chip. Operator: Thank you. Your next question comes from Bin Wang from Deutsche Bank. Please go ahead. Bin Wang: Thank you. The first question is about the margin in the third quarter. It clearly has a big margin drop by 4.4% by its explanation because of cost reduction. Since the just enough. Do you think because of the mix because in our IT, has been a volume contribution more than 20,000 units. Can you break about the margin driver? How much came from the margin from the onboard LID? How much from the cost reduction? Really construction was the key item you actually got cost the job in the number three quarter. Thank you. William Li: Thank you for the question. As you've mentioned, our vehicle growth margin result in Q3 and the improvement from the previous quarter, this is majorly driven by two factors. The first is the cost reduction contributed by the supply chain driven by the increase in our sales volume. And the second factor is the sales and the delivery of the L90, which is a high-margin product that we have started to deliver from Q3 in comparison to Q2. We have delivered more than 20,000 L90 contributing better margin performance than the L60 in the previous quarters. These are two major drivers of the gross margin improvement in Q3. As for the specific breakdown, I will also share more information offline with you. But here, I can share with you some of the vehicle margin performance model by model. For the new ES8, as mentioned by William, the vehicle margin is 20%. Of course, we didn't start the delivery of the ES8 until late Q3, so its actual contribution in the volume side is relatively small. And for the ET5, ET5T, their vehicle gross margin is between 15 to 20%. And for ES6, and EC6, their vehicle gross margin is over 20% and even reaching 25% as these are already products being in the market for a while. We have already worn off the new car bus on this model. And for the L90, the vehicle margin is around 15 to 20%. Overall speaking, for the new models plus the onboard L90, they do have a pretty good vehicle margin performance. Bin Wang: My second question is about your latest chip joint venture with Xcela. This is maybe not for shareholders with a 36.4% stake in the company. My question is number one, why did you choose this partner, Xcela, from Chongqing? Why not somebody else? Secondly, what's the best model about this joint venture? Is it just a sales company? And it's always actually you really made a joint venture to make a check by itself. Meanwhile, do you actually get any license fee income already from the store manager? Because this is to be will save your chips. Thank you. William Li: Thank you for the question. Yes, some media has covered the establishment of this chip joint venture. And, also, we are leveraging our partners of this joint venture to sell our chip and also our IC design capabilities to other clients and also potential users. But this is not an exclusive partnership with you. We have the possibility and also the opportunities to sell our chip solution and the product to other partners and companies from our site. So that's one part of the way to sell that solution. We can also leverage our partners' resources to provide our chip solution to other car companies or other clients and they will be acting as a tier one providing such a solution. In the meantime, as mentioned, we also see opportunities of applying such a chip in the non-car or the non-automotive industry. So that is also a pretty common practice for car companies to share their technologies across different industries. And for our partners, they do have mature experience and also skills in the industry, in the design industry. They also have their own client and also network connections. And, they have some chip products that can be complementary to our chip across different scenarios. So overall speaking, we believe that this is a win-win partnership. Operator: Thank you. Your next question comes from Jeff with Citi. Please go ahead. Jeff: Hi. This is Jeff from Citi. My first question is on the 4Q ASP. So it looked like the 34 billion of revenue guidance should match with vehicle ASP. Up 12% Q on Q at the 246,000 RMB. So if the GB margin reaches 18%, that's around 6 billion gross profit. Right? So this is my first question. And my second question is the first quarter. Because we recognize the 4Q guidance, such as the revenue up 56% Q on Q. Right? And the GP margin reached 18%. But having said that, entering the first quarter next year, our volume is not going to drop back to the third quarter level. Right? And secondly, it looks like our high-margin products, the Q on Q volume, in the first quarter is going to be stable. So, therefore, the product mix should further improve into one queue. On a Q on Q base. So my second question is would the first quarter vehicle margin also stay closer to the 18% level because the higher margin products contribute more to the mix. William Li: Thank you for the question. Regarding the average selling price, it will increase in Q4. This is mainly driven by the sales of the high-margin product, the ES8. As for the full year, our volume guidance for the year, that is around 40,000 units, and most of this result will be happening in Q4. So it is also contributing to the improvement. And regarding your second question on the gross margin outlook for Q1 next year, well, normally, Q1 is the low season of the automotive industry. So overall speaking, the soft volume in Q1 will not be as good or as high as we normally expect for Q3 and Q4 in the previous years. But as also mentioned, in Q4 this year, we may not see the common sales spikes fueled by the seasonality. In that case, even if we are going to encounter the low season in Q1 next year, the impact or the reduced or the decrease from Q4 this year to Q1 next year won't be that significant in comparison to the previous years. Not to mention that we also have the ES8 order backlog that will last into the next year. This will also help to offset the seasonality impact in Q1 next year. So overall speaking, our operations and also volume forecast for Q1 next year will not be as good as in Q4 this year, but will also not be as low as in Q1 this year. So overall speaking, the vehicle gross margin falls into the same trend. It will be lower than the margin outlook we have for Q4 this year, but will be better than Q1 last year. Operator: Thank you, Jeff. Your next question comes from Ming-Hsun Lee with Bank of America. Please go ahead. Ming-Hsun Lee: Hello, William. This is Ming. So my first question is regarding your overseas plan because I think in the past few years, you have built several sales channels in Europe. And could you give us more of your strategy for overseas expansion for the next few years? Thank you. That's my first question. William Li: Thank you for the question. We entered into Europe in 2021. And from 2021 to 2024 in the past several years, we've been doing direct to customers or direct to users, the direct selling model for the European market. Yet in the meantime, with all the external factors, such as the tariffs in the EU, we also started to realize that for a broader market entrance, we do need to rely on and leverage more on the partner's support and resources. That's why starting this year, we have started to look for local partners for our market entry. Right now, we already have identified high-quality partners in more than 10 countries and regions, and the Firefly will be the first brand where we introduce to the overseas markets leveraging our partners' resources and network. The product will become available not only in Europe, Asia, but also in the Middle East and South America. So overall speaking, for the global market expansion, we are switching our business model from the direct-to-selling business model to a more partner-based and also local partner-supported business model. And also for the Firefly and its product, it's actually a very good product suitable for broader markets and also its European version and right-hand drive version already developed. Ready for the global market entry. So we do have confidence in the global expansion of the Firefly product. And in the meantime, we are also developing the Onward product for the global market. It is also a brand with a reasonable price range and product set lineup for the global market expansion. As for the new brand, as it targets the premium segment, it does take patience and time to establish brand awareness on the new product. In that case, we are also more patient and also more long-term for the global market expansion of the new brand. So overall speaking, in China, we started with the new premium one, and then we have the Amo brand and the Firefly. But for the global market expansion, they will take the opposite way where we will start with Firefly and then when Amo has the product ready for the global market, we will then push out Amo and then NIO. Ming-Hsun Lee: Thank you, William. My second question is regarding the expansion of more mass market opportunities. So since Amo is very successful in L90 and also recently, L60. Volume sales also continue to grow. So in the future, do you expect to launch more products under the Amo brand and to have more business opportunities for the segment at the 200,000 RMB or even below? Yeah. Thank you. William Li: Thank you for the question. For the Amo brand, it is defined as a family-oriented brand for the mass market. So just like Toyota and Volkswagen, for the long term, we do need to create a wide and broad product bandwidth to cater to more needs and also to cover more price and market segments. So for the long term, for the Amo brand, our price bandwidth will be ranging from 100,000 to 300,000 RMB. Within that range, we are going to offer more diverse products and options for our users to choose from. We started with L60 priced around 200,000 RMB. And for the L90, the fully loaded one has a price point of around or close to 300,000 RMB. And next year for the L80, it will also be between 200 to 300,000 RMB. So that is already a plus segment captured by the existing three products. In the meantime, we are also developing a new product platform where we are targeting the price range below 200,000 RMB. We believe that with this diversified product and price lineup, plus a more mature power swap network, we are able to achieve a reasonable market share in the price range from 100,000 to 300,000 RMB. This is also the single largest price segment in the market in China's passenger vehicle market with a total volume of 15 million. In such a large market, there's no reason for us not to launch enough products to capture a sufficient market share. Operator: Thank you. Your next question comes from Xing Chang with CICC. Please go ahead. Xing Chang: Hi. Thank you for taking my question. I have only one question, a follow-up question. Regards to the R&D expense. We have already seen our R&D expense in the third quarter decreased a lot to our previously guided level. So but in the industry is increasing investment in intelligence and also AI-related other areas. How do we allocate our limited R&D expense and how do we balance the short-term R&D efficiency and also long-term R&D cost? William Li: Thank you for the question. Actually, this year, our major focus in the R&D activities is to improve the efficiency and also to identify the priority of different R&D activities and projects. In that regard, the CPU mechanism has played a very important role in helping to make useful use of the R&D investment and expenses. In the meantime, we will also make sure that we will not lose our long-term competitiveness as that is a baseline that we will not cross. So with the CPU, we are pleased to see that even if we're dialing back on the R&D expenses in the recent quarters, yet we still maintained the R&D capabilities and competitiveness in the 12 full-stack capabilities for the smart TV. So we're also confident to control to continue that competitiveness. And, also, in the past several years, we've made major investments in developing the fundamental technologies for the core EV products, including our chips, operating systems, intelligent chassis, and also 900-volt high voltage architecture. As the foundation is already laid for the future product and technology platform, the follow-up iterations won't be as costly as developing the foundation and also the fundamental as the future iterations will also get more efficient in utilizing limited R&D resources. And also regarding the AI technology and its applications, like the smart driving and also our AI companion, Nomi, as well as the internal management and efficiency tools, we will continue our R&D intensity and efforts, but we'll achieve that in a more efficient way. And in terms of using algorithms and data, we actually have identified some good practices and approaches that can be more efficient than simply putting up investments or resources for the sake of achieving a high computing power or data performance. So we have identified some approaches with higher return on the investment. Actually, in the AI industry, the success of the deep sick has also proven that you don't need to make costly investments into developing a good large language model performance. So it's the same practice for us. Not to mention that we can also leverage our collective artificial intelligence equipped on all the vehicles and also our data close loop with that to achieve a same level of computing performance, we actually need to use that much computing power as our competitors or other peers are doing. So overall speaking, in terms of the R&D, we have been putting more focus on the return on investment evaluation as well as doing a better priority for our R&D activity. Xing Chang: Yes. Thank you. I get it. Thank you. Operator: Thank you. Your next question comes from the line of Yuqian Ding with HSBC. Please go ahead. Yuqian Ding: Thanks, team. I got two questions. First one is, could you share the cost benefit when we hit the volume threshold? The current run rate is half a million now. And it's only gonna get higher next year. What benefit can we get, let's say, and all the critical components that have high weight in the bomb structure? William Li: Thank you for the question. As mentioned, when the source volume reaches a certain level of scale, we will actually see how the economy of scale is contributing to the improvement in the financial performance, and it's mainly contributed where it's mainly from two perspectives. The first is regarding stronger bargaining power along the chain. This can also help improve the vehicle cost structure as you already see in our Q3 and Q4 vehicle margin guidance. And for the next, we don't have a clear picture regarding how much it will be contributed by the economy of scale from the supply side. Yet, as mentioned by William, our margin target for next year is 20%. That will actually partially be driven by the economy of scale on the supply side. And the second is regarding the improvement in manufacturing efficiency and cost optimization. Driven by the manufacturing as we improve our sales volume, the overall amortized manufacturing cost per unit will be gradually optimized. That will also contribute to the improvement in the cost structure of our products. Yuqian Ding: Thank you, Stanley. The second question is regarding next year's new model. Could you help us to put in context the potential higher scale and also the mixed impact? We talked about the bigger vehicle has better margin. But we also talked about the Amo L90 still 15 to 20%. So L80, will be below, 90 in terms of the pricing. Presumably. Will there be dilution or joint on those scale outweigh? That? William Li: Thank you for the question. As mentioned, the three new large SUV models that we're going to introduce next year, they are all positioned at the higher end of the price spectrum of their respective segment. We haven't finalized the prices for these new models yet. Yet we already expect more significant margin contribution by these three models. Not to mention that these three large models are fully synergized with the current audio ES8 and L90 from the cost structure. So this year and next year for the cost structure for the cost optimization and the cost-saving opportunities, that we've identified on the ES8 and L90 can also be carried over to these three new models. So with five large models combined, we expect them to contribute to the good product as a good product performance as well as on the margin levels. Overall speaking, achieving 20% of equal margin. Yuqian Ding: Thank you. Operator: Thank you. As there are no further questions, now I'd like to turn the call back over to the company for closing remarks. Rui Chen: Thank you again for joining us today. If you have any further questions, please feel free to contact our Investor Relations team through the contact information on the website. This concludes the conference call. You may now disconnect your line. Thank you.
Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to Jiayin Group Inc.'s Third Quarter 2025 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. I will now turn the call over to Mr. Sam Lee from Investor Relations of Jiayin Group Inc. Please proceed. Sam Lee: Thank you, operator. Hello, everyone. Thank you all for joining us on today's conference call to discuss Jiayin Group Inc.'s financial results for 2025Q3. We released our earnings results earlier today. The press release is available on the company's website as well as from Newswire services. On the call with me today are Mr. Yan Dinggui, Chief Executive Officer, Mr. Chunlin Fan, Chief Financial Officer, and Ms. Yifang Xu, Chief Risk Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filing with the SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Also, this call includes discussion of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP financial measures to GAAP financial measures. Please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese renminbi. With that, let me now turn the call over to our CEO, Mr. Yan Dinggui. Mr. Yan will deliver his remarks in Chinese. I will follow up with corresponding English translations. Please go ahead, Mr. Yan. Yan Dinggui: Good afternoon, everyone. Thank you for joining Jiayin Group Inc.'s Third Quarter 2025 Earnings Conference Call. In the third quarter, China's GDP grew by 4.8% year-on-year, slowing from 5.2% in the previous quarter but remaining stable overall. Consumption continued to play a dominant role, contributing 56.6% to growth. Meanwhile, demand for consumer finance has been rising steadily. A narrow consumer credit balance up 4.2% year-on-year as of September 30 signals from the recent regulatory policies indicate that coordinated efforts to stabilize growth, boost consumption, and advance inclusive finance are creating a favorable environment for our long-term healthy and sustainable development of the industry. In this quarter, the company facilitated RMB 32.2 billion in loan volume, a year-on-year increase of approximately 20.6%, and reported non-GAAP income from operation of RMB 190 million, up around 50.3% year-on-year, achieving our previously issued guidance. During the reporting period, the company maintained cooperation with 75 financial institutions, with another 64 under negotiation. We have been included in the white list by most of our partner financial institutions, providing a solid foundation for stable funding supply. Leveraging our technological strength, tropical management capabilities, and risk control expertise, we enhance our funding partners' capital allocation efficiency, accurately align with their risk preferences, and actively explore new models for business collaboration. Against the backdrop of industry contraction and tightening liquidity, we observed pressure on overall risk indicators and fluctuations in asset quality. In response, we rapidly iterated our risk control model, continuously tightened strategies for high-risk, high-volatility users, and introduced models combining long-term and short-term perspectives to enhance the flexibility and timeliness of risk monitoring, thereby enabling sharp insight into risk trends and enabling timely responses. At the end of the third quarter, the ninety-plus day delinquency rate stood at 1.33%. We will remain committed to prudent operations, continue to reinforce our competitive edge in risk management. To optimize resource allocation efficiency, we adopted a cautious strategy for new customer acquisition, with a stronger focus on high-quality borrower segments. All newly added channels are leading Internet platforms, and we continue to optimize our credit limit management to enhance user stickiness and facilitate repeat borrowing. Additionally, as the cornerstone of business growth, repeat borrowers saw their share of facilitation volume rise further to 78.6%. This drove the overall average borrowing amounts per borrowing up to RMB 9,115 yuan, representing a year-on-year increase of approximately 19.5%. Since the beginning of this year, the company's AI development has entered a new phase. Through increased resource investment and organizational restructuring, we have achieved multiple significant innovations, establishing a technical benchmark of high performance, low cost, and lightweight. In terms of deepening business empowerment, we focused on deploying multimodal anti-fraud systems and AI-powered agent assistance. Compared to external models, our in-house model not only directly reduces cost by over RMB 1 million but more importantly, builds our own technological moat while fundamentally enhancing our AI capability. By establishing a historical voiceprint database and a high-quality voiceprint processing pipeline, we conduct real-time fraud identification for incoming calls, identifying over 4,000 new fraudulent voiceprints to date. For image recognition, by capturing contextual features of applicants and screening clues from high-risk scenarios, we achieved an accuracy rate exceeding 90% in identifying associations with organized fraud. With the integration of these multimodal capabilities, the timeliness of fraud detection was compressed from a week to within two hours, forging a new tech-driven line of defense against fraud. In the customer service process, our AI product matrix covers the entire business process, from initial agent training and real-time conversation support to post-event analysis. With 100% agent coverage and over 90% accuracy, it significantly boosted staff efficiency and service quality. In terms of broadening business coverage, the launch of the intelligent agent R&D platform has significantly lowered the development threshold for AI agents. So far, the number of such agents has exceeded 300, with an internal monthly active penetration rate exceeding 40%, effectively enhancing department efficiency and enthusiasm in independently developing AI agents. The model management platform is dedicated to improving model deployment efficiency, reducing the time required for models to go from R&D to production from thirty-two days to sixteen days, and nearly tripling the number of models put into production. These two platforms have enabled various business departments to transition from stand-alone applications to an integrated collaborative ecosystem. Looking ahead, we will continue to further advance the four-plus-two strategy, focusing on four major application directions and leveraging two key infrastructure platforms to integrate existing AI models and tools, further achieving an upgrade and innovation from technological breakthrough to value creation. Overseas markets serve as both a game-changing engine for us to break through regional growth boundaries and a core pillar in building our global strategic footprint. In the third quarter, our Indonesian business maintained engagement with multiple financial institutions, driving business scale increased by nearly 200% year-on-year, and the number of borrowers rising by approximately 150% compared to the same period last year. Recognizing its growth potential, we have significantly increased our investment in the local operator, acquiring a stake of more than 20% through capital injection, demonstrating our strong commitment to local market development. In Mexico, the loan volume and user base have maintained rapid growth, with initial success in market expansion. Currently, we remain in a critical phase of product innovation and foundational capacity building, aiming to lay a solid foundation for in-depth local operation. With the implementation of the new loan facilitation regulation in October, the industry is undergoing numerous changes and challenges. The company projects its loan facilitation volume at RMB 23 billion to RMB 25 billion for Q4 2025, with full-year volume expected to be in the range of RMB 127.8 billion to RMB 129.8 billion, representing a year-on-year increase of approximately 26.8% to 28.8%. Full-year non-GAAP operating profit guidance is set at RMB 1.99 billion to RMB 2.06 billion, reflecting a growth of approximately 52.3% to 57.6%. Amid a complex, volatile, and increasingly competitive external environment, we aim to navigate cyclical headwinds with lean operational capabilities and forge long-term resilience for steady, sustainable growth. And with that, I will now turn the call over to our CFO, Mr. Chunlin Fan. Please go ahead. Chunlin Fan: Thank you, Mr. Yan, and hello, everyone, for joining our call today. I will now review our financial highlights for the quarter. Please note that all numbers will be in RMB. All percentage changes refer to year-over-year comparisons unless otherwise noted. As Mr. Yan noted earlier, we demonstrated robust business resilience in Q3 and successfully achieved our financial guidance. Loan facilitation volume was RMB 32.2 billion, representing an increase of 20.6% from the same period of 2024. Our net revenue was RMB 1.47 billion, representing an increase of 1.8% from the same period of 2024. Moving on to costs, facilitation and servicing expense was RMB 286.5 million, compared with RMB 419.1 million for the same period of 2024. This was primarily due to decreased expenses related to financial guarantee services. Allowance for uncollectible receivables, contract assets, loans receivable, and others was RMB 1.5 million, representing a decrease of 87.1% from the same period of 2024, primarily due to decreased allowance for overseas loans as a result of disposal of Nigerian entities during 2024 and the gross slowdown of receivables from loan facilitation business. Sales and marketing expense was RMB 544.2 million, representing a decrease of 1.1% from the same period of 2024. General and administrative expense was RMB 72.4 million, representing an increase of 29% from the same period of 2024, primarily driven by an increase in share-based compensation. R&D expense was RMB 108.7 million, representing an increase of 13.3% from the same period of 2024, primarily driven by an increase in expenditures for employee compensation-related benefits. Non-GAAP income from operation was RMB 490.6 million, compared with RMB 326.5 million in the same period of 2024. Consequently, our net income for the third quarter was RMB 370.765 million, representing an increase of 39.7% from the same period of 2024. Our basic and diluted net income per share was RMB 1.83, compared with RMB 1.27 in 2024. Basic and diluted net income for ADS was RMB 7.32, compared with RMB 5.08 in 2024. We ended this quarter with RMB 124.2 million in cash and cash equivalents, compared with RMB 316.2 million at the end of the previous quarter. With that, we can open the call for questions. Ms. Xu, our Chief Risk Officer, and I will answer your questions. Operator, please proceed. Operator: Thank you so much, dear participants. As a reminder, please standby while we compile the Q&A rules. This will take a few moments. And now we are going to take our first question. It comes from the line of Ivan Shu from Coergin Securities. Your line is open. Please ask your question. Ivan Shu: Good evening, management. Thank you for taking my questions. I am Yiwen from Synolink Securities. I have two questions. The first one is that after the new regulation took effect in October, what impact have you seen on the business? And could management provide more color on any strategic adjustments and the outlook going forward? This is my first question. Thank you. Yifang Xu: Hi, Yiwen. I will do the translation for Ms. Xu. So following the implementation of the new regulation, the impact on the industry has been pretty significant. Most of the changes have been primarily on the downward pressure of pricing and the continued emphasis on consumer protection. So as of October, the asset pricing of our loan facilitation business is fully compliant with the regulatory requirements of our funding partners. As liquidity tightened, we have responded to the pricing pressure and liquidity pressure in the broader industry and the volatility industry. We have really intensified adjustment traffic acquisition and placed a greater focus on cross-industry platforms and optimizing our traffic mix, adopting a more cautious customer acquisition strategy under the current environment. For our existing power base, we have enhanced borrower segmentation. On one hand, we want to improve our risk identification for higher-risk groups. We are utilizing measures such as managing outstanding balances and accelerating runoff based on indicators like recycle elasticity, pricing, and recent frequency to address the segments that are more challenging to operate under lower pricing. On the other hand, through product and pricing adjustments, we have strengthened the efforts to retain and reengage high-quality borrowers who may potentially churn. Taken together, these initiatives are helping us optimize the overall portfolio structure. Regarding asset pricing, it is foreseeable that the downward trend will continue. Our focus is not only navigating through the current period of volatility but also continuously strengthening our ability to operate through risk cycles over the long term. That is my answer for the first question. Ivan Shu: Thank you. And given the current environment, how should we think about the revenue take rate and the margin expectations going forward? Thank you. Chunlin Fan: Thank you, Yiwen. I will answer this question. In 2025, the company facilitated RMB 32.2 billion in volume and delivered RMB 491 million in non-GAAP income from operations, in line with the guidance we previously provided. The net profit for the quarter was RMB 376 million, representing a net margin of 25.6%. In terms of the net margin, it is a slight decrease from the 27.5% net margin in Q2. For the first three quarters, we achieved RMB 1.435 billion in net profit, up 84% year-over-year and already well above the full-year 2024 figure of RMB 1.056 billion. For the full year of 2025, we expect profitability to be significantly higher than 2024. As Ms. Xu mentioned, the new regulation brought short-term pressure to the industry while liquidity and asset quality. As a highly agile technology-driven company, and drawing on our past experience navigating regulatory credit cycles, we made timely and prudent adjustments to our business scale, risk posture, and pricing strategy in response to market conditions. Over the long term, enforcement of the new regulation will raise industry entry barriers and help drive the sector towards a healthier, more orderly, more compliant, and more sustainable development. As the industry shifts towards higher-quality borrower segments, pricing, therefore, revenue take rate is expected to moderate, and margins will return to a healthier and more sustainable level. The company is entering a new phase of high-quality development. I want to reiterate Mr. Yan's guidance that he provided earlier. We expect Q4 volume to reach RMB 23 to 25 billion, bringing full-year facilitation volume to RMB 127.8 to 129.8 billion, approximately 26.8% to 28.8% year-over-year growth. Full-year non-GAAP income from operation guidance is RMB 1.99 to 2.06 billion, approximately 52.3% to 57% growth year-over-year. Ivan Shu: Thank you, management. That is very helpful. No more questions. Thank you. Operator: Dear participants, if you would like to ask a question, please press 11 on your telephone keypad. Dear speakers, there are no further questions for today. I would now like to hand the conference over to Sam Lee for closing remarks. Sam Lee: Thank you, operator, and thank you all for participating on today's call. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Operator: Thank you all again. This concludes the call. You may now disconnect.
Operator: Good morning, and welcome to the Alico Fourth Quarter and Fiscal Year Ended 2025 Earnings Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the call over to your host, John Mills, Managing Partner at ICR. Please go ahead. John Mills: Thank you. Good morning, everyone, and thank you for joining us for Alico's Fourth Quarter and Fiscal Year 2025 Conference Call. On the call today are John Kiernan, President and Chief Executive Officer; and Brad Heine, Chief Financial Officer. By now, everyone should have access to the fourth quarter and fiscal year 2025 earnings release, which went out yesterday at approximately 4:15 p.m. Eastern Time. If you've not had a chance to view the release, it's available on the Investor Relations portion of the company's website at alicoinc.com. This call is being webcast, and a replay will be available on Alico's website as well. Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in these statements. Important factors that could cause or contribute to such differences include risks detailed in the company's quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K and any amendments thereto filed with the SEC and those mentioned in the earnings release. The company undertakes no obligation to subsequently update or revise the forward-looking statements made on today's call, except as required by law. During this call, the company may also discuss non-GAAP financial measures, including EBITDA, adjusted EBITDA and net debt. For more details on these measures, please refer to the company's press release issued yesterday. And with that, it is my pleasure to turn the call over to the company's President and CEO, Mr. John Kiernan. John Kiernan: Thank you, John. Good morning, everyone, and thank you for joining us for Alico's Fourth Quarter and Fiscal Year 2025 Earnings Call. This has been a truly transformational year for Alico. We successfully executed on our strategic pivot from a traditional citrus producer to a diversified land company, positioning ourselves for sustainable long-term value creation while maintaining our deep commitment to conservation and responsible stewardship. Fiscal year 2025 will be remembered as a milestone year in Alico's 125-plus year history. We delivered on the commitments we made to you, our shareholders, and demonstrated the disciplined execution that defines our approach to this transformation. Let me highlight our key accomplishments. First, we successfully completed our final major citrus harvest, officially concluding our capital-intensive citrus production operations. This achievement represents the culmination of a carefully planned 12-month transition that we executed while maintaining day-to-day agricultural operations. Second, we exceeded our financial guidance across key metrics. We achieved $22.5 million in adjusted EBITDA surpassing our $20 million target. Our land sales of $23.8 million also exceeded a $20 million guidance, demonstrating strong demand for our strategically located properties. Third, we strengthened our balance sheet significantly. We ended the year with $38.1 million in cash and reduced our net debt to $47.4 million providing us with the financial flexibility to fund operations through fiscal year 2027, while advancing our high-value development projects. The takeaway accomplishment for 2025 is that we have essentially lowered the financial risk for the company by reducing the volatility of weather-dependent and disease-affected citrus agricultural operations by leasing land to other agricultural crop growers while maintaining the stability of diversified land usage. Our development pipeline continues to advance on schedule with Corkscrew Grove Villages leading the way as the crown jewel of our portfolio. The establishment of the Corkscrew Grove Stewardship District represents a significant regulatory milestone that validates our development strategy and provides the framework for sustainable community focused growth. The Stewardship District approved unanimously by the Florida legislature positions us to effectively finance infrastructure, restore and manage natural areas and oversee the administration of our master planned communities. I'm particularly excited about our strategic partnership with the Florida Department of Transportation to design and construct a wildlife underpass as part of the State Road 82 expansion. This $5 million investment demonstrates our commitment to the Florida Wildlife Corridor and showcases the innovative conservation approach that sets Alico apart in the development community. We remain on track for the final decision from Collier County in 2026 with potential construction for Corkscrew beginning as early as 2028. The entitlement process -- I'm sorry, the entitlement progress with our Bonnett Lake property is also progressing well with our application moving through the review process as expected. Collectively, our 4 near-term real estate development projects Corkscrew Villages, Bonnett Lake, Saddlebag Grove and Plant World, totaling approximately 5,500 acres maintain their estimated present value of between $335 million and $380 million to be realized within the next 5 years. This represents significant value creation potential from just 10% of our land holdings, demonstrating the substantial embedded value within our diversified portfolio. Our conservation legacy continues to be a cornerstone of our strategy. Over the past 40 years, we've transferred lands that have become part of major conservation areas, including the CREW, Tiger Creek Preserve, and the Okaloacoochee Slough Wildlife Management Area. The Corkscrew Grove Villages project will continue that legacy by placing no less than 6,000 acres into permanent conservation, supporting the implementation of the Florida Wildlife Corridor and Collier Rural land stewardship program. We believe in responsible development that balances growth with conservation and believe it enhances the value and marketability of our development projects. Our approach creates the best of both worlds. With approximately 25% of our land identified for strategic development and 75% remaining for diversified agriculture, we've built a balanced platform for both near-term returns and long-term growth. We've successfully negotiated lease agreements for approximately 5,250 acres with third-party citrus growers and we're seeing strong interest from cattle operators, sugarcane growers and [ soy ] producers. This diversified approach generates revenue during our transition and also maintains productive use of our agricultural lands while preserving optionality for future development or continued agricultural use. Brad will provide detailed financial results in a moment. I want to emphasize our strong cash generation and disciplined capital allocation. The $20.4 million in crop insurance proceeds we received following Hurricane Milton, combined with our land sales, has created a robust liquidity position. We remain committed to returning capital to shareholders. We paid our fourth quarter dividend in October, maintaining our track record of consistent dividend payments. Since 2015, we've returned more than $190 million of capital through dividends, share repurchases and debt reduction. Management's comprehensive NPV analysis of our approximately 49,000 acres indicates a market value of assets between $650 million and $750 million. With our current market capitalization of approximately $240 million and net debt of $47.4 million, we believe Alico represents compelling value for investors seeking exposure to Florida's continued growth story. What differentiates Alico is our unique combination of strategic landholdings across 8 Florida counties, more than 125-plus years of local relationships and conservation credibility, a proven management team with deep expertise in both agriculture and real estate development and a balanced portfolio approach with 75% of our land remaining in agriculture. Looking ahead into fiscal 2026, we've already demonstrated continued execution of our land monetization strategy. Earlier this month, we completed the sale of 579 acres of citrus land for approximately $6.1 million and sold our office and shop in Frostproof, for approximately $1.7 million, further optimizing our real estate portfolio while generating additional cash flow. Our priorities for fiscal year 2026. To continue our transformation momentum, our first, to optimize our agricultural operations by maximizing revenue from our diversified leasing programs while maintaining rigorous cost controls across all properties. Second, to remain committed to advancing our residential and commercial development projects by continuing to progress through the entitlement process for our 4 priority projects with particular focus on securing final approvals for Corkscrew Grove Villages. Third, our capital allocation approach will balance required entitlement investments with shareholder returns while maintaining the financial flexibility necessary to execute our long-term strategy. And finally, to pursue operational excellence by leveraging our experienced management team and strong local relationships to execute efficiently across all of these initiatives. In closing, fiscal year 2025 was a year of successful transformation that positions Alico for sustainable long-term growth. We've derisked our business model, strengthened our balance sheet and created a clear path to unlock the significant value embedded in our land portfolio. Our approach of balancing specific high-value development projects with the diversified agricultural operations creates a business model that leverages our core strengths while adapting to market opportunities. We're well-capitalized, strategically focused and positioned to deliver sustainable value creation. The foundation is in place, and we're excited about the opportunities ahead. With that, I'll turn it over to Brad to walk through our detailed financial results, and then we'll be happy to take a few questions. Bradley Heine: Thank you, John, and good morning, everyone. I'll walk you through our fourth quarter and full fiscal year 2025 financial results, which demonstrate the successful completion of our strategic transformation. For the fourth quarter ended September 30, 2025, revenue was $802,000 compared to $935,000 in the prior year quarter, reflecting the substantial conclusion of our citrus operations. We reported a net loss attributable to legal common stockholders of $8.5 million or $1.11 per diluted share compared to a net loss of $18.1 million or $2.38 per diluted share in the prior year quarter. This improvement was driven by the completion of our transformation activities and reduced operational complexity. For the full fiscal year, revenue was $44.1 million compared to $46.6 million in fiscal 2024. While we reported a net loss of $147.3 million or $19.29 per diluted share, this was primarily due to noncash charges related to our strategic transformation including $162.7 million in accelerated depreciation and $25 million in asset impairments as we exited citrus operations. Importantly, our adjusted EBITDA for fiscal 2025 was $22.5 million, exceeding our $20 million guidance target. This demonstrates the underlying operational strength of our transformed business model. Our balance sheet transformation has been remarkable. We ended fiscal year 2025 with $38.1 million in cash and cash equivalents compared to just $3.2 million at the end of fiscal 2024. Our net debt decreased significantly to $47.4 million from $89 million, representing a $41.6 million improvement year-over-year. This strong liquidity position, combined with our $92.5 million available under our line of credit provides us with sufficient resources to fund operations through fiscal 2027, while advancing our development projects. Our working capital ratio improved to 9.56:1 demonstrating exceptional financial flexibility. We exceeded our land sales guidance, generating $23.8 million in proceeds from 96 acres sold during fiscal 2025, surpassing our $20 million target. These sales, combined with our operational improvements have created the financial foundation for our next phase of growth. Looking ahead, our financial position is strong, and we're well balanced to execute on our development pipeline while maintaining operational efficiency. Now I'd like to turn the call back to John for his closing remarks. John Kiernan: Thank you, Brad. Fiscal 2025 was truly transformational for Alico. We delivered on our commitments. We completed our final major citrus harvest, exceeded our financial guidance across key metrics and now have a balance sheet that provides the company with years of operational runway. Most importantly, we've eliminated citrus agricultural volatility while unlocking the value in our approximately 49,000 acre Florida portfolio. Our path forward has been set, and we believe it is compelling. We're optimizing agricultural leasing across our entire portfolio, advancing our high-value development projects through local, state and federal entitlement processes and maintaining our disciplined approach to capital allocation. With Corkscrew Grove Villages approaching the first set of approvals in 2026 and our other development projects advancing as well, we have multiple catalysts for value creation. The numbers tell the story. Our NPV analysis values our land portfolio between $650 million and $750 million, yet we trade at just $240 million today. We believe this represents a significant valuation disconnect that we expect will close as we execute. We remain committed to shareholder returns through our 50-year dividend legacy and multiple capital deployment options, including our authorized $50 million buyback program. As land sales accelerate, we have increasing flexibility to return more capital. Alico today is fundamentally transformed, well-capitalized, strategically focused and spread across Southwest Florida with more than 125 years of Florida heritage, proven conservation leadership, and a clear real estate development pipeline, we're very well positioned to deliver sustainable value creation. Mickey, we'll now open up the call for questions. Operator: [Operator Instructions] And we'll take our first question from [ George ] with [ Freedom Broadcast ]. Unknown Analyst: My only question, what is the expected current of the land sales in the next 12 months? Should we anticipate larger transactions similar to prior year disposals of more measured pace? John Kiernan: I'm sorry, are you asking if we're giving any sort of guidance or forecast on revenues for fiscal 2026? Unknown Analyst: Yes, if you have some guidance on land sales. John Kiernan: Right. So we have not provided any guidance on additional land sales at this time for fiscal year 2026. Operator: [Operator Instructions]. And we show no further questions in queue. At this time, I will turn the call back to John Kiernan for closing remarks. John Kiernan: Thank you. I want to thank all of our employees for their dedication during this transition. I'd like to thank our Board for their continued support of our strategic vision. And I'd like to thank you, our shareholders, for your patience and confidence as we execute this transformation. We look forward to updating you on our further progress in the new fiscal year. I wish everyone a happy holiday. Thank you. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and welcome to the Abercrombie & Fitch Co. Third Quarter Fiscal Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. To ask a question, please press 11. If your question hasn't been answered and you'd like to remove yourself from the queue, press 11 again. We ask that you limit yourself to one question and a follow-up. Today's conference is being recorded. At this time, I would like to turn the conference over to Mohit 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 D. Lipesky, Chief Operating Officer, and Robert J. Ball, Chief Financial Officer. Fran Horowitz: 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 mention 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. Mohit Gupta: Thanks, Mo, and thanks, everyone, for joining as we head into the important holiday season. I am happy to report our twelfth 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 UK, our largest country in the region, continued to be fueled by localized marketing, inventory distortions, and strategic partnerships. Strength in The UK 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, franchise, wholesale, and licensing. Turning to the brands, in line with our expectations, we made sequential improvement in Abercrombie brands. Net 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, bottom, 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 Kimo Sabe. Putting these two brands together was a great way to connect with new and existing customers, offering authentically crafted leather apparel and accessories, highlighting the western trend. Abercrombie Brands 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 what 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 and REACT model, we've been keeping inventory tight while continuing to flow in newness, allowing for AUR improvement on lower promotions. Coming up with a very strong back-to-school season, I was proud of the team transition to fall and into holiday. Speaking of holiday, Hollister has some exciting campaigns and collaborations planned that will highlight some must-haves for the season. We kicked off a couple of weeks ago with six college athletes co-designing special items in our collegiate collection for football's rivalry week. And you might have seen yesterday's announcement with Taco Bell, where 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 business 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 in 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 agent-to-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 three 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 J. Ball: 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, The 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 channels 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 the 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 for 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 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 rightsizes 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 2025, we expect net sales to be up 4% to 6% from the 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 a 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 three 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: Thank you. Our first question comes from Dana Telsey with Telsey Advisory Group. Your line is open. Dana Telsey: Hi. Good morning, everyone, and 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. Thank you. Fran Horowitz: Sure. Hey, Dana. Good morning. So super excited about the results we just put up for the third quarter. I mean, total company twelfth consecutive quarter of growth, top line at 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 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 in denim, fleece, and sweaters, very strong categories for us. As I mentioned also, 30 new stores to date, six more opening up this quarter. So we are fully prepared to compete for the fourth quarter. Robert J. 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, UK 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 an 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 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. Dana Telsey: Thank you. Operator: Thank you. Our next question comes from Corey Tarlowe with Jefferies. Your line is open. Corey Tarlowe: Great. Thanks and good morning. Fran, the Hollister momentum has been really impressive. And it seems 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 and into 2026? Fran Horowitz: Hey, Corey. Good morning. 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 and 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 exciting. I'm sure you saw the announcement yesterday. You know, the 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? Thanks so much. Robert J. Ball: Yeah. I mean, Corey, so across our brands, when we think about 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 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've 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 and 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. Corey Tarlowe: Great. Thanks so much, and best of luck. Operator: Thank you. Next question comes from Matthew Boss with JPMorgan. Your line is open. Matthew Boss: Great, thanks. 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 J. Ball: Yeah. So I'll jump in here. So we obviously had a really strong third quarter delivering our twelfth consecutive quarter of growth, reaching the top end of our guide. Abercrombie, obviously sequential improvement here. Hollister continues to grab share with that customer. And 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 gonna keep units tight here and aligned with our forward growth expectations by brands. We didn't provide a brand breakout, but as you'd expect, Hollister units are up more than the A&F units. And again, 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. 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 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. Matthew Boss: Great. Best of luck. Robert J. Ball: Thank you. Thanks. Operator: Thank you. Our next question comes from Marni Shapiro with The Retail Tracker. Your line is open. Marni Shapiro: Hey, guys. Congratulations on another great quarter. Best of luck for the holidays in case I forget. Fran Horowitz: Thank you. Marni Shapiro: Can you talk a little bit about the collaborations you've been doing, the NFL, the NCAA, but you also have, you know, Kimo Sabe. You did Crocs. I'm curious, are these all global collaborations or are these specific to The US? 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 increased or similar cadence into '26? Fran Horowitz: Hey, Marni. Good morning. So, yeah, you know, the collabs are our goal with our collaborations, honestly, is a real authentic branding moment. You know we talk about this a lot. You know, we stay close to our customer and we listen to them, what's important to them, happening in their life moments. That's how we make these decisions to do these collaborations so they are planned, you know, 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 listen to the customer. They told us several years ago how important football fandom was to them, and we took that and tested our, you know, our way into it and have seen a nice success with it. Scott D. Lipesky: Kimo 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 one, 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 D. Lipesky: Hey, 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 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. Marni Shapiro: Fantastic. Thanks, guys. Operator: Thank you. Our next question comes from Alex Stratton with Morgan Stanley. Your line is open. Katie Delahunt: Hi, thank you so much. This is Katie Delahunt on for Alex Stratton. You know, just thinking about, you know, the Abercrombie banner. I know you've all talked about sales growth being about flat for the fourth quarter, but what are the timeline you're thinking about for return to sales growth and then even comp as well? Thank you. Robert J. Ball: Yeah. So, Katie, this it's Robert. Obviously, delivering sequential improvement here in Q3, that's important for us. Teams have 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, and 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. Katie Delahunt: Got it. Thank you. Operator: Thank you. Our next question comes from Mauricio Serna with UBS. Your line is open. Mauricio Serna: Great. Good morning. Thanks for taking my questions. First, on the marketing front, could you elaborate a little bit more about what you're doing across each brand, you know, 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 brands performance in Q3, could you break down like how the comps reflected AUR versus unit or total sales that would be very helpful. Thank you. Robert J. Ball: Yeah. Mauricio, let me jump in here real quick. You know, obviously, not gonna share a ton in terms of our specific marketing plans. We've got some exciting collaborations that we have 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. Pretty intentional with our marketing here. We're obviously focused on brand building, driving customer engagement, and ultimately supporting both near term and long term. So it's not all just what are we gonna 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 two 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 ANF 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. Mauricio Serna: Got it. Thanks so much, and congratulations. Operator: Thanks, Mauricio. Thank you. Our next question comes from Rick Patel with Raymond James. Good morning and congrats on the progress. Rick Patel: 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 in performance to flag in The US due to the weather or any regional differences. Thank you. Robert J. Ball: Yeah. So quick on the SG&A side of things. Yeah. We'll see a little bit of increased marketing investment year over year. We've obviously been leaning into this throughout the first part 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 year, 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. You know, 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 and there that 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. Rick Patel: Thank you. Operator: Thank you. Our next question comes from Janine Stichter with BTIG. Your line is open. Janine Stichter: Hi, good morning, and congrats on the progress. More question about Abercrombie. It sounds like a lot of the improvement sequentially was led by women's. Can you just elaborate on what's going on in the men's side? If I recall, the comparisons there maybe weren't challenging as what you had in the first half with Abercrombie, but just help us understand what's going on with that side of the business. Fran Horowitz: Hey, Janine. It's Fran. Good morning. Yeah, led by women's, but also seeing nice sequential improvement in men's as well. You know, again, inventories are clean. 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 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 Stichter: Perfect. And then maybe one for Robert just on the tariff. 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 J. Ball: Yeah. So we've talked quite a while, Janine, around, you know, our source 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 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 will start delivering here post-holiday. We've done all of that as we've been navigating 2025. We've delivered record sales for the first three 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 to some of this stuff in 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. Janine Stichter: Perfect. Thanks for the color and best of luck. Robert J. Ball: Yep. Thanks, Janine. Operator: Thank you. Again, to ask a question, please press 11. Our next question comes from Janet Joseph Kloppenburg with JJK Research Associates. Your line is open. Janet Joseph Kloppenburg: Hi, everybody. 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, will 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, Fran, I thought that the assortments at 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 or what you're thinking about for the fourth quarter. Thank you. Robert J. Ball: All right, Janet. Where do you want to start, Robert? Do you want to start and take the tariff one for time? Come back. Let's just keep the tariff conversation going here a little bit. So, okay. Okay. Haven't quantified anything related to 2026. But as you think about how this is gonna cadence out, Janet, you know, for the last that we would expect that a lot of our mitigation tactics, which we've been working at, you know, nine months here, those will start to take hold heading into 2026. So, the hope here and, you know, 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'll 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. Fran Horowitz: Thank you. Robert J. Ball: From a promo and Janet Joseph Kloppenburg: Yeah. Promos. And then Fran can talk to the A&F assortments. Go ahead. Go ahead. Finish the promo. Robert J. Ball: Yeah. So from a promo standpoint, you know, 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 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 executing that playbook. Fran Horowitz: And then just real quick on the last piece of that question. So 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 really across the board in categories. So we're heading into the fourth quarter. We 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 or our goal is approximately flat for the fourth quarter. You know, that's on top of a record fourth quarter for last year. 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 Joseph Kloppenburg: You're talking about A&F? Plan? Fran Horowitz: Listen, 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 Joseph Kloppenburg: Do you feel like the challenges that faced in merchandising in the first half at A&F are now behind you? Fran Horowitz: Yeah. We committed to getting clean. You know, the opportunities and first half, which we talked about on both of those calls, were 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. 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: Thank you. 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: 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: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Atour Lifestyle Holdings Limited third quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a Q&A session. Today's conference is being recorded. I would now like to turn the conference over to Mr. Luke Hu, Senior IR Manager. Please go ahead, sir. Luke Hu: Thank you, Operator. Good morning, and good evening, everyone. Welcome to our third quarter 2025 earnings conference call. Today, you will hear from our Founder, Chairman, and CEO, Mr. Haijun Wang, and our EVP, Co-CEO, Mr. Jianfeng Wu. Before we continue, please be aware that today's discussion will include forward-looking statements under federal securities laws. These statements are subject to various risks and uncertainties, and actual results may differ significantly from what is stated or implied in our comments today. The company is not obligated to update any forward-looking statements except as required by applicable laws. Additionally, during this call, our management will discuss certain non-GAAP financial measures solely for comparison purposes. For a clear understanding of these measures and a reconciliation of GAAP to non-GAAP financial results, please refer to the earnings release issued earlier today. Furthermore, a webcast replay of this conference call will be accessible on our website at ir.yadu.com, where a copy of the results presentation is also available. Now I will turn the call over to Mr. Wang, our CEO. Haijun Wang: Thank you, Luke. Hello, everyone. Thank you for joining Atour Lifestyle Holdings Limited's third quarter 2025 earnings call today. Amidst the ongoing volatility in the macro environment, consumers have shown a clear shift toward prioritizing value and making more rational purchasing decisions. Innovative experiences emerging from new scenarios and business models have become a key force driving the release of consumption potential. For the hotel sector, the overall market has shown a moderate recovery since the third quarter. While travel and leisure demand continues to be robust, the industry is also characterized by rapidly shifting hotspots and uneven recovery across regions. In the retail market, consumption is increasingly centered around experiential offerings and quality of life upgrades. Evolving consumer habits coupled with technological advancements are jointly fueling development across various segments. As a leading lifestyle group, Atour keenly observes the evolution of user needs and captures consumption trends with precision. Through continuous innovation and enhanced experience in both our hotel and retail businesses, we consistently respond to and lead contemporary consumers' pursuit of quality living. Now I would like to provide more details on our performance for 2025. Let's begin with our hotel business. Please turn to Slide four of our third quarter 2025 results presentation. In the third quarter, our RevPAR was RMB 371.3, representing 97.8% of its level in the same period of 2024. Specifically, OCC nearly recovered to the prior year level at 99.9% of the same period in 2024, and ADR reached 98.1% of its level in the same period of 2024. Please turn to Slide five. In the third quarter, RevPAR for our mature hotels in operation for more than eight months was 95% of the level in the same period of 2024, while OCC and ADR stood at 98.5% and 96.6% of their levels in the same period of 2024, respectively. Please turn to Slide six. Driven by our brand power and product excellence, Atour's hotel network steadily expanded with the successful launch of various high-quality projects. In the third quarter, we opened 152 new hotels, a record high for a single quarter. By the end of the third quarter, we had a total of 1,948 hotels in operation, representing a 27.1% year-over-year increase. We have full confidence in achieving our strategic target of 2,000 premier hotels by year-end, laying a solid foundation for the next phase of our journey. As of the end of the third quarter, our pipeline of hotels under development remained steady at 754. Amid our rapid expansion, we remain steadfast in our quality-first principle. By applying rigorous project selection criteria and strict quality standards, we are driving healthy and sustainable high-quality growth. Next, I would like to share the latest developments for our hotel brands. Please turn to Slide seven. Within our upper mid-scale product portfolio, ATURE 3.6 represents a new benchmark for ATURE series three hotels. To date, we have opened 19 3.6 hotels, which continue to gain market recognition and acclaim. Through meticulous attention to detail and optimized scenario design, ATURE 3.6 seamlessly integrates functional amenities, premium service, and humane ambience. It effectively addresses the core needs of guests for efficiency and comfort, offering a new, more refined choice for travel experiences. Please turn to Slide eight. Grounded in a forward-looking understanding of consumers' long-term needs, Atour Series four has received strong market recognition, reaffirming its precise product positioning. In the third quarter, the RevPAR of the Atour 4.0 hotels in operation for more than three months surpassed RMB 500, while delivering both functional utility and emotional value. Atour 4.0 hotels place greater emphasis on fostering a deep resonance with guests, creating a healing experience that promotes holistic well-being. The upper mid-scale segment has long been our core focus and strategic foundation. By leveraging the synergistic deployment of ATURE series three and Series four, we effectively serve the diverse needs of different customer groups. As Atour products continue to penetrate core business districts across cities, we will further solidify our competitive moat and leading position in the upper midscale market. Please turn to Slide nine. Saka Hotel represents a significant breakthrough for us in the upper-scale lifestyle segment. In the third quarter, the two operating hotels demonstrated robust performance, with RevPAR exceeding RMB 900. On November 18, our third Saka Hotel began its soft opening in Guangzhou and has already received positive market feedback. With its unique design style and exceptional accommodation experience, Saka Hotel continues to attract a diverse clientele, demonstrating its substantial growth potential. Saka Hotel is dedicated to creating rejuvenating journeys for the discerning clientele, masterfully fusing Eastern cultural heritage with modern aesthetics. We are now collaborating with a professional institution to integrate scientific wellness concepts across the guest experience, from customized healthy diets to carefully curated in-room amenities, building a comprehensive deep experience for guests and showcasing our thoughts and practice of the Chinese experience concept in the upscale segment. For our expansion strategy, we will continue to adhere to precise site selection, striving to make every Saka hotel a model of local lifestyle. Please turn to Slide 10. For our midscale brand, we consolidated our differentiated advantages by continuously refining our products, improving operational efficiency, and enhancing brand building. ATURE Lite continued its strong performance in the third quarter, with the RevPAR of ATURE Lite Series three hotels in operation surpassing year-ago levels. As the latest upgraded version, ATURE Lite 3.3 has seen its first batch of hotels successively open. 3.3 features a more mature model that incorporates targeted optimizations in practicality and spatial aesthetics, earning strong acclaim from both users and franchisees. At the current stage, ATURE Lite will continue to concentrate its presence in higher-tier cities, advancing steadily while building brand recognition through benchmark projects. Simultaneously, we are systematically enhancing our operational framework by refining service touchpoints, optimizing operational standards, and strengthening talent development. These efforts ensure premium experiences while consistently driving operational efficiency, solidifying our competitive edge in the midscale segment and laying a solid foundation for the long-term development of the ATURE Lite brand. Moving now to our retail business. Please turn to Slide 11. During the third quarter, our retail business sustained strong growth, with GMV reaching RMB 994 million, representing a 75.5% year-over-year increase. Online channels continue to contribute over 90% of total GMV. During the recently concluded Double Eleven Shopping Festival, Atour Planet has not only delivered its excellent sales momentum but has also further strengthened the DeepSleep brand image in the mind of users. Meanwhile, across both the third quarter and the Double Eleven period, Atour Planet also ranked among the top brands in the bedding category on major third-party platforms. Please turn to Slide 12. The outstanding performance of Atour Planet keeps validating our ability to provide comprehensive sleep solutions in the market. In our core categories, we pursue breakthrough innovation through initiatives like collaborative R&D with academic institutions, consolidating our competitive advantages while gradually expanding market reach. Meanwhile, based on in-depth insights into user needs, we are also developing new categories such as deep sleep fitted sheets and deep sleep loungewear, refining and enriching the sleep ecosystem of Atour Planet. Next, I will now walk you through the latest updates on Atour Planet's core categories. Please turn to Slide 13. In the third quarter, Atour Planet continued to lead the market in the pillow category across major third-party platforms. Deep Sleep Memory Foam Pillow Pro 3.0 has received glowing reviews for its excellent support and comfort. Since its launch, it has shown strong sales performance, exceeding RMB 100 million GMV in just 25 days, reducing 19 days compared to the previous generation. Up till now, the cumulative sales volume of the Deep Sleep Pillow Series has exceeded 8 million units since its release. In addition, we have expanded the Pillow portfolio with products like DeepSleep travel pillow and Deep Sleep Pillow for Children, gradually building a product portfolio that covers different scenarios and serves various user groups. This expansion demonstrates our execution capabilities in enhancing sleep experiences while reinforcing our category leadership position. Please turn to Slide 14. Atour Planet is leading the transformation of the category driven by the exceptional performance of our deep sleep thermal regulating comforter series. As the seasons change, we launched two upgraded products in the third quarter: DeepSleep Thermal Regulating Comforter Pro 2.0, all season and winter season, both featuring an upgraded dual-layer temperature control system that dynamically adjusts the sleep microenvironment for more stable rest. To date, the cumulative sales volume of the DeepSleep thermal regulating comforter series has exceeded 2 million units since its launch. Please turn to Slide 15. With the launch of new products targeting users' core sensory needs during sleep, we officially released the Atour Planet Deep Sleep Standard, covering the dynamic pressure stabilization factor for the pillow category and the dynamic temperature management factor for the comforter category. In the future, this standard will serve as the core criteria for product iteration, ensuring high quality and consistency of products. The establishment of this standard has also driven us to continuously enhance our supply chain capabilities, further strengthening our competitive advantages and the technical barriers in the sleep field. Our goal with this is to elevate industry standards and make natural deep sleep an experience that every user can truly perceive and achieve. In the current market where imitators and followers are emerging, Atour Planet remains committed to its founding aspiration, dedicated to listening to users' genuine needs and refining product details. Our deep understanding and agile responsiveness to user needs have become a solid moat, supporting long-term brand development. In the meantime, we will keep strengthening our foundational capabilities. We will pursue excellence in product development, supply chain management, and quality control to solidify a strong foundation for healthy growth. Looking to the future, we are ready to work with our industry partners to move forward together and guide China's sleep industry to a new stage of higher quality development. Please turn to Slide 16. Last but not least, I would like to share our progress across our membership business and channel development. With our growing brand influence and the continuous enrichment of our membership benefit system, our membership base maintained robust growth. By the end of the third quarter, the number of registered individual members exceeded 108 million, representing a year-over-year growth of over 30%. In terms of channel development, our core CRS channel remained stable, accounting for 62.4% of the total room nights sold in the third quarter. The contribution of room nights sold to corporate members was 20% during the quarter. Please turn to Slide 17. The evolution of the A-Card system and the upgrade of membership benefits stem from our deep understanding of members' genuine needs. By integrating online and offline resources, we have created multi-scenario end-to-end service experiences that continuously explore innovative possibilities in quality living. Looking ahead, we will sharpen A-Card's brand positioning. With a focus on a complete customer life cycle, we will analyze consumption patterns across accommodation and retail scenarios among different user groups, expanding lifestyle experiences and introducing compelling benefits and activities to deepen emotional connection with our members. Please turn to Slide 18. Moving forward, we will continue to deepen our focus across three key areas: user, employee, and fundamental capabilities. As for our users, we will always adhere to the user-first philosophy, embedding it across all touchpoints of our hotel and retail business. We will continuously enhance users' experiences and deepen our emotional connection with them. For our employees, we pay close attention to their growth trajectories and accumulated experience. Through diversified mechanisms, we redefine traditional industry promotion and development paths, driving continuous organizational evolution. To strengthen our foundational capabilities, we have been leveraging digital solutions alongside granular operations management, thus driving a comprehensive upgrade in both efficiency and the customer experience, providing a solid foundation for the group's long-term sustainable high-quality growth. I will now turn the call over to our Co-CFO, Mr. Jianfeng Wu, who will discuss our financial results. Jianfeng Wu: Thank you, Haijun. I would like to present the company's financial performance for 2025. Please turn to Slide 20 of the results presentation. Our net revenues for 2025 grew by 38.4% year over year and 6.5% quarter over quarter to RMB 2,628 million. Revenues from our monetized hotels for 2025 were RMB 1,560 million, up 32.3% year over year and 20.1% quarter over quarter. The year-over-year increase was primarily fueled by the ongoing expansion of our hotel network. The total number of our monetized hotels increased from 1,504 as of September 13, 2024, to 1,924 as of September 30, 2025. The quarter-over-quarter increase was mainly due to the growth in RevPAR and our supply chain business. Revenues contributed by our leased hotels for 2025 were RMB 164 million, representing a decrease of 13.4% year over year and an increase of 9.7% quarter over quarter. The year-over-year decline was primarily driven by a decrease in the number of leased hotels as a result of our product mix optimization. The quarter-over-quarter increase was mainly due to an increase in RevPAR. Revenues from our retail business for 2025 were RMB 846 million, reflecting a 76.4% year-over-year increase but a 12.3% quarter-over-quarter decline. The year-over-year growth was driven by increasing brand recognition, successful product innovation, and a broadened range of product offerings. The quarter-over-quarter decline was primarily due to the seasonality of our retail business. Now let's move to cost and expenses. Please turn to Slide 21. Hotel opening costs for 2025 increased by 23.5% year over year and 21.1% quarter over quarter to RMB 1,082 million. These increases were primarily due to higher variable costs, such as supply chain costs and hotel manager costs, associated with our ongoing hotel network expansion. Gross margin of our hotel businesses expanded to 37.3% in 2025, from 36% during the same period of 2024, primarily due to a lower proportion of leased hotels as the result of our product mix optimization. Retail costs for 2025 went up by 36.3% year over year and down by 11.2% quarter over quarter to RMB 100 million. The year-over-year increase was associated with the rapid growth of our retail business. Gross margin of our retail business remained stable compared to the same period of 2024. Now please turn to Slide 22. Selling and marketing expenses for 2025 were RMB 355 million compared with RMB 218 million for the same period of 2024. Selling and marketing expenses accounted for 13.5% of net revenues for 2025 compared with 11.5% for the same period of 2024. The increase was mainly due to investments in brand recognition and the effective development of online channels, in line with the growth of our retail business. General and administrative expenses for 2025 were RMB 100 million and included RMB 10 million in share-based compensation expenses, compared with RMB 82 million for the same period of 2024, which also included RMB 3 million in share-based compensation expenses. General and administrative expenses, excluding share-based compensation expenses, accounted for 3.4% of net revenues for 2025, compared with 4.2% for the same period of 2024. The decrease was primarily due to improved management efficiency and economies of scale. Technology and development expenses for 2025 were RMB 44 million compared with RMB 30 million for the same period of 2024. Technology and development expenses accounted for 1.7% of net revenues for 2025 compared with 1.6% for the same period of 2024. Please turn to Slide 23. Adjusted net income for 2025 was RMB 488 million, representing a 27% increase year over year. Adjusted net profit margin for 2025 was 18.6%. Adjusted EBITDA for 2025 was RMB 685 million, up by 28.7% year over year. Adjusted EBITDA margin for 2025 was 26.1%. Please turn to Slide 24. We also maintained a healthy cash position. As of September 13, 2025, our cash and cash equivalents totaled RMB 2,670 million with net cash of RMB 2,603 million. Please turn to Slide 25. In line with our commitment to enhancing shareholder value and our annual dividend policy adopted in August 2024, today, we declare our second cash dividend for 2025, totaling approximately USD 50 million. Through a comprehensive shareholder return initiative encompassing dividends and share repurchase, we are taking concrete actions to reward shareholders' trust and support, enabling all shareholders to share in the company's growth achievements. Please turn to Slide 26. For the full year 2025, given ongoing network expansion and rapid growth of our retail business, we currently expect total net revenues to increase by 35% compared with the full year 2024. That concludes our financial highlights for 2025. Now let's open for Q&A. Operator: Thank you, management. We will now begin the question and answer session. To ask a question, please wait for your name to be announced. For the benefit of all participants on today's call, if you raise your questions in Chinese, please immediately repeat your questions in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. One moment for the first question. Our first question comes from the line of Dan Chi from Morgan Stanley. Please go ahead. Dan Chi: Hello, management. Could the management share the RevPAR trend since October? And also, if it's possible, can you provide your outlook for RevPAR in the fourth quarter and also potentially next year? Thank you. Haijun Wang: Thank you, Dan. Let me address your question. Since the beginning of this year, with the continued recovery in industry supply and demand dynamics, we have adhered to high-quality development and leveraged a refined strategy of revenue management, demonstrating strong operational resilience. Throughout the first three quarters of this year, our RevPAR has shown a trend of progressive improvement on a year-over-year basis. During the National Day holiday, leisure travel demand remained robust, but the market exhibited some significant structural divergence. Driven by stronger ADR, our RevPAR achieved year-on-year growth. After the holiday, the market returned to a business-dominated environment. But benefiting from active exhibitions and business travel activities, the demand in core cities demonstrated strong resilience. Therefore, we expect the pressure from the year-on-year decline in RevPAR to further ease in the fourth quarter. Looking ahead, the market will continue to show divergence, with still some challenges and uncertainties remaining. We will continue to deeply understand user needs, strengthen our foundational capabilities, and attract users with high-quality hotel products and differentiated experiences. By forging deeper emotional ties with them, we will secure long-term advantages in a volatile market environment and demonstrate our resilience for development. Thank you. Dan Chi: Thank you, Haijun. Next question, please. Operator: Thank you for the question. Next question comes from Sijie Lin of CICC. Please go ahead. Sijie Lin: Thank you, management. Could you please share more about the recent new hotel signing trends and whether there are any changes to the full-year hotel opening and closure targets? Thank you. Haijun Wang: Thank you, Sijie. Let me answer your question. In recent years, we found that during our scale expansion, Atour Lifestyle Holdings Limited has consistently maintained our strategic focus on premier hotels, concentrating on core locations for expansion, and we strictly controlled quality. At the same time, we have launched several new hotel products that align with market needs. With the successful launch of many high-quality projects, our brand strength and differentiated competitive advantage have been further solidified. So we do not endorse a growth strategy driven purely by scale. We firmly believe that only by advancing scale growth on the foundation of quality can we achieve sustainable betterment. Regarding signings, as we mentioned earlier, we maintain a strict selection mechanism, focusing on expansion in core business districts of key cities. With high quality being a prerequisite, the total number of new hotel signings this year is generally in line with last year, maintaining a steady development pace. At the same time, we are also clearing stock projects in the pipeline in an orderly fashion to promote the healthy development of our pipeline. In terms of openings and closures, we opened 152 hotels in the third quarter. We have full confidence in achieving the full-year guidance of 500 new openings and reaching our strategic target of 2,000 premier hotels by the end of this year. Meanwhile, for the operating hotels of ours, we place great emphasis on operational quality and user experience. By strengthening standard implementation and refined management, we can ensure that every hotel can deliver consistently high-quality service. To this end, we maintain a certain proactive replacement rate to continuously enhance the quality of our overall hotel network. In the third quarter, we closed 28 hotels and expect approximately 80 closures entirely for this year. Thank you. Sijie Lin: Thank you, Haijun. Next question, please. Operator: Thank you for the question. Next question comes from Xin Chen of UBS. Please go ahead. Xin Chen: This is Xin Chen from UBS. My question is about the retail business. Could the management share your perspective on the competition in the retail business? In addition, given the consistent performance of the retail business, would you consider any adjustments to your full-year retail revenue guidance? Thanks. Haijun Wang: Thank you, Xin Chen. Let me start by sharing the development strategy of ours and the competitive landscape of our retail business. Since Atour Planet entered the sleep industry, our brand and product power have gradually gained market recognition. This has been followed by a rise in imitators and industry participants, leading to increasingly fierce competition. However, we always believe that the real competition is not about the peers but is about the ever-evolving user needs. To address this, we did not simply follow the existing industry path. Instead, we progressively built our products and supply chain system with our distinctive characteristics. For example, we officially launched the Atour Planet Deep Sleep Standard recently. This standard differs from traditional industry metrics like fabric weights or thread counts, but it is based on sensory science and the natural rhythms of human sleep, focusing on two core sensory indicators of sleeping users: the fluctuation of pressure and the change of temperature. This standard also places higher demands on our product development and production. We aim to continuously strengthen our product barriers through this forward-looking standard while collaborating with the upstream supplier partners to jointly lead the industry progresses. As a relatively new player in the industry, we always plan our layout with a longer-term mindset. While developing quite rapidly, we have been constantly building our foundational capabilities. I believe our underlying philosophy is consistent between the retail and hotel businesses, which is to always prioritize quality over scale. Moving forward, Atour Planet will continue to strengthen our product power, remain user-centric, focus on the systematic development of our long-term capabilities, and practice Atour Lifestyle Holdings Limited's long-termism development path. Let me address your question about our retail revenue. During the Double Eleven period, Atour Planet delivered outstanding performance and continuously strengthened our brand presence in the minds of users. Based upon our strong performance in Q3 and the Double Eleven, we are now raising our full-year retail revenue growth outlook to at least 65% year on year and accordingly adjust the group's full-year revenue guidance to a growth of 35% year on year. Thank you. Xin Chen: Thank you, Haijun. Next question, please. Operator: Certainly. Next question comes from Ronald Leung of Bank of America. Please go ahead. Ronald Leung: Let me translate my question into English. So we noticed Atour Lifestyle Holdings Limited has announced a second dividend distribution plan this year. Could management provide an update on the planning and progress regarding shareholder returns? Thank you. Haijun Wang: Thank you, Ronald. Regarding dividends, as we announced today, our second dividend distribution this year amounts to approximately USD 50 million, representing about 29% of last year's net income. Consequently, the cumulative dividend total for this year reaches about USD 100 million, accounting for approximately 2% of the prior fiscal year's net income, exceeding our commitment of no less than 50% of that. Additionally, we formally commenced our share repurchase program in September and will continue to execute them in accordance with our established three-year plan. Looking ahead, we will continue to implement our comprehensive shareholder return program, combining dividends and repurchases, targeting a payout ratio of 100% based upon the previous fiscal year's GAAP net income, with the specific implementation pace to be dynamically arranged in line with our business development and capital planning. Through these tangible actions, we are committed to creating long-term value and sharing the success of the company with our shareholders, in appreciation of your ongoing support and trust. Thank you, Ronald. Next question, please. Operator: One moment for the next question. The next question comes from Lydia Ling of Citi. Please go ahead. Lydia Ling: Thank you, management. I'm Lydia from Citi. We noticed the strong operational performance for Atour Lite in the third quarter. Could you share your plan for Atour Lite in the next step? And any plan for accelerating the store expansion? Thank you. Haijun Wang: Thank you, Lydia. Yes, indeed. In the third quarter, the RevPAR of operating Atour Lite Series three hotels surpassed the level from the same period last year, performing pretty decently. In fact, since the beginning of this year, Atour Lite has achieved notable results in brand building, operational efficiency, and user experience, with both operational performance and scale growth meeting our expectations. We always believe that the core of a brand license is products. The Atour Lite hotel product accurately aligns with the needs and aesthetic preferences of today's young users. The newly launched Atour Lite 3.3, with its constantly optimized investment model, achieved a better balance between service experience and operational efficiency. Through the implementation of the first batch of our Atour Lite 3.3 project, we are constantly gathering feedback from various sites, refining product details, and strengthening our differentiated competitive advantage in the midscale market. We expect the scale of Atour Lite Series three hotels in operation will be reaching 170 to 180 by the end of this year. We are firmly optimistic about the long-term development of Atour Lite. At this current early stage of the brand development, we are particularly focused on solidifying the operational foundation and our systematic capabilities. As for our next step, we will systematically build a dedicated operational system for Atour Lite, strengthening its differentiated positioning in all aspects, including from brand concept to service delivery. This will not only distinguish it from our main Atour Hotel brand but also highlight the unique value in the midscale hotel market. On this basis, we will steadily advance towards a longer-term development goal of hitting the 1,000 hotels milestone for the Atour Lite brand. Thank you. Lydia Ling: Thank you, Haijun. Operator: That concludes today's question and answer session. I would like to turn the conference back to Mr. Luke Hu for any additional comments or closing comments. Luke Hu: Thank you for joining us today. If you have any further questions, please feel free to contact our IR team. We look forward to speaking with you again next quarter. Thank you, and goodbye. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the B.O.S. Better Online Solutions Ltd. Conference Call. All participants are at present in listen-only mode. As a reminder, this conference call is being recorded and will be available on the B.O.S. Better Online Solutions Ltd. website as of tomorrow. Before I turn the call over to Mr. Cohen, I would like to remind everyone that forward-looking statements for the respective company's business, financial condition, and results of its operations are subject to risks and uncertainties, which could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development, and the effect of the company's accounting policies, as well as certain other risk factors which are detailed from time to time in the company's filings with the various securities authorities. I would now like to turn the call over to Mr. Eyal Cohen, CEO. Mr. Cohen, please go ahead. Eyal Cohen: Thank you. Good morning, and thank you for making the time to meet with us today. Joining me is Mr. Moshe Zeltzer, our Chief Financial Officer. B.O.S. Better Online Solutions Ltd. integrates cutting-edge technologies to streamline and enhance supply chain operations. We delivered strong growth in the first nine months of this year. Revenue grew year-over-year by 28% to $38 million, continuing our record performance this year. We are strategically expanding overseas by partnering with international subcontractors of our Israeli defense client. These markets are relatively untapped by B.O.S. Better Online Solutions Ltd. and represent potential growth for us. We see India as a major target market because it is a global hub for wire and connector assembly, where we have a competitive advantage. Through this approach, our international revenues grew by 24% year-over-year, demonstrating the growth potential in international markets. Our net income grew year-over-year by 54% to $2.8 million, while our revenues grew by 28%, showing our ability to convert revenue into bottom-line results plus profit leverage as we scale the operating base of the business. We have demonstrated consistent profitability with steady net income growth, achieving a compound annual growth rate of 51% from 2021 through 2025. This result underscores the strength of our defense-focused strategy, reflecting years of deliberate investment in product diversification and operational excellence that position us to capitalize on the defense sector's robust growth trajectory. Given our strong execution and stable backlog exceeding $24 million, we are raising our full-year 2025 financial guidance. We now expect to meet the high end of our previous guidance range of $45 to $48 million in revenue and $2.6 million to $3.1 million in net income. There are several tailwinds that have accelerated our growth momentum and we believe will support our long-term organic growth. First, as you know, the global increase in defense budgets. Second, replenishment and expansion of Israeli Defense Forces inventory and equipment and vehicles. Third, the potential stabilization and improving conditions in The Middle East, which is a pivotal tailwind for the growth of the Israeli civil market and will positively impact the growth of our RFID division. These drivers support our continued organic growth in conjunction with our outbound sales efforts. We continue to look for opportunities to enhance our growth with strategic actions that fit our business and diligent pricing parameters. Through the combination of these efforts, we intend to grow both over the coming years. With that overview, I will turn the call over to Moshe Zeltzer, our CFO, to discuss our financial position. Please, Moshe. Moshe Zeltzer: Thank you, Eyal. Financial validation has never been stronger. Cash and equivalents grew to $7.3 million, up from $3.6 million at year-end. Our shareholders' equity amounts to $25 million, which accounts for 66% of our balance sheet. We have positive working capital of $18 million and $1.1 million in long-term loans secured by real estate we are using for our own operation. This strong balance sheet gives us the flexibility to capitalize on opportunities as they arise, supporting organic growth and strategic acquisitions. Our valuation offers attractive upside compared to Russell 2000 index multiples. Price-to-earnings ratio Russell 2020 versus B.O.S. Better Online Solutions Ltd. at 11. Price-to-book ratio, Russell 2000 at 2.2 versus B.O.S. Better Online Solutions Ltd. at 1.7. Thank you for your time and attention. We are happy to take your questions. Eyal Cohen: Hi, y'all. Can I ask you a question? Scott Weiss: Yes, please. Great. This is Scott Weiss at Semco Capital. Hi. Eyal Cohen: Hi. Great quarter. Terrific quarter. I have a few questions, and if it's okay, I'd like to ask them one at a time. In the press release, you highlighted that you're excited about your expanding opportunities with new and existing customers. Can you highlight a couple that you're particularly enthusiastic about and specifically new customers? Eyal Cohen: Yeah. The main customer that we are joining to our portfolio is many overseas clients, mainly from India. And I can tell you that in the recent week, there was a huge delegation here from India, including ministers from India, and we were happy to meet with many companies from India, and those are the major clients that we are joining our group. Scott Weiss: Okay. When would you expect revenues to hit the bottom line? To impact your P&L? Eyal Cohen: What do you mean? Scott Weiss: When do you expect revenues from this new Indian customer to impact your P&L? Eyal Cohen: Yeah. It already impacted this year, this nine months, as we already see the growth in revenues from the international market by 24% as compared to the comparable period last year, and this has mainly come from the Indian market. And it's a process. Gradually, we are increasing our market share in this territory. Scott Weiss: Okay. Thank you. Question, can you expand on the loss in the RFID division? And exactly what you mean by logistics center slowdown in Israel? Eyal Cohen: Yeah. The RFID division engages in the civil market, not in the defense market segment. And this segment had a very challenging time in the recent two years because of the conflict in The Middle East, and it adversely affected the business. In the recent two quarters, we also saw the effect of the US dollar devalued against the Israeli shekel, which also adversely affected the business. But in the fourth quarter, because of some measures we took operationally and in the business model as well, and the change in the environment in Israel, especially in the geopolitical environment, we see a rebound in demand. We are optimistic about returning to profit in the fourth quarter. Scott Weiss: Okay. Great. And then that was my next question. Can you expand on the currency impact? And how much can you quantify the effect it had on your P&L? And do you hedge? And if not, are you going to start hedging? Eyal Cohen: Mhmm. Yes. So the US dollar devalued against the Israeli shekel by about 11% in the six months ended September 30 this year. Actually, the second and the third quarter. Since most of our operational expenses are denominated in shekels, and revenues are primarily in dollars, this currency movement created approximately half a million dollars in additional cost pressure on operating income during this period, or roughly about a quarter million dollars per quarter. As I mentioned before, we are proactively addressing this headwind through strategic sales price adjustments initiated in the fourth quarter and operational efficiency improvements. Regarding hedging, we are hedging the balance sheet exposure. For every hedging, each hedging has a limitation period. We do not believe that it's a temporary exchange rate; I think it will be with us for the long term. So any kind of hedging on the dollar is temporary. We are trying to find a solution for the long term. Because of that, we are in a process of such price adjustments and operational efficiency improvements. Scott Weiss: Okay. One more question, and I'll jump back in the queue. One of the potential concerns on your P&L and continued growth is the impact of the end of the war in Gaza. Can you address this? And how should we think about the end of the war and its impact? Eyal Cohen: I think there are two sides to the coin. On one side, we are in the defense segment. In the supply chain division, the biggest division in B.O.S. Better Online Solutions Ltd., 90% of its business is in defense, and its customers are the major clients in Israel. So there is a direct impact of the tension. On the other hand, we have the RFID division, which is in the civil market. The civil market does not benefit from the war. But because we have the biggest exposure to defense, we are growing in the top line and in the bottom line. Scott Weiss: Historically, have you grown faster on the defense side in a time of war or time of peace? Eyal Cohen: Over the years, the main growth came from the supply chain. Even in times of peace, those clients are the biggest exporters in Israel, and they grow year by year. Also, the defense budget of Israel is growing year by year, even before the war. I am not sure about the number, but I think the average growth rate of the defense market in Israel over the years was about 7%. It is growing, and sometimes in some periods in a sharp way, like in the recent two years, about 17% each year or more. In normal years, about 10%. Scott Weiss: Thanks. I'll jump back in the queue. Eyal Cohen: Thank you. Operator: Good morning, Eyal and Moshe. Congratulations on another great quarter. Todd Felte: I see that you have $7.3 million in cash. I assume that amount is rising in the current quarter. You've talked about M&A possibilities. Will you have to raise equity, or will you be able to use cash for any M&A activity? Eyal Cohen: Hi, Todd. Nice to meet you again. Yes. Our cash position was strong at the end of the third quarter, with over $7 million and zero bank debt. That continues to grow in the fourth quarter. For M&A, we are targeting profitable Israeli defense sector companies with complementary products serving our major clients and their subcontractors. Acquisition targets of up to $10 million, and bank financing is typically available for approximately 50% because it's a profitable company. 50% of the purchase price. We can execute this transaction using our existing cash on hand without requiring equity raising, while maintaining sufficient working capital for operation and organic growth. Todd Felte: That's great. Also, can you give us some clarity on the amount of the percentage of your defense business, which is in Israel, and the amount that's international, and how you expect that to change? I've seen a lot of contracts from India and Europe, and I was hoping you could quantify that for us. Eyal Cohen: Yeah. I was really showing the chart. In the nine months, out of the $38 million, $3.6 million were sales overseas related to the supply chain, related to defense. We are taking measures and allocating resources to increase this number by being active and with an active approach, especially in India. Maybe even to change our approach in how to operate the sales in India, and we see a lot of potential in this market. I believe that this number of $3.6 million that reflects a 24% increase in sales overseas will continue. We will see this trend continue in the fourth quarter and in 2026 as well. Todd Felte: Okay. I know you talked about opening up a branch office in India. I assume that's where a lot of the expansion is going to be. Is there any update to that office you're going to open over there? Eyal Cohen: Yeah. We are checking various options on how to make it in the most efficient way. We are taking very conservative measures on how to allocate our financial resources overseas and how to do it in a very lean way. I believe that next year, we'll see the actual results of our plan. Todd Felte: Okay. I'll hop back in the queue. Congratulations again on a great quarter. Eyal Cohen: Thank you. Thank you, Todd. Operator: How's everyone? Igor: Hello. Could I ask you this question? Hello. My name is Igor. This is my second call with you, and congratulations on a strong quarter. My question is, Israel is expensive. Everything in Israel is expensive, any operations. Now it's getting even more expensive with a stronger shekel. Now that you're becoming more and more of an international company with international sales, any thoughts of spreading the cost and moving some of your operations outside of Israel? Given that it's so expensive to do anything in Israel? Eyal Cohen: It's a good idea, but maybe it's a good idea. We need to think about it. Actually, I don't see any unit we can operate overseas. But one of the options, as I mentioned to Todd, is to instead of doing the sales to India from Israel, to do the sales in India from India. This is the first example of how we can reduce our cost. The main approach to do sales in India was not to save cost, but to increase sales. But we can get both of the things together. But it's a good idea. I need to be honest. I need to think about it, and I will keep you updated in the next call. Igor: My other question is, so I know that the last years were sort of overshadowed by the Gaza war and other people would refer to this. Historically, if you take many, many years, your company is a bit of a cyclical company. Some periods of time, there's more demand, some periods a little bit less demand. How do you intend to make the company a little bit less cyclical and more like sustainable growth? What is your strategy like? What do you see the company like five years down the road? Eyal Cohen: I think by going overseas to increase our sales overseas, as we saw in the number, like out of the $38 million, just $3.6 million were international sales. If you increase it, we can reduce the cycling. Growing by acquisition and adding more, increasing the portfolio of our offering, and by that, we can eliminate the exposure that you mentioned. But the structure of B.O.S. Better Online Solutions Ltd. is that we have the supply chain in defense, and we have the RFID in the civil, and we have the robotic in between. So we are already spread. But I have to be honest with you, we are in defense for many years, more than years. It's all the time growing. I remember a cycle of a slowdown in this segment. I'm sure that in three or four years, the demand will come back to normal after the situation in The Middle East and in Europe. But I believe it's the best segment to attach to. Igor: Okay. And my last question about the potential for M&A. Obviously, you put 4.5 million at the market option. Now, and you have plenty of cash. You don't lack for any cash. So do you have are you looking at any specific opportunities right now? Or you just put it just in case? What is your thought about M&A, like, for the next year or two years? Eyal Cohen: I hope that next year, we will close on M&A. This is the working plan. My plan is to close one, and I hope that every two years, we will be able to close an M&A. By that, with the organic growth, to reach the $100 million bond, this target. But those are plans, and we are working according to those plans. Igor: Just curious. I understand this might be opportunistic, but why don't you look to borrow to do an M&A and potentially look at the equity component given that your stock is not particularly high? So that would be maybe a little bit suboptimal versus borrowing from a bank given that you're a pretty solid company, with good cash flow and earnings. Eyal Cohen: I didn't understand your question. Igor: So it looks like you put a potential M&A, you have an option of 4.5 million dollar equity. Obviously, I don't know what the M&A opportunity is going to look like, but I would hope that your first intent would be to borrow money from the bank to do an M&A versus equity given that your equity is relatively low, given your valuation. Eyal Cohen: Actually, how you think about it? As I mentioned to Todd, in case of doing an acquisition even of $10 million, which is a frame of investment we are targeting, assuming 50% by bank loans because it will be a profit target company. So for the rest, the $5 million, absolutely, we don't need to issue more stock. We have it on hand. Operator: Okay. Eyal Cohen: Alright. Thank you so much. Yeah. We have $7.5 million as of September. The cash continues to grow. I don't see any need to raise more equity to consume an M&A. Igor: So you just have a just in case in case a big opportunity comes up that you have a 4.5 million dollar offering at the market. Eyal Cohen: We see it. We have tools like every public company should have. Like the shelf perspective that we have, and we haven't used for four years. Like the ATM that we have and we haven't used since the date it was filed. It's filed? And the unused credit line that we have in the bank is not used. So we have all the facilities we should have. But, actually, in order to consider a $10 million M&A, we don't need to raise to use any of those tools except for the unused credit line. Bank credit lines. Igor: How much do you have available credit as of now approximately? Eyal Cohen: Sorry? Igor: How much credit do you have unused as of now? Moshe Zeltzer: Right. Eyal Cohen: You're One million for the real estate. No. Unused. Unused. We have unused for ongoing use, not for the acquisition. We are Oh, I see. Okay. Yeah. So that's a Igor: capital I understand. Yeah. It's something like Eyal Cohen: 1.5 to $2 million unused credit line for revolving credit for organic growth, but we already checked with the banks in case of a model of acquisition, a profitable company. I believe we can get 50% financing from the bank for the acquisition. Yeah. Igor: Okay. Thank you. Eyal Cohen: You're welcome. Scott Weiss: Eyal, from an investor perspective, have you finalized your dates as to when you're going to come to The US to meet investors? Eyal Cohen: Yeah. I think it will be April next year. In between, I will participate in a virtual summit. We will announce it. I will continue to do ongoing one-on-one weekly meetings with potential investors. Moshe Zeltzer: Scott? Scott Weiss: Yeah. I got it. Thank you very much. Moshe Zeltzer: You're welcome. Eyal Cohen: Any further questions? No. No follow-up. I'm good. Scott Weiss: Although, I'd like to meet you when you come to The US for sure. Igor: Yeah. We're meeting. Eyal Cohen: So thank you again for your participation. If you need more details or would like to follow up, please feel free to reach out to us. Thank you. Moshe Zeltzer: Thank you. Bye-bye.
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: Hello, everyone, and welcome to Burlington Stores, Inc. Third Quarter 2025 Earnings Webcast. Please note that this call is being recorded. After the speakers' prepared remarks, there will be a question and answer session. If you'd like to ask a question during that time, please press star followed by one on your telephone keypad. Thank you. I'd now like to hand the call over to Mr. David J. Glick, Group Senior Vice President, Investor Relations. Please go ahead. David J. Glick: Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington Stores, Inc.'s fiscal 2025 third quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer, and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded, or broadcast without our expressed permission. A replay of the call will be available until December 2, 2025. We take no responsibility for inaccuracies that may appear in this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores, Inc. Remarks made on this call concerning future expectations, events, strategies, objectives, trends, or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-Ks and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy-acquired leases. These pretax costs amounted to $11 million during 2025 and 2024 and $28 million and $9 million respectively, for the first nine months of 2025 and 2024. Now here's Michael. Michael O'Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover four topics this morning. Firstly, I will discuss our third quarter results. Secondly, I will review our updated fourth quarter and full-year guidance. Thirdly, I will provide some early thinking on the outlook for 2026. And lastly, I will comment on the progress we are making towards our longer-range financial goals. Then I will turn the call over to Kristin to provide additional details. Okay. Let's start with our Q3 results. Total sales increased 7% in the third quarter at the high end of our guidance. This was on top of 11% sales growth last year. This means that year-to-date, total sales have increased 8% on top of 11% year-to-date growth last year. Comp store sales for the third quarter increased 1%. We started the quarter well with a strong back-to-school trend, but in September, we saw a significant drop-off in traffic to our stores driven by warmer-than-usual weather. As we have discussed previously, we have very strong brand equity in outerwear. Many shoppers still think of us as Burlington Coat Factory. Outerwear is a great business and a source of competitive strength. But this means that in Q3, our comp trend is very sensitive to weather, much more so than competitors. In some years, the impact is positive. In some years, it is negative. This year, it was negative. That said, in mid-October, once the weather turned cooler, our comp trend picked up to the mid-single digits. And that momentum of mid-single-digit comp growth continued through the first three weeks of November. Finishing up on Q3, I would like to comment on earnings. Despite the weather-driven slowdown in our sales trend in Q3, we still delivered margin expansion that was well ahead of last year and earnings growth that significantly beat our guidance. It's worth calling out that this was despite the considerable headwind that we faced from tariffs. Moving on to the fourth quarter, we are maintaining our previously issued comp store sales guidance of 0% to 2%. We feel good about our recent trend, but it is still early in the quarter, and in the coming weeks, we'll be up against very strong comparisons from last year. So it makes sense to remain cautious. That said, given the strong margin and expense trends that we are seeing, we are increasing our Q4 margin and EPS guidance. To be clear, we are adjusting our full-year 2025 earnings guidance, passing along all of our beat to earnings in Q3 and factoring in our higher Q4 earnings outlook. I would like to call out that we started this fiscal year with EBIT margin guidance of flat to up 30 basis points. Our updated full-year 2025 guidance now calls for expansion of 60 to 70 basis points. This is despite pressure from tariffs and is on top of 100 basis points of margin improvement in 2024. We are excited about the progress we are making on margin expansion. I will return to this topic in a few moments when I talk about our longer-range financial goals. But first, I would like to share our initial thoughts on the outlook for 2026. We are early in the budget process, but as a starting point, we're planning for total sales growth in the high single digits. We now expect to open 110 net new stores in 2026. This is higher than previously discussed and it reflects the strength of our new store pipeline and the performance we are seeing from new stores. We are excited for these new store openings. For comp sales, we are assuming growth of flat to 2% in 2026. This should sound familiar. It is our typical off-price playbook. There is significant economic uncertainty and we do not know how this might affect our business in 2026. So we will plan our business conservatively at 0% to 2% comp sales growth and then be ready to chase if the trend is stronger. In terms of operating margin expansion, for budgeting purposes, we are assuming that at 2% comp growth, our operating margin would be flat versus this year, then 10 to 15 basis points higher for each point of comp above 2%. Before I turn the call over to Kristin, there is one more topic that I would like to talk about. I would like to provide an update on our longer-range financial goals. As a reminder, two years ago, we shared our objective of getting to approximately $1.6 billion in operating income in 2028. The headline is that we feel good about the progress that we are making toward this goal. We are tracking in line with where we thought we would be at this point. We are especially pleased with the progress we have made in driving operating margin. This means that at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified two years ago. And of course, we will have achieved this despite the negative headwind from tariffs. Apart from margin expansion, the other drivers of our long-range financial model are new store sales and comp store sales growth. On new store sales, we are even more bullish now about our new store opening program than we were two years ago. Originally, we had assumed that we would open 100 net new stores a year in the period 2024 to 2028. In fact, this year, we will open 104, and in 2026, we are now planning to open 110 net new stores. Based on our new store pipeline, there is a possibility that we could sustain or even exceed this stronger pace of new store openings. The other major driver of our long-range model is comp sales growth. As I discussed in the context of our Q3 results, leaving weather aside, we feel good about the underlying comp trends that we are seeing. We believe that we can achieve average annual comp sales growth in the range of 4% to 5% over the remaining years of the long-range plan. In other words, between now and 2028. Of course, we recognize there are a lot of external variables that can affect comp growth. So in the nearer term, as we always do, we will plan our business conservatively. And then chase. Now I would like to turn the call over to Kristin to review our Q3 results, updated 2025 guidance, and high-level outlook for 2026 in more detail. Kristin Wolfe: Thank you, Michael. And good morning, everyone. I will start with some additional color on Q3. Then I will talk about our updated guidance. Lastly, I will comment on our initial outlook for 2026. Starting with the third quarter, total sales grew 7%, while comp store sales increased 1%, both within our guidance range. As Michael described, our comp trend in the third quarter fell off significantly after the back-to-school period driven by warmer weather, but then picked up to mid-single digits in mid-October. The gross margin rate for the third quarter was 44.2%, an increase of 30 basis points versus last year. This was driven by a 10 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses. Moving down the P&L, our Q3 product sourcing costs were $2 million versus $29 million in the third quarter of last year. Product sourcing costs decreased 40 basis points compared to last year. This was primarily driven by leverage in supply chain, through continued cost savings and efficiency initiatives. Adjusted SG&A cost in Q3 levered 20 basis points versus last year. This leverage was primarily achieved in store-related costs. Our store teams drove significant leverage in store payroll, through numerous efficiency and productivity initiatives. Q3 adjusted EBIT margin was 6.2%, 60 basis points higher than last year. This was well above our guidance range of down 20 basis points to flat. Our Q3 adjusted earnings per share was $1.8, which came in well above our guidance range. This represents a 16% increase versus the prior year. At the end of the quarter, comparable store inventories were down 2% versus the end of 2024. Let me provide a little more context here. In Q3, we saw a significant slowdown in our comp trends, a weather-driven slowdown, but using our merchandising 2.0 tools, our planners and merchants were able to react very quickly to adjust receipts, especially in cold weather categories. So despite the slowdown, our store inventories are well balanced, current, and very clean going into the fourth quarter. Moving on to our reserve inventory. Reserve inventory was 35% of our total inventory versus 32% of our inventory last year. In dollar terms, reserve inventory was up 26% compared to last year. We are pleased with the quality of the merchandise and the values and brands that we have in reserve. And as a reminder, we use reserve inventory as ammunition to chase the sales trend. For example, our reserve includes great out-of-revise that we made earlier this year, that we've been pulling out over the last few weeks to fuel the trend since the weather turned cold in mid-October. We ended the third quarter with approximately $1.5 billion in liquidity. This consisted of $584 million in cash and $948 million in availability on our ABL. We had no outstanding borrowings on the ABL at the end of the quarter. During the third quarter, we repurchased $61 million in stock, and at the end of the quarter, we had $444 million remaining on our repurchase authorization. In Q3, we opened 73 net new stores, bringing our store count at the end of the quarter to 1,211 stores. This included 85 new store openings, 10 relocations, and two closings. We now expect to open 104 net new stores in fiscal 2025, up from our original estimate of 100 net new stores. Now I will turn to our outlook for the fourth quarter and full year for fiscal 2025. We are maintaining our fourth quarter fiscal 2025 guidance for comp sales and total sales. We are guiding comparable store sales to be flat to up 2% with total sales to increase 7% to 9% for the fourth quarter. We are raising our adjusted EBIT margin and adjusted earnings per share guidance for the fourth quarter. We now expect our adjusted EBIT margin to increase by 30 to 50 basis points. This margin outlook now translates to an adjusted earnings per share range of $4.5 to $4.7, an increase of 9% to 14% versus the fourth quarter of last year. For full-year fiscal 2025, after factoring in our actual Q3 results and our improved outlook for Q4, we expect comp store sales growth of 1% to 2%, total sales to increase approximately 8%, and EBIT margins to range from an increase of 60 to 70 basis points. As Michael noted earlier, this fiscal 2025 EBIT margin guidance is 40 basis points higher than our original full-year guidance at the high end, and this is despite the significant pressure from tariffs. Finally, factoring in Q3 actuals and updated Q4 guidance, adjusted earnings per share are now expected to be in the range of $9.69 to $9.89, an increase of 16% to 18% for the full year 2025. Finally, I would like to touch on our preliminary FY 2026 outlook. We are in the early stages of the budgeting process, so this could change. But at this point, we are planning on total sales growth in the high single digits. We are assuming at least 110 net new stores, and we're planning comp store sales in the range of flat to up 2%. For operating margin, as Michael said, we are assuming that at a 2% comp growth, our operating margin would be flat to this year. And we expect leverage of 10 to 15 basis points for each additional point of comp. And now I will turn the call back over to Michael. Michael O'Sullivan: Thank you, Kristin. Before I turn the call over to the operator for your questions, I would like to summarize a few of the key points from today's call. Firstly, Q3 was impacted by warmer weather in September through early October. Once the weather normalized, our trend improved to mid-single-digit comp growth. And we are off to a strong start for Q4 with comps up mid-single digits for the first three weeks of November. Secondly, we are pleased with our margin trends. We are updating our full-year 2025 guidance to reflect the earnings beat in Q3 as well as our improved earnings outlook for Q4. At this point, we are maintaining our previously issued Q4 comp guidance of 0% to 2%. Thirdly, we are pleased with how we are tracking towards our long-range financial goals, especially the pace of margin expansion. And within this long-range financial plan, we think there may be additional upside in terms of our new store opening program. Now I would like to turn the call over for your questions. Operator: We are now opening the floor for the question and answer session. Please press star followed by one on your telephone keypad. Your first question comes from the line of Matthew Robert Boss of JPMorgan. Your line is now open. Matthew Robert Boss: Great. Thanks. Good morning, Michael. Good morning, Matt. Good morning. So on relative performance, your comp this quarter came in below both of your off-price peers. This is a clear reversal from results in the second quarter and over the last year. Clearly, you cited weather was a factor, but how concerned are you by this change in your relative comp versus peers? Michael O'Sullivan: Well, good morning. Good morning, Matt. Thank you for the question. You're right. Just to lay out the facts, we ran a 1% comp in Q3, our peers were 6% to 7%. Very impressive. That's a very significant difference. I can't give you a complete bridge, but at a high level, let me try and dissect that gap. I'll start with the obvious. We know that weather was the biggest driver of our slowdown in Q3. It's not an excuse, but it is a partial explanation. You know, we changed our name some years ago, but shoppers still call us Burlington Coat Factory. So mild weather in September and October has a huge impact on our business. You know, this is a real thing, and it is unique to us, I think, versus our peers. Now in September and October, cold weather merchandise balloons to more than 20% of our assortment. In the third quarter, our comp sales for ladies and men's coats, jackets, boots, and cold weather accessories, all these important categories were down double digits. Now they bounced back in mid-October, once it turned cold, but by then it was too late to really drive the comps up. Let me go a little further and try to quantify the weather impact on our comp in Q3. If you strip out the drag on our overall comp from cold weather categories, the categories I just listed, and if I make an adjustment for the impact that lower weather-related traffic had on the rest of the store, then I can get to the low end of a mid-single-digit comp. In other words, I do not get to 6% or 7% comp. So in my view, weather only explains half of the gap versus peers. Now, you know, usually, in off-price, when your comp is lower than your peers, it's just the customer telling you that they preferred the value and the assortment that they found elsewhere. In the second quarter, when we ran a 5% comp, growth ahead of our peers, the customer was voting for us. But in Q3, that changed. Now we have some hypotheses on why, but we have more work to do to really tear that apart. And then aggressively go after that performance difference. But before I leave the question, let me just call out a silver lining. The comp numbers that our peers have just reported reaffirm that the off-price shopper at all income levels is alive and well. You know, leaving aside the weather, the major implication for us is that we need to take better advantage of that than we did in the third quarter. Matthew Robert Boss: Great. And then, Kristin, as a follow-up, could you provide more color on the 60 basis points of operating margin expansion in the quarter, particularly just given as we think about the pressures that you faced from tariffs and the 1% comp? Kristin Wolfe: Good morning, Matt. Thanks for the question. Yes. First, it's worth reiterating that we really are pleased with the 6.2% operating margin in the quarter, up 60 basis points versus last year on a 1% comp, as you noted in your question. Let me provide the major puts and takes starting with gross margin. First, our merchandise margin increased 10 basis points. And within merchandise margin, there was a lot going on. Tariffs had a negative impact on markup, but we were able to offset this impact through numerous actions such as negotiating with our vendors, adjusting the mix, and driving a faster turn. The net impact of all this was much more favorable than we originally guided back in August. This was really driven by our tariff mitigation strategies. Now staying in gross margin, freight levered by 20 basis points. This was due to greater efficiencies and cost savings initiatives, particularly in transportation. So our overall gross margin increased 30 basis points versus the third quarter of last year, all this despite the impact from tariffs. On product sourcing costs, moving down the P&L, we drove 40 basis points of leverage here. This was driven by supply chain and efficiency initiatives in our DCs. We're excited about the consistent progress we've made in streamlining our chain costs. And moving on to SG&A, we showed about 20 basis points of leverage here on a 1% comp, and this was driven by efficiency initiatives in stores, such as speeding up checkout times at point of sale. Offsetting this leverage was higher depreciation, which delevered about 20 basis points driven by increased CapEx in supply chain and new stores. So taken altogether, this drove the 60 basis points of EBIT expansion in the quarter. Thanks, Matt. Operator: Next question comes from the line of Ike Boruchow of Wells Fargo. Your line is now open. Ike Boruchow: Hey, good morning, Michael, Kristin, and David. I guess my question kind of piggybacking off of Matt's is, so the comp growth in Q3 was lower than peers. But the margin and earnings were actually pretty much better. How should we reconcile that? And then really more importantly, were there choices that you made during the quarter that may have driven the higher margin at the expense of sales? Michael O'Sullivan: Well, I'll take that, Ike. Good morning. Thank you for the questions. It's a good question. I think the direct answer is yes. There were decisions or choices that we made that helped drive our margin in Q3 but may have had a negative impact on our sales. And I'll give you a couple of examples, but maybe I should just preface what I'm gonna say with a couple of points. Firstly, our margin and earnings performance in Q3 was very strong. Margins were up 60 basis points and adjusted EPS grew 16%. We've also taken up full-year earnings guidance. In other words, we've rolled right over tariffs. Secondly, on comp sales, to reiterate, the biggest driver of the slowdown that we saw was weather. If I adjust our comp for weather, we probably would have been pretty happy with the outcome. But as I explained a moment ago, that only explains half of the gap between our 1% comp growth and our peers' 6% to 7% comp. So if I come back to your question, yes, there were choices that we made that might explain our relatively strong margin and earnings performance, and our weaker comp growth in Q3. Now these were choices that we made as part of our tariff mitigation strategies. And let me describe two specific examples. Firstly, when tariffs were first introduced, we reduced our sales and receipt plans for categories where the margin impact was too significant. We did not feel like we could raise retails in those categories. And we did not want to accept the margin compression. That meant that in some businesses, especially some categories in home, our inventory levels and assortments were very light in Q3. And we saw that in terms of the sales in those categories. The sales were lower. Now that wasn't an error. It was a deliberate decision. I would say it was an economically rational decision. And it worked. It may have hurt sales, but it drove our earnings in Q3. Now I should add that as tariff rates have come down, we've gone back and we've taken up sales and receipt plans in most of the categories that were affected. So I would expect this impact to be less significant in Q4. A second example, as Kristin described a moment ago, another step that we took to help offset tariffs was to trim inventory levels in many businesses across the store and force a faster turn. Again, this helped to offset the margin pressure from tariffs. Now we only really took that step in Q3, not in Q4. We already turned very fast in Q4, so we didn't want to try and force a faster turn going into holiday. But again, in Q3, that approach drove earnings, but it may have hurt sales. So for both of the examples I've just given, at a high level, those decisions worked. You know, we fully absorbed tariff pressure on our margin, and we drove very strong margin and earnings growth in Q3. And all this happened actually despite a slowdown in comp sales due to weather, normally a slowdown like that would drive deleverage. Anyway, with that said, we really need to do a full after-action assessment on Q3. Now that we have our competitors' comp results, we need to go back and hindsight our performance and identify anything we could have done or should have done differently. Ike Boruchow: Got it. Thanks, Michael. And then maybe, Kristin, just to elaborate maybe a little more on the 2026 initial outlook, key risk opportunities in the outlook, anything else you could share? Kristin Wolfe: Yes. Great. Thanks, Ike. It's still somewhat early in the process. We're actively working through the budget for 2026. But let me give some headlines or how we're thinking about it. The outlook for next year is pretty hard to predict, with significant economic and political uncertainty that could absolutely affect consumers' discretionary spending. There are potential tailwinds like the possibility of higher tax refunds in the early part of next year. And then there are potential headwinds like tariff-driven price increases, which could put additional inflationary pressure on our core customer. Michael spoke to this earlier, but given this uncertainty, we're planning to stick with our off-price playbook. That really means planning comps at flat to 2% and positioning us to chase the trend if it's stronger. In terms of new stores, we mentioned this in the prepared remarks, but it's worth reiterating, we feel very good about the new store pipeline. We are planning to open at least 110 net new stores in 2026. So combined with our comp guidance, this should drive a high single-digit increase in total sales. On the operating margin side, as we said, we're modeling operating margin flat to last year at the 2% comp. We do expect 10 to 15 basis points of leverage for every point above a 2% comp. And then there's a couple of things in the margin. A couple of puts and takes. We are planning for slightly higher merch margin as we look to offset any impact of tariffs, particularly as we lap the fall season next year. We're planning for continued supply chain productivity gains next year, but there will be offsets here due to the start costs and the initial ramp-up of our new Southeastern distribution center, which we plan to open in 2026. And finally, we do expect fixed cost leverage on the high single-digit total sales growth, but we also are expecting higher depreciation, which creates deleverage. The higher depreciation is really due to the higher CapEx spend in supply chain and our increased number of new stores. Those are really the main callouts for 2026 at this point. Operator: Your next question comes from the line of Lorraine Hutchinson of Bank of America. Your line is now open. Lorraine Hutchinson: Thank you. Good morning. Michael, one of your off-price peers is accelerating comps with more focus on marketing, more in-store inventory, and a store refresh. Do you see any risk that Burlington Stores, Inc. will lose market share? Michael O'Sullivan: Good morning, Lorraine. Thank you for the question. It's a good question. I'm going to avoid talking about any specific competitor, but I think I can still try to answer your question maybe in more general terms. You know, I'll start by saying that actually we like innovation and fresh ideas. We believe in off-price retail. And anything that drives off-price awareness and excitement is a good thing. In fact, I'd go further and say that a strong off-price sector is important for us. So it's good that our off-price peers are achieving very strong results. But your question was more about potential risks to Burlington Stores, Inc. So let me come at it from that angle. I think there are two important points that I would make here. Firstly, when we talk among each other and when we talk to analysts and when we talk to investors, I think we sometimes talk about off-price as if it were a separate isolated ring-fenced segment of retail. But the customer does not think of it that way. The customer does not respect the boundaries of off-price. If she needs a pair of pants or a dress, she might shop Burlington Stores, Inc. or one of our off-price peers, but we know from our own research that she also cross-shops department stores, specialty retailers. In fact, any retailer where she likes the assortment. She doesn't care about our off-price business definition. She just cares about finding a great deal and great value in the categories, brands, and styles that she's looking for. Now if you're an investor in off-price, I think it's very important that you understand this. This is not like the retail market for office supplies. We aren't three companies just scrapping it out for market share in a limited space off-price. It's bigger than that. We compete in a very large and competitively fragmented market for apparel, accessories, shoes, home, beauty, and so on. Off-price is really just a small part of that overall market. Our opportunity is to take share from non-off-price retailers. That's what has been happening over a long period of time. So, I mean, just to bring it up to just to throw in some numbers. Today, we announced 7% total sales growth in Q3, on top of 11% growth last year. You know, at those growth rates, it's self-evident that we are taking market share. But so are our off-price peers. These share gains are not coming at the expense of each other. Mathematically, that wouldn't be possible. These share gains are coming from non-off-price. And, you know, I think that the shift from traditional full-price retail to off-price is unlikely to end anytime soon. So that's the first point. The second point I would make is that despite everything I've just said, I think it's very important and useful for us to pay close attention to our off-price peers. They matter. They operate a similar business model to us. They've been very successful over the years, and we can learn a lot from them. So if our off-price peers come up with new ways of doing things, new processes in stores, new innovative marketing programs, then we need to pay close attention. Now not all of those ideas will work, of course. And certainly, not all of them will make sense for us. But we need to be open to new ideas that could help drive our business and actually drive off-price retail in general. Let me finish up. Your question was about risk to Burlington Stores, Inc. Right now, I see off-price as a whole as being very healthy. For 2025, we now expect to grow total sales by 8% on top of 11% last year. And at the high end of our guidance, we now expect to achieve EPS growth of 18% on top of 34% last year. Those are by any metric, those are very healthy numbers. I anticipate that our off-price peers are going to be successful too. But I don't see that as a risk. In fact, it's better for us if the off-price segment as a whole continues to perform well. Lorraine Hutchinson: Thank you. And I wanted to follow-up on pricing. Did you take price in 3Q? And what impact did that have on your comp? And then what's your strategy on pricing for the fourth quarter? Michael O'Sullivan: Yes. That's a good question. I would sum up our pricing strategy in three words: be very careful. We recognize that because of tariffs, prices are going up across the retail industry. But we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases. We've said this many times before, we have a very price-sensitive customer. We know that the reason that they shop at Burlington Stores, Inc. is that they're looking for a great deal. Our core strategy is to offer great value. And, of course, that means keeping prices low. Now our approach to tariffs this year has been to avoid retail pricing increases, and to focus instead on finding other margin and expense offsets. Kristin described those actions earlier. We're very pleased with how that approach has worked. It's allowed us to avoid price increases but still to grow margin and earnings this year. Now of course, we have tested some things. We've tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories. But I would say that those pricing tests were in a very limited number of areas. And mostly, the higher retails worked. We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And, also, of course, we need to see what happens with tariff rates going forward. Operator: Your next question comes from the line of John David Kernan of TD Cowen. Your line is now open. John David Kernan: Good morning. Happy almost Thanksgiving. Michael, it sounds like you see store openings and the cadence of growth. Sounds like you see an opportunity to take up the number of new stores. Can you expand a bit upon this? What are you seeing in terms of the new store pipeline, both from a real estate perspective and also potential new store productivity? Kristin Wolfe: Good morning, John. It's Kristin. I'll take this one. We're really pleased with the performance of our new stores across the board. They've been delivering results that are in line or better than expectations as well as our financial hurdles. It really reinforces the strength of our site selection process and the Burlington Stores, Inc. brand really across markets. And it's worth pointing out just with some data. Our Q3 comp course is at the midpoint of our guidance. But our total sales growth in Q3 was at the high end of our guidance, up 7%. And this was driven by new stores. And based on our Q4 guidance, our total sales increase is planned at 9% at the high end as we benefit from the slew of new stores we just opened in the third quarter, 73 net new. Now as I mentioned in the prepared remarks, we now expect to open 104 net new stores this year. This is a modest step up from our original plan of 100 net new. And this increase reflects really two things. First, the ability to pull forward some openings that were originally slated for 2026, and secondly, the strength of our real estate pipeline. Looking ahead to 2026, we're raising that new store target to at least 110 net new stores. This is supported by this robust pipeline, but also by 40 leases we secured from the Joanne Fabrics bankruptcy. These incremental sites really give us confidence in sustaining the high level of growth next year. And as for the pipeline for 2027 and beyond, it's still early to provide specific numbers, but I will say we feel very good about the long-term opportunity. Our real estate team continues to identify attractive locations. And we already have a very healthy pipeline for new stores beyond 2026. John David Kernan: Got it. Maybe as a follow-up, obviously, three off-price retailers are resonating strongly with consumers. I like how Michael framed the industry's opportunity. You're clearly feeling more bullish on the number of stores, maybe a little bit more cautious on comp sales, but more bullish on the potential margin expansion potential for the business. Is that the right way to think about it? Kristin Wolfe: Great. Yes. John, thanks for that question. It's a good question. So two years ago, we shared our objective of getting to approximately $1.6 billion in operating income by 2028. The headline is that we feel very good about the progress we're making towards this goal. We're tracking in line with where we thought we would be at this point. And we're especially pleased with the progress we made in driving operating margin at the high end. Michael said this thoroughly, but worth repeating. At the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified two years ago. And we will have achieved this despite the negative headwinds from tariffs. So really, to sum up, we're pleased with the progress. But the way you characterize the long-range model in your question is about right. It's true. We're more bullish on new stores. And we are more bullish on margin expansion. On the comp, we still believe we can drive an average annual comp growth of 4% to 5% over the remaining three years of the long-range plan, but we recognize that there is external uncertainty so we are slightly more cautious here. Operator: Your next question comes from the line of Brooke Siler Roach of Goldman Sachs. Your line is now open. Brooke Siler Roach: Good morning and thank you for taking our question. Michael, I'd like to ask you about the trends that you're seeing with the lower-income customer. How did these customers perform in the third quarter? And are there any other callouts in terms of customer demographics that are worth sharing? Michael O'Sullivan: Well, good morning. Good morning, Brooke. Thank you for the question. The headline is that we feel very good about the lower-income customer. We've been and the trends that we're seeing with that demographic. We've been watching this particular demographic segment very closely all year. This is a critical customer for us. You know, given the economic uncertainty and the cost of living issues, we've been concerned about lower-income customers. But the good news is that this customer has been very resilient. When we look at our stores in lower-income trade areas, they continue to outperform the chain. This has been true for several quarters now. I should say as we listen to other retailers, it seems like this is a consistent pattern. You know, many retailers are reporting strength with lower-income consumers. In terms of other demographic callouts, there's one other callout. Specifically relating to Hispanic customers. Again, we've been watching this demographic very closely all year. It's an important customer for us. We have many stores across the country that are in trade areas with a high proportion of Hispanic households. You may recall that in previous quarters, we've said that our stores that are in trade areas with a high proportion of Hispanic households have been slightly outperforming the chain in terms of comp growth. Well, in Q3, the trend in those stores slipped. They've gone from slightly outperforming the chain to trailing the chain. Now the change in trend for those stores varies a lot depending on the specific market and even the specific particular location of the store. In other words, it's very localized to what's happening in those particular cities. And, of course, it's difficult for us to say how long those localized slowdowns might last. Brooke Siler Roach: Great. And then my follow-up would be for Kristin. Kristin, can you give us more color about your guidance for the fourth quarter, both in terms of comp sales and for earnings? Kristin Wolfe: Good morning, Brooke. Thanks for the question. Sure. Let me repeat a little bit. I think it's worth reiterating some of what we described earlier. On comp store sales and total store sales, we're maintaining our Q4 previously issued guidance. So comp of flat to 2% and total sales growth 7% to 9%. We do, as we said, feel really good about our recent trend in Q4, but it's still early in the quarter. The critical weeks are ahead of us. And in those coming weeks, we'll be up against very strong comparisons from last year. So we'll continue to take a cautious approach on sales. On the margin side, we are increasing our margin and EPS guidance for Q4. We now expect our Q4 adjusted EBIT margin to increase by 30 to 50 basis points. We do anticipate some tariff-driven pressure on merch margin in Q4, but we expect to more than fully offset that pressure and drive overall operating margin expansion in Q4 versus last year. And the drivers of the margin leverage should be similar to what we saw in Q3. We expect continued cost savings in freight and supply chain and in-store related initiatives. And finally, we should also see additional leverage in SG&A given the higher incentive comp accrual in the fourth quarter of last year. Operator: Your next question comes from the line of Alexandra Ann Straton of Morgan Stanley. Your line is now open. Alexandra Ann Straton: Great. Thanks for taking the question. Michael, can you talk about the availability of off-price merchandise as you're heading into the fourth quarter? And then I have a quick follow-up. Michael O'Sullivan: Yes. Good morning, Alex. Thank you for the question. I would characterize the buying environment for off-price as very, very strong. Earlier in the year when tariffs were first introduced, there were some concerns, a lot of concerns about whether vendors would be reluctant to bring potentially excess merchandise into the country. But frankly, concerns have just not materialized. Even some of the categories where supply was tighter in the summer, categories like housewares and home, also housewares and toys, have come back. I think that's probably pretty consistent with what you've heard from our off-price peers. A lot of great merchandise at great values, and we're taking advantage of it, both to flow to stores and to build up reserve. Alexandra Ann Straton: Perfect. And then just on the cold weather merchandise in the quarter, is there any just detail you can provide on that dynamic, the impact on the overall comp for the chain? I know you've given a lot of details, but anything else worth highlighting there? Michael O'Sullivan: Sure. Yeah. So after back-to-school, the cold weather merchandise becomes very important to our mix. As I said earlier, it expands to more than 20% of our total assortment during the quarter. Now, cold weather merchandise, just to define it, includes categories like coats, jackets, boots, and accessories like gloves and scarves. It's only stuff you need if it's cold outside. And our customer is very need-driven. For September through mid-October, our comp sales in those businesses were down in the negative mid-teens. Then in the last two weeks of October, once the weather turned cold, they grew up double-digit comp. You know, maybe if I step back for a moment, there are two ways in which milder weather in September and October affects our business. There is the direct drag on our overall comp growth from lower sales in the cold weather categories that I just mentioned. That's one impact. But there is also an impact on our non-cold weather businesses. Because if you think about it, if the customer comes in to buy a coat, she's probably gonna put some other things in the basket too. So if because the weather is mild, she doesn't come into the store to buy that coat, then this doesn't just hurt our coat sales. It impacts other businesses as well. Now mathematically, the drag on our overall comp from cold weather categories alone was worth about 200 basis points in Q3. If you then add the impact that lower traffic had on other non-cold weather categories, you can easily get up to a few points of comp. And I think that's somewhat consistent with the fact that we saw a bounce back to mid-single-digit comp growth in October, once the weather had turned cold. Operator: Your last question comes from the line of Mark R. Altschwager of Baird. Your line is now open. Mark R. Altschwager: Kristen, could you give us some more detail on regional trends, category trends as well as any of the detailed comp metrics for Q3? Kristin Wolfe: Good morning, Mark. Yes, absolutely. In terms of regional performance, the Southeast was our strongest region in the quarter. The West, Northeast, and Midwest were in line with the chain, while the Southwest trailed the chain. On category performance, we saw the strongest performance in beauty, accessories, and shoes. Apparel comped slightly above the chain, while home was softer, comping below the chain in Q3. In terms of the comp metrics, our traffic was down in the third quarter. That was largely driven by September and early October when weather was unseasonably warm, and this lower traffic was offset by a higher average basket size. So for the quarter, we were pleased to see that both conversions and basket size or average transaction size were higher than last year. So this tells us that once she's in the store, she liked what she saw. Mark R. Altschwager: Excellent. Thank you. And then, Michael, as we look at the Q4 comp guidance, do you view that as conservative just given typically less weather sensitivity in the fourth quarter? Thank you. Michael O'Sullivan: Good morning, Mark. Sometimes when we give comp guidance, we'll also sort of signal, if you like, if we think there may be upside. I don't think I don't see a lot of upside in our Q4 comp guidance. The reason I say that is that we're up against 6% comp growth from Q4 last year. So 6%. If you take our 0% to 2% guidance, that gets you to a two-year stack of 6% to 8%. Now we exceeded that in Q2 of this year, but we were well below it in Q3. I should also add that when I look at our off-price peers, the way I'm interpreting their guidance, it looks like they are slightly below us on a two-year stack basis. So even though we're happy with our recent trends, and with how we started the quarter, and we're excited for our holiday assortments, we're not anticipating significant upside to our Q4 comp sales guidance at this point. Operator: I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks. Michael O'Sullivan: Let me close by thanking everyone on this call for your interest in Burlington Stores, Inc. We would like to wish you all a very happy Thanksgiving. We look forward to talking to you again in March to discuss our fourth quarter and full-year 2025 results. Thank you for your time today. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Greetings, and welcome to the Titan Machinery Inc. third quarter fiscal 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Sonnek with ICR. Thank you. You may begin. Jeff Sonnek: Welcome to the Titan Machinery Inc. third quarter fiscal 2026 Earnings Conference Call. On the call today from the company are Bryan J. Knutson, President and Chief Executive Officer, and Bo Larsen, Chief Financial Officer. By now, everyone should have access to the earnings release for the fiscal third quarter ended October 31, 2025, which is also available on Titan Machinery Inc.'s Investor Relations website at ir.titanmachinery.com. In addition, we are providing a supplemental presentation to accompany today's prepared remarks along with the webcast and replay information, which can also be found on Titan Machinery Inc.'s Investor Relations website within the Events and Presentations section. We would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Statements do not guarantee future performance and therefore undue reliance should not be placed upon them. Forward-looking statements are based on management's current expectations and involve inherent risks and uncertainties, including those identified in the forward-looking statements section of today's earnings release and the company's filings with the SEC, including the Risk Factors section of Titan Machinery Inc.'s most filed annual report on Form 10-K and quarterly reports on Form 10-Q. These risks and uncertainties could cause actual results to differ materially from those projected in any forward-looking statements. Except as may be required by applicable law, Titan Machinery Inc. assumes no obligation to update any forward-looking statements that may be made in today's release or call. Please note that during today's call, we may discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into Titan Machinery Inc.'s ongoing financial performance, particularly comparing underlying results from period to period. We have included reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures in today's release and supplemental presentation. At the conclusion of our prepared remarks, we will open the call to take your questions. And with that, I would now like to introduce the company's President and CEO, Bryan J. Knutson. Please go ahead, Bryan. Bryan J. Knutson: Thank you, Jeff. And good morning to everyone on the call. I will start by providing an update on our inventory optimization progress and operational focus areas. And then discuss the current environment across our segments before turning the call over to Bo for his financial review and comments on our fiscal 2026 modeling assumptions. Nine months into the fiscal 2026, we are making meaningful progress on our inventory optimization initiatives which will position us to emerge from this cycle leaner and stronger. Our team did an excellent job executing in what remains a very challenging market environment. As we head into the final quarter of the year, our focus is on finishing strong and continuing to drive inventory optimization while maintaining the customer relationships and service excellence that differentiate us in the market. We have made substantial progress through the first nine months of the fiscal year, reducing total inventory by $98 million. As I just mentioned, I am extremely proud of the disciplined work our teams have been doing all year to move equipment in a very difficult demand environment. And we are confident we will significantly exceed our $100 million full-year reduction target. As such, we are raising our inventory reduction target to $150 million. The quality of our inventory also continues to improve. It is fresher and has an increased mix of more high-demand categories. But we are not stopping there. We still have excess inventory in certain seasonal new equipment categories as well as our overall used equipment level. Our focus remains on finishing this fiscal year in a healthier inventory position, so that we can return to the more normalized equipment margins that we have historically achieved. Regarding equipment margins, they beat expectations for the quarter driven largely by a more favorable sales mix and our improved inventory position. Bo will provide further details but I do expect equipment margins to moderate somewhat in the fourth quarter given less favorable sales mix and additional inventory optimization efforts as we finish the year. The work we are doing now on inventory optimization is about setting ourselves up properly for next year over maximizing near-term margins. Our customer care initiative continues to demonstrate strategic value and remains central to our operating strategy. While equipment demand remains under pressure at this phase of the cycle, our parts and service businesses are generating well over half of our gross profit dollars. The stabilizing force of our parts and service business is essential in times like these. Keeping us closely engaged with our customers allowing us to add value to their operations, and positioning us well for when equipment demand eventually recovers. This relentless focus on our customers optimization, both domestically and abroad, dovetails with our recent activity surrounding footprint. As you may recall, we acquired Heartland Ag Systems in 2022, which allowed us to gain access to the full product line of Case IH application equipment. Including self-propelled sprayers and fertilizer applicators, along with incremental sales opportunities to the commercial ag application segment of the market. As a part of the integration process of that business, we have recently divested certain stores outside of our core footprint and sold them to local CNH dealers in the respective areas. This change will allow us to focus our resources on markets where we can best leverage our broader service network to provide best-in-class service and support to our customers and deliver improved shareholder returns. In that same vein, we have also taken an objective look at our international operations to ensure we are allocating capital to high-performing markets. Our German operations have faced challenges that have historically weighed on returns within our year operating segment. And as such, are in the process of divesting our dealership operations located in Germany, working in close coordination with CNH and local New Holland dealers in the region. An additional part of our footprint optimization is continuing to build upon the dual-brand strategy that we previously implemented in approximately one-third of our US store network over the years. For instance, in Australia, we recently gained access to the New Holland distribution rights in six of our 15 rooftops. While we are not adding new rooftops in the country, we now have both Case IH and New Holland brands available in these markets, helping us provide better scale and customer service through improved coverage. To drive increased market share while capturing synergies from both brands. We remain focused on organic growth through market share gains and focusing on our customer care strategy to drive higher parts and service revenues. At the same time, we are well-positioned to continue to pursue M&A opportunities that align within our strategy that focuses on leveraging our service network to provide best-in-class customer service while driving scale and efficiencies to achieve higher levels of profitability. With that, I will now turn to our segments. In domestic ag, the quarter performed within our expected range. Despite an environment that remains challenging for our farmer customers. While the harvest season is now largely complete, and yields were generally solid across our footprint, farmers continued to face multiple headwinds. These include depressed commodity prices, which is the fundamental issue pressuring farm profitability, as well as the government shutdown, which slowed payments to farmers adding to current cash flow challenges, along with higher interest expense. While we have seen some improvement in commodity prices recently, they generally remain below breakeven levels for our customers. And while it is encouraging to see China committing to resume soybean purchases, it is unlikely that this will result in a sustainable inflection in commodity prices in the near term. Further, while the reinstatement of 100% bonus depreciation is a positive for those customers who find themselves in a taxable position, many simply do not have the income to take advantage of it this year. The bottom line is that without a significant improvement in commodity prices, or substantial additional government support, equipment demand is likely to remain at trough-type levels for the near term. Now turning to our construction segment, which continues to face some softness reflecting the broader economic uncertainty. Equipment margins remain subdued, pressured by some of the same variables that are impacting our domestic ag segment. Infrastructure and data center projects are providing a baseline level of activity, while the overall demand environment remains somewhat softer than the highs of recent years. But still at healthy levels. Europe had a strong third quarter, as Romania continued to drive segment performance as customers capitalized on EU subvention funds up to the September deadline. However, absent this temporary stimulus, the underlying demand in the region remains soft and is tied to the broader ag cycle. Australia continues to experience a similar backdrop as their domestic ag business with industry volumes below prior trough levels. However, the third quarter also reflected some difficult comparables relative to the prior year. The market remains challenging, but the fourth quarter revenue should be closer to what we saw in the prior year. In closing, we have accomplished a great deal over the past year reducing total inventory by over $500 million from peak levels in Q2 of the prior year. This has been a full team effort, and why I want to express my appreciation for how our people have maintained exceptional customer service while executing these initiatives by outperforming the market. The agricultural equipment market remains challenging and the industry is not expecting a near-term recovery. However, we are staying disciplined in our execution managing what we can control, and positioning the business to perform well when market conditions eventually improve. With that, I will turn the call over to Bo for his financial review. Bo Larsen: Thanks, Bryan, and good morning, everyone. Starting with our consolidated results for the fiscal 2026 third quarter. Total revenue was $644.5 million compared to $679.8 million in the prior year period. Reflecting a 4.8% decrease in same-store sales driven by weaker demand in our domestic ag, construction, and Australia segments, largely offset by stimulus-driven strength in our European segment as Bryan discussed earlier. Despite the sales headwind in the third quarter, gross profit was essentially flat at $111 million compared to $110.5 million in the prior year period. While gross profit margin expanded to 17.2% as compared to 16.3% in the prior year. This was largely driven by a 70 basis point improvement in our equipment margins for the third quarter versus the prior year comparative period. Notably, equipment margins for our domestic ag segment were 7% in this year's third quarter. Which is a significant improvement from the 3.1% that was achieved in the first half of this fiscal year. This improvement is largely driven by our improved inventory position and a favorable sales mix. But also benefited from a $3.7 million accrual for manufacturer incentive plans for which nothing was accrued in the first half of the year. Operating expenses were $100.5 million for 2026. Compared to $98.8 million in the prior year period. Our headcount and discretionary spending is down year over year as a result of disciplined expense management. However, the small increase in total operating expense was led by higher variable compensation and some transaction-related expenses. Lower plan and other interest expense was $10.9 million as compared to $14.3 million in the prior year period reflecting our continued efforts to reduce interest-bearing inventory over the past year. In 2026, net income was $1.2 million with earnings per diluted share of $0.05 compared to net income of $1.7 million or earnings per diluted share of $0.07 for the same period last year. Now turning to a brief overview of our segment results for the third quarter. Our domestic ag segment realized a same-store sales decrease of 12.3% which took segment revenue to $420.9 million. Segment pretax income was $6.1 million compared to pretax income of $1.8 million in the third quarter of the prior year. Reflecting the positive equipment margin dynamics that I discussed earlier, as well as lower operating expenses, and lower floorplan interest expense as compared to the prior year. In our Construction segment, same-store sales decreased 10.1% to $76.7 million which was driven by lower equipment sales. Pretax loss was $1.7 million compared to a pretax loss of $0.9 million in the third quarter of the prior year. In our Europe segment, same-store sales increased 88% to $117 million which includes a $6.1 million positive foreign currency impact. Net of the effect of these foreign currency fluctuations, revenue increased 78%. Which was primarily driven by Romania as customers capitalized on EU subvention funds ahead of the September deadline. Pretax income for the segment increased to $3.5 million compared to a pretax loss of $1.2 million in the third quarter of last year. In our Australia segment, same-store sales decreased 40% to $29.9 million which included a 1.3% negative foreign currency impact. Net of the effect of these foreign currency fluctuations, revenue decreased 39%. This decrease reflects the continued normalization of sprayer deliveries in fiscal 2026 after having caught up on a multiyear backlog of deliveries during fiscal 2025. Pretax loss was $3.8 million compared to a pretax loss of $0.3 million in the third quarter of last year. Now on to our balance sheet and inventory position. We had cash of $49 million and an adjusted debt to tangible net worth ratio of 1.7 times as of October 31, 2025. Which is well below our bank covenant of 3.5 times. Regarding inventory, as Bryan mentioned, we reduced our total inventory by $98 million through the first nine months of the year to $1 billion. Of that $98 million reduction, approximately $15 million came from equipment sold through three domestic divestitures we completed. The vast majority of the reduction reflects the disciplined work our team has been doing to move equipment in a challenging demand environment. Our cumulative total inventory reduction from peak levels in Q2 of the prior year now stands at $517 million. Beyond the headline inventory reduction number, we are also seeing a meaningful improvement in the quality of our inventory. We continue to focus on reducing aged inventory. Which we define as equipment that has been on our lots for more than twelve months. Aged equipment inventory peaked in May fiscal year and we have been able to reduce this by a total of $94 million over the last five months. This aged inventory reduction is critical to returning more normalized equipment margin levels. Given the progress we have made and the programs we have in place to continue to drive sales in the fourth quarter, we have confidence in making further progress on aged inventory and inventory levels overall. As such, as Bryan mentioned previously, we are increasing our inventory reduction target to $150 million for the full fiscal year. Turning to our fiscal 2026 modeling assumptions. We are refining our revenue expectations for both the Construction and Europe segments based on our year-to-date performance. While keeping our assumptions for domestic ag and Australia intact. We are now expecting construction to be down 5% to 10% compared to our prior expectation of down 3% to 8%. And Europe is expected to be up 35% to 40%, an improvement from our prior range of up 30% to 40%. Reflecting the strong performance in Romania during the third quarter. From an equipment margin perspective, I want to provide some additional context for the fourth quarter. As Bryan mentioned, our third quarter consolidated equipment margins of 8.1% benefited from our improved inventory position and favorable sales mix. Given a less favorable sales mix, and additional inventory optimization efforts in the fourth quarter, we anticipate consolidated equipment margins to moderate back to approximately 7% for the fourth quarter. This reflects three primary factors. First, the fourth quarter is traditionally a big quarter of delivery of multiunit deals for larger ticket cash crop equipment and generally speaking, those tend to have moderately lower margins than other transactions. Second, we continue to work through aged inventory as part of our optimization effort. And third, we anticipate some moderation in Europe following the September expiration of subvention fund availability in Romania. Consistent with our prior expectations, operating expenses are expected to decrease year over year on an absolute basis. And I continue to expect them to be approximately 16% of sales for the full fiscal year. Forward plan and other interest expense is expected to continue to decline as we make additional progress on inventory reduction and mix optimization and we should see some of those benefits in the fourth quarter given the reduction in aged inventory we have seen in recent months. As a preface to our earnings per share expectations, I want to call out the anticipated recognition of a non-cash valuation allowance that is expected to be recognized in the fourth quarter and result in an increase in our reported tax expense by approximately $0.35 to $0.45 per share. Reflecting a variable that was not considered in our previous assumptions. This is dictated by accounting guidance and is influenced by the degree to which our profitability is being impacted by the broader cycle. It is something that we had to recognize in the prior downturn as well, and then subsequently reversed as the industry recovered from the prior trough. I expect a subsequent reversal at some point in the future this time as well. However, this will result in an increase to tax expense for the time being. Based on guidance from regulators, we do not plan to adjust this incremental tax expense out of our presentation of full-year adjusted earnings per share. So I mention it here so you can better appreciate the magnitude that the underlying equipment margin improvement is having on our results in the second half of the fiscal year. To be clear, our margin improvement is being negated by the valuation allowance and as a result, we are reaffirming our adjusted diluted loss per share guidance a range of a loss of $1.50 to $2. In summary, we are pleased with the progress we have made in a challenging demand environment, with industry volumes below prior trough levels. And we are poised to make further progress in the fourth quarter. Our team's hard work advancing our inventory reduction and footprint optimization initiatives are positioning the business for improved financial performance as we move into fiscal 2027. This concludes our prepared comments. Operator, we are now ready for the question and answer session of our call. Operator: Thank you. 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 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. To allow for as many questions as possible, and one follow-up. Thank you. We ask that you each keep to one question. Our first question comes from the line of Liam Burke with B. Riley Securities. Please proceed with your question. Liam Burke: Thank you. Good morning, Bryan. Good morning, Bo. Morning. Morning. We saw very nice results on parts and service, excuse me, service was down 4%. Is that just normal quarter-to-quarter seasonality, or is there something within that number on that down year-over-year number that is influencing it? Bo Larsen: Yeah. So there is some noise there from a quarter-to-quarter perspective. The way service is reflected does get impacted by how much new equipment we are delivering and how much of their labor is going towards PDI, which ultimately shows up as whole good versus service revenue. Overall and big picture, service generally speaking is flattish this year in a world where large ag new equipment is down about 30%. Pretty happy with that. Certainly driving initiatives and expecting over the long term, as we have talked about for a while now to be able to drive sustainable growth. But, again, stability in this environment, will take for now as we work on some underlying things such as driving higher take rates on extended warranties, preventative maintenance agreements, and the like. To really help us accomplish what we want and that is to see something more like mid-single-digit growth on average over a longer period of time. Still feeling good about all that. Liam Burke: Great. And then on the construction, same-store sales just do not seem to be recovering. More in line with ag. We would think that there would be less decline, but it seems to be either the same or no getting worse. When most of the larger infrastructure players and larger construction players are doing okay. Bo Larsen: Yeah. The first thing I would say, and I am sure Bryan will add to it as well. Underneath that for us, I would say that there are some specific factors that are not necessarily reflective of the market. Specifically, last year was a big year for us recovering and catching up on the delivery of wheel loaders. That extends back to the production or COVID production supply chain constraints. So last year, we received a lot in, we delivered a lot of them. Q3 was a big quarter for that specifically. So that was less about the market conditions and more about catching up on that backlog. You know, underneath that, we do see more stability ourselves and kind of reflective of what the overall market environment is like. I do not know if you wanted to add anything. Bryan J. Knutson: Yeah. Just as it relates maybe to the overall infrastructure impact we certainly do not play as much in that market as, say, Caterpillar would, but, you know, a good a better portion of our business is tied to ag in general. With, as Bo mentioned, wheel loaders and a lot of material handling equipment. As well as Razwitch with the interest rates where they are know, has still been lagging. But we are certainly seeing some good stability and data center projects up up here in the Midwest. And, again, it is basically hanging in there, mainly what you are seeing in the comparables is what Bo mentioned with just the year-over-year comparison to the change in the wheel loader backlog shipment that we had. But we are expecting, you know, potentially here rate cut in December, which could be positive news and a lot of our contractors are you know, I will say, cautiously optimistic here as they start to look to at their 2026 schedules. And so yeah, we are looking at potential uplift for next year in that market. Liam Burke: Great. Thank you, Bryan. Thank you, Bo. Bryan J. Knutson: Yep. Thank you. Operator: Our next question comes from the line of Mig Dobre with Baird. Please proceed with your question. Mig Dobre: Good morning, and congratulations on really good progress your team seems to be making here. So I guess my first question, I would like to talk a little bit about Europe. And appreciate the guidance raised here, but if I heard you correctly, the tailwind in Romania from those subsidies is going to dissipate, went away in September. What are you seeing in that region more broadly? Is and I guess, really, the answer to my question is at this point, all of us really kinda focus on fiscal 2027, you know, the current fiscal year is pretty much done. What is the right way to think about this portion of the business for fiscal 2027, recognizing that the comparisons here are really difficult. Bo Larsen: Yeah. No. I appreciate the question. And for sure, Romania, you know, this year, essentially doubled up year over year. And kudos to the team for on that and capitalizing on all the opportunity that was there. You know, first of all, just in terms of what we are seeing in the region, both for Romania and Bulgaria, I would say they have not had the best weather conditions in both calendar 2024 and 2025. So whereas more broadly in Europe, some of the yields were better. They were not as well off there. So that is a bit of a headwind. Obviously, the funds kinda helped us mask some of that and overperform there. From a next year backdrop perspective, I would say and, again, this is directionally speaking, we will provide guidance when we get on our March call. But for Romania, the pullback, you know, 30% to 40% we will sharpen our pencil on that, but that is not out of the range of reasonable given the backdrop that they have and the significant growth they had this year. For Bulgaria and Ukraine, I would say more stable and opportunity for growth. So ex Germany, of course, which we are talking about divesting of, mix all that in, you are talking about something, again, directionally speaking, we will sharpen the pencil, some high teens, maybe 20% down year over year forge are up or for Europe ex Germany. Mig Dobre: That is really helpful. And, you know, you guys are not hearing of any other stimulus packages or anything of the sort that might be might be going on in region outside of Romania? And we can you know, Ukraine as well. Obviously, those guys have been put a lot. Bo Larsen: So it does actually continue a bit. And, again, we will continue to sharpen our pencil. But there are still funds in play even in Romania through 2027 for certain categories of equipment. They are pretty prescriptive. We feel like we are in a decent position to continue to take or to execute on those opportunities. We will continue to sharpen our pencil, provide more clarity. But again, I would say, you know, an amazing job by the team to double up the business year over year. Some pullback expected. We will continue to sharpen. Funds are there. Maybe not as significant as we saw this year. Mig Dobre: Sure. Reverting back to The US business, it sounds like you guys are doing some more on the footprint which, you know, you have done in prior downturns. As well. I guess the commentary, as I heard it from Bryan in the prepared remarks, was pretty subdued as we think about fiscal 2027. And, again, directionally, I am sort of wondering a couple of things here. Should we plan for another year of decline in fiscal 2027 on what you know today about your North American business? And if that is the case, what is the right way to think about margins As you have reduced the inventory, are we to the point where we can see on the equipment side, more normalized margins even if we have to deal with another year of top line or volume And then I will have one final follow-up. Bo Larsen: Yep. From a margin perspective, and then I will turn it over to Bryan to talk more about just about footprint in general there. So, yeah, back half of the year, obviously, you saw a pretty significant So I am talking domestic ag here, setting aside the other stake. Segments, which have not had as much volatility. First half of the year, equipment margins were about 3.1%. Back half of the year, equipment margins about 6.5%. If you set aside manufacturer incentives, we are generally accruing and recognizing in the back half of the year as we gain certainty, But back half of the year margins would be more like 5.25 So if we go into next year and there is an assumption that, you know, industry volume is down again and kind of setting a new historical low at least for the past couple of decades, that five and a quarter is maybe a decent proxy to start with for the first half of next year. And then continue to see us driving improvement from there. I do not know if you wanted to add any on the industry in general. Yeah. Make out maybe just add a little bit on footprint and then and then secondly on the industry industry next year. So with footprint, we work very hand in hand with CNH They do not get surprised by any acquisition we do, nor do they with any divestiture that we do. And so we have done a lot of work in recent years here on our strategic plan and we are just really continuing to work that plan. So if you look at, some of the larger acquisitions that we have done and as we refine those now such as some of the divestitures we have done related to our Heartland application business, We will continue to refine that. And, again, we are working hand in hand with CNH in our fellow CNH dealers on that. And we believe that is a great solution for our customers in the end. And we are very pleased with that acquisition, and, again, as we continue to refine it. Secondly is, you know, just continuing to get ready for additional acquisitions that are will be accretive and in line with our strategic plan. And so we will continue to refine our footprint and optimize in the areas where we perform the best. And can really maximize our customer care strategy And then third, you will see us doing a lot with the multi-brand strategy with CNH as you saw. We just added the contract at five or six of our rooftops in Australia where we did not actually add any rooftops, but we added the new Holland contract to six of our 15. As well as we have got a third of our North American footprint that is dual branded. And, there is a lot of value there that we can unlock for our shareholders and for our customers and give better customer services. We do that we are going to continue to execute on that strategy as well. And just with the overall demand, Meg, I mean, I think as you know, there are a lot of variables in play here. We and we will see what continues to happen with soybean sales and soybean consumption. So really on the demand side and as we continue to look at stock to use ratios here, Also with, Ren Fuel standards as we get into January here, think we will see some further development on that. Things around E15 and biodiesel especially. And then really, if you look at the government stimulus, it is going to be big wild card here. So with the shutdown, you know, no assistance came. We will see what comes yet in 2025. Of course, we are running out of time in the calendar year. So 2026, I think that is going to be the big question as at today's commodity prices, even though we have had a recent uptick, many of the farmers are still not at profitable levels here even with the good yields that we had. So, that is going to, I believe, be another big wild card for next year here that we should, get a lot more color on here as especially the February WASDE report comes out and as insurance rates get locked in at the February and so forth. Mig Dobre: Alright. And then my last question. From an inventory standpoint, maybe you can comment a little bit as to how you think about that I and I know I have asked this question before that you record dollar inventories. Right? But I we gotta sort of keep in mind that the price of the equipment that you have in inventory has gone up a lot over the years and, you know, your store count has increased as well. Is there a way to maybe help us understand or maybe frame for us where you are in terms of unit count of inventories and you know, maybe relative to the prior cycle or really any way that you think shareholders might find it helpful? Thank you. Bo Larsen: Yeah. And to start with, certainly, inventory being a big topic, trying to think about, you know, the best ways to provide transparency without overcomplicating things there. And so certainly super impactful to talk about the price increase You know, over the last year, we had talked about the cost of a four drive going up more than 80% since 2014. We have talked directionally speaking again in the last year. As we Versus where we started the last downturn, had about one third as many used combines which is, you know, an indicator an important indicator in terms of how much work there is to be done on the used equipment side of things. So we will keep working on, you know, the best ways to portray that info. But I mean, it is pretty easy to quickly just think about it in terms of like half the number of units. And, yeah, we are much better positioned than we previously were. And that is really shown in just what happened with our equipment margins in Q3, for example, versus the first half of the year. Our stance has been to aggressively manage our inventory, including the value in which sits on our balance sheet, that is pulled forward some of that. P and l pain, and that is where we saw lower margins than we had seen historically. But then you saw that significant inflection here in the third quarter. We feel really good about where things are priced the number of units we still have to move and exactly what we need to continue to accomplish this year to set ourselves up for success next year. We feel really good about where we are going to be to end the year. And then in a, you know, a market where North America is potentially down a bit again from there, it is going to be a continued focus on managing that aging profile but we are just going to be in a lot better position, to execute at the market instead of trying to be more aggressive out there. And so we should continue to see progress on those equipment margins and, of course, on that reduction in floor plan interest. Bryan J. Knutson: Yeah. Ming, I would just add, you know, good good point on your part, As you said, as we have had equipment prices, per unit in some categories nearly double in less than ten years here, Dollars is not in and of itself, a good way to look at it purely. And as you mentioned, also increasing our store count as well. So as you know, inventory turns is a really good way to look at that. And also interest expense in general. So you know, those are some of the key things in for us is just as we go forward to manage our interest, expense mitigate that as much as possible. Maximize our manufacturer floor plan terms, etcetera. And ultimately, presale with customers So the high dollar cash crop, high ticket equipment, is presold and not sitting on our balance sheet for any longer than possible and especially accruing interest expense. So you know, we will continue to monitor, turns and entered expense are a couple of big indicators there. Mig Dobre: Alright. Very helpful. Thank you, guys. Bryan J. Knutson: Thank you, Mig. Operator: Thank you. Our next question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question. Ted Jackson: Thanks. Good morning. Bryan J. Knutson: Good morning. Good morning, Ted. Ted Jackson: So I wanted to start out and just kinda ask a few questions around inventory. Just to make sure, you know, I kinda understand everything and it will drive a few other things. So you commented. So your inventory year to date is down $98 million. But it would be down $75 million. You had not done the divestitures. Is that correct? Bo Larsen: Yeah. That is correct. Ted Jackson: Okay. So when I think about the and that is fabulous progress, by the way, so I wanted to make sure to say that. But when I think about the $150 guidance that has been put out, if you had not done any divestitures, what would that guidance be? Bo Larsen: Well, and there is a couple of through the end of the year. Right? Essentially, what I am saying is Australia acquisition that we did largely offset those divestitures. Then the other wrinkle, I guess, we have is the Germany divestiture. That will be helpful there as well. But yeah. I mean, somewhere in the $130, $140 range. But, again, there are some offsetting impacts. The other thing that was against us from a dollars perspective was just the FX. On the Europe side, which added to inventory without actually adding units. And last last thing I would say just to gauge the progress, and again, this is dollars, so it is not exactly units. But in the last down cycle, it took us two years to decrease inventory $348 million. It took us three years to decrease inventory, $543 million. You know, we are going to go past that in an eighteen-month period of time here. Again, it just speaks to the approach that we are taking into managing this down faster. To get position heading into the next year. Ted Jackson: So putting it into, like, context of, you know, when we were talking about inventories before and units and everything, the, the $150 to a $100 on a unit basis, you know I mean? Even if, like, if you will make it look organically, you are taking up your view of terms of what you are going to be able to take your inventory numbers down. Let us call it on a unit basis. You know, at you know, regardless of the divestitures that, you know, you are you know, it is a it is indeed a a a change. You see what I am saying? It is not it is not being driven by a change in your footprint. It is being driven by accomplish. change in your view with regards to what you are going to be able to. Bo Larsen: Oh, yeah. Absolutely. And, I mean, the biggest thing that has been reduced here to make sure that you are appreciating it is aged used equipment, which is you know, the biggest risk in turn of valuation. So just I mean, could not be happier with the progress the team has made. It about the additional progress we are going to be able to make. It reflects on the balance sheet in a given quarter. The reality is this is something that we have been at for more than two years now as we have seen how things have been evolving with lead times when we are getting stuff in from the OEMs, how we are digesting that. So really great progress, we look to make more here in the next couple of months. Ted Jackson: And then with regards to the change with with your outlook for inventory. Is it by chance being done because you have a is there is is there a is that change more pessimistic view of how you know, both this goal '26 looks to be Or you you understand what I am saying? I mean, is it you know, like, you know, if your view is that, you know, the the market going forward is weaker than I expected so I do not need as much inventory. So I am going to get try to get rid of more inventory. Do struggle with that? Is it a change in terms of know, how you kind of view the macro, or do you still kinda feel like we will move on? I mean, you often you know, been let us call it calendar '25, and we should have a more stable market in '26. And the that that that view that has been, you know, generally expressed across the ag market, the ag ag players for the last, you know, several quarters is still intact. Does that make sense for me? Yeah. Big picture wise, I do not think that things have. Bo Larsen: shifted drastically. I mean, the and the OEMs in the general space have been talking about North America potentially down somewhat next year. But not so much that it changes, you know, our trajectory of where we want to go. It is more a reflection of the work that we still feel like we, have and and can accomplish for the year. I would say, though, that as we flip the calendar into next year, so we are going to get to a pretty pretty darn good spot ending this year, all things considered. We do absolutely expect some seasonal build in the spring. Kinda refreshing some categories ahead of the selling season. So I would not expect further reduction in the back half of next year. But getting to a good spot at the end of this year, seasonal build in the first half of year. And then depending on where we see the market shaping up, probably, you know, taking it back down a bit in the direction of kinda where we ended this year. That that is kind of my base case scenario that I would lay out for you. Yeah. And, Ted, I would just add, you if we go back to. Bryan J. Knutson: the earlier discussion with Mig there around you know, we for our growers next year, we unless we see a significant uptick here in commodity prices or, again, the wildcard with government assistance. Next year, looks like it could be challenging again for our growers, so we want to be you know, prudent about how we are stocking our inventory accordingly. And then also as we talked about interest expense, you know, with interest rates, as high as they are, it is important that we are mitigating the interest expense. And then the third thing I would say for next year and going forward is just again, a strategic change for us. And in our balance sheet management. And really, as we talk about our footprint optimization, one of the benefits of that is we to refine and get our tighter contiguous footprint, which allows us to leverage that footprint and leverage our scale and share inventory more freely amongst our stores and still be able to you know, capture every sale. That is still the ultimate goal. And keep our customers up and running and satisfy their equipment needs and make them more efficient. So to never miss a sale, but to do that with leaner inventories. And so that is where we are headed. Ted Jackson: Okay. And then my last question, it is maybe more of just, like, actually for a little color. So, you know, I mean, a big thing with CNH is they really want to get, their their, their brands consolidated into, you know, under one roof. And you made a comment that in Australia, six of your 15 roofs now take both, you know, case and New Holland equipment. I was kinda curious when if you could provide a similar kind of metric for the other regions and maybe talk about you know, well, maybe it is too much. But, you know, area you know, like, many when you think about that, is there first of all, how much of your footprint at a region is you know, is that consolidation already taken place? And I do not know. Maybe to the extent that you can, how you think you are positioned for further consolidation of rooftops for CNH because it is such an important longer-term strategy for them. That is my last question. Yes. Bryan J. Knutson: Thank you. It is for sure. And so we are very much aligned with with CNA in our our fellow dealers in that strategy. And we think there is a lot of value for our our customers and our shareholders again there. And we can it gives us additional scale. It gives our customers most importantly, a lot of benefits as we do that and allowing us to give them quicker response times and less downtime ultimately. So we are very focused on that. We have been for a long time, We like that that we have seen that growing, you know, additional energy around that. Strategy, again, from other dealers and from CNH collectively, And we are going to continue to push on that. You asked how we are sitting now. So that is that six of 15 obviously brings us to just over a third in Australia. And we are going to keep pushing there. We are just about a third in The US, and, we will keep doing the same there. And then in Europe, again, you are seeing that in kind of the earlier stages. So working hand in hand with CNH, in Germany, in that case, we ended up selling, and we will look to again, in other areas be a buyer as continue to move around here, and we leverage that strategy. So that is also part of, again, our strategic strategic plan as we get some dry powder ready here and look to continue to execute on that strategy in coming years. Ted Jackson: Okay. Hey. Thank you very much for taking my questions. Bryan J. Knutson: Thanks, Ted. Operator: Thank you. Our next question comes from the line of Steve Dyer with Craig Hallum Capital Group. Matthew Joseph Raab: Hey. Thanks. This is Matthew Joseph Raab on for Steve. Just want to go back to the government payments. Are you starting to see flow through to your farmers in the footprint, or is it just too early to tell? And then I guess with that, was there any impact in the quarter or on order books given those payments? Bryan J. Knutson: So earlier in the year, they received some and then they received a little bit more in, early summer. And then as we speak, they are receiving a little bit more, which is the final 15%. They receive the 85% of some of the first assistance back in approximately June. And now they are receiving the last of that. However, you know, there was up to nearly $10 billion discussed for soybean assistance. We have not seen that yet. You know, there is a verbal agreement with China to that would potentially return them to about 25 million metric tons annually, which is about what they have historically produced, that is about in line with their five-year average. So you know, we will see if, if it looks like they are going to execute on those purchases, then maybe we see, prices come up and those funds do not need to come through. And vice versa. So I think the government will continue to monitor that. Again, as we look at what is left here for 2025, not optimistic about a lot more getting into our growers' hands other than what is already in motion. But certainly for 2026, I think there is a lot to look at there, when you look at the pricing levels of where they are at today, especially with the current price of wheat and corn and soybeans as an example. But really, generally, most of the commodities are pressured right now. And, again, it does come back to that supply and demand ratios. Matthew Joseph Raab: Understood. Thank you. And then, on the footprint optimization, and then really thinking about Germany, Maybe, Bo, any sense you can give us in the overall contribution Germany was to the Europe segment from the top and bottom line? Standpoint? And then I guess with that any is that enough to move the needle as we think about next year? And what that could mean from a sales perspective? Bo Larsen: Yeah. So overall, for Germany, over the last several years, they have averaged roughly $40 million low forties million top line. And pretax loss of somewhere in the, you know, $4 to $6 million range. So beneficial to transition that off from a bottom line perspective. In the context of our total whole goods revenues you know, not a not a massive impact there. Matthew Joseph Raab: That is great. Thank you very much. Operator: Thank you. That concludes our question and answer session. I will turn the floor back to management for any final comments. Bryan J. Knutson: Well, thank you, everybody, for your time this morning, and we look forward to updating you on our next call. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, everyone, and welcome to Burlington Stores, Inc. Third Quarter 2025 Earnings Webcast. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Mr. David Glick, Group Senior Vice President, Investor Relations. Please go ahead. David Glick: Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 third quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until December 2, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $11 million and $0 million, respectively, during the fiscal third quarters of 2025 and 2024 and $28 million and $9 million, respectively, for the first 9 months of 2025 and 2024. Now here's Michael. Michael O'Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 4 topics this morning. Firstly, I will discuss our third quarter results. Secondly, I will review our updated fourth quarter and full year guidance. Thirdly, I will provide some early thinking on the outlook for 2026. And lastly, I will comment on the progress we are making towards our longer-range financial goals. Then I will turn the call over to Kristin to provide additional details. Okay. Let's start with our Q3 results. Total sales increased 7% in the third quarter at the high end of our guidance. This was on top of 11% sales growth last year. This means that year-to-date, total sales have increased 8% on top of 11% year-to-date growth last year. Comp store sales for the third quarter increased 1%. We started the quarter well with a strong back-to-school trend, but in September, we saw a significant drop-off in traffic to our stores, driven by warmer-than-usual weather. As we have discussed previously, we have very strong brand equity in outerwear. Many shoppers still think of us as Burlington Coat Factory. Outerwear is a great business and a source of competitive strength. But this means that in Q3, our comp trend is very sensitive to weather, much more so than competitors. In some years, the impact is positive. In some years, it is negative. This year, it was negative. That said, in mid-October, once the weather turned cooler, our comp trend picked up to the mid-single digits. And that momentum of mid-single-digit comp growth continued through the first 3 weeks of November. Finishing up on Q3, I would like to comment on earnings. Despite the weather-driven slowdown in our sales trend in Q3, we still delivered margin expansion that was well ahead of last year and earnings growth that significantly beat our guidance. It's worth calling out that this was despite the considerable headwind that we faced from tariffs. Moving on to the fourth quarter. We are maintaining our previously issued comp store sales guidance of 0% to 2%. We feel good about our recent trend, but it is still early in the quarter. And in the coming weeks, we'll be up against very strong comparisons from last year. So it makes sense to remain cautious. That said, given the strong margin and expense trends that we are seeing, we are increasing our Q4 margin and EPS guidance. To be clear, we are adjusting our full year 2025 earnings guidance, passing along all of our beat to earnings in Q3 and factoring in our higher Q4 earnings outlook. I would like to call out that we started this fiscal year with EBIT margin guidance of flat to up 30 basis points. Our updated full year 2025 guidance now calls for expansion of 60 to 70 basis points. This is despite pressure from tariffs, and it is on top of 100 basis points of margin improvement in 2024. We are excited about the progress we are making on margin expansion. I will return to this topic in a few moments when I talk about our longer-range financial goals. But first, I would like to share our initial thoughts on the outlook for 2026. We are early in the budget process, but as a starting point, we are planning for total sales growth in the high single digits. We now expect to open 110 net new stores in 2026. This is higher than previously discussed, and it reflects the strength of our new store pipeline and the performance we are seeing from new stores. We are excited for these new store openings. For comp sales, we are assuming growth of flat to 2% in 2026. This should sound familiar. It is our typical off-price playbook. There is significant economic uncertainty, and we do not know how this might affect our business in 2026. So we will plan our business conservatively at 0% to 2% comp sales growth and then be ready to chase if the trend is stronger. In terms of operating margin expansion, for budgeting purposes, we are assuming that at 2% comp growth, our operating margin would be flat versus this year, then 10 to 15 basis points higher for each point of comp above 2%. Before I turn the call over to Kristin, there is one more topic that I would like to talk about. I would like to provide an update on our longer-range financial goals. As a reminder, 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income in 2028. The headline is that we feel good about the progress that we are making toward this goal. We are tracking in line with where we thought we would be at this point. We are especially pleased with the progress we have made in driving operating margin. This means that at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And of course, we will have achieved this despite the negative headwind from tariffs. Apart from margin expansion, the other drivers of our long-range financial model are new store sales and comp store sales growth. On new store sales, we are even more bullish now about our new store opening program than we were 2 years ago. Originally, we had assumed that we would open 100 net new stores a year in the period 2024 to 2028. In fact, this year, we will open 104. And in 2026, we are now planning to open 110 net new stores. Based on our new store pipeline, there is a possibility that we could sustain or even exceed this stronger pace of new store openings. The other major driver of our long-range model is comp sales growth. As I discussed in the context of our Q3 results, leaving weather aside, we feel good about the underlying comp trends that we are seeing. We believe that we can achieve average annual comp sales growth in the range of 4% to 5% over the remaining years of the long-range plan, in other words, between now and 2028. Of course, we recognize there are a lot of external variables that can affect comp growth. So in the nearer term, as we always do, we will plan our business conservatively and then chase. Now I would like to turn the call over to Kristin to review our Q3 results, updated 2025 guidance and high-level outlook for 2026 in more detail. Kristin? Kristin Wolfe: Thank you, Michael, and good morning, everyone. I will start with some additional color on Q3, then I will talk about our updated guidance. Lastly, I will comment on our initial outlook for 2026. Starting with the third quarter, total sales grew 7%, while comp store sales increased 1%, both within our guidance range. As Michael described, our comp trend in the third quarter fell off significantly after the back-to-school period, driven by warmer weather, but then picked up to mid-single digits in mid-October. The gross margin rate for the third quarter was 44.2%, an increase of 30 basis points versus last year. This was driven by a 10 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses. Moving down the P&L. Our Q3 product sourcing costs were $214 million versus $209 million in the third quarter of last year. Product sourcing costs decreased 40 basis points compared to last year. This was primarily driven by leverage in supply chain through continued cost savings and efficiency initiatives. Adjusted SG&A costs in Q3 levered 20 basis points versus last year. This leverage was primarily achieved in store-related costs. Our store teams drove significant leverage in store payroll through numerous efficiency and productivity initiatives. Q3 adjusted EBIT margin was 6.2%, 60 basis points higher than last year. This was well above our guidance range of down 20 basis points to flat. Our Q3 adjusted earnings per share was $1.80, which came in well above our guidance range. This represents a 16% increase versus the prior year. At the end of the quarter, comparable store inventories were down 2% versus the end of the third quarter of 2024. Let me provide a little more context here. In Q3, we saw a significant slowdown in our comp trends, a weather-driven slowdown. But using our merchandising 2.0 tools, our planners and merchants were able to react very quickly to adjust receipts, especially in cold weather categories. So despite the slowdown, our store inventories are well balanced, current and very clean going into the fourth quarter. Moving on to our reserve inventory. Reserve inventory was 35% of our total inventory versus 32% of our inventory last year. In dollar terms, reserve inventory was up 26% compared to last year. We are pleased with the quality of the merchandise and the values and brands that we have in reserve. And as a reminder, we use reserve inventory as ammunition to chase the sales trend. For example, our reserve includes great outerwear buys that we made earlier this year that we've been pulling out over the last few weeks to fuel the trend since the weather turned cold in mid-October. We ended the third quarter with approximately $1.5 billion in liquidity. This consisted of $584 million in cash and $948 million in availability on our ABL. We had no outstanding borrowings on the ABL at the end of the quarter. During the third quarter, we repurchased $61 million in stock. And at the end of the quarter, we had $444 million remaining on our repurchase authorization. In Q3, we opened 73 net new stores, bringing our store count at the end of the quarter to 1,211 stores. This included 85 new store openings, 10 relocations and 2 closings. We now expect to open 104 net new stores in fiscal 2025, up from our original estimate of 100 net new stores. Now I will turn to our outlook for the fourth quarter and full year for fiscal 2025. We are maintaining our fourth quarter fiscal 2025 guidance for comp sales and total sales. We are guiding comparable store sales to be flat to up 2%, with total sales to increase 7% to 9% for the fourth quarter. We are raising our adjusted EBIT margin and adjusted earnings per share guidance for the fourth quarter. We now expect our adjusted EBIT margin to increase by 30 to 50 basis points. This margin outlook now translates to an adjusted earnings per share range of $4.50 to $4.70, an increase of 9% to 14% versus the fourth quarter of last year. For full year fiscal 2025, after factoring in our actual Q3 results and our improved outlook for Q4, we expect comp store sales growth of 1% to 2%, total sales to increase approximately 8% and EBIT margins to range from an increase of 60 to 70 basis points. As Michael noted earlier, this fiscal 2025 EBIT margin guidance is 40 basis points higher than our original full year guidance at the high end, and this is despite the significant pressure from tariffs. Finally, factoring in Q3 actuals and updated Q4 guidance, adjusted earnings per share are now expected to be in the range of $9.69 to $9.89, an increase of 16% to 18% for the full year 2025. Finally, I would like to touch on our preliminary FY '26 outlook. We are in the early stages of the budgeting process, so this could change. But at this point, we are planning on total sales growth in the high single digits. We are assuming at least 110 net new stores, and we're planning comp store sales in the range of flat to up 2%. For operating margin, as Michael said, we are assuming that at a 2% comp growth, our operating margin will be flat to this year, and we expect leverage of 10 to 15 basis points for each additional point of comp. And now I will turn the call back over to Michael. Michael O'Sullivan: Thank you, Kristin. Before I turn the call over to the operator for your questions, I would like to summarize a few of the key points from today's call. Firstly, Q3 was impacted by warmer weather in September through early October. Once the weather normalized, our trend improved to mid-single-digit comp growth. And we are off to a strong start to Q4 with comps up mid-single digits for the first 3 weeks of November. Secondly, we are pleased with our margin trends. We are updating our full year 2025 guidance to reflect the earnings beat in Q3 as well as our improved earnings outlook for Q4. At this point, we are maintaining our previously issued Q4 comp guidance of 0% to 2%. Thirdly, we are pleased with how we are tracking towards our long-range financial goals, especially the pace of margin expansion. And within this long-range financial plan, we think there may be additional upside in terms of our new store opening program. Now I would like to turn the call over for your questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan. Matthew Boss: So on relative performance, your comp this quarter came in below both of your off-price peers. This is a clear reversal from results in the second quarter and over the last year. Clearly, you cited weather was a factor, but how concerned are you by this change in your relative comp versus peers? Michael O'Sullivan: Thank you for the question. You're right. Just to lay out the facts, we ran a 1% comp in Q3. Our peers were 6% and 7%, very impressive. That's a very significant difference. I can't give you a complete bridge, but at a high level, let me try and dissect that gap. I'll start with the obvious. We know that weather was the biggest driver of our slowdown in Q3. That's not an excuse, but it is a partial explanation. We changed our name some years ago, but shoppers still call us Burlington Coat Factory. So mild weather in September and October has a huge impact on our business. This is a real thing, and it is unique to us, I think, versus our peers. Now in September and October, cold weather merchandise balloons to more than 20% of our assortment. In the third quarter, our comp sales for ladies and men's coats, jackets, boots and cold weather accessories, all these important categories were down double digits. Now they bounced back in mid-October once it turned cold. But by then, it was too late to really drive the quarter. Let me go a little further and try to quantify the weather impact on our comp in Q3. If you strip out the drag on our overall comp from cold weather categories, the categories I just listed, and if I make an adjustment for the impact that lower weather-related traffic had on the rest of the store, then I can get to the low end of a mid-single-digit comp. In other words, I do not get to 6% or 7% comp. So in my view, weather only explains half of the gap versus peers. Now usually, in off-price, when your comp is lower than your peers, it's just the customer telling you that they preferred the value and the assortment that they found elsewhere. In the second quarter, when we ran a 5% comp growth ahead of our peers, the customer was voting for us. But in Q3, that changed. And we have some hypotheses on why, but we have more work to do to really tear that apart and then aggressively go after that performance difference. But before I leave the question, let me just call out a silver lining. The comp numbers that our peers have just reported reaffirm that the off-price shopper at all income levels is alive and well. Leaving aside the weather, the major implication for us is that we need to take better advantage of that than we did in the third quarter. Matthew Boss: Great. And then, Kristin, as a follow-up, could you provide more color on the 60 basis points of operating margin expansion in the quarter, particularly just given as we think about the pressures that you faced from tariffs and the 1% comp? Kristin Wolfe: Matt, thanks for the question. Yes, first, it's worth reiterating that we really are pleased with the 6.2% operating margin in the quarter, up 60 basis points versus last year on a 1% comp, as you noted in your question. Let me provide the major puts and takes. Starting with gross margin. First, our merchandise margin increased 10 basis points. And within merchandise margin, there was a lot going on. Tariffs had a negative impact on markup, but we were able to offset this impact through numerous actions such as negotiating with our vendors, adjusting the mix and driving a faster turn. The net impact of all this was much more favorable than we originally guided back in August. This was really driven by our tariff mitigation strategies. Now staying in gross margin, freight levered by 20 basis points. This was due to greater efficiencies and cost savings initiatives, particularly in transportation. So our overall gross margin increased 30 basis points versus the third quarter of last year, all this despite the impact from tariffs. On product sourcing costs moving down the P&L, we drove 40 basis points of leverage here. This was driven by supply chain and efficiency initiatives in our DCs. We're excited about the consistent progress we've made in streamlining our supply chain costs. And moving on to SG&A, we showed about 20 basis points of leverage here on a 1% comp, and this was driven by efficiency initiatives in stores such as speeding up checkout times at point of sale. Offsetting this leverage was higher depreciation, which delevered about 20 basis points, driven by increased CapEx in supply chain and new stores. So taken all together, this drove the 60 basis points of EBIT expansion in the quarter. Operator: Next question comes from the line of Ike Boruchow of Wells Fargo. Irwin Boruchow: I guess my question kind of piggybacking off of Matt's. So the comp growth in Q3 was lower than peers, but the margin and earnings were actually pretty much better. How should we reconcile that? And then really more importantly, are there choices that you made during the quarter that may have driven the higher margin in Q3 at the expense of sales? Michael O'Sullivan: Well, I'll take that, Ike. Thank you for the question. It's a good question. I think the direct answer is yes. There were decisions or choices that we made that helped drive our margin in Q3, but may have had a negative impact on our sales. And I'll give you a couple of examples, but maybe I should just preface what I'm going to say with a couple of points. Firstly, our margin and earnings performance in Q3 was very strong. Margins were up 60 basis points and adjusted EPS grew 16%. We've also taken up full year earnings guidance. In other words, we've rolled right over tariffs. Secondly, on comp sales, to reiterate, the biggest driver of the slowdown that we saw was weather. If I adjust our comp for weather, we probably would have been pretty happy with the outcome. But as I explained a moment ago, that only explains half of the gap between our 1% comp growth and our peers' 6% and 7% comp. So if I come back to your question, yes, there were choices that we made that might explain our relatively strong margin and earnings performance and our weaker comp growth in Q3. Now these were choices that we made as part of our tariff mitigation strategies. And let me describe two specific examples. When -- firstly, when tariffs were introduced -- first introduced, we reduced our sales and receipt plans for categories where the margin impact was too significant. We did not feel like we could raise retails in those categories, and we did not want to accept the margin compression. That meant that in some businesses, especially some categories in home, our inventory levels and assortments were -- they were very light in Q3. And we saw that in terms of the sales in those categories. The sales were lower. Now that wasn't an error. It was a deliberate decision. I would say it was an economically rational decision, and it worked. It may have hurt sales, but it drove our earnings in Q3. Now I should add that as tariff rates have come down, we've gone back and we've taken up sales and receipt plans in most of the categories that were affected. So I would expect this impact to be less significant in Q4. A second example, as Kristin described a moment ago, another step that we took to help offset tariffs was to trim inventory levels in many businesses across the store and force a faster turn. Again, this helped to offset the margin pressure from tariffs. Now we only really took that step in Q3, not in Q4. We already turned very fast in Q4. So we didn't want to try and force a faster turn going into holiday. But again, in Q3, that approach drove earnings, but it may have hurt sales. So -- for both of the examples I've just given, at a high level, those decisions worked. We fully absorbed tariff pressure on our margin, and we drove very strong margin and earnings growth in Q3. And all this happened actually despite a slowdown in comp sales due to weather. Normally, a slowdown like that would drive deleverage. Anyway, with that said, we really need to do a full after-action assessment on Q3. Now that we have our competitors' comp results, we need to go back and hindsight our performance and identify anything we could have done or should have done differently. Irwin Boruchow: Got it. And then maybe, Kristin, just to elaborate maybe a little more on the 2026 initial outlook, key risk opportunities in the outlook, anything else you could share? Kristin Wolfe: Yes. Great. Thanks, Ike. We're still -- it's still somewhat early in the process. We're actively working through the budget for 2026. But let me give some headlines or how we're thinking about it. The outlook for next year is pretty hard to predict with significant economic and political uncertainty that could absolutely affect consumers' discretionary spending. There are potential tailwinds like the possibility of higher tax refunds in the early part of next year. And then there are potential headwinds like tariff-driven price increases, which could put additional inflationary pressure on our core customer. Michael spoke to this earlier, but given this uncertainty, we're planning to stick with our off-price playbook. That really means planning comps at flat to 2% and positioning us to chase the trend if it's stronger. In terms of new stores, we mentioned this in the prepared remarks, but it's worth reiterating, we feel very good about the new store pipeline. We are planning to open at least 110 net new stores in 2026. So combined with our comp guidance, this should drive a high single-digit increase in total sales. On the operating margin side, as we said, we're modeling operating margin flat to last year at the 2% comp. We do expect 10 to 15 basis points of leverage for every point above a 2% comp. And then there's a couple of things in the margin, a couple of puts and takes. We are planning for slightly higher merch margin as we look to offset any impact of tariffs, particularly as we lap the fall season next year. We're planning for continued supply chain productivity gains next year, but there will be offsets here due to the start-up costs and the initial ramp-up of our new Southeastern distribution center, which we plan to open in the first half of 2026. And finally, we do expect fixed cost leverage on the high single-digit total sales growth, but we also are expecting higher depreciation, which creates deleverage. The higher depreciation is really due to the higher CapEx spend in supply chain and our increased number of new stores. Those are really the main call-outs for 2026 at this point. Operator: Your next question comes from the line of Lorraine Hutchinson of Bank of America. Lorraine Maikis: Michael, one of your off-price peers is accelerating comps with more focus on marketing, more in-store inventory and a store refresh. Do you see any risk that Burlington will lose market share? Michael O'Sullivan: Lorraine, thank you for the question. It's a good question. I'm going to avoid talking about any specific competitor, but I think I can still try to answer your question maybe in more general terms. I'll start by saying that actually, we like innovation and fresh ideas. We believe in off-price retail. And anything that drives off-price awareness and excitement is a good thing. In fact, I'd go further and say that a strong off-price sector is important for us. So it's good that our off-price peers are achieving very strong results. But your question was more about potential risks to Burlington. So let me come at it from that angle. I think there are 2 important points that I would make here. Firstly, when we talk among each other -- to each other and when we talk to analysts and when we talk to investors, I think we sometimes talk about off-price as if it were a separate isolated ring-fenced segment of retail. But the customer does not think of it that way. The customer does not respect the boundaries of off-price. If she needs a pair of pants or a dress, she might shop Burlington or one of our off-price peers. But we know from our own research that she also cross-shops department stores, specialty retailers. In fact, any retailer where she likes the assortment, she doesn't care about our off-price business definition. She just cares about finding a great deal and great value in the categories, brands and styles that she's looking for. Now if you're an off-price -- if you're an investor in off-price, I think it's very important that you understand this. This is not like the retail market for office supplies. We aren't 3 companies just scrapping it out for market share in a limited space called off-price. It's bigger than that. We compete in a very large and competitively fragmented market for apparel, accessories, shoes, home, beauty and so on. Off-price is really just a small part of that overall market. Our opportunity is to take share from non-off-price retailers. That's what has been happening over a long period of time. So I mean, just to bring it up to -- just to throw in some numbers, today, we announced 7% total sales growth in Q3 on top of 11% growth last year. At those growth rates, it's self-evident that we are taking market share, but so are our off-price peers. These share gains are not coming at the expense of each other. Mathematically, that wouldn't be possible. These share gains are coming from non-off-price. And I think that the shift from traditional full-price retail to off-price is unlikely to end anytime soon. So that's the first point. The second point I would make is that despite everything I've just said, I think it's very important and useful for us to pay close attention to our off-price peers. They matter. They operate a similar business model to us. They've been very successful over the years, and we can learn a lot from them. So if our off-price peers come up with new ways of doing things, new processes in stores, new innovative marketing programs, then we need to pay close attention. Now not all of those ideas will work, of course. And certainly, not all of them will make sense for us, but we need to be open to new ideas that could help drive our business and actually drive off-price retail in general. Let me finish up. Again, your question was about risk to Burlington. Right now, I see off-price as a whole as being very healthy. For 2025, we now expect to grow total sales by 8% on top of 11% last year. And at the high end of our guidance, we now expect to achieve EPS growth of 18% on top of 38 -- sorry, 34% last year. Those are -- by any metric, those are very healthy numbers. I anticipate that our off-price peers are going to be successful, too. But I don't see that as a risk. In fact, it's better for us if the off-price segment as a whole continues to perform well. Lorraine Maikis: And I wanted to follow up on pricing. Did you take price in 3Q? And what impact did that have on your comp? And then what's your strategy on pricing for the fourth quarter? Michael O'Sullivan: Yes. That's a good question. I would sum up our pricing strategy in 3 words. Be very careful. We recognize that because of tariffs, prices are going up across the retail industry, but we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases. We've said this many times before, we have a very price-sensitive customer. We know that the reason that they shop at Burlington is that they're looking for a great deal. Our core strategy is to offer great value. And of course, that means keeping prices low. Now our approach to tariffs this year has been to avoid retail price increases and to focus instead on finding other margin and expense offsets. Kristin described those actions earlier. We're very pleased with how that approach has worked. It's allowed us to avoid price increases, but still to grow margin and earnings this year. Now of course, we have tested some things. We've tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories. But I would say that those pricing tests were in a very limited number of areas. And mostly the higher retails worked. We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And also, of course, we need to see what happens with tariff rates going forward. Operator: Your next question comes from the line of John Kernan of TD Cowen. John Kernan: Michael, sounds like you see an opportunity to take up the number of new store openings and the cadence of growth. Can you expand a bit upon this? What are you seeing in terms of the new store pipeline, both from a real estate perspective and also potential new store productivity? Kristin Wolfe: John, it's Kristin. I'll take this one. We're really pleased with the performance of our new stores across the board, they've been delivering results that are in line or better than expectations as well as our financial hurdles. It really reinforces the strength of our site selection process and the appeal of Burlington really across markets. And it's worth pointing out just some data. Our Q3 comp, of course, was at the midpoint of our guidance, but our total sales growth in Q3 was at the high end of our guidance, up 7%, and this was driven by new stores. And based on our Q4 guidance, our total sales increase is planned at 9% at the high end as we benefit from the slew of new stores we just opened in the third quarter, 73 net new. Now as I mentioned in the prepared remarks, we now expect to open 104 net new stores this year. This is a modest step-up from our original plan of 100 net new. And this increase reflects really two things. First, the ability to pull forward some openings that were originally slated for 2026; and secondly, the strength of our real estate pipeline. Looking ahead to 2026, we're raising that new store target to at least 110 net new stores. This is supported by this robust pipeline, but also by 45 leases we secured from the Joann Fabrics bankruptcy. These incremental sites really give us confidence in sustaining the high level of growth next year. And as for the pipeline for 2027 and beyond, it's still early to provide specific numbers, but I will say we feel very good about the long-term opportunity. Our real estate team continues to identify attractive locations, and we already have a very healthy pipeline for new stores beyond 2026. John Kernan: Got it. Maybe as a follow-up, obviously, all 3 off-price retailers are resonating strongly with consumers. I liked how Michael framed the industry's opportunity. You're clearly feeling more bullish on the number of stores, maybe a little bit more cautious on comp sales, but more bullish on the potential margin expansion potential for the business. Is that the right way to think about it? Kristin Wolfe: Great. Yes. John, thanks for that question. It's a good question. So 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income by 2028. The headline is that we feel very good about the progress we're making toward this goal. We're tracking in line with where we thought we would be at this point. And we're especially pleased with the progress we made in driving operating margin at the high end, Michael said this earlier, but it's worth repeating, at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And we will have achieved this despite the negative headwind from tariffs. So really, to sum up, we're pleased with the progress. But the way you characterized the long-range model and your question is about right. It's true, we're more bullish on new stores, and we are more bullish on margin expansion. On the comp, we still believe we can drive an average annual comp growth of 4% to 5% over the remaining 3 years of the long-range plan, but we recognize that there is external uncertainty, so we are slightly more cautious here. Operator: Question comes from the line of Brooke Roach of Goldman Sachs. Brooke Roach: Michael, I'd like to ask you about the trends that you're seeing with the lower income customer. How did these customers perform in the third quarter? And are there any other callouts in terms of customer demographics that are worth sharing? Michael O'Sullivan: Brooke, thank you for the question. The headline is that we feel very good about the lower-income customer. We've been -- and the trends that we're seeing with that demographic. We've been watching this particular demographic segment very closely all year. This is a critical customer for us. Given the economic uncertainty and the cost of living issues, we've been concerned about lower-income customers. But the good news is that this customer has been very resilient. When we look at our stores in lower-income trade areas, they continue to outperform the chain. This has been true for several quarters now. I should say, as we listen to other retailers, it seems like this is a consistent pattern. Many retailers are reporting strength with lower-income consumers. There is -- in terms of other demographic call-outs, there's one other call out, specifically relating to Hispanic customers. Again, we've been watching this demographic very closely all year. It's an important customer for us. We have many stores across the country that are in trade areas with a high proportion of Hispanic households. You may recall that in previous quarters, we've said that our stores that are in trade areas with a high proportion of Hispanic households have been slightly outperforming the chain in terms of comp growth. While in Q3, the trend in those stores slipped. They've gone from slightly outperforming the chain to trailing the chain. Now the change in trend for those stores varies a lot depending on the specific market and even the specific or the particular location of the store. In other words, it's very localized to what's happening in those particular cities. And of course, it's difficult for us to say how long those localized slowdowns might last. Brooke Roach: Great. And then my follow-up would be for Kristin. Kristin, can you give us more color about your guidance for the fourth quarter, both in terms of comp sales and for earnings? Kristin Wolfe: Brooke, thanks for the question. Sure. Let me repeat a little bit. I think it's worth reiterating some of what we described earlier. On comp store sales and total store sales, we're maintaining our Q4 previously issued guidance. So comp of flat to 2% and total sales growth of 7% to 9%. We do, as we said, feel really good about our recent trend in Q4, but it's still early in the quarter. The critical weeks are ahead of us. And in those coming weeks, we'll be up against very strong comparisons from last year. So we'll continue to take a cautious approach on sales. On the margin side, we are increasing our margin and EPS guidance for Q4. We now expect our Q4 adjusted EBIT margin to increase by 30 to 50 basis points. We do anticipate some tariff-driven pressure on merch margin in Q4 but we expect to more than fully offset that pressure and drive overall operating margin expansion in Q4 versus last year. And the drivers of the margin leverage should largely be similar to what we saw in Q3. We expect continued cost savings in freight and supply chain and in store-related initiatives. And finally, we should also see additional leverage in SG&A given the higher incentive comp accrual in the fourth quarter of last year. Operator: The question comes from the line of Alex Straton of Morgan Stanley. Alexandra Straton: Michael, can you talk about the availability of off-price merchandise as you're heading into the fourth quarter? And then I have a quick follow-up. Michael O'Sullivan: Yes. Alex, thank you for the question. I would characterize the buying environment for off-price as very, very strong. Earlier in the year, when tariffs were first introduced, there were some concerns, a lot of concerns about whether vendors would be reluctant to bring potentially excess merchandise into the country. But frankly, those concerns have just not materialized. Even some of the categories where supply was tighter in the summer, categories like housewares and home also housewares and toys have come back. I think that's probably pretty consistent with what you've heard from our off-price peers. There's a lot of great merchandise at great values, and we're taking advantage of it, both to flow to stores and to build up reserve. Alexandra Straton: Perfect. And then just on the cold weather merchandise in the quarter. Is there any just additional detail you can provide on that dynamic, the impact on the overall comp for the chain? I know you've given a lot of details, but anything else worth highlighting there? Michael O'Sullivan: Sure. Yes. Yes. So after back-to-school, the cold weather merchandise becomes very important to our mix. As I said earlier, it expands to more than 20% of our total assortment during the quarter. Now cold weather merchandise, just to define it, includes categories like coats, jackets, boots and accessories like gloves and scarves. So it's only stuff you need if it's cold outside. And our customer is very need-driven. For September through mid-October, our comp sales in those businesses were down in the negative mid-teens. Then in the last 2 weeks of October, once the weather turned cold, they grew up double-digit comp. Maybe if I step back for a moment, there are 2 ways in which milder weather in September and October affects our business. There is the direct drag on our overall comp growth from lower sales in the cold weather categories that I just mentioned. That's one impact. But there is also an impact on our non-cold weather businesses because if you think about it, if the customer comes in to buy a coat, she's probably going to put some other things in the basket, too. So if -- because the weather is mild, she doesn't come into the store to buy that coat, then this doesn't just hurt our coat sales, it impacts other businesses as well. Now mathematically, the drag on our overall comp from cold weather categories alone was worth about 200 basis points in Q3. If you then add the impact that lower traffic had on other non-cold weather categories, you can easily get up to a few points of comp. And I think that's somewhat consistent with the fact that we saw a bounce back to mid-single-digit comp growth in the second half of October once the weather had turned cold. Operator: Your last question comes from the line of Mark Altschwager of Baird. Mark Altschwager: Kristin, could you give us some more detail on regional trends, category trends as well as any of the detailed comp metrics for Q3? Kristin Wolfe: Mark, yes, absolutely. In terms of regional performance, the Southeast was our strongest region in the quarter. The West, Northeast and Midwest were in line with the chain, while the Southwest trailed the chain. On category performance, we saw the strongest performance in beauty, accessories and shoes. Apparel comp slightly above the chain, while home was softer, comping below the chain in Q3. In terms of the comp metrics, our traffic was down in the third quarter. That was largely driven by September and early October when weather was unseasonably warm. And this lower traffic was offset by a higher average basket size. So for the quarter, we were pleased to see that both conversion and basket size or average transaction size were higher than last year. So this tells us that once she's in the store, she liked what she saw. Mark Altschwager: Excellent. And then, Michael, as we look at the Q4 comp guidance, do you view that as conservative just given typically less weather sensitivity in the fourth quarter? Michael O'Sullivan: Mark, sometimes when we give comp guidance, we'll also sort of signal, if you like, if we think there may be upside. I don't think -- I don't see a lot of upside in our Q4 comp guidance. The reason I say that is that we're up against 6% comp growth from Q4 last year, so 6%. If you take our 0% to 2% guidance, that gets you to a 2-year stack of 6% to 8%. Now we exceeded that in Q2 of this year, but we were well below it in Q3. I should also add that when I look at our off-price peers, the way I'm interpreting their guidance, it looks like they are slightly below us on a 2-year stack basis. So even though we're happy with our recent trends and with how we started the quarter, and we're excited for our holiday assortments. We're not anticipating significant upside to our Q4 comp sales guidance at this point. Operator: I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks. Michael O'Sullivan: Let me close by thanking everyone on this call for your interest in Burlington Stores. We would like to wish you all a very happy Thanksgiving. We look forward to talking to you again in March to discuss our fourth quarter and full year 2025 results. Thank you for your time today. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Thank you for standing by, and welcome to the Web Travel Group Limited First Half FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. John Guscic, Managing Director. Please go ahead. John Guscic: Thank you, Harmony. Good morning, everyone. Welcome to the Web Travel Group results for the first half of FY '26. Joining me today is our CFO, Tony Ristevski. Grab your ticket and your suitcase, thunders rolling down the tracks. Web knows where it's going, and we know we'll never go back. Investors, if you're weary, lay your head upon my chest. We'll take what we can carry, and we'll leave the rest. Big Web rolling through fields where sunlight streams, meet me in the land of hope and dreams. Welcome, guys. We said that we would deliver world-class growth in FY '26, and we said that margins would stabilize. And we've done both things. If you go to Slide 3, you'll see that our TTV is up 22%. Our margin is at 6.5%. We'll talk about how we get there and the construct in a second. EBITDA for the group is up 17%. If we break it down to the underlying performance of WebBeds, TTV of $3.2 billion, up 22% on the first half of '25, revenue of $204.6 million, up 20%, EBITDA of $94 million, up 21% on the corresponding period. We've maintained market-leading TTV growth rates while maintaining margins. Revenue is a reflection virtually identical with TTV and EBITDA is up almost exactly the same. We'll go through the construct of how that all transpired in a second. If we get to the overall group performance, underlying EBITDA is up $81.7 million after corporate costs of $12.3 million. NPAT is $48.6 million, and we continue to skew out cash at a rate well above our contemporaries where we're up circa $120 million in the year. CapEx is in line with our expectation at $18.6 million. And our cash position is exceptionally strong, notwithstanding that we spent $150 million on buying back shares in the second half of the last financial year. What we have done is to provide greater flexibility is increased our undrawn revolver credit facility from $40 million to $200 million. Moving through to our key metrics. I've covered most of these, but bookings at 5.70 million, TTV at $3.17 million. In both cases, we're seeing strong organic growth in all regions. And our bookings and TTV combination reflects the expansion of the network in which -- or the distribution network in which we participate in both various geographies and various channels that have all expanded during the first half of '26. Record revenue at $204.6 million and record EBITDA at $94 million, obviously, reflecting our revenue growth as well as our planned increase in operating expenses as we future-proof our business to maintain the margin levels that we are currently delivering and expect to deliver for the foreseeable future. Let's go through the highlights. Bookings up 18% across all regions. TTV up 22%. Revenue, 20%, expenses up 19%. That's reflecting CPI increases, the reintroduction of the bonus scheme, which we didn't get paid in FY '25, as well as the previously flagged investment in hotel contracting. In functional currency, we expect expenses to go up in high single digits. We'll talk a little bit about the functional currency in a little while as we go through what has transpired. EBIT is up 21%. We said at the start of the year, we reaffirmed during the AGM that EBITDA margins will be between 44% and 47%, and we are at 45.9%. So let's get into a little bit more of the detail of what we've been able to deliver. As those who are familiar with the business are aware that we carve out our superior growth rate in 3 separate buckets. One is what does the market growth or system growth look like. What are we adding to the pile through new customers and through improved supply arrangements or entering into new markets. And the third is same-store sales, which we call conversion, what are we doing to increase the sales that we make from our existing customer base. So if you look at systems growth, so if you're not growing at 5%, you're going backwards against the market. We think our estimates are the overall hotel supply and distribution market grew circa 5%. We looked at our business and what's different between the first half in specific inventory that we've sold and/or specific clients that we've sold to. That accounted for about 5% of our growth. And all the rest is the singular focus of an organization of circa 1,900 employees looking to ensure that we provide the right product at the right price at the right time for our customer base and enhancing the value of our supply partners by giving them global distribution. And again, we had another standout result where we improved our conversion by another 12% in the first half of '26. All right. Let's get a little bit technical here, and we're going to have to talk about the vagaries of the FX market and how that played out for us over the year and talk specifically about the regional performance of our respective markets and how that's been translated to our functional currency. So as you can see, in aggregate, globally, our bookings are up 18%, but in the functional euro currency, we're only up 14%. This is an anomaly from this perspective. What we have seen in FY '26, as we compare the exchange rates of the euro, in particular, against FY '25 is the euro has appreciated considerably, in particular, against the U.S. dollar. The net effect of that is that at a functional currency level, we're only up 14%. At a bookings level, which is activity, we're up 18%. At Aussie dollar level, we're up 22%, and 22% is circa normal. If you had a bookings growth rate of 18%, then you would expect average booking values to go up circa 3% to 4%. So 22% is the expected outcome of bookings of 18%. How we got there is a little bit unusual. So let's go through the individual markets and call out what's actually happened. So Americans had clearly, the standout performance in the half, up 36%, a factor of, again, some great client wins and massive market share gains from existing clients driving a massive outperformance in that particular market. And yet when you translate that to euros, it's only up 27%. The vast majority of that delta is the previously mentioned exchange rate between the U.S. dollar and euro. Let's go to Europe. Europe, very strong results at a bookings level, up 14% in the most mature distribution market in the B2B landscape. That is a superior result. And perversely, TTV in euros is down 12%. And that's because there are not just the euro that we sell in Europe, we're selling GBP pounds. We're selling Scandinavian currencies, we're selling Eastern European currencies. The way we account, we've got Turkish lira in there, and all of those currencies have depreciated against the euro, which shows the 14% bookings translating to 12% at a TTV level. Okay. Let's go to APAC and strong growth, double-digit growth in APAC and TTV growing faster than bookings. That's purely a function of average booking value increasing quite significantly in APAC because there was an FX drag on many of those currencies against the euro. So we saw ABV rates of circa 5%, driving a 2% net TTV to euro improvement. And the starkest example is the Middle East, where solid bookings, 6%. They were up massively in April and May, as you will have at our full year highlights as we -- of FY '25 when we called out our respective results, they were up significantly. There's been a significant softening in the Middle East market as a consequence of the war in Israel and Gaza and the bombing in particular, of Iran and Qatar saw a significant slowdown in region of that particular, in market, and that resulted in the subdued growth. We have high conviction that our Middle East business will continue to grow at above market rates. And as we'll talk about in the forward-looking element of our presentation, as the FX exchange rate delta ameliorates over time, that will translate to double-digit TTV growth in the market. So overall, really strong performance and that's how we landed in our respective marketplaces. Moving on to Slide 9. Again, for those who have been on us for this particular journey, in particular, in the post-COVID world, you've seen a significantly streamlined business doing significantly more volume, significantly more profit with lower resources invested in that effort. So the time scale to the right shows you the history of our business. In particular, it's a proud moment for our entire organization to see that growth rate continuing at our expectation of delivering towards our $10 billion TTV target. We're on track for that particular effort. We spoke about our margin where -- we said that we would be circa a year ago, I said that we would be at least 6.5% over the next 3 half reporting periods, which is an 18-month period. We continue to be on track to deliver 6.5% not only for FY '26, but with all the things that we've done in our business for FY '27, and I'll talk about those when we get to the forward-looking statements about our business. How we get to improve margins when clearly 6.5% is less than 6.6% is during the course of the year, we sold our DMC business, which is a high-margin business, low volume. That accounts for circa 20 basis points, and we actually improved our margin across the board to deliver 6.5%. So the most simple way of looking at it is the -- we're on a run rate to circa $6 billion in TTV this year. We delivered circa $5 billion last year. And what we've done is deliver the exact same TTV plus the incremental circa $1 billion over the full year, and we've maintained margins across the entire pool of business that we've sold to, which is in line with our overarching strategy over the last 12 months of ensuring that we solidify that margin and anchor it to the 6.5% and continue to deliver superior revenue and TTV growth as we deliver across the 3 piles that I talked about, systems growth, new customer supply and markets and improved conversion. So moving on to Slide 10. We're expanding our customer base. I've had opportunities through various presentations internally over the last few weeks to reflect upon the journey that we've undertaken from a customer base. And in essence, we started as a business where we sold Dubai as a destination to the Middle East. We made a small acquisition in Sunhotels in which we sold Mediterranean beach holidays to Scandinavians, and it was predominantly through a retail channel and predominantly through a narrow focus of customers. What we've done exceptionally well over the post-pandemic recovery period is broaden out that customer mix, in particular, looking at where are the fastest-growing customers globally and how can we tap into meeting their needs as a wholesale bedbank provider. And we've done that very well, and you see the superior results, in particular, in the Americas where we're partnered with the most innovative OTAs in the region to maintain our superior growth rates. Our customer diversification extends to what I've just described in America versus the tour operator business that we provide the same offering to and the same level of success in Europe, let alone the super apps in Asia or the corporate clients that we deal with in the Middle East. So we've got a really broad portfolio of customers that we continue to expand, and we have a strong pipeline for the balance of FY '26 and into FY '27. The next element is our supply mix in which we have a renewed sense of focus over the course of the last 12 months, and it's the most important strategic focus -- sorry, most important operational focus of our business going forward. So we were unhappy with our performance in FY '25, where there was the wrong inventory being sold at the wrong prices to some of our clients. We are addressing that, in particular, with our efforts to improve directly contracting sales in Americas, in particular, where we are significantly underweight. There's an enormous opportunity for us as we play out that particular strand of our tactical initiatives, and that will continue into FY '27. The second thing that has been, again, a credit to the hybrid business model we have of directly contracted inventory and partnering with the major third-party suppliers is we've seen an increase in supply of last-minute accommodation over the course of this half. Our average booking window has compressed by circa 5%, which is material in as someone who's been in this industry for 20-odd years. So it's the most significant compression of the booking window because of the broad range of supply that we have, we're able to tap into that particular compressed booking window and our percentage of last-minute bookings is up significantly against the same period of last year. And as we continue to grow, we have increased our relevance and presence with the major hotel chains. And we've got to the -- we've got into now the consideration set of being a viable distribution partner on a semi-exclusive basis to some of the largest hotel chains in the world, and we couldn't make that claim 2 to 3 years ago. As we were a business of circa $2 billion to $3 billion, we're a long way from having the global reach and presence that we now do have. And that dialogue is changing, and there will be some considerable success stories as we roll out our chain strategy over the course of the next 2 to 3 years. Moving on to geographic mix. In a Utopian world, we think we'll have 3 equal regions of roughly 30% each between Europe, America and APAC. We're getting pretty close to that. Middle East will be circa 10% of our overall business. We will continue to grow in all regions. We are not underinvesting in any. We have high-quality individuals who are running our sourcing and sales organizations in all those regions. And that's why we continue to outperform our competitors at both the TTV and EBITDA level. One of the significant contributors, and those who have followed our story will know that Europe is our highest margin region. We have improved margins in our highest margin region. And as we've grown faster in some of those regions, it's more than compensated for that TTV margin geographic mix that would have been down with pressure on us, and it's one of the reasons why we're so confident about delivering 6.5% for the balance of this year but also into FY '27. Finally, if we talk a little bit about scalability in the biggest hat tip I can give to the operational element of our organization and the people responsible for efficiency across the entire organization. It's an incredible achievement that we're now delivering bookings at circa triple what we were doing per FTE pre-pandemic. We're up 174%, and that number will continue to expand as we deliver the multitude of initiatives that we have within our organization that enable us to leverage technology to become more relevant and embedded in our business and to drive greater efficiency. And that's, as I said, a credit to, in particular, the operations teams within our business, which are all in-house. If we move to AI, there are a number of things that we have done. In particular, we have delivered margin optimization over the last number of years through a significant investment that we have made in that particular space. We think that we have market-leading solutions there. We also have a number of other AI initiatives undertaken within the business to improve how we surface inventory, the quality of the inventory we surface and how we service that inventory once it's been sold. There's been a little bit of a conversation about most particularly in the last week or so from industry commentary about the impact of what AI tools by some of the large language models will have on our business. The short answer is that will be another growth engine for us. The most recent example is Google announced their new travel initiative. And as I've shared previously with my colleagues on this particular call, there's only one team -- one time in the history of my 14 years, I generally thought -- apart from COVID, of course, but what I generally thought we faced an existential threat was when Google Flights was launched at the top of the funnel on all Google Search to displace the existing meta providers and take and capture demand before it fell to people like Webjet back in the day. The new Google -- and if that had been -- if that had played out, you wouldn't see the success of the large OTAs globally and Webjet's continued success over that intervening 10-year period. Now there are many reasons for that because at the end of the day, in this Google AI initiative and the various others that are coming down the track that we are aware of, what they all are is fixing a specific problem. And it's a problem that we have discussed many times internally when we were Webjet is how do you improve the search experience for customers, and we now have the answer: AI makes it infinitely better than typing in a date range, number of packs and a location and hoping that the 1,000 properties in Paris come to in the sequence that you would like. So it's an incredible fill up for those businesses that have -- that will -- sorry, for consumers that will enable them to derive superior results faster and have it tracked and be able to keep a log of everything that you're looking at before you make your booking decision. But the booking decision will not be made by the AI. The booking decision, and this is straight from Google last week, the booking decision will be -- they will not be the merchant of record. They'll pass that through to their partners. They will not service the customer. They will not go through all the things that we go through to enable that to happen. And where we fit in and why this is going to be a sustainable growth channel within our organization is we feed the people who are the consumer-facing level. We feed the OTAs that are going to be partnering with them. We feed any of the other channels that they choose to partner with. So rather than being a displacement for us, we think this will continue to enable us to grow faster as we have because we have a very broad range of inventory as demonstrated by the fact that we're on track to sell $6 billion of it. And it's not going to become less attractive in an AI world. What AI will do is deliver these incredible insights to get to our inventory faster. So we're very excited about that particular initiative. Finishing off the scalability, investment in contracting staff, we think will have a meaningful impact, in particular, in Americas, where we believe our margins will go up on the back of that. And in light of the fact that 5 or 6 years ago, we were the only publicly listed company that had publicly declared data about this industry, you'll see that with new people coming into the public markets, it still remains a significantly fragmented market, which continues to create opportunities, and we will look to take advantage of those opportunities over the course of this and the next financial year. So with that, I will now hand over to Tony to go through the finances. Tony Ristevski: Thank you, John. Good morning, everyone. Can you turn to Slide 12, which is our first financial summary, the P&L. Consistent now for the better part of 7 years, we've presented the P&L in the statutory format, which is to the left and the one that's more relevant, which is the underlying format to the right. John has already gone through the key operational results as it relates to review and EBITDA for the WebBeds business. Corporate cost is the next idea there in line, and that is pretty much consistent to what I said 6 months ago, where we're on track to do circa $24 million, but I'll talk a bit a bit about that in the next slide. And our operating expenses, which we do exclude from underlying of $5.5 million for the half is really predominantly a function of a mark-to-market to the equity-linked instrument that is a function of share price. Our share price obviously at 30 September is lower than what it was at 31 March, and that resulted in a revaluation downwards, which we do exclude from the result. The other key item there to call out is our effective tax rate at an underlying level. It is on track to be around 17% for the year. But this time last year, when we were part of the enlarged Webjet Group, we had the benefit of Australian earnings to offset the corporate losses, which were incurred in root, which for this half, we don't get that benefit. So consistent with what I said 6 months ago, our effective tax rate going forward will be in the vicinity of around 17%. The other key thing to call out on the slide is, as you can see, there at an underlying NPAT level, despite the record earnings for the half. But at an NPAT level, we are down versus last year, and that is really a function of the demerger, which I'll take you through the next slide, which is quite important. So if you then turn to Slide 13. What our NPAT represents in the first half of '26 is really the stand-alone business in its post-demerger format. So if you then look to the left there of corporate expenses, being $12.3 million, if you go back 6 months ago, second half '25, the exit run rate for corporate cost was $11.1 million. So when you then look at it in the context of the $12.3 million, it's the natural progression as we stand into an individual corporate function post demerger. Then if you then go to the next item, which is depreciation and amortization, the compare is a function of the demerger allocation. But then if you look at the second half of '25, that was $13 million approximately in D&A, and that did grow up 20% into the first half into $15.5 million and on track to be around $31 million for the full year. And then if you then go to the right there with net interest and finance costs, 12 months ago, at the half, we were in a positive situation, $600,000. Then in the second half of '25, we went to a negative $4.3 million, resulting in a $3.7 million for the full year of a net expense. Obviously, in the first half, we're at $7.4 million of net expense. And that's really a function of a couple of items there. Firstly, we did upsize our revolver, which does have a cost. Secondly, we did effectively reduce our cash balance by approximately $300 million, which we're getting the benefit for, firstly, through the demerger, handing $143 million over to Webjet. And then in the second half, $150 million through the buyback. And obviously, as has been the case over the last 7 or 8 years, our option premium costs are pretty much growing in line with our TTV numbers. So all in all, we're expecting net finance costs to be around $15 million for the full year. Going on to the next slide, which is our balance sheet. Strong healthy cash number, which John talked to earlier. Our working capital, which is our debtors and creditors is consistent now as we normalize after last year, where we did have a contraction around creditor days. Debtor days are sort of around 20 days going forward and creditor days are around the mid-30s going forward. So overall, quite pleased to see that both have stabilized. And I'll talk about the cash consequences of that on the next slide. Turning to the next item of substance, which is probably borrowing costs. You would see in our statutory accounts with the convertible notes due to mature April of '26, the borrowing cost has now been classified as current as opposed to noncurrent. But equally, as you would have seen 6 months ago during the April period of '25, we did upsize our revolver from $40 million to effectively $200 million, plus we've got an undrawn facility there of another $18 million. So all in all, we currently sit around $700 million of liquidity. So to the extent that we will be looking at a potential redemption event, we are well capitalized and have a well amount of liquidity to deal with that eventuality. Lastly, on capital efficiency, the key thing there is that it has grown materially from where we were at this time last year as our earnings grow organically through the generation of cash and earnings, it has now grown to almost 22%. And when I look back over the previous slide, it is now sitting in record territory, ROIC. And that will only continue to expand as we organic grow our business into the financial year. Then I'll turn to the next slide, on Slide 15, which is talk about cash. As always, our cash comes from our profits. And then the other key element to consider here is obviously working capital. We are working capital positive in the first half, which is consistent with the trading over that summer shoulder period. You got to recall, when we look at our TTV numbers being record levels across that August, September period, we do collect that cash. And then there's an unwind of payables that typically occurs across October and November. So what you'll see consistent with past years is in the second half, we'll have negative working capital, and that will result in approximately a cash conversion number of about circa 100%. Looking down to the next items there from a financing dividend perspective. Obviously, we'll continue to invest in our business and the prospects around growth. So no dividend has been declared. Talked about cash conversion being approximately 100%. And in terms of capital management, we talked about this 6 months ago. We obviously completed the buyback in the second half, which did address 88% of the potential dilution that could come from the node. We upsized the revolver, and coupled with the cash from operations, we are well equipped from a liquidity perspective to deal with whether it's commercial or redemption come April of '26. But come May of '26, we'll be a bit more explicit around how we think about capital management going forward once that event is behind us. And lastly, on the last slide being CapEx. No surprise there. We did churn spend half-on-half as a result of the point-of-sale solution being accelerated this time last year, which is why we ended up being smaller in spend this half. Going forward, we do see CapEx to be effectively like-for-like in terms of underlying functional currency versus '26 versus '25. And then from an outlook perspective, we do see that it will grow in line with inflation. So on that note, I'll hand over to John. John Guscic: Thank you, Tony. For those who have seen the ASX announcement this morning, you'll note that Tony has resigned from our business. It's bittersweet to make that announcement. We have sat across the table from each other for 15 of these half year results and full year results update. We will, in turn, spend plenty of time celebrating everything that Tony has done with us during the next 6 months. Tony will still be with us at the full year results, and we'll give him a proper sendoff there. And in between times, he will get his regular torture from me. So thank you for everything you've done for us, Tony. Tony Ristevski: Looking forward to it. John Guscic: So let's go on Slide 18 reconfirming the financial outlook statements. As you'll see on the left-hand side, in relation to WebBeds in functional currency, we made the following promises at the AGM in August that our TTV margin would be at least 6.5%. We are on track. Expenses to grow in high single digits. We are on track. EBITDA margin is expected to be between 44% and 47%. We delivered that in the first half, and we are on track. CapEx to be in line with FY '25, as Tony just covered, on track. If we get to the mothership at Web Travel Group, corporate cost is $24 million. We're consistent with what we said in August, D&A at $31 million. That's consistent with what we said in August. Net financing costs are at $15 million, that's circa $1 million lower than what we said in August, underlying effective tax rate, 17%, full year cash conversion, 100%. So everything we said in August, we have ticked and bashed. So now I spoke earlier about the impact of the euro to USD headwinds and the AUD to euro tailwinds. As we roll forward another 6 months, we expect that to be less pronounced based on existing exchange rates. And therefore, the results in FY -- in the second half of FY '26 will be less impacted by currency fluctuations based on what has happened today. I make no forward-looking statement about what might happen with those exchange rates. Moving on to FY '26 trading update and guidance. So second half TTV up until the 21st of November, we are up 23% versus the same time this last year. So strong growth in the second half, remarkably consistent with the growth in the first half. First half was skewed to first quarter outperforming second quarter being a little bit below that number. And now we're seeing a nice rebound into the third quarter, and we expect that to continue for the full year. Our EBITDA guidance is between $147 million to $155 million. That is an increase of circa the bottom range, 22% to the top 29%, which means basically that we are delivering significantly superior EBITDA in the second half because we delivered 17% in the first half. So to get to 22% means the second half at a minimum is going to be high 20s, 27-odd, and it could be as high as mid-30s in second half performance, which goes to the conviction and the confidence of all the things I spoke about of why the business has delivered against the promise of superior TTV growth and stabilized take rate, delivering increased and superior EBITDA, notwithstanding the continued investment that we make in our business. If we move to the final slide, and we start to think of what's next year going to look like. We continue to build out our marketplace. Our marketplace continues to be more relevant for all of our major players and all of our major partners. So we see no reason that we won't be able to deliver on our TTV growth rates that enable us to get to 30 -- sorry, $10 billion by FY '30. This time last year, I said that we just delivered circa 6.5% TTV margin we would for the next 12 months. I mean in the same position today, we will deliver it for the back half of this year. We'll deliver that number again in FY '27. I've spoken a couple of times about this, but I just want to make the point that the investment that we've made this year is in our OpEx this year around contracting staff, we believe will make a meaningful impact to our results in FY '27. And WebBeds remains a highly scalable business, and we expect to deliver circa 50% EBITDA margins in FY '27. So information, Web will provide for you and will stand by your side. You'll need a good companion for this part of the ride. Leave behind your sorrows, let this day be the last. Tomorrow, there'll be sunshine and all this darkness past. Big Web roll through fields where sunlight streams. Meet me in the land of hope and dreams. With that, Harmony, we will take questions. Operator: Your first question comes from Sam Seow from Citi. Samuel Seow: Congrats on the results. Just if I could just quickly ask on that 10 basis points of improvement in the revenue margin. You called out that optimization initiatives driving the growth. Could you possibly present some color on that? Is it direct contracting? Is it something you've done in Europe there looks like? Or yes, just any color on that would be greatly appreciated? And then maybe a question for Tony. What kind of uptick do you expect purely from the accounting change in the second half? John Guscic: Thanks for the question, Sam. We have increased the proportion of directly contracted sales during the half. So that's contributed to it. We have increased pricing in some jurisdictions. And as you will have noted from previous conversations where we've been very explicit, the other 3 regions beyond Europe, operate at a lower margin. And notwithstanding that they've grown in aggregate faster, we've still been able to increase the margin because of those activities. So that sharpening of focus around who we're selling -- what we're selling to who is what's contributed to that outcome. Tony Ristevski: And on the second part there, Sam, that uptick in trading is effectively offsetting less than pronounced delta half-on-half around the accounting change. I would describe probably 6 to 12 months ago. The underlying business performance is actually improving as a result. What we're seeing is less what I would call, variability half-on-half around that retrospective approach to the error rates that I would describe 12 months ago, landing on a margin for the year at least 6.5%. Samuel Seow: Got it. Got it. And just quickly, I noticed when you break down your TTV, your underlying market growth there at 5%, normally, that's pretty standard. But just of interest to me, obviously, particularly in the first half of your year, the market appeared to be quite volatile. So just kind of wondering how you put that 5% together? Is that your market specifically? Is it just more domestic focused? Because obviously, inbound in the U.S. was quite soft and some of your peers talking about channel changes, et cetera, and percentage of last minute bookings. But yes, just kind of that color on the 5%, it seems quite robust. John Guscic: Your question is very relevant, and it's one of the things that we've tried over the course of the last 4 to 5 years to talk about our geographic spread. We talk about our channel mix and in that portfolio of businesses, you have winners and losers. And even with the market up 5%, I'll be hazarding a guess that 15% of our customers went backwards. 10% of our geographies went backwards. You've called out the one that everyone can call out, which is inbound to America is down circa 15%. Americans going to Canada or Canadians go to America is down, I don't know, 20-odd percent. So all those things play out. I tend not to get overly focused on the individual travel corridors. I have lots of people in our organization who spend an infinite amount of time looking at these travel corridors. But when we roll them all up to a business that's up at $6 billion, there are winners and losers, and we end up with more winners than losers and that's why we continue to outperform the market. The second thing I'll touch on, which you, again, I think, was implicit in your question, and I didn't call it out, even though I spoke about it, even though it was written down in the deck somewhere that the macro events do impact us, but they impact us for a very short period because unless you're into a global issue, the markets are growing at, say, the underlying GDP growth is 2%, for example, and it goes to 1.5%, it has an outsized influence on businesses that are directly correlated to the underlying growth rate of their individual market. We're not in that state. So I called out in August that for the 2-week period, when Israel bombed Iran, all markets went backwards, and we still delivered 22% TTV growth and 18% bookings growth. At a transactional level, all of that, we had massive cancellations during that period that exceeded creative bookings, and we still delivered 18% bookings over the half. We had a phenomenal first 7 weeks, which we called out, that was significantly impacted, and we've recovered nicely into the second half of FY '26. So giving you more color is not going to help you is the short answer. It's in the aggregate. Does our business continue to grow faster than market? Checked. Where is it coming from? We've given you all of the regions. Within each of those regions, there's still winners and losers. There's still customers that win and lose. There's still geographies that win and lose. That's just the nature of having a global business in which we sell in more than 100 countries, and we sell to thousands of endpoints, and we sell thousands of destinations. Samuel Seow: That is actually very helpful. Just to kind of get an understanding of that diversification, but I might just jump back in line and appreciate some of your commentary. Operator: Your next question comes from Tim Plumbe from UBS. Tim Plumbe: Just 2 questions from me, if possible, please. John, just the first one around the directly contracted hotel strategy. Can you give us a sense in terms of how far progressed you are with the hiring? Do you still need to put on incremental heads? And in terms of getting full momentum of contracted hotels, where are we currently? And when would you expect to see full momentum? Is that kind of first half of '27 or second half of '26? John Guscic: Thanks, Tim. Look, we have -- depending on how you count it, we have circa 1/4 of our employees involved somehow in getting inventory onto the system through contracts or through negotiating contracts or through loading contracts through the myriad of solutions that we provide all of our partners to get those contracts for sale at any point in time. What I've called out in the -- at the end of last year's financial results is, well, I'll call it out here, we are well over 60% directly contracted in all regions except the Americas. And what we are doing is addressing that specifically in the Americas. So in aggregate, we're over 50% directly contracted but we're under 50% in the Americas, and we want to lift the Americas closer to what we're doing in the other 3 regions. There are some unique elements of that, which suggests that if we got to 50%, that would be an optimal structure for us. I don't think it will get to the circa 2/3 that we do in some of the other regions. For the large domestic market that we're servicing in America and the broad geographic spread of that, it just becomes inefficient to have more contractors. So our focus beyond our existing circa 500 people is adding contracting in America, and we expect that to -- it will start to improve our overall margins and our -- the surface ability of that inventory in FY '27. Tim Plumbe: Great. And then just the second question was a bit of a follow-on from Sam and for Tony. So just thinking about that seasonal skew, you mentioned less pronounced than before, like if you back solve the guidance that you guys put out previously, it kind of implied a 20 to 60 basis point half-on-half seasonal tailwind in the second half. Are you saying that there will still be a seasonal tailwind but less pronounced than previously expected? Or there is no seasonal tailwind? John Guscic: Correct. Tony Ristevski: Less than pronounced than, Tim. So as I said, you can do the math to back off the 6.5% is less pronounced than what we anticipated because of the portfolio growth in the business and the way it has. Operator: Your next question comes from Ben Gilbert from Jarden. Ben Gilbert: Just the first one for me. Just in terms of sort of the 3 pillars of growth as you look forward, it's been pretty consistent in terms of the composition. Do you envisage the composition changing much moving forward? I'm just interested in the comment around the change strategy that you talked over next 2 to 3 years. Is that more an opportunity around conversion? Or is that going to provide new supply in markets around the world? John Guscic: Supply will -- look, customers, we're slowing down in the rate of new substantial customers that can be added. That is slowing down, but supply is actually increasing. Not only for the direct customer conversation we had with regard to the incremental investment that we are making, but in particular to some of the larger chain hotels in getting greater access to the various rate plans that those hotels have on offer. So it's not unusual for a hotel to have 20 rate plans depending on your geography, the channel, the period, the season, et cetera. So we're getting -- as we become more relevant and more deeply entrenched as a reliable supply partner with those partners, we're getting access to more rate plans. So we see supply continuing to grow, customers are at a more moderate level. And the consequence of that will be that our conversion rate will continue to grow. And if I was to take a prediction 3 to 4 years out, the conversion factor would still be at least 3x the underlying new customer new supply mix because we are getting -- the data analytics in our business now has is remarkable compared to where we were 2 to 3 years ago. The sophistication of our conversations with our distribution partners and our supplier partners is predicated on that data. So we're not just saying, give us a deal, we're good guys. We're saying this is what we can do for you. This is how we will do it, and this is the benefit that you'll get. So that's why the conversion number ultimately continue to outperform the other 2 metrics. Ben Gilbert: So this is a lot of that work you did around the consolidation of the tech stack, right, when you sort of put the hotels, the DOTW in. So you're giving your customers also client or your supply partners confidence around your pricing deck, which is what's then allowing you to get the exclusives, little bit of that moat, if you like, so that you can then sell on to your customers. Is that fair? John Guscic: Correct. Ben Gilbert: Yes. So in terms of the competitive pressure you're seeing out there, it doesn't seem like there's any escalation in the competitive threat out there's. There's chatter previously that some of the bigger global OTAs might be trying to push into your space, but it doesn't really seem like there's much evidence of them having any impact at all based on the strength of those numbers. Is that fair? John Guscic: The simplest -- the way I can put your mind at rest, Ben, is that our sales to the largest global OTAs is greater than our underlying bookings growth of 18%. Operator: Your next question comes from Andrew Hodge from Canaccord Genuity. Andrew Hodge: Just a question sort of extending on that idea around the contracted increase, if you like, with the business development that you're putting in. When you think about the impact to the business, does it have a greater impact on your revenue margin or on your TTV growth? John Guscic: Thank you for the question, Andrew. I'll take a step back and see, just doing -- let's just do simple math. This is a hypothetical example. So last year, we're doing -- and I'll say, completely hypothetical, so don't take it literally. Last year, we did $5 billion of TTV. Let's say we did 50% directly contracted at that $5 billion. So we go back to our hotel partners and say we're selling you at a rate of $2.5 billion, and we're selling now from other people at $2.5 billion. And then I go to this year, and we're run rate of $6 billion. So we're selling, let's say, 60%, and again it's hypothetical. I'm not suggesting the delta is that great. Just the math works easier in my mind, and we deliver $3.6 billion of directly contracted hotels and only $2.4 billion of third party. So our $2.5 billion has gone to $3.6 billion. Our hotel partners see that. Then they're going, s***, these guys are delivering. And then our guys going, of course, we are. We always told you we would. It's only the investment analysts who didn't believe that we would deliver. But the rest of us, we believe we would deliver. So how do we fix -- how do we continue to show that we are a great partner, and we can get you sales from around the world. And then, as I said, go back to the previous question, what's the data analytic tools that we have that we arm our guys with, it gives them insights in where they're performing against their peers, where they're not performing against their peers, where their price is too high, where their price is too low. We're having that conversation. When you have that conversation, getting access to inventory, is a hell of a lot easier because, one, you're demonstrably better than you were a year ago. Two, you're giving them insights that they don't have. At the end of the day, a hotelier has an OTA as a booking engine to compare themselves but doesn't have the demand pattern that we do. So we can show them. Yes, this is what your price. You're $10 more expensive here, but it's costing you 10 basis points of occupancy or you're $10 cheaper, you can go up and still get the same occupancy that you're getting, et cetera. These are the conversations that we have, which are very different to the conversations we had when we just went in there and said, we promised to do good by you by selling your stuff. Andrew Hodge: And then just a clarification on the second half '26 trading update. I just want to make sure that, that's your report, that the numbers that you provided there are in your reporting currency rather than the functional currency? John Guscic: Correct. Aussie dollars. Operator: Your next question comes from Wei-Weng Chen from RBC Capital Markets. Wei-Weng Chen: So I appreciate your comments before about the consumer AI tools and I guess, downplaying the threat. But is there an opportunity for you guys to go maybe for a lack of better term, B2B2C kind of via partnering with these AI companies like Google and supplying them with inventory? John Guscic: I'll answer it that over the course of the last 2 years, in particular, as we're seeing this coming down the pipe, we have had many, many conversations about how we will take advantage of this and how we will -- how we think we can mitigate the risk to our business. So we have no confirmed plans about B2B2C, but it's certainly something that we focus on internally of how do we maximize the growth rate of our business and having a business like that potentially gets you there. I'm not saying we're going to do it, but it's one of the ones -- and there are a myriad of others, Wei-Weng, that we're also considering, but there are other opportunities as well that are in our consideration set as well. Wei-Weng Chen: Yes. Okay. And then I guess, speaking about opportunities. I mean your name is Web Travel Group, but in terms of operating businesses, you're still a group of one. So I guess what's the thinking in terms of building out more operating pillars? What are some of the organic opportunities you're looking into and maybe some of the inorganic options that might be available? John Guscic: I just came from a Board meeting yesterday where we perhaps made a more derisory comment about Web Travel Group versus WebBeds as the naming convention. We're still ambitious to be a travel group. We spend a little bit of time in the presentation talking about liquidity, and we spent a little bit of time talking about the fragmented nature of the industry. All of those things remain relevant to our thinking about what we do on an inorganic side. And on the organic side, you touched on it with your question. Are there other adjacencies to what we do, white labels, B2B2C, et cetera, how do they fit into the strategy? They're all things that we are currently contemplating. Wei-Weng Chen: Yes. Cool. And then just last question for me. I guess noting the comments about the business being increasingly Northern Hemisphere based and the challenges of managing out of Australia. Do you have a preference for where your next CEO -- CFO, sorry, is going to be based, balancing, I guess, management considerations with the fact that you've got a predominantly Australian investor base? John Guscic: The new CFO will be based in Australia. Operator: Your next question is from Abraham Akra from Shaw and Partners. Abraham Akra: Two questions from me. I suppose some of the concerns related to Google's agentic AI push into travel is increase in direct bookings to hotels and away from some of your customers like OTAs. What do you think about this assessment? John Guscic: It's a little bit muted. If the question was, are they going to be using OTAs more or less than currently? Abraham Akra: Using OTAs less given Google is going to partner with some of the hotel chains and hotel partners. John Guscic: Well, yes, that will be dilutive to everybody if they do that, clearly, but that would be an outcome that would be suboptimal to getting the overall results because the whole thing about what they're trying to do is they are the most sophisticated meta search in the world and the most sophisticated booking engine -- I'm sorry, the most anticipated results delivered agent in the world focused around your needs, you're not going to be just getting -- serving up chain hotels, you're going to be serving up everything. And if it is chains that they go through and chains bypass OTAs, yes, that will be a potential downside risk. I would hazard to guess that if we looked at what our performance would be in circa 3 years after this has launched, and let's pretend there's been a 10% dislocation to this market, 20%, pick a number, doesn't really matter. It's all conjecture at this point. Pick a number, 20% improvement -- sorry, this channel becomes 20% of the overall market, it will be a net contributor to Web Travel Group's business. Abraham Akra: Understood. John Guscic: Let me give you just one bit of color just so to put your minds at rest about why this is -- this is a threat, don't get me wrong, but it needs to be put into the context of what the threat actually is. So go to a market like Italy, massive destination for many people as an inbound market. I don't have the number off the top of my head, but I think it's circa 80 million or 90 million tourists go to Italy a year. And in Italy, they have 94% independent hotels. So as we have said previously, when we set this business up more than 10 years ago, we said we would be the distribution arm for independent hotels. That would be one of the strengths of our business, still remains one of the strengths, notwithstanding chain hotels. Chain hotels are massively important. They're our biggest supply partner and increasingly a bigger supply partner. And I don't have the time on this call to explain it to you, but if you go through the travel ecosystem and the legacy technology that sits within that travel ecosystem, you will know that there is nobody who ever can do everything for all people, whether you're an agentic AI or not. Just from a fundamental element of having a PMS, they are so old and clunky and putting booking engines on them has improved their direct conversion, but they still have significantly more supply from third-party distribution as a hotel chain than they do from direct. That's after 20 years of trying. So that's inevitable. Abraham Akra: Very helpful. And I suppose your comment earlier around the average booking window compression by 5%. Is that a function of your booking mix or customer booking trends? John Guscic: It's impossible for me to answer that with any certainty. All I can tell you is what's happened. It's a little bit like someone -- usually on one of these calls, some will say, who are you winning share from? How do I know? I just know we are. So I just know it is. I'm not sure why it's happening. It might be geographic mix, it might be the fact that -- but it's happening in 3 regions out of 4. So that's just unusual. That's all I'd point out. Just been a lot of last -- shorter booking window, last-minute bookings are less, the length of stays, moderately down, et cetera. Abraham Akra: Got it. And last one for me -- just a quick one. John Guscic: You've outplayed your hands. You have to cover the questions, Wei-Weng. Tony Ristevski: No, it's Abe. John Guscic: Apologies, Abe. I'm apologizing you. I apologize to Wei-Weng. Abraham Akra: He's a good analyst. And lastly, the 23% year-on-year TTV growth year-to-date in the second half. Do you mind providing a regional breakdown? John Guscic: We've given you in the first half. All 4 regions are up. They're not massively different to where they were so that's where we're at. Operator: Your next question comes from Mitch Sonogan from Macquarie. Mitchell Sonogan: Just a quick one on the EBITDA margin target in '27, guiding to around that 50% range. I guess can you maybe just talk to the key swing factors on how you're balancing that, just noting, obviously, given the 44% to 47% range for FY '26. So yes, just trying to understand the specific target around 50% and how you're thinking about it? John Guscic: Yes. We're seeing revenue growth faster than EBITDA -- sorry, expenses, and it doesn't require a big tick to go from somewhere between 44% and 47% to get to 50%. So it's not a stretch target in that sense. If we keep the revenue margin consistent and added the expected TTV increase, and we still had low single-digit expenses, it gets us there. So they're the sort of guardrails for you to think about. Mitchell Sonogan: Yes. And just noting you talked to potential impacts from macro events that have occurred over the last 6 to 12 months. Can you maybe just talk to what percentage of bookings in the different regions are domestic versus international, whether you can give that by the major regions? Because obviously, lots of people have looked at softer Australia into U.S. international travel, but the U.S. is a pretty domestic market. So yes, just keen to understand if you can give us some color on how we should think about that looking at future events that may come our way. John Guscic: There's always a sense of amusement when I see some travel-related data being announced publicly and all the travel stocks fall in unison in relation to it, in particular, in our case, less than 2% of our TTV is Australia. So in the game earlier of swings and roundabouts, if the entire Australian market was eliminated for some reason, we would have grown at 20% instead of 22%. So as I said, just -- I chuckle when I see investor response to news that's not relevant to what's happening to us as a global business. So to go to it, I'll just explain it as I have historically. Our biggest domestic market is clearly the U.S. And in most of our other markets, the domestic component is substantially less than half and what our sweet spot is, is interregional travel, Asians going to Asia, Americans going to America, Europeans going to Europe, Middle East going to the Middle East. That's where the vast majority of what we tap into which is, as you would expect, it's more frequent travel. It's short-haul travel. It's not your once-a-year Aussie going to Europe or going to New York and doing that. That's part of -- obviously part of our business, but it's not the main part of our business because that's -- you're once in a multi-generation trip. Our efforts on people going for 3 nights from Italy to Switzerland as going 6 nights from Paris to Majorca. There's a myriad of combinations. And literally, we have a dashboard that goes through them, and we look at the ups and the downs. But in the end, overall, the vast majority of our business is what we consider short-haul international travel, less than 6 hours. Most of it's around 3 hours flight time and you see what our average booking value is. All right. Have we lost everyone? Operator: Your next question comes from Patrick Cockerill from Ord Minnett. Patrick Cockerill: On behalf of John O'Shea. Just 2 very quickly from me. Firstly, on the revenue margin, noting that 6.5% now seems to be going longer than the initial 18 months or 3 reporting periods. Can you just give us a little bit of color around the factors at play there that has made that continue into your expectations for FY '27? John Guscic: I won't go through all the things I've said previously, Patrick, other than we have seen and will continue to see a noticeable shift towards directly contracted hotels operating at higher margins. And we continue to focus on geographic expansion, but it's sort of offset by some of the channel expansion, which gives us greater confidence in our ability to maintain that beyond -- into the next 3 reporting periods. So that's the major reason, and I've covered off that a few times already. So that's the key driver, Patrick. Patrick Cockerill: And then very quickly, just on your EBITDA guidance and the more pronounced 1H skew. Is this something we should expect going forward? John Guscic: More pronounced in what sense? The EBITDA number or the gross number? Patrick Cockerill: Skewed to 1H? John Guscic: But what's skewed? Sorry, I don't understand. Tony Ristevski: Look, I think, Patrick, we've always had a skew to first half. If you look at our reporting over the last so many years, that's why we changed our year-end from 30 June to 31 March to capture in the first half ending September, the contribution of the higher TTV that we get from Europe, which continues to be the trend in this reporting period. Operator: Your next question comes from Brian Han from Morningstar. Brian Han: John, in terms of future proofing the business to sustain growth, is it possible for cost growth to stay elevated in that high single-digit regions for the next couple of years? John Guscic: I wouldn't say that would be elevated if we're growing revenue at a multiple of it. So our focus -- whilst our public commentary is around things that investors can latch on to $10 billion TTV, 6.5% take rate, 50% EBITDA margin, our internal focus is on growing revenues at a rate faster than expenses with the exception of the markets in which we invest, and we've called it out in the presentation and in the Q&A about our investment in North American contracting. But if you strip that out and strip out the things that we are doing to maintain our overall competitiveness, our underlying growth rate is -- our expense growth rate is barely above CPI. Brian Han: Yes. I wasn't suggesting that that's actually a bad thing to grow your costs if it means, as you say, future-proofing the business to sustain the current growth rate? John Guscic: Yes. Look, look, the journey is an incredible journey that WebBeds as a business has been on, and you just need to go to slide -- we'll call it up, Slide 9 to see that. So over that journey, we've done things to enable us to continue to grow at the rate that we have. So whether it's building out specific tech for an individual region, building out analytics tools to support our sales initiative, building out efficiency tools to get better imaging, get better rates into the system faster, et cetera. We will continue to do that. We're not playing this game so that we can eke out system growth and defend our share. We are a disruptor in the overall industry and our growth rate reflects that. We have a clear vision about the value we add and how we can accentuate the difference between our competitors, and we've clearly demonstrated that over the last 15 years or 13 years. And there's no reason to suggest that, that run rate expires over the course of the next 2 to 3 years. There are lots of things for us to do, and we know what they are. Brian Han: It can't be clearer than $10 billion. Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Guscic for closing remarks. John Guscic: Thank you, Harmony, and thank you to everyone who asked the questions. I'll just summarize that to all of our employees who have delivered this result, I'd like to give them a heartfelt thank you for their contribution to everything that we've been able to do in this year. We continue to have a highly engaged workforce, and none of this would be possible without them. So I'm delighted that they continue to provide the bulwark of what we need to enable us to continue to be the market leaders. And with that, I'll say, as I've said in the forward-looking statements, we've had a really strong first half. We will have an even stronger second half. With that, thank you very much. Operator: That does conclude our conference for today. Thank you for participating. 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.
Kylie Yeung: Good evening, and good morning, everyone. Welcome to Tongcheng Travel's 2025 First Quarter Results Conference Call. I'm Kylie Yeung, Investor Relations Director of the company. Joining us today on the conference call are our Executive Director and CEO, Mr. Hope Ma; our CFO, Mr. Julian Fan; and our Chief Capital Officer, Ms. Joyce Li. For today's call, our management team will provide a review of the company's performance in the first quarter. Hope will brief us on the company's strategies, Joyce will discuss our business and operational highlights, and then Julian will address the details of our financial performance accordingly. We will take your questions during the Q&A session that follows. As always, our presentation contains forward-looking statements. Such statements are based on management's current expectations and current market operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, which may cause the company's actual results, performance or achievements to differ from those in the forward-looking statements. This presentation also contains some unaudited non-IFRS financial measures. They should be considered in addition to, but not as a substitute for measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of non-IFRS measures, please refer to our disclosure documents in the IR section of our website. Now let me introduce our CEO, Hope. Hope will be presenting in Mandarin, and our colleague will provide the English translation afterwards. Hope, please go ahead. Heping Ma: [Interpreted] Thank you, and good evening, everyone. Welcome to our 2025 third quarter earnings call. In the third quarter of 2025, China's travel market continued to unleash its growth potential, driven by profound changes in tourism consumption patterns and behaviors. Notably, we have observed a growing trend toward more diversified and personalized consumer demand. Experience-oriented consumption, including emerging segments such as event-driven economy and concert economy has gained significant traction. The ongoing emergence of innovative service scenarios and business models has introduced new momentum into the industry, fostering sustainable growth. Riding on this tailwind, we swiftly identified changing market demand and proactively grow product innovation to meet these evolving needs. Benefiting from these initiatives, our ending paying users in the third quarter reached a historic high and surpassed 250 million, which demonstrates our organizational agility to capture new opportunities and our continuously expanding brand influence. Horizontally, we're expanding our business by proactively enriching our product and service offerings to cater to diverse demand while maintaining steady growth in our core domestic OTA business. Vertically, we're deepening our value chain integration through exploring potential growth opportunities to build a solid foundation for our long-term development. Driven by our effective expansion strategy and outstanding execution capabilities, we delivered robust results in the third quarter, marking a milestone in our overall development. In the National Day holiday, the travel industry exhibited a healthy growth momentum supported by sustained travel enthusiasm, validating the resilience and growth potential of China's travel industry. As a leading travel platform in China, we will consistently embrace technological innovation to drive product and service upgrades with a steadfast focus on delivering high-quality, convenient and diversified travel experiences for our users. Concurrently, we remain committed to executing our core strategy. While maintaining focus on mass market to consolidate our domestic leadership, we will continue to expand our outbound business and explore opportunities across the travel industry to seek new growth drivers. On October 16, 2025, we successfully completed the acquisition of Wanda Hotel Management, which we believe will accelerate the growth trajectory of our hotel management business, contributing to further expansion and strengthening of our company. Going forward, we will further promote the integration of AI technologies and our supply chain resources to persistently enhance operational efficiency and user experience. We have strong conviction that our clear strategic road map and excellent operational capabilities will enable us to achieve long-term sustainable growth and generate more value for all stakeholders. Next, I will hand over the call to Joyce, who will share with you our business and operational highlights of the third quarter of 2025. Joyce, please go ahead. Joyce Li: Thank you. Since the start of this year, China's travel market has been demonstrating an upward trajectory, characterized by rising demand for immersive natural and cultural experience. Against the backdrop of the evolving consumer preference, we continue to achieve solid growth across all segments, underpinned by the precise execution of our strategies. In the third quarter, our accommodation business sustained its growth momentum, reaching record highs in both daily room nights sold and quarterly revenue. During this period, we focused on addressing users' evolving demand for higher-quality hotels, resulting in a meaningful increase in the proportion of high-quality accommodation on our platform, with more than 20% growth in its room nights sold. In the meantime, we will reinforce our value for money proposition to further solidify our presence in the mass market. Our upgraded membership program has been instrumental in enhancing user engagement, enabling users to freely redeem their points on our platform. This, combined with the fast response to user inquiries has greatly increased user purchase frequency and strengthen user loyalty. In our international accommodation business, we remain focused on strengthening cooperation with third-party partners and expanding our product service offerings. These efforts were designed to better meet the diverse needs of our users and drive further growth in the segment. As for our transportation business, it demonstrated solid growth during the third quarter, supported by enhanced monetization capabilities. Throughout the quarter, we prioritized improving user experience and deepening connections with targeted users. Leveraging our acquisition capabilities and further integrating live transportation options, we provided users with more seamless, feasible and convenient travel solutions. Through engaging and entertaining marketing campaigns, we aim to strengthen mind share among younger demographics and enhance our brand positioning as an experience-driven platform rather than merely a ticketing service provider. In the past quarter, we launched an AI-driven interactive game that allow users to discover travel destinations tailored to their disposition. Such entertaining initiatives has successfully enhanced our brand appeal among younger users over the past years. In terms of our international air ticketing business, we're focusing on strengthening user loyalty and fortifying our market position by implementing a disciplined incentive policy and improving operational efficiency. We maintain a balanced approach to growth in both volume and value. These efforts contributed to healthy volume growth and further improvement in the monetization capability of this segment, aligned with our long-term growth strategy. We see significant growth potential in China's hotel industry and have been actively investing in the hotel management business since 2021, which we believe will serve as a key growth driver for the company. Over the third quarter, our efforts were focusing on expanding our geographic network, while prioritizing quality growth, to optimize operations, we streamed our brand portfolio and concentrated resources on several major brands so as to precisely target segmented markets. At the end of September, the total number of hotels in operation has risen to nearly 3,000 with 1,500 in the pipeline. In mid-October, we completed acquisition of Wanda Hotel Management. The companies are processing multiple upscale hotel brands with a strong presence and influence in the Tier 2 and below cities along with the network of 239 hotels, both domestically and internationally at the end of September. We believe Wanda Hotel's valuable brand equity combined with profound industry expertise, while diversifying our brand portfolio and accelerate the growth and expansion of our hotel management segment, further strengthening our competitive positioning in this industry. Besides the addition of Wanda Hotel will also have positive financial impact on the company. By implementing innovative and effective user engagement initiatives, we have built an extensive and steadily expanding user base across China. For the past 3 months, our 12-month annual paying sustained its growth trajectory and recorded another historical high of 253 million, representing a year-over-year growth of 8.8%. In the meantime, the cumulative number of passengers served on our platform over the past 12 months exceeded 2 billion, indicating stable annual pay purchase frequency of 8x per year -- per user. Furthermore, our MPUs for the quarter also reached a record high of 47.7 million, suggesting a year-over-year growth of 2.8%. Besides our annual ARPU by the end of September increased by 6% year-over-year to more than RMB [ 17.4 ]. The Weixin ecosystem remained a crucial traffic channel during the period, where we focus on enhancing operational efficiency as well as maximizing user value. At the same time, our standalone app, a key driver for acquiring new users maintained strong growth momentum during the last quarter with its DAU hitting an all-time high of nearly 5 million before the National Day holiday. By introducing innovative products, and launching engaging marketing activities, our standalone app has attracted a significant number of younger users. Additionally, social media platforms have become an increasingly important channel for user engagement, particularly among the younger experience-oriented travelers. So collaboration with influencers and the distribution of creative content, we strengthened user mind share and has broadened user reach within this high potential demographics. To further amplify the brand visibility and a deeper engagement with top users, we have made consistent investments in brand equity. This summer, we collaborated with Tencent Music and exclusively sponsored 3-day music festival in Macau, effectively capturing the attention of younger audience and significantly boosting brand exposure among them. Additionally, we appointed a popular stand-up comedian as our brand ambassador to reinforce our valuable money proposition and strengthen our positioning as a dynamic and entertaining platform. These efforts have not only elevated our brand presence, but also positioned us as a preferred choice for value-conscious, experience-driven travelers, driving user loyalty. As a technology-driven travel platform, we proactively embrace cutting-edge technologies and seek to upgrade our business capabilities and deliver enhanced value to our users. In March, we launched our AI-driven travel planner DeepTrip, which generates viable and personalized travel itineraries for users by leveraging the reasoning capabilities of DeepSeek and the supply chain advantage of our platform. Since its debut, it has more than 5 million users in total with a steadily increasing number of orders placed directly through the portal. In the foreseeable future, we will remain focused on iterating DeepTrip's functionalities and expand its application across our business processes, in an effort to cultivate user mind share and strengthen user trust. In the area of customer service, we have made meaningful progress in integrating AI technology to enhance operational efficiency and improve user experience. By embedding AI tools into every stage of the customer service process, we have eased the workload of our customer service staff and shortened handling time. These AI-powered capabilities allow our staff to better understand user inquiries and provide timely, accurate response to address user concerns, ultimately enhancing user satisfaction. We will continue our investments in AI capabilities to deliver seamless and efficient service while fostering long-term user loyalty. We remain deeply committed to advancing our ESG performance to align with the highest global standards and best practices. Through years of dedicated efforts, we have achieved exceptional results in ESG performance, earning significant international recognition. Notably, our MSCI ESG rating has achieved the highest level of AAA, placing us among the top 5% of companies globally in our industry. In addition, our CSA score has improved consistently over the past 3 years and was awarded industry mover by S&P Global. These achievements underscore our commitment to ESG principles and demonstrating our ability to continuously enhance our ESG performance, establishing us as an ESG leader among global peers. I will stop here to hand over the call to our CFO, Julian. He will walk with you through our financial highlights for the third quarter. Julian, over to you. Lei Fan: Thank you, Joyce. Good evening, everyone. In the past quarter, China's travel industry maintained robust growth with travel demand demonstrating strong momentum. During the summer peak season, we observed steady increases in diversified travel scenarios, including family trips, graduation trips and educational tours, leveraging our precise understanding of user needs and agile operational capabilities, we successfully captured emerging opportunities across various travel scenarios, driving impressive growth in our Core OTA business. In the third quarter of 2025, we achieved outstanding results for both top line and bottom line. We reported a net revenue of RMB 5.5 billion, marking a 10.4% year-over-year increase from the same period of 2024, thanks to our effective marketing investment and enhanced operational efficiency of our OTA business. We achieved a remarkable adjusted net profit of RMB 1,060 million reflecting a 16.5% year-over-year growth, with adjusted net margin expanding to 19.2% compared to 18.2% in the same period of last year. Our Core OTA business revenue registered an excellent growth of 14.9% year-over-year and recorded RMB 4.6 billion, supported by growth across our accommodation reservation, transportation, ticketing and other business segments. Our accommodation reservation business achieved RMB 1.6 billion in revenue for the third quarter of 2025, representing a 14.7% increase from the same period in 2024. The revenue growth was mainly attributable to the increase in hotel room nights sold as well as the slight increase in ADR. For the domestic accommodation business, we rapidly responded to emerging user demands and actively explored new consumption scenarios to capitalize on new growth opportunities. For the international accommodation business, we continue to deepen cooperation with global suppliers and strengthen our footprint in outbound designations favored by Chinese travelers, in order to solidify user mind share, driven by changes of consumer preferences on our platform and our proactive adjustments to user subsidy strategies, our ADR sustained a year-over-year increase and once again outperformed the industry. Additionally, during the third quarter, our blended take rate maintained at a relatively high level which was similar to that of the same period last year, mainly fueled by our precise and disciplined marketing strategies. Our transportation ticketing revenue for the third quarter reached RMB 2.2 billion, marking a 9.0% year-over-year increase compared with the same period of 2024. During the past quarter, we continued to optimize our VAF offerings and enhance user experience to improve the monetization capabilities of the segment. The revenue growth is a testament to our profound user insights and operational refinement. Furthermore, supported by enhanced user mind share along with our disciplined operational approach, our international air ticketing business maintained stellar growth momentum and accounted for around 6% of our total transportation ticketing revenue, up about 2 percentage points year-over-year. Other business segments continued to expand rapidly with revenue reaching RMB 821 million in the third quarter, marking a growth of 34.9% year-over-year. This growth was primarily fueled by the outstanding performance of our hotel management business. Our tourism business achieved a revenue of RMB 900 million, representing an 8% decrease from the same period in 2024. This decline was mainly caused by travelers persistent safety concerns regarding travel to Southeast Asia since the beginning of this year and our strategic scaling back of prepurchased business to reduce operational risks. In terms of profitability, our gross profit increased by 14.4% year-over-year to RMB 3.6 billion with gross margin rising to 65.7% for the third quarter of 2025. Our operating profit for the Core OTA business achieved RMB 1.4 billion, with margin increasing to 31.2% in the third quarter of 2025. The margin improvement was primarily attributable to our efforts to enhance the ROI of sales marketing investments and improve operational efficiency. The operating profit for the tourism business reached RMB 12.4 million with 1.4% margin. Our adjusted EBITDA increased by 14.5% and reached RMB 1.45 billion, with a 27.4% margin compared to 26.4% margin in the same period last year. Adjusted net profit grew by 16.5% to RMB 1,060 million with a 19.2% margin, up from 18.2% in the third quarter of 2024, demonstrating consistent year-over-year margin improvement. Service development and administrative expenses in the third quarter of 2025 decreased by 3.2% from the same period of 2024. Excluding share-based compensation charges, service development and administrative expenses in total accounted for 13.8% of revenue in the third quarter compared with 14.7% of revenue in the same period of 2024. Selling and marketing expenses in the third quarter of 2025 increased by 16.9% from the same period of 2024, excluding share-based compensation charges, selling and marketing expenses accounted for 31.0% of revenue in the third quarter compared with 29.2% of revenue in the same period of 2024. As of September 30, 2025, the balance of cash, cash equivalents, restricted cash and short-term investment was RMB 13.6 billion. In the first 3 quarters of 2025, the Chinese travel market continues its upward trajectory with travel enthusiasm flourishing. During the National Day holiday, a nationwide increase in travel activity was observed, further demonstrating the resilience of travel market. According to official government data, both the summer and National Day holidays recorded solid year-over-year growth in a number of domestic tourists indicating that travel is one of the key contributors to high-quality economic development. Heading into the fourth quarter, we remain committed to capitalizing on market opportunities, navigating challenges with agility and efficiency, and managing risks with discipline and prudence. We are dedicated to balancing market expansion and profitability, aiming for robust growth in both top line and bottom line. Looking ahead, we will unwaveringly focus on our Core OTA business. In this context, we will enhance user value and operational efficiency in our domestic business while actively expanding outbound business and strengthening our global market presence. Concurrently, we will continue expanding our presence across the travel industry, strategically advancing the development of our hotel management business to unlock more growth potential. Through this strategic initiative, we are posted to further solidify our industry-leading position, while maintaining sustainable growth and decent profitability, which we believe will deliver greater value to all stakeholders. With that, operator, we are ready to take questions now. Thank you. Operator: [Operator Instructions] Our first question comes from the line of Qiuting Wang from CICC. Qiuting Wang: Congratulations on the solid performance. I have 2 questions regarding for your future growth engines. The first one is about international business, what is your expected growth rate in the following years? And what are the key growth drivers? And how will the company balance monetization rate and volume growth? And what is the better margin for next year? And the second one is about hotel management business, how many hotels are expected to be opened in the next 2 or 3 years? And what measures will be taken to effectively manage these hotels? And after the acquisition with Wanda Hotel Management, what will -- how will the company achieve synergy with your Core OTA business? Joyce Li: Thank you, Qiuting, for the questions. I will take these 2 questions. And the first is concerning our international business, mainly the outbound business, we would say that outbound business has been our growth driver for our Core OTA business right now. For our outbound accommodation business, we have continued to deepen the partnerships with global suppliers and strengthen our presence in regions levered by Chinese travelers. Destinations like Hong Kong, Macau and Asian regions continued to attract high demand and performed exceptionally well on our platform. Our outbound air ticketing business maintained a steady growth momentum. This has been supported by our competitive pricing strategy focused on expanding user mind share combined with a disciplined marketing approach aimed at maximizing efficiency and return on investment. These efforts positioning us well to capture the increasing demand and deepen our market presence in the outbound travel segment. In third quarter, our international air ticketing business accounted for around 6% of our total transportation ticketing revenue, representing nearly 2-percentage-point increase year-over-year. And in 2025, we introduced a margin improvement program for outbound business, as we mentioned, concentrating on marketing and promotional efficiency. As a result, our outbound business turned profitable in the third quarter. Looking ahead, we will continue to enhance our outbound travel offerings through strategic partnerships with the leading global OTAs, wholesalers, airlines and overseas TSPs. We plan to increase investments in research and development to improve service capabilities and ensure a seamless booking experience, but also exploring cross-selling opportunities from outbound air tickets to accommodation to drive further revenue and profit growth. In the next 2 to 3 years, expanded business volume and user base growth remains our key prioritized with a strong focus on profitability. We anticipate rapid growth in outbound segment, targeting a revenue contribution of 10% to 15%, making it a major growth driver with higher margins than our domestic business. Overall, we are on track for breakeven this year with international business poised to positive impact margins and become a significant revenue contributor in the future. And in terms of the hotel management business, as a comprehensive travel platform, we are dedicated to expanding our influence throughout industry trend to ensure sustainable growth. Hotels play a vital role in China's travel ecosystem and deepen our involvement in hotel management will further solidify our positioning in this travel industry. We have seen significant potential for our hotel management business to become our second growth driver, playing a vital role in our long-term strategy. Our objective is to become a key player in China's hotel industry by offering a diverse range of brands that create exceptional value for hotel owners and travelers like. In 2024, already ranked 8 in China's hotel group scale ranking, measured by the number of rooms in our hotel portfolio. In the last month, we have successfully completed the acquisition of Wanda Hotel Management company, and now we are progressing with the integration and transition. Wanda Hotel Management has a comprehensive portfolio in 9 major upscale hotel brands with strong marketing trends, as we mentioned. So together with eLong Hotel management platform, we are currently operating over 3,000 hotels. Given its stable and mature development as well as strong brand influence in the market, the Wanda brand will be retained. This will allow the brand to complement our existing hotel portfolio and strengthen our overall offerings. The core management team and the key staff of that company largely remain in place, continuing to oversee and execute strategic development and operations. From a financial perspective, as I mentioned, the hotel business we acquired has decent profitability. Although the acquisition impact only around 3 months this year, it is expected to contribute positively to our revenue and profit. We believe the acquisition will accelerate growth of our hotel management business, supporting further expansion and strengthening of the company. We are confident that our clear strategy road map and clear operational capabilities will drive long-term sustainable growth and create great value for all stakeholders. Operator: Our next question comes from the line of Yang Liu from Morgan Stanley. Yang Liu: Congratulations on the solid results. I have 2 questions here. The first is -- question is about the management's view on the future hotel ADR trend and also Tongcheng's take rates for hotels given that the recent high-frequency data suggest some improvement from the value chain, do you think this will translate to even better ADR trends for Tongcheng? And the second question is regarding the competition in domestic market, we noticed that certain peers announced a pretty good GMV data since the fourth quarter this year. Does there -- any bring -- any incremental competitive pressure to Tongcheng and that company need to fight back or need to do anything to retain its market position? Lei Fan: Liu, thank you for the question. For the hotel industry, actually, we mentioned a lot of times that the domestic ADR has largely stabilized year-on-year in quarter 3 and our domestic ADR already turned positive since quarter 2 and the trend continued in quarter 3. This great improvement is driven by 2 factors. The one is the recovery of the ADR across the industry. And the second is the shift in user behavior in our platform, as users increasingly prefer high-quality products, which has resulted in shift from 2-star hotel to 3-star or above hotel bookings in our platform. In quarter 3, the proportion of higher quality accommodation bookings on our platform increased meaningfully with more than 20% -- more than 20% growth in the room night sales. Given this trend, we expect that the growth in ADR will be a positive factor contributing to accommodation segment's revenue growth this year and also for the next few quarters. At the same time, we have adopted a more disciplined and targeted approach for user subsidies. This approach has also helped us to maintain our net take rate at a very decent level, ensuring a balanced focus on both expansion and the profitability. Our outstanding performance in accommodation business in the past few quarters demonstrated that the pricing pressures of the industry had a rather limited impact on our revenue as ADR on our platform remains relatively resilient, thanks to our extensive exposure in the mass market and our ability to swiftly seize market opportunities. So in the future, we think the trend of ADR improvement are still ongoing because there's a lot of space will be released for the high-quality hotel booking along with the user value and user maturity improved in our platform. In terms of the competition landscape, I think you will have, Joyce. Joyce Li: Thank you, Julian. In terms of competition landscape, as we mentioned a lot of times before, we believe established OTAs with deeper supply chains, user understanding and service capabilities maintain strong defensive moat. First, for the new entries in the OTA market, supply chain will be one of the major challenges for them. As a leading OTA with over 20 years of industry experience, we have an extensive hotel supply chain and deeply established relationships with TSPs. Efficiently managing hotels supplies requires complex systems and close communication with hotels, especially when handling the price fluctuation and room availability constraints. This strong supply chain advantages are difficult for new entries to replicate quickly. Secondly, purchase of travel product services tend to be relatively low frequency and involve longer, more complicated decision-making process. Therefore, converting users into paying customers in OTA space is particularly challenging, as it requires thorough understanding of users' preference and behaviors. And thirdly, our focus on OTAs on delivering superior service and user experience, heavily investing in innovative value-added products tailored to market demand, coupled with a dedicated customer service team, addressing user needs rapidly. These competitive ages are not easily matched by newcomers. Besides, we have upgraded our membership program to enhance user engagement by providing faster response to inquiries and allowing users to redeem their points as cash on our platform. These enhancements aim to boost purchase frequency and deepen user loyalty. The OTA market is complex and requires significant time, resources and experience to build sustainable competitive advantages. We expect near-term competition to remain relatively stable, and our current strategy continues to focus on improving operational efficiency with the profit expectations unchanged. So we remain vigilant to make adjustments as market dynamics evolve. Thank you. Operator: Our next question comes from the line of Brian Gong from Citi. Brian Gong: Congratulations on the solid results. Two questions. First, management just talked about ADR and wondering how should we think about room night growth in the first quarter and any initial color for next year? And the second question is our take rate on transportation has been persistently improving this year. But I heard that airline ticketing pricing has been under pressure. And it seems airline companies also lowered commission fees to some extent. Not sure if this will impact our transportation revenue growth ahead. Lei Fan: Thank you for the question, Brian. I would like to give you some color for the Q4 performance first and then provide more color on the transportation side from the airline companies. As mentioned throughout this year, the company remains focused on striking the balance between top line and bottom line as well as enhancing user value and ARPU. In quarter 4, actually, the margin improvement will remain our key priority, while we simultaneously pursue maximum growth and market share gains, both for accommodation and transportation. For accommodation business, we believe that the growth will be driven by both volume expansion and also the ADR improvement like what I imagined. Our volume is expected to continue outpacing the market growth. While our ADR will be benefited from the ongoing upgrade in hotel store mix driven by the shift in user preference like I mentioned in previous question. For transportation, actually, the ATV has already turned positive in quarter 3 because we monitor that there's more demand released in the long haul in the summer vacation and also the October holidays because the October holidays, we have 8 days holidays this year. So actually, for the industry, the ATV has already turned positive. And also the ATV has also turned positive in our platform as well. We don't have any pressure for the commission decrease from the airline companies. We don't have any information from that. For the fourth quarter, the transportation business volume growth will be still in line with the market. The market is only single digits. While the take rate still have some space to improve, driven by cross-sell and VS will continue to contribute the revenue growth. In the long run for the transportation business, actually, we will continue to emphasize innovation in our products and services to meet the diverse needs in our users during their travel journeys, thereby increasing the monetization of our transportation business. As our platform progresses towards becoming a fully integrated one-stop travel solution, we are starting to explore opportunities for cross-selling from long-haul transportation to a broader area of short-haul options with our Huixing and AI capabilities. Our goal is to develop comprehensive travel combo solutions that extend beyond selling individual tickets, which will help enhance the monetization capability and drive revenue growth in the future for our transportation segment. And in terms of the color for next year, actually, it's still too early to say because of the booking window is shortened lately. So we may give you more information on that, I think, in next call, February, March next year. I think that will be more accurate than now. So thank you for the questions. Operator: Our next question comes from the line of Wei Xiong from UBS. Wei Xiong: Congrats on the solid quarter. First, I want to ask about the margin trend. So after our encouraging effort to improve cost efficiency this year, how should we think about the room for margin expansion next year as well as the drivers behind? And second, just regarding AI because given the technology advancement, we do see investor discussion on the potential AI disruption to vertical platforms like OTA. So I want to get your latest thoughts on the topic as well as our strategy to navigate such potential risk. Lei Fan: Thank you for the question, Xiong. In terms of the margin expansion, actually, as we discussed, as always, our strategy for 2025 and beyond is to balance the revenue growth with profitability improvement. Margin improvement remains a key priority while we continue to pursue maximum growth and market share gains. In the second half of 2025, the quarter 3 and quarter 4, the net margins for both the company and our Core OTA business will improve year-over-year, mainly driven by gross margin expansion and operational leverage. The broad applications of AI have significantly improved automation and efficiency across customer service and tech development processes such as coding, further supporting our margin performance. Looking ahead, we still see a lot of room for our service development and G&A expenses ratio to trend down in second half of 2025 and 2026, as overall operating efficiency continues to improve. This efficiency gain will remain an important long-term driver of margin expansion, while on selling and marketing expenses in the second half of 2025, specifically, we expect the ratio to stay broadly stable compared with last year, since we have already realized savings in G&A and delivered solid margin improvement. We will maintain an appropriate level of marketing investment to support growth and strengthen our marketing position and to seek more market share and opportunities. That said, we will continue to strengthen our ROI and efficiency of sales and marketing spending over the long term to ensure sustainable margin improvement for our business in the next 2 to 3 years. So that is my comments on margin expansion. In terms of the AI, Joyce, please. Joyce Li: Sure. First of all I would say that the development of AI technology will largely benefit OTA like us. As we mentioned lot times before, we have remained dedicated to developing our technology, which has been instrumental in improving our operational efficiency and enhancing the user experience. I think DeepTrip is a vivid example of how we embrace this advancement of AI technology. And I would say that we have keep investing in the implement of DeepTrip's functionality and it has already overcome the limitation of traditional travel recommendations and delivers reliable and actionable insights to users. It offers ample access to a wide range of options on our platform and support seamless closed bookings. Moving forward, DeepTrip will continue to evolve through the generative updates to meet users' needs more effectively. And I think DeepTrip's benefits from our extensive resources, including a comprehensive portfolio of online travel products and services. While general purpose large models can generate travel guides, they offer less ability to match recommendations with actual real-time travel resources availability. DeepTrip provides a more practical and actionable solution by directly integrating Tongcheng products into the planning and booking process. Our strong connections and close relationships with supply end enable us to secure competitive pricing and high-quality products to satisfy diverse travel needs. And secondly, I think AI technology has helped improve our operational efficiency and reduce manual work. Julian also have touched on that. Currently, generative AI has reduced our coding workload by 20%. Generative AI also handles over 60% of our accommodation related to online consultations and more than 70% of Internet phone inquiries. It delivers improved accuracy and efficiency. We have made significant progress in integrating AI into our customer service operations, embedding AI robots across entire service process to lighten staff workload and shorten the response times. This enables our team to better understand user inquiries and provide timely, accurate answers, resulting in a 10% reduction in handling time. So we will continue investing in AI to deliver seamless, efficient service and foster long-term use loyalty. In parallel, AI will also help us identify new application scenarios, product innovations or traffic opportunities, supporting both revenue expansion and efficiency-driven profitability improvement in the future. Thank you. Operator: Our next question comes from the line of Thomas Chong from Jefferies. Thomas Chong: My question is about the impact coming from a recent Japan incident. And how is the latest market situation right now? And how does that affect the business performance, if any? Joyce Li: Thank you, Thomas. Currently, we expect that there will be slight impact on our business. But we strongly believe that people's devise for outbound travel remains very strong. So they will be willing to explore other destinations. And we believe for OTA users, it is quite easy for them to change the travel plan and destinations but the impact on the group tools of our tourism business may be a little more obvious, and we will closely monitor further policy developments and adjust our product mix and marketing strategies accordingly to mitigate the impact. Overall, we do not expect a material impact on our full year performance at this stage. Thank you. Operator: Thank you. There are no further questions at this time. So I'll hand the call back to Kylie for closing remarks. Kylie Yeung: Thank you. We are closing the call now. If you wish to check out our presentation and other financial information, please visit the section of our company website. Thank you, and see you next quarter. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded and webcasted. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am. Yolanda Liu: Thank you, operator. Hello, everyone. Welcome to Zhihu's Third Quarter 2025 Financial Results Conference Call. Joining me today on the call from the senior management team are Mr. Zhou Yuan, Founder, Chairman and Chief Executive Officer; and Mr. Wang Han, Chief Financial Officer. Before we begin, I'd like to remind you that today's discussion will include forward-looking statements made under the safe harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our public filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Additionally, the discussion today will include both GAAP and non-GAAP financial measures for comparison purpose only. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to our earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our IR website at ir.zhihu.com. This quarter, Victor Zhou, Zhou Yuan's AI agent will once again deliver the prepared remarks in English on his behalf. Victor is still in training, so we appreciate your patience as he continues to improve. Victor, please go ahead. Yuan Zhou: Thank you, Yolanda. Hello, everyone, and thank you for joining Zhihu Third Quarter 2025 Earnings Call. I am Victor Zhou, and I am pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman and CEO of Zhihu. The third quarter marked another meaningful step toward our goal of achieving non-GAAP breakeven on a full year basis. As our structural optimization initiatives continue to take effect, we further refined our service offerings and balanced commercialization with community health. We also maintained disciplined cost control and improved operating efficiency. As a result, our non-GAAP operating loss narrowed by 16.3% year-over-year in the third quarter. At the same time, our community ecosystem continues to strengthen user mix and engagement improved, while MAUs increased modestly from the second quarter. Daily time spent continued to trend higher year-over-year and quarter-over-quarter. Our users and creators remain highly active, supporting improved core user retention and a steady stream of reliable high-quality content on the platform. With our high-quality content, expert network and AI capabilities working greater synergy. We are accelerating our agentic AI upgrades to deliver trusted and differentiated experiences to users, both within and beyond the community. As the AI industry enters a new phase of real-world integration and accelerated deployment, Zhihu as a trusted source of high-quality content and data upstream of Chinese LLMs and AI applications is gaining prominence, creating expanding opportunities for collaboration. With rising high-quality content, a highly active base of professional creators and accelerating AI integration, our community ecosystem radiates vitality. Our competitive moat of trusted content continues to strengthen. In the third quarter, daily creation of high-quality content increased by over 25% year-over-year, with professional AI-focused content up by more than 30% compared to the same period last year. As AI technologies and applications rapidly advance in China, Zhihu remains a go-to platform for frontline engineers and researchers for sharing and lively discussions. AI-focused content covers a range of subjects, including deep technical analysis, innovative product applications, emerging industry trends, personal growth, career development and a growing array of emerging topics driven by rapid AI adoption from the technical debate between MiniMax and Moonshot AI over efficient attention, which sparks heated discussions on Zhihu and highlighted China's diverse approaches to LLM innovation to the in-depth engineering analysis of new models shared by leading companies. Zhihu has become a trusted source for authentic first-hand exchanges. These discussions have made our platform a place where AI innovations are first interpreted, validated and shared. Meanwhile, we continue to strengthen our trustworthy content ecosystem through ongoing improvements to content governance mechanisms and recommendation algorithms. Professional creators are a vital force in our community. In the third quarter, daily active high-tier creators increased significantly on both year-over-year and a sequential basis. The number of verified honored creators also grew by 29% year-over-year. Engagement among AI-focused creators also continues to strengthen. Zhihu now brings together more than 60 million continuous learners and 3.56 million proficient creators in science and AI and 150,000 ecosystem builders. These contributors not only add consistent high-quality input to our AI content ecosystem, but also show significant potential as future service providers for enterprises. Beyond the science and AI, creator activity in humanities and social sciences also remains strong across the platform. In September, we launched the co-benefit co-creation initiative [Foreign Language] in collaboration with leading institutions such as Alibaba Foundation, Tencent Charity Foundation, One Foundation, and Greenpeace alongside the psychologists, medical experts and the writers. This initiative generated a wide range of high-quality content across disability rights, mental health, environmental protection and more joining over 80 million views. We also hosted the 2025 Zhihu Humanities Season, Zhihu Renwenji event, which brought creators together through a blend of online and offline engagement. The campaign attracted nearly 30 influential creators, driving a 7.5% quarter-over-quarter increase in creator activity in the humanities category and generating 5.82 million topic views, reinforcing Zhihu's professional influence and cultural relevance. To better support professional creators, we continue to enhance the content creation and distribution experience. Our ideas product supports knowledge-based expression from high-tier creators and enables more diverse short-form content creation among mid-tier creators. As a result, average daily content volume and interactions increased by 21.7% and 33.1% quarter-over-quarter, respectively. Our Circles product also continues to serve as a focused space for users with shared interests to gather and interact with average daily views more than tripling sequentially during the quarter. We also continue to advance our agentic AI upgrades across the community. From a product perspective, Zhihu Zhida evolved into the agentic mode at the end of September, delivering more accurate and smarter search results. Most notably, Zhihu Zhida now serves as a helpful partner for deep thinking and creativity, capable of understanding user intent, performing multistep reasoning and synthesizing information across research, learning and content creation. Our advancements in agentic AI are also amplifying the value of our creators. By strengthening the attribution of content to trusted creators across the knowledge base and search, AI-generated responses now sites to verify the knowledge during the reasoning stage, significantly reducing hallucination and improving trust. This strengthens creator influence within the generative AI landscape and gives Zhihu a distinct advantage as a trusted content provider in the emerging AI ecosystem. Now moving on to commercialization. In the third quarter, our commercialization continued to recover on a healthier base with total revenues reaching RMB 658.9 million in the third quarter. We also made notable progress in exploring new monetization avenues by leveraging our core strengths. Let's take a closer look at our performance by business unit. In the third quarter, marketing services revenue was RMB 189.4 million. Notably, the year-over-year decrease narrowed, indicating the bottoming out of our adjustment cycle. We expect marketing services revenue to begin growing on a sequential basis in the fourth quarter. During the quarter, we made a solid progress in both optimizing our client mix and upgrading our advertising products. We continue to optimize client mix by deepening our focus on high-value accounts with our brand power and expanding commercial IP, driving strong uptake from enterprise clients, particularly in technology and other high-value verticals. In late September, we hosted the TechClub Conference, bringing together AI experts and some of the most influential tech creators from the Zhihu community to explore the latest developments and future applications of AI. The event showcased the technology's transforming role in everyday life and our unique ability to connect professional content with meaningful brand engagement, further expanding our high-value client base. Through the Zhihu platform, leading companies such as Gree, China Mobile, Huawei and FY Tech further strengthened their brand positioning in technological innovation and product excellence. Backed by the credibility of our brand and strong commercial efficiency created by professional discussions across our community, we made a solid progress in acquiring new clients across diverse sectors such as automotive, consumer and health care. This quarter, we also further upgraded a wide range of our commercial products by integrating AI more deeply across our portfolio. Our dual ecosystem optimization and product efficiency engines drove a significant increase in positive feedback from clients. For example, we launched the upgraded CCS for idea scenarios and introduced the product to more clients. By offering this short content plus precise scenarios format, it bridges authentic experiences and purchase decisions for brands and merchants. At the same time, it makes content consumption and the decision-making for users substantially more efficient. We are also seeing rising demand from clients to improve brand and product presentation in AI-generated answers. Leveraging our trusted content and high citation rate across the Internet, we launched our new GEM marketing solution in early November. This new solution provides core insights such as visibility across AI platforms and citation analytics. Leading technology clients we have worked with include Lenovo, FlightTech, Vivo and Proa. We have received a positive endorsement as we help enhance both their SEO and GEO performance for brands and new products. Looking ahead, with a healthier ecosystem, stronger client base and more robust service offerings, we will continue to leverage AI to drive a steady recovery and long-term growth in our marketing services business. And now for our paid membership business. In the third quarter, average monthly paid members increased by 8.1% sequentially to 14.3 million, with revenue reaching RMB 386 million. Our efforts to boost member retention and ARPU through diversified initiatives continue to generate positive feedback from both creators and users. The Yanyan Story long-form writing marathon came to a successful close in late October after 6 months campaign, generating tens of thousands of submissions in the third quarter alone. This initiative opened up new development pathways for aspiring creators and provided a steady pipeline of content for our library and the future IP development. At the same time, voice live streaming saw a further improvement in paid conversion rates. We also unlocked further commercial potential for our IP adaptations in China and overseas. During the quarter, revenue from IP licensing maintained its triple-digit growth rate year-over-year and generated high double-digit growth quarter-over-quarter. Year-to-date, revenue has nearly doubled compared with the same period last year. In mid-October, Yanyan Story debuted at the Frankfurt Book Fair, showcasing Chinese digital literature on a global stage for the first time. It also draw coverage from the U.K. magazine, the bookseller, which noted the new growth path for Chinese short-form digital literature in the international markets. By the end of October, Yanyan Story licensed more than 100 titles for publication across major Asian markets, including Japan, South Korea, Thailand and Vietnam. A number of works have also been adapted into short dramas for overseas markets and performed well, reflecting the growing popularity of Chinese short-form content abroad. Meanwhile, Yanyan Story has established partnerships with international platforms such as Mobile Reader and GoodNovel to translate works into English, Spanish, Japanese, Korean, Portuguese, Thai, Indonesian and other languages, further expanding its international reach. Going forward, we will pursue a diversified set of initiatives to improve member retention and ARPU. By enhancing content supply, membership benefits and personalized experiences, we aim to strengthen long-term member value. As AI enables more efficient content creation, the potential for IP development and commercialization will expand, unlocking new growth opportunities for our membership business. Starting this quarter, we are simplifying our revenue breakdown and will begin reclassifying vocational training revenue into other revenues to align with our overall strategy. Other revenues were RMB 83.9 million, of which we will continue to adjust our vocational training business with a focus on improving operational efficiency and prioritization. Although our vocational training business has been reclassified, we continue to build on its creator-driven foundation with the development of our column product. Designed primarily to serve super creators, column is intended to enhance the creator ecosystem rather than act as a new commercial growth driver. During the quarter, we enhanced the product by rolling out a PC version and AI tools that help creators generate column descriptions and cover designs. This enhancement drove sequential growth in both the number of leading column creators and creator user engagement. Monetization models for column creators is also becoming more diversified with overall GMV more than doubling compared with last quarter. Going forward, we will continue to operate with discipline, maintaining stability while investing prudently for sustainable growth. With the ongoing enhancements in efficiency and steady cost optimization, we are confident in achieving our full year profitability target. Building on this foundation, we will continue to invest with a long-term view to strengthen our AI capabilities and improve the efficiency of our core operations. Deeper AI integrations will drive greater synergies across content creation, distribution and monetized on Zhihu. Meanwhile, we will further refine our product and marketing strategies to capitalize on new growth opportunities from high-quality users and enterprise clients. With a healthier operating structure and ongoing innovation, we are well positioned to thrive in this next stage of high-quality growth. With that, I will hand the call over to our CFO, Wang Han. Han, please go ahead. Wang Han: Now I will review the details of our third quarter financials. For a complete overview of our third quarter 2025 results, please refer to our earnings release issued earlier today. In the third quarter, we maintained disciplined cost management and drove further improvements in operational efficiency. As a result, our non-GAAP operating loss narrowed by 16.3% year-over-year. We continue to invest in areas that reinforce our long-term growth potential, striking a healthy balance between efficiency and investment. Our total revenues for the quarter were RMB 658.9 million compared with RMB 845 million in the same period of 2024. The decrease was mainly the result of our continued efforts to optimize revenue mix and focus on sustainable, high-quality growth. Notably, the year-over-year decrease narrowed for the third consecutive quarter, in line with our expectations. Our marketing services revenue for the quarter was RMB 189.4 million compared with RMB 256.6 million in the same period of 2024. This decrease was mainly driven by our proactive refining of service offerings and optimization of client mix. Encouragingly, the year-over-year decrease narrowed meaningfully, indicating that our adjustment cycle has bottomed out. Paid membership revenue was RMB 385.6 million compared with RMB 459.4 million in the same period of 2024. While the number of average monthly subscribing members fell year-over-year, they rebounded and grew 8.1% sequentially to 14.3 million. We also continued to enhance retention and ARPU through diversified content and membership initiatives. Other revenues were RMB 83.9 million compared with RMB 129 million in the same period of 2024. The decrease was primarily due to the strategic refinement of our vocational training business. Our gross profit for the quarter was RMB 403.6 million compared with RMB 540.1 million in the same period of 2024. Gross margin was 61.3% compared with 63.9% in the same period of 2024. Our total operating expenses for the quarter decreased by 19.4% year-over-year to RMB 503.5 million. The decrease was primarily due to a more efficient cost structure and disciplined resource allocation across key operating areas. Selling and marketing expenses decreased by 14.9% to RMB 330.1 million from RMB 388 million in the same period of 2024. The decrease was mainly due to tighter control over promotional spending and optimized personnel-related expenses. Research and development expenses decreased by 36.2% to RMB 114.4 million from RMB 179.3 million in the same period of 2024. The decrease was primarily driven by continued improvement in research and development productivity and efficiency. General and administrative expenses were RMB 59 million compared with RMB 57.2 million in the same period of 2024. Our GAAP net loss for this quarter was RMB 46.7 million compared with RMB 9 million in the same period of 2024. On a non-GAAP basis, our adjusted net loss was RMB 21 million compared with RMB 13.1 million in the same period of 2024. As of the 30th of September 2025, we had cash and cash equivalents, term deposits, restricted cash and short-term investments of RMB 4.6 billion compared with RMB 4.9 billion as of the 31st of December 2024. As of the 30th of September 2025, we repurchased 31.1 million Class A ordinary shares for an aggregate value of USD 66.5 million on the open market. Additionally, we repurchased a total of 22.5 million Class A ordinary shares for an aggregate value of USD 34.5 million through the trustee of the company as of the end of the third quarter. Looking ahead, we are on track to achieve full year breakeven on a non-GAAP basis. We will continue to further strengthen our monetization capabilities and pursue new revenue opportunities that leverage Zhihu's strength in high-quality content creator expertise and AI-driven innovation. Together, these efforts will reinforce our business resilience and support sustainable long-term growth. This concludes my prepared remarks on our financial performance for this quarter. Let's turn the call over to the operator for the Q&A session. Operator: [Operator Instructions] We will now begin with our first question, and this is from Vicky Wei from Citi. Yi Jing Wei: Will management share some color about the AI progress of Zhihu? For example, the penetration rate of Zhihu Zhida and the progress of the AI integration with the Zhihu Community. Yuan Zhou: [Interpreted] Thank you for question. This is from Zhou Yuan, Zhihu CEO. First of all, I would like to say sorry about my weak voice because I didn't recover yet from my cold. Anyway, I would just start with your first question. So as you can see, Zhida remains one of our key products. Its overall usage and penetration rate continued to increase in the third quarter with the penetration rate existing 15%, nearly 4x higher than the same period last year. This not only reflects the ongoing evolution of our foundational AI capability across the community, but also demonstrates strong user endorsement of a very strategic depending of AI plus community. This also gives us a very strong confidence to continue upgrading this AI plus community experience updates across more touch points. Now let me just share some recent progress and upcoming plans. First of all, in the search scenario, by late November, Zhida will fully augment our general AI search capability to include Zhida-generated content for all users. Additionally, we will soon launch pilot features such as cross-topic content aggregation and the community trend summaries. This will formally navigate Zhida from secondary entry point to a primary one, further boosting AI adoption across the entire community. And second of all, on the content creation side, we are empowering professionals with strong AI copilot. In this quarter, we launched a suite of AI assistant writing tools for our creation assistant, which includes smart headlines, grammar and fact checking and lead paragraph generation. This will help creators optimize long-form structures and expert-level content. So by the end of 3Q, adoption of these new AI features has already surpassed 20%. Looking ahead, we plan to introduce additional capabilities such as AI-powered multi-model content conversion, intelligent formatting and short-form content generation and et cetera. These tools will significantly lower the barrier to entry for mid-tier creators, enabling more users to express themselves effortlessly to increase posting frequency, creation frequency and engage more actively. In addition, on the content consumption and distribution side, we are also expanding Zhida into high-frequency consumption scenarios. For example, AI-powered daily briefing on Zhihu's training topics and other vertical-specific topics as well as the ability to mention Zhida in threats or to also summarize discussions and surface key insights will help users quickly grasp complex conversations and participate more meaningfully. We believe this will further strengthen user engagements and community stickiness. Thank you. Operator: We'll now take the next question. This is from Luqing Zhou from Goldman Sachs. Luqing Zhou: So my question is on how do you see the current status of Zhihu's user ecosystem? And based on that, could management share more color on the directions for improving Zhihu's future product design and how is the progress so far? Yuan Zhou: [Interpreted] Thank you for your question. This is from Zhou Yuan, Zhihu CEO. We believe, overall, the community ecosystem is very healthy. We do not rely on any single metric to assess its health. Instead, we focus on content quality, user structure and user quality and whether our content creator incentives are forming a virtuous cycle. We have also deployed AI as a core product driver at a strategic level. Over the past few quarters, we have made the synergistic development of high-quality content, multiply expert network, multiply AI capabilities as a core path for driving our ecosystem in a positive direction. From this perspective, our ecosystem is stable and continuously improving. This is fully in line with our expectations as well. First of all, the trustworthiness and professionalism of our content are very crucial. They are crucial indicators of the ecosystem health. Over the past few quarters, we have continued to strengthen our trustworthy content ecosystem and our expert network while also cracking down on low-quality content and traffic to keep the ecosystem healthy at its core and reinforce the virtuous cycle. As a result, we have delivered several consecutive quarters of double-digit growth in daily high-quality content creation. The AI category is the most reflective of this progress with the professional AI-related content regarding double-digit growth for 4 consecutive quarters. On this basis, users' trust in our content has also continued to increase steadily. And secondly, our user structure and user quality have improved and users' need across different scenarios has been addressed. As we can see from last Q4, our MAU has remained stable on a sequential basis for 4 consecutive quarters. And building on that, average daily user time spent, which we believe as a proxy for engagement and retention has delivered double-digit year-over-year growth for 6 consecutive quarters. Our users remain mainly young and focused on learning and growth with user age between 18 to 30, accounting for more than 65% of our total user base. Among them frontline professionals in technology and AI have become one of the most representative groups. They have long-term professional learning, frontier exploration and interest development needs and contribute more content and provide a stronger positive feedback to the ecosystem. And last but not the least, the content -- the creator ecosystem continues to grow and expand. Output from top-tier professional creators have remained stable over 7 consecutive quarters. At the same time, by using AI tools, we are continuously lowering the creation threshold for mid-tier creators and increasing the creation frequency of the entire creator group. This makes the supply side of the community more diverse and keep social interaction within the community growing. So in summary, ecosystem health is foundational to Zhihu. Going forward, we'll continue to invest in trust content and expert network so that as a community scales, it can maintain its professionalism, vibrancy and trustworthiness. Let me just turn to the second question you mentioned. It's about our core product going forward plan. Here, we hold a few key beliefs. First of all, over the next 3 years, people will consume more AIGC content. At the same time, human-to-human interaction will become more valuable. So we believe both trends will coexist. And the second belief we hold here is that stronger AI becomes, the more people will experience a sense of diminished presence, which means the participation, social capital and relationships enabled by community will become increasingly scarce and increasingly demanded. And the third belief here is that high-quality human-generated content and data will become extremely scarce as well as valuable on the supply end. This supply matters on both ends. It's crucial for the advancement of AI as well as for human development. So going forward, Zhida will definitely integrate with our users' functional social needs. For example, when a user wants to ask a question, search or look for resources, AI will dramatically raise efficiency. And Zhida will push the community further towards utility, enabling even the first day users to get a meaningful experience immediately. At the same time, we will double down on the social needs that come from real human connection things like building recognized, growing together and finding people who share your identity. We want to build these things with user feel like a sense of belonging in an environment grounded in real people, real culture and trusted interactions. So our future product direction is built around 2 pillars: utility and identity. My hope is for Zhihu to become the connection layer for humans in AI era as a place where people can use AI tools to understand the world as well as a community where they can find renaissance and understanding from one another. At the same time, we plan to build a trusted content and expert network as 2 foundational layers of infrastructure. Thank you. Thank you again for your question. Operator: We will take next question. This is from Daisy Chen from Haitong International. Kewei Chen: Could management update the progress of the adjustments in each business line? Did you see any signs that the revenue has bottomed out or started to rebound? In particular, how do you expect the future of the advertising business? And also, could you share your outlook on the company's profitability? Wang Han: [Interpreted] Thank you for your question, Daisy. This is from Wang Han, Zhihu CFO. So I will just pick up your second question. Here's a quick take on our profitability outlook. After delivering solid profits in the first 2 quarters, we now see a very high likelihood of achieving our first full year non-GAAP profitability in 2025. So with that buffer in place, we are using Q3 and Q4 as a window to keep fine-tuning and investing where needed. That's why you will see -- you can see a small loss in Q3, which is well within what we can comfortably take. Let me just walk through the adjustments across our major revenue lines. First, about the marketing services. As we mentioned last quarter, this Q3 is -- it will become the bottom. And we expect a sequential recovery starting in Q4. What we see now give us confidence to maintain that guidance. Looking ahead to next year, our goal is for each quarter to stay above the baseline set by Q3 this year. And second, about the pay membership. This segment is still in a transition period. As we said before, even the best libraries and bookstores separate fiction from nonfiction, the real challenge here is how to differentiate and integrate them in a way that feels natural to users. We will continue experimenting here. So we cannot say membership -- pay membership revenue has hit its bottom yet. But even if there is some decline, it will be about products or cohorts with lower ROI and weaker profitability or less than ideal retention. Search is about vocational training. This business is no longer a drag on our overall bottom line. Given this relatively low base or small scale, we have now reclassified it into others. So overall, you've seen us deliver several consecutive quarters of profitability followed by the small loss in Q3. Even though we remain confident in achieving full year profitability. With that foundation, we are taking this period to make necessary adjustments and targeted investments. As we approach our first full year of profitability, we also want to use this moment to shed some legacy inefficiencies and to start fresh. We have no intention of staying where we are and simply just squeezing out profits. We are now operating from a healthier foundation and getting back onto a trajectory that aligns with Zhihu's long-term development. Also, we have a solid -- very solid cash position, and we are not reverting to the old model of spending aggressively just forth go. And this new AI cycle or in this AI era, our focus is on strengthening Zhihu's position in real people interactions, expert network and trusted content areas. And these capabilities are becoming increasingly important and carry real social value. Thank you for your questions. Operator: We will now take the next question. And this is from [ Jing Yi Wang from Guangfa ]. Unknown Analyst: Could management share some more color about the shareholder return pay in progress. Wang Han: [Interpreted] Thank you for your question. This is from Wang Han, Zhihu CFO. We can see over the past 2 years, we've been one of the most active buyback companies among U.S.-listed Chinese names. That conviction came from our confidence in reaching profitability. And this year, we expect to demonstrate that our outlook and the targets set 2 years ago are being delivered. Even so Zhihu's current market cap remains significantly below the cash on our balance sheet. So we believe we are super undervalued. Therefore, we intend to maintain our buyback program and expect to remain one of the most active repurchase in this sector. Thank you again for your question. Operator: That concludes today's Q&A session. At this time, I will turn the conference back to Yolanda for any additional or closing remarks. Yolanda Liu: Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or Christensen Advisory. Thank you so much. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Zhihu Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded and webcasted. At this time, I would like to turn the conference over to Yolanda Liu, Director of Investor Relations. Please go ahead, ma'am. Yolanda Liu: Thank you, operator. Hello, everyone. Welcome to Zhihu's Third Quarter 2025 Financial Results Conference Call. Joining me today on the call from the senior management team are Mr. Zhou Yuan, Founder, Chairman and Chief Executive Officer; and Mr. Wang Han, Chief Financial Officer. Before we begin, I'd like to remind you that today's discussion will include forward-looking statements made under the safe harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. As such, actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our public filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Additionally, the discussion today will include both GAAP and non-GAAP financial measures for comparison purpose only. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please refer to our earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our IR website at ir.zhihu.com. This quarter, Victor Zhou, Zhou Yuan's AI agent will once again deliver the prepared remarks in English on his behalf. Victor is still in training, so we appreciate your patience as he continues to improve. Victor, please go ahead. Yuan Zhou: Thank you, Yolanda. Hello, everyone, and thank you for joining Zhihu Third Quarter 2025 Earnings Call. I am Victor Zhou, and I am pleased to deliver today's opening remarks on behalf of Mr. Zhou Yuan, Founder, Chairman and CEO of Zhihu. The third quarter marked another meaningful step toward our goal of achieving non-GAAP breakeven on a full year basis. As our structural optimization initiatives continue to take effect, we further refined our service offerings and balanced commercialization with community health. We also maintained disciplined cost control and improved operating efficiency. As a result, our non-GAAP operating loss narrowed by 16.3% year-over-year in the third quarter. At the same time, our community ecosystem continues to strengthen user mix and engagement improved, while MAUs increased modestly from the second quarter. Daily time spent continued to trend higher year-over-year and quarter-over-quarter. Our users and creators remain highly active, supporting improved core user retention and a steady stream of reliable high-quality content on the platform. With our high-quality content, expert network and AI capabilities working greater synergy. We are accelerating our agentic AI upgrades to deliver trusted and differentiated experiences to users, both within and beyond the community. As the AI industry enters a new phase of real-world integration and accelerated deployment, Zhihu as a trusted source of high-quality content and data upstream of Chinese LLMs and AI applications is gaining prominence, creating expanding opportunities for collaboration. With rising high-quality content, a highly active base of professional creators and accelerating AI integration, our community ecosystem radiates vitality. Our competitive moat of trusted content continues to strengthen. In the third quarter, daily creation of high-quality content increased by over 25% year-over-year, with professional AI-focused content up by more than 30% compared to the same period last year. As AI technologies and applications rapidly advance in China, Zhihu remains a go-to platform for frontline engineers and researchers for sharing and lively discussions. AI-focused content covers a range of subjects, including deep technical analysis, innovative product applications, emerging industry trends, personal growth, career development and a growing array of emerging topics driven by rapid AI adoption from the technical debate between MiniMax and Moonshot AI over efficient attention, which sparks heated discussions on Zhihu and highlighted China's diverse approaches to LLM innovation to the in-depth engineering analysis of new models shared by leading companies. Zhihu has become a trusted source for authentic first-hand exchanges. These discussions have made our platform a place where AI innovations are first interpreted, validated and shared. Meanwhile, we continue to strengthen our trustworthy content ecosystem through ongoing improvements to content governance mechanisms and recommendation algorithms. Professional creators are a vital force in our community. In the third quarter, daily active high-tier creators increased significantly on both year-over-year and a sequential basis. The number of verified honored creators also grew by 29% year-over-year. Engagement among AI-focused creators also continues to strengthen. Zhihu now brings together more than 60 million continuous learners and 3.56 million proficient creators in science and AI and 150,000 ecosystem builders. These contributors not only add consistent high-quality input to our AI content ecosystem, but also show significant potential as future service providers for enterprises. Beyond the science and AI, creator activity in humanities and social sciences also remains strong across the platform. In September, we launched the co-benefit co-creation initiative [Foreign Language] in collaboration with leading institutions such as Alibaba Foundation, Tencent Charity Foundation, One Foundation, and Greenpeace alongside the psychologists, medical experts and the writers. This initiative generated a wide range of high-quality content across disability rights, mental health, environmental protection and more joining over 80 million views. We also hosted the 2025 Zhihu Humanities Season, Zhihu Renwenji event, which brought creators together through a blend of online and offline engagement. The campaign attracted nearly 30 influential creators, driving a 7.5% quarter-over-quarter increase in creator activity in the humanities category and generating 5.82 million topic views, reinforcing Zhihu's professional influence and cultural relevance. To better support professional creators, we continue to enhance the content creation and distribution experience. Our ideas product supports knowledge-based expression from high-tier creators and enables more diverse short-form content creation among mid-tier creators. As a result, average daily content volume and interactions increased by 21.7% and 33.1% quarter-over-quarter, respectively. Our Circles product also continues to serve as a focused space for users with shared interests to gather and interact with average daily views more than tripling sequentially during the quarter. We also continue to advance our agentic AI upgrades across the community. From a product perspective, Zhihu Zhida evolved into the agentic mode at the end of September, delivering more accurate and smarter search results. Most notably, Zhihu Zhida now serves as a helpful partner for deep thinking and creativity, capable of understanding user intent, performing multistep reasoning and synthesizing information across research, learning and content creation. Our advancements in agentic AI are also amplifying the value of our creators. By strengthening the attribution of content to trusted creators across the knowledge base and search, AI-generated responses now sites to verify the knowledge during the reasoning stage, significantly reducing hallucination and improving trust. This strengthens creator influence within the generative AI landscape and gives Zhihu a distinct advantage as a trusted content provider in the emerging AI ecosystem. Now moving on to commercialization. In the third quarter, our commercialization continued to recover on a healthier base with total revenues reaching RMB 658.9 million in the third quarter. We also made notable progress in exploring new monetization avenues by leveraging our core strengths. Let's take a closer look at our performance by business unit. In the third quarter, marketing services revenue was RMB 189.4 million. Notably, the year-over-year decrease narrowed, indicating the bottoming out of our adjustment cycle. We expect marketing services revenue to begin growing on a sequential basis in the fourth quarter. During the quarter, we made a solid progress in both optimizing our client mix and upgrading our advertising products. We continue to optimize client mix by deepening our focus on high-value accounts with our brand power and expanding commercial IP, driving strong uptake from enterprise clients, particularly in technology and other high-value verticals. In late September, we hosted the TechClub Conference, bringing together AI experts and some of the most influential tech creators from the Zhihu community to explore the latest developments and future applications of AI. The event showcased the technology's transforming role in everyday life and our unique ability to connect professional content with meaningful brand engagement, further expanding our high-value client base. Through the Zhihu platform, leading companies such as Gree, China Mobile, Huawei and FY Tech further strengthened their brand positioning in technological innovation and product excellence. Backed by the credibility of our brand and strong commercial efficiency created by professional discussions across our community, we made a solid progress in acquiring new clients across diverse sectors such as automotive, consumer and health care. This quarter, we also further upgraded a wide range of our commercial products by integrating AI more deeply across our portfolio. Our dual ecosystem optimization and product efficiency engines drove a significant increase in positive feedback from clients. For example, we launched the upgraded CCS for idea scenarios and introduced the product to more clients. By offering this short content plus precise scenarios format, it bridges authentic experiences and purchase decisions for brands and merchants. At the same time, it makes content consumption and the decision-making for users substantially more efficient. We are also seeing rising demand from clients to improve brand and product presentation in AI-generated answers. Leveraging our trusted content and high citation rate across the Internet, we launched our new GEM marketing solution in early November. This new solution provides core insights such as visibility across AI platforms and citation analytics. Leading technology clients we have worked with include Lenovo, FlightTech, Vivo and Proa. We have received a positive endorsement as we help enhance both their SEO and GEO performance for brands and new products. Looking ahead, with a healthier ecosystem, stronger client base and more robust service offerings, we will continue to leverage AI to drive a steady recovery and long-term growth in our marketing services business. And now for our paid membership business. In the third quarter, average monthly paid members increased by 8.1% sequentially to 14.3 million, with revenue reaching RMB 386 million. Our efforts to boost member retention and ARPU through diversified initiatives continue to generate positive feedback from both creators and users. The Yanyan Story long-form writing marathon came to a successful close in late October after 6 months campaign, generating tens of thousands of submissions in the third quarter alone. This initiative opened up new development pathways for aspiring creators and provided a steady pipeline of content for our library and the future IP development. At the same time, voice live streaming saw a further improvement in paid conversion rates. We also unlocked further commercial potential for our IP adaptations in China and overseas. During the quarter, revenue from IP licensing maintained its triple-digit growth rate year-over-year and generated high double-digit growth quarter-over-quarter. Year-to-date, revenue has nearly doubled compared with the same period last year. In mid-October, Yanyan Story debuted at the Frankfurt Book Fair, showcasing Chinese digital literature on a global stage for the first time. It also draw coverage from the U.K. magazine, the bookseller, which noted the new growth path for Chinese short-form digital literature in the international markets. By the end of October, Yanyan Story licensed more than 100 titles for publication across major Asian markets, including Japan, South Korea, Thailand and Vietnam. A number of works have also been adapted into short dramas for overseas markets and performed well, reflecting the growing popularity of Chinese short-form content abroad. Meanwhile, Yanyan Story has established partnerships with international platforms such as Mobile Reader and GoodNovel to translate works into English, Spanish, Japanese, Korean, Portuguese, Thai, Indonesian and other languages, further expanding its international reach. Going forward, we will pursue a diversified set of initiatives to improve member retention and ARPU. By enhancing content supply, membership benefits and personalized experiences, we aim to strengthen long-term member value. As AI enables more efficient content creation, the potential for IP development and commercialization will expand, unlocking new growth opportunities for our membership business. Starting this quarter, we are simplifying our revenue breakdown and will begin reclassifying vocational training revenue into other revenues to align with our overall strategy. Other revenues were RMB 83.9 million, of which we will continue to adjust our vocational training business with a focus on improving operational efficiency and prioritization. Although our vocational training business has been reclassified, we continue to build on its creator-driven foundation with the development of our column product. Designed primarily to serve super creators, column is intended to enhance the creator ecosystem rather than act as a new commercial growth driver. During the quarter, we enhanced the product by rolling out a PC version and AI tools that help creators generate column descriptions and cover designs. This enhancement drove sequential growth in both the number of leading column creators and creator user engagement. Monetization models for column creators is also becoming more diversified with overall GMV more than doubling compared with last quarter. Going forward, we will continue to operate with discipline, maintaining stability while investing prudently for sustainable growth. With the ongoing enhancements in efficiency and steady cost optimization, we are confident in achieving our full year profitability target. Building on this foundation, we will continue to invest with a long-term view to strengthen our AI capabilities and improve the efficiency of our core operations. Deeper AI integrations will drive greater synergies across content creation, distribution and monetized on Zhihu. Meanwhile, we will further refine our product and marketing strategies to capitalize on new growth opportunities from high-quality users and enterprise clients. With a healthier operating structure and ongoing innovation, we are well positioned to thrive in this next stage of high-quality growth. With that, I will hand the call over to our CFO, Wang Han. Han, please go ahead. Wang Han: Now I will review the details of our third quarter financials. For a complete overview of our third quarter 2025 results, please refer to our earnings release issued earlier today. In the third quarter, we maintained disciplined cost management and drove further improvements in operational efficiency. As a result, our non-GAAP operating loss narrowed by 16.3% year-over-year. We continue to invest in areas that reinforce our long-term growth potential, striking a healthy balance between efficiency and investment. Our total revenues for the quarter were RMB 658.9 million compared with RMB 845 million in the same period of 2024. The decrease was mainly the result of our continued efforts to optimize revenue mix and focus on sustainable, high-quality growth. Notably, the year-over-year decrease narrowed for the third consecutive quarter, in line with our expectations. Our marketing services revenue for the quarter was RMB 189.4 million compared with RMB 256.6 million in the same period of 2024. This decrease was mainly driven by our proactive refining of service offerings and optimization of client mix. Encouragingly, the year-over-year decrease narrowed meaningfully, indicating that our adjustment cycle has bottomed out. Paid membership revenue was RMB 385.6 million compared with RMB 459.4 million in the same period of 2024. While the number of average monthly subscribing members fell year-over-year, they rebounded and grew 8.1% sequentially to 14.3 million. We also continued to enhance retention and ARPU through diversified content and membership initiatives. Other revenues were RMB 83.9 million compared with RMB 129 million in the same period of 2024. The decrease was primarily due to the strategic refinement of our vocational training business. Our gross profit for the quarter was RMB 403.6 million compared with RMB 540.1 million in the same period of 2024. Gross margin was 61.3% compared with 63.9% in the same period of 2024. Our total operating expenses for the quarter decreased by 19.4% year-over-year to RMB 503.5 million. The decrease was primarily due to a more efficient cost structure and disciplined resource allocation across key operating areas. Selling and marketing expenses decreased by 14.9% to RMB 330.1 million from RMB 388 million in the same period of 2024. The decrease was mainly due to tighter control over promotional spending and optimized personnel-related expenses. Research and development expenses decreased by 36.2% to RMB 114.4 million from RMB 179.3 million in the same period of 2024. The decrease was primarily driven by continued improvement in research and development productivity and efficiency. General and administrative expenses were RMB 59 million compared with RMB 57.2 million in the same period of 2024. Our GAAP net loss for this quarter was RMB 46.7 million compared with RMB 9 million in the same period of 2024. On a non-GAAP basis, our adjusted net loss was RMB 21 million compared with RMB 13.1 million in the same period of 2024. As of the 30th of September 2025, we had cash and cash equivalents, term deposits, restricted cash and short-term investments of RMB 4.6 billion compared with RMB 4.9 billion as of the 31st of December 2024. As of the 30th of September 2025, we repurchased 31.1 million Class A ordinary shares for an aggregate value of USD 66.5 million on the open market. Additionally, we repurchased a total of 22.5 million Class A ordinary shares for an aggregate value of USD 34.5 million through the trustee of the company as of the end of the third quarter. Looking ahead, we are on track to achieve full year breakeven on a non-GAAP basis. We will continue to further strengthen our monetization capabilities and pursue new revenue opportunities that leverage Zhihu's strength in high-quality content creator expertise and AI-driven innovation. Together, these efforts will reinforce our business resilience and support sustainable long-term growth. This concludes my prepared remarks on our financial performance for this quarter. Let's turn the call over to the operator for the Q&A session. Operator: [Operator Instructions] We will now begin with our first question, and this is from Vicky Wei from Citi. Yi Jing Wei: Will management share some color about the AI progress of Zhihu? For example, the penetration rate of Zhihu Zhida and the progress of the AI integration with the Zhihu Community. Yuan Zhou: [Interpreted] Thank you for question. This is from Zhou Yuan, Zhihu CEO. First of all, I would like to say sorry about my weak voice because I didn't recover yet from my cold. Anyway, I would just start with your first question. So as you can see, Zhida remains one of our key products. Its overall usage and penetration rate continued to increase in the third quarter with the penetration rate existing 15%, nearly 4x higher than the same period last year. This not only reflects the ongoing evolution of our foundational AI capability across the community, but also demonstrates strong user endorsement of a very strategic depending of AI plus community. This also gives us a very strong confidence to continue upgrading this AI plus community experience updates across more touch points. Now let me just share some recent progress and upcoming plans. First of all, in the search scenario, by late November, Zhida will fully augment our general AI search capability to include Zhida-generated content for all users. Additionally, we will soon launch pilot features such as cross-topic content aggregation and the community trend summaries. This will formally navigate Zhida from secondary entry point to a primary one, further boosting AI adoption across the entire community. And second of all, on the content creation side, we are empowering professionals with strong AI copilot. In this quarter, we launched a suite of AI assistant writing tools for our creation assistant, which includes smart headlines, grammar and fact checking and lead paragraph generation. This will help creators optimize long-form structures and expert-level content. So by the end of 3Q, adoption of these new AI features has already surpassed 20%. Looking ahead, we plan to introduce additional capabilities such as AI-powered multi-model content conversion, intelligent formatting and short-form content generation and et cetera. These tools will significantly lower the barrier to entry for mid-tier creators, enabling more users to express themselves effortlessly to increase posting frequency, creation frequency and engage more actively. In addition, on the content consumption and distribution side, we are also expanding Zhida into high-frequency consumption scenarios. For example, AI-powered daily briefing on Zhihu's training topics and other vertical-specific topics as well as the ability to mention Zhida in threats or to also summarize discussions and surface key insights will help users quickly grasp complex conversations and participate more meaningfully. We believe this will further strengthen user engagements and community stickiness. Thank you. Operator: We'll now take the next question. This is from Luqing Zhou from Goldman Sachs. Luqing Zhou: So my question is on how do you see the current status of Zhihu's user ecosystem? And based on that, could management share more color on the directions for improving Zhihu's future product design and how is the progress so far? Yuan Zhou: [Interpreted] Thank you for your question. This is from Zhou Yuan, Zhihu CEO. We believe, overall, the community ecosystem is very healthy. We do not rely on any single metric to assess its health. Instead, we focus on content quality, user structure and user quality and whether our content creator incentives are forming a virtuous cycle. We have also deployed AI as a core product driver at a strategic level. Over the past few quarters, we have made the synergistic development of high-quality content, multiply expert network, multiply AI capabilities as a core path for driving our ecosystem in a positive direction. From this perspective, our ecosystem is stable and continuously improving. This is fully in line with our expectations as well. First of all, the trustworthiness and professionalism of our content are very crucial. They are crucial indicators of the ecosystem health. Over the past few quarters, we have continued to strengthen our trustworthy content ecosystem and our expert network while also cracking down on low-quality content and traffic to keep the ecosystem healthy at its core and reinforce the virtuous cycle. As a result, we have delivered several consecutive quarters of double-digit growth in daily high-quality content creation. The AI category is the most reflective of this progress with the professional AI-related content regarding double-digit growth for 4 consecutive quarters. On this basis, users' trust in our content has also continued to increase steadily. And secondly, our user structure and user quality have improved and users' need across different scenarios has been addressed. As we can see from last Q4, our MAU has remained stable on a sequential basis for 4 consecutive quarters. And building on that, average daily user time spent, which we believe as a proxy for engagement and retention has delivered double-digit year-over-year growth for 6 consecutive quarters. Our users remain mainly young and focused on learning and growth with user age between 18 to 30, accounting for more than 65% of our total user base. Among them frontline professionals in technology and AI have become one of the most representative groups. They have long-term professional learning, frontier exploration and interest development needs and contribute more content and provide a stronger positive feedback to the ecosystem. And last but not the least, the content -- the creator ecosystem continues to grow and expand. Output from top-tier professional creators have remained stable over 7 consecutive quarters. At the same time, by using AI tools, we are continuously lowering the creation threshold for mid-tier creators and increasing the creation frequency of the entire creator group. This makes the supply side of the community more diverse and keep social interaction within the community growing. So in summary, ecosystem health is foundational to Zhihu. Going forward, we'll continue to invest in trust content and expert network so that as a community scales, it can maintain its professionalism, vibrancy and trustworthiness. Let me just turn to the second question you mentioned. It's about our core product going forward plan. Here, we hold a few key beliefs. First of all, over the next 3 years, people will consume more AIGC content. At the same time, human-to-human interaction will become more valuable. So we believe both trends will coexist. And the second belief we hold here is that stronger AI becomes, the more people will experience a sense of diminished presence, which means the participation, social capital and relationships enabled by community will become increasingly scarce and increasingly demanded. And the third belief here is that high-quality human-generated content and data will become extremely scarce as well as valuable on the supply end. This supply matters on both ends. It's crucial for the advancement of AI as well as for human development. So going forward, Zhida will definitely integrate with our users' functional social needs. For example, when a user wants to ask a question, search or look for resources, AI will dramatically raise efficiency. And Zhida will push the community further towards utility, enabling even the first day users to get a meaningful experience immediately. At the same time, we will double down on the social needs that come from real human connection things like building recognized, growing together and finding people who share your identity. We want to build these things with user feel like a sense of belonging in an environment grounded in real people, real culture and trusted interactions. So our future product direction is built around 2 pillars: utility and identity. My hope is for Zhihu to become the connection layer for humans in AI era as a place where people can use AI tools to understand the world as well as a community where they can find renaissance and understanding from one another. At the same time, we plan to build a trusted content and expert network as 2 foundational layers of infrastructure. Thank you. Thank you again for your question. Operator: We will take next question. This is from Daisy Chen from Haitong International. Kewei Chen: Could management update the progress of the adjustments in each business line? Did you see any signs that the revenue has bottomed out or started to rebound? In particular, how do you expect the future of the advertising business? And also, could you share your outlook on the company's profitability? Wang Han: [Interpreted] Thank you for your question, Daisy. This is from Wang Han, Zhihu CFO. So I will just pick up your second question. Here's a quick take on our profitability outlook. After delivering solid profits in the first 2 quarters, we now see a very high likelihood of achieving our first full year non-GAAP profitability in 2025. So with that buffer in place, we are using Q3 and Q4 as a window to keep fine-tuning and investing where needed. That's why you will see -- you can see a small loss in Q3, which is well within what we can comfortably take. Let me just walk through the adjustments across our major revenue lines. First, about the marketing services. As we mentioned last quarter, this Q3 is -- it will become the bottom. And we expect a sequential recovery starting in Q4. What we see now give us confidence to maintain that guidance. Looking ahead to next year, our goal is for each quarter to stay above the baseline set by Q3 this year. And second, about the pay membership. This segment is still in a transition period. As we said before, even the best libraries and bookstores separate fiction from nonfiction, the real challenge here is how to differentiate and integrate them in a way that feels natural to users. We will continue experimenting here. So we cannot say membership -- pay membership revenue has hit its bottom yet. But even if there is some decline, it will be about products or cohorts with lower ROI and weaker profitability or less than ideal retention. Search is about vocational training. This business is no longer a drag on our overall bottom line. Given this relatively low base or small scale, we have now reclassified it into others. So overall, you've seen us deliver several consecutive quarters of profitability followed by the small loss in Q3. Even though we remain confident in achieving full year profitability. With that foundation, we are taking this period to make necessary adjustments and targeted investments. As we approach our first full year of profitability, we also want to use this moment to shed some legacy inefficiencies and to start fresh. We have no intention of staying where we are and simply just squeezing out profits. We are now operating from a healthier foundation and getting back onto a trajectory that aligns with Zhihu's long-term development. Also, we have a solid -- very solid cash position, and we are not reverting to the old model of spending aggressively just forth go. And this new AI cycle or in this AI era, our focus is on strengthening Zhihu's position in real people interactions, expert network and trusted content areas. And these capabilities are becoming increasingly important and carry real social value. Thank you for your questions. Operator: We will now take the next question. And this is from [ Jing Yi Wang from Guangfa ]. Unknown Analyst: Could management share some more color about the shareholder return pay in progress. Wang Han: [Interpreted] Thank you for your question. This is from Wang Han, Zhihu CFO. We can see over the past 2 years, we've been one of the most active buyback companies among U.S.-listed Chinese names. That conviction came from our confidence in reaching profitability. And this year, we expect to demonstrate that our outlook and the targets set 2 years ago are being delivered. Even so Zhihu's current market cap remains significantly below the cash on our balance sheet. So we believe we are super undervalued. Therefore, we intend to maintain our buyback program and expect to remain one of the most active repurchase in this sector. Thank you again for your question. Operator: That concludes today's Q&A session. At this time, I will turn the conference back to Yolanda for any additional or closing remarks. Yolanda Liu: Thank you once again for joining us today. If you have any further questions, please contact our IR team directly or Christensen Advisory. Thank you so much. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]